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EarningCall_1800	Welcome, everyone. Thank you for joining us today. My name is Andy Nowinski. I am a software analyst at Wells Fargo. And today, itâs my pleasure to introduce you to the team at Fortinet. So we have Michael Xie, the Co-Founder and CTO of Fortinet; and Peter Salkowski, Head of Investor Relations. Thanks, guys. Thank you, Michael. Thanks, Pete. Thanks, Peter. Well, thank you guys for joining us today. Obviously, a complete TMT audience here. So maybe you could start off by just giving us a brief overview of Fortinet for those that donât know what Fortinet does. â¦ before I know thatâs not going to have any bearing on what you are going to say, Michael, but I am going to do it anyway and really fast. Iâd like to remind everyone that we may make forward-looking statements during todayâs fireside chat. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected in those statements. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q and the other reports we may file from time to time with the SEC for additional information on factors that may cause actual results to differ materially from our current expectations. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Mike? All right. Thank you, Peter. So, Andy, thank you. Itâs a privilege to be here. And I think just a quick version, Fortinet is a leading cybersecurity company. We started out 22 years ago in 2000 and we headquartered in -- at the Silicon Valley. So today, obviously, we are public. Our symbol is FTNT. We have a global footprint, offer a broad portfolio for cybersecurity and our customers from SMB to large enterprise and carrier as well. So myself, Michael Xie, I am a Co-Founder and I am the CTO for the company for the past 23 years. So itâs been a great journey and so I think maybe you just -- I want to outline a couple of things. When we started out, we had a couple of visions. One is we think the cybersecurity company should define their problems based on what their customer needs and particularly in our industry, we help our customers to find the threats and as threats constantly evolve, so basically our business evolves based on that as well. So I think over the years, I think, we may talk about that. We see how the technology evolve from the very early firewall driven centric business to todayâs platform driven broad portfolio. And I think the second piece is also as another vision we started out is we always believe the cybersecurity should not become a cyber slowdown, because we see a lot of the solutions out there, they are not fast enough, itâs low latency, itâs low throughput. So we have been very unique in that way we design our own ASIC chips. We do a lot of things in hardware in addition to other software designs. We build a place to be the fastest firewall in the world. Thatâs about it, Andy. Itâs a good overview. It certainly is a difficult balance when you are trying to keep an organization safe and protect them from threats and also not slow the organization down and give them a -- not get in the way of productivity. So having that custom ASIC, I think, is something that you have developed that enables that better performance versus the competition? Yes. We -- I think the company culture wise, we are -- I mean since the start, we are a very technology-centric company and innovation has always been one of our key focuses. So the first part is we basically we speak with our customers and partners. We define the problem and then how to solve that. I think, so we have like a large team building our products and solutions. I think one indicator, it may not be the only one, is like just look at the number of patents. I think we have a slide in our investor package that we listed the patents for us and competitors. We are probably having more than the next couple of guys combined. So I think itâs not the only indicator, but itâs basically showing the culture wise we really encourage our employees to focus on innovation and solving problems. Another, I think, a really interesting point on Fortinet, you talked about having a 20-year tenure in the industry. So you have been around in this industry for a long time where firewalls are really the only -- the first line of defense and the only line of defense 20 years ago. Obviously, the company has largely evolved, but when you think about a tightening macro environment and how things -- our priorities may be shifting within security, why does Fortinet continue to deliver record level growth in firewalls over the last 18 months when more applications are moving to the cloud, more applications are moving outside the data center, yet you still manage to drive record levels of growth during that timeframe? Yeah. So I think there are obviously several aspects of the business thatâs important to drive that growth and I will try to first address the technology side. So being in the industry for more than 20 years, what we find 6is the -- in our industry itâs interesting, itâs like the arms race between the what we call the bad guys. It could be originally in the -- when we started out, it could be the cyber hobbyist providing the viruses just to get their name out to international crime syndicates with the ransomware or skimming of the credit card number and to like some very advanced hacking teams thatâs possibly backed by maybe even nation, state background. So I think with that sort of diverse threats, like, the landscape and the -- itâs also the ever expanding threat surface that a lot of the enterprise customers today as they used to have on-prem network, but now they are expanding to the cloud. Also, thereâs kind of IoT devices. You may not know this. And also in the OT world, a lot of the manufacturing and oil, gas, they have a lot of these devices traditionally mechanical, but they are all controlled by computer. So itâs ever increasing threat landscape in the tech surface. So all these needs some kind of effective protection. So I think for us, we -- from day one, when we started the company, we realized at that time, if you go back 23 years, the firewall company at that time focused mostly on safety inspection when the content payload starts to carry attacks, they say, okay, itâs not my problem, right? I have my firewall. But at Fortinet, we started off by saying we are a cybersecurity company, and if the threat changes, we are going to evolve our technology to stop that. So we started out by -- we are the first one who came out with the UTM firewall, the next-gen firewall, and then, gradually, as the attack surface extends to the cloud, to the OT, we just basically expanded the portfolio to cover. So for example, for the last five years to 10 years, a significant driver was SD-WAN, a lot of customers, they started to have branch offices, they build up the overlay between the branch and HQ. So we evolve the technology and SD-WAN is part of our standard offerings and Gartner also recognized that by putting us into the Leaders Quadrant for SD-WAN, as well as the network firewall. So I mean, moving forward, we are also seeing lot of the advanced threats like APT, we call it advanced persistent threat, APT. So thereâs different technology on that as well, which requires newer platform based defense mechanism, like, Zero Trust technologies, and like OT would bring a total different aspect of those challenges to us. But I mean, technology is one side, but maybe I will let Peter comment on the sales and finance discipline that we put in to help accompany the growth. Yeah. I think that, I mean, what Michael is basically saying, in a nutshell, itâs a very complicated industry with a lot of different and the bad guys are always finding new ways to be bad guys and finding different ways into different companies situations. I think the foresight that Michael and his brother, Ken, whoâs our CEO, had in creating Fortinet 22 years ago is that, having the robustness in the operating system and the ability to run that operating system on custom ASICs that allow us to add more value to our product has differentiated us from the rest of the market. You say a lot of things are going to the cloud. Thereâs a lot of cloud spending. We are platform agnostic. We donât really care where you need to protect it. We would rather just protect it. And so our operating system works in the cloud, just like everybody elseâs operating system, but it also works on premise. And so itâs all about protecting the entire infrastructure, not just one part of the infrastructure and I think the challenge that companies have is if they use a vendor in the cloud for one thing and they use a different vendor on-premise, if they make any changes to the security rules in either one of those locations and itâs not running on the same operating system, they are going to leave themselves vulnerable. So you want to have a holistic solution. Our operating system is really our secret sauce. The ability to add additional functionality is very important. But to your point, even on the macro side or on the cloud side is Fortinet or security is a must have, right? You have to have it. Itâs not something you can put off and wait until next year to buy and so I think thatâs really important. Thereâs other drivers or differentiations in our business and not just the operating system, but we are a very diversified business, 70% of our revenue comes from outside of the United States. We grew up as an international based business. We have got 40% of our total business in the North America, which includes the U.S. and the Americas actually includes South America, 40% in Europe and 20% in Asia Pac. And so itâs a very diversified business. Half our business is from 100 countries, no one of which is more than 3% of my billings. We are diversified by customer segment. We are diversified by product. So, again, we can provide your security in any one of those locations, geographies, premise, cloud, whatever and provide you a robust solution, because of the way they started this company 20 years ago. Thatâs great. Certainly, the sophistication of cyber attacks has massively changed and increased over the last, call it, 10 years to 15 years and Fortinet has evolved as well. But I think one of the other changes that we have noticed with Fortinet is if you look even last quarter, you had 153 deals over $1 million. That was up 84% year-over-year. So you are not just selling to the smaller customers. What do you think is driving just the growth in these massive $1 million deals? So I think from our -- because of the global footprint, right? We -- traditionally we do really well in the SMB and the commercial and we started to get a harder push into the enterprise, because we have the enterprise-ready platform. And I think a lot of the enterprises, they find our messaging for consolidation resonating with their CISO and CIO teams. Itâs -- in the past, we can see customers buying -- the firewall-centric customers buying a lot of the firewalls and managed firewall only. But as you mentioned, over the last few years, because of the threat landscape change, what we find is relying on the firewall only will not give enough protection for todayâs distributing larger enterprise. So what we found is that a lot of these enterprises, they started to actually understand the story and then they started to buy different components, itâs a firewall, but then itâs not traditionally just on-prem, but also thereâs VM, in the cloud or in the private cloud, data center. And then on top of that they have -- if they have perhaps an SD branch, they can have networking components in that to help with the visibility of the devices, and then, if thereâs a same and sure and all kind of central management and visibility components. So we see a lot of deals where the customers, they come in and buy 20, 30 different products, and then they love it because in the past, they have to buy that from 20, 30 different companies, meaning they have to get their CISO team trained on all these different user interfaces, come online and automation, itâs a nightmare. And so I think essentially over the past few years, the consolidation message starts to resonate with the more and more enterprises, they come in and buy, for example, a complete solution from us, where we design them organically, usually from the very beginning to interoperate with each other and we call that platform Security Fabric. So essentially, the center piece is still the multifunction firewall carry a lot of the features, the traditional SSL, SD-WAN and like the -- but also it includes components in the cloud, for example, like the SASE component, so we can secure the OT platform, if that customer has a component, as well as I think the more recent is the ZTNA, the Zero Trust architecture. So I think in the end, the value is we provide the customer with a single pane of glass, like, visibility. They see all these components like your alert and traps in one screen and then they can easily manage them to discover and mitigate the threats. I would add, additional to the consolidation message of really kind of bringing products and vendors together into a single operating system, which again goes back to the value of our operating system is the concept of convergence. And I think what you are seeing and what you have seen over the last five years is companies are reconfiguring their networks to do more cloud capabilities and then if you think about, go back five years, 10 years ago, cloud wasnât a big part of their business. They set their networks up a certain way and now they need to change that. As they are changing and reconfiguring their networks to be more cloud centric, or in this case, work-from-anywhere centric, given that we are all kind of working from other places these days, they are rethinking their security. They have to build their security now to deal with that new networking configuration, really kind of -- some of it goes back to Zero Trust, just donât trust anybody in your network when you are doing it. But what they are really saying is, look, our security operating system and our networking operating system used to be separate buying centers and those two buying centers are coming closer together and communicating more today than they ever have. And in doing so, the networking guys have always been -- they basically have been worried about how do I move data as fast as possible and as low cost as possible and the security guys have to worry about everything else. They have to worry about the sender, the recipient, the content, the device, all of these other things, which again goes back to why the ASIC strategy is so important, because you have to do so much compute capabilities that the security guys -- the network guys will get mad at the security guys, because the security guys would slow them down and the security guys will get mad at the networking guys, because the networking guys didnât care about anything what was moving around and paying attention to it. Those two groups are coming closer together and they are converging. SD-WAN is an example of that conversion. We call it Secure SD-WAN, because itâs built into our operating system and sold with our firewalls. So you get security and networking functionality built into a single unit. A lot of our security competitors donât have that networking capability or understanding. We have built both of that into our operating system. Another point to make though, because I think, we somehow get -- well, I know why, we get pigeon holed into being a hardware company, 60% of our revenue today is services. I would call it a hybrid SaaS model and the only reason itâs down to 60% is because over the last couple of years with COVID and supply chain and everything else thatâs been going on, we have had some price increases to offset cost increases that we have been dealing with. The percentage or mix of product versus services prior to COVID was 65% services, 35% product. Less last quarter, it was 60% services, 40% product. Over time, the services will catch up to the price increases. Right now, they are dropped on the balance sheet in our deferred revenue. As that happens over time, you are going to see our services go back to that 65% at an 85% gross margin and so thereâs value in those services that we canât lose sight of even though I know a lot of people and we do as well talk a lot about the hardware. That makes sense. So you have got the trends of convergence between network and security driving demand. You have got the need for consolidation to ripping out point products and consolidating to a single platform and then you have also got an increasingly sophisticated threat landscape driving demand. I mean that certainly doesnât sell itself or sell your products yourself. So have you made any changes as well to your sales force that can continue driving these large million dollar deals, have you had to make any changes from that end? Yeah. Of course. So I think both on the sales and marketing side. For marketing, you guys probably know that we started to sponsor the Fortinet Championship, the PGA event since last year in Napa, California. So I think one thing is on the lead gen, I mean, thereâs like a ton of numbers that just basically showing like these marketing helps. But also I think on the branding side, I mean, I play golf as a hobby, but I think I have met more people know about us from the golf than from the cybersecurity side. So itâs a very just powerful like marketing method. And I think on the sales side, obviously, I think, since a couple of years ago when we saw the opportunity, we started really invested into hiring a lot of salespeople. But I think at the end, itâs not just hiring them, but also be able to tell the story, right? And then I think, particularly in our industry, this is a challenge, a lot of times, people just think itâs one and plus another one, then you get two. But in our consolidation story, a lot of times, you have got one plus one, but you get more than two as a result. So I will give you one example of that. Like for example, a lot of people, they want the segmentation story in their offices, they want the firewall with the switches and access points. Now these, you can individually procure from different companies. However, when they do from us, our salespeople can tell them how easy it is to set it up so that they can segment their office network dynamically almost with no additional steps from just managing some policies. While in the old days, like if you are familiar with the like the NAC concept from Cisco. I remember they did a demo a few years back requires like six different components and thereâs a lot of CDs and downloads. So itâs -- I think at the end, the consolidation can produce more productivity for the customers. And then, I think, from a sales and marketing perspective, the challenge has always been how to demo that and then tell the story. Once we can get a story out, and then our cost rate is really, really high. And to give a sense, I joined in January of 2018, I think, we had about 5,000 people at the time. This last quarter, we ended with 13,000 worldwide employees, 70% of which are outside of the United States. I think the other thing to think about in terms of the business, to your point, on the $1 million-plus deals. In 2018, we looked at, because we are -- there was a change in 2017 that occurred in this business and that is we moved into the Leader Quadrant for enterprise firewalls for the first time in the companyâs history. We had always been a leader in the UTM Magic Quadrant, which was a separate quadrant at the time and that was sort of synonymous with SMB and small and medium-sized businesses. When we moved into the enterprise business in 2017 -- July of 2017, we started using that as a calling card. You could go into an enterprise customer, or at least get invited into an RFP now because you were in the Leader Quadrant. And so in 2018, we really started to push that message. But we looked at how many companies an individual enterprise sales rep was assigned to and it came down to 65:1. I am like, okay, thatâs not an enterprise sales force. We need to do something about that. But we also had growth in margin profitability targets out there out to 2022, that said, we would grow in sort of the 15% to 20% range, and we would grow our margins from what we are mid-teens at the time to 25% by 2022 and that it would grow at about 150 basis points to 200 basis points a year. So we couldnât go out and hire all enterprise salespeople at once. We hired them over time. If you look today, that ratio is about 14:1 enterprise salespeople to companies. That should be in the single digits and so we will continue to hire more people, but -- and grow that enterprise or that large business. But whatâs really interesting, though, is we have a -- we have a small- and medium-sized enterprise business. We have a two tier distribution model. We sell the distributors. They sell the resellers who sell to the customers. That reseller or that channel relationship is extremely important to us, because a lot of our small- and medium-sized business dealings and deals, we donât touch, right? They just go through the channel. Itâs a run rate sort of business. We hear a lot of chatter about it back in 2020 when COVID first hit. Everyone was worried about small- and medium-sized businesses going out of business and itâs third of Fortinetâs business, therefore, they are going to fall apart. It didnât happen. The small- and medium-sized businesses continue to need security. They continue to buy security. We are hearing that rumbling again today with macro concerns that you have this SMB exposure. That has been a strong run rate cash cow business for us since I have been there for the five years, and we have been using that cash to fund our enterprise business and hire more enterprise salespeople within the growth and profitability parameters that we provided to the street. So it sounds like, I mean, the Fortinet Championship was an amazing event. You have got a lot more marketing spend around that, bringing more awareness to Fortinet, hiring a lot more salespeople. But if you look back over the last, call it, two years, three years, the firewall market certainly looks like itâs gone from a four-horse race down to a two-horse race and Cisco and Check Point are clearly underperforming relative to Fortinet and Palo Alto. Do you think that could be just, number one, I guess, why do you think they have been ceding market share to Fortinet and do you think thatâs also maybe fueling some of that record growth you have seen over the last 18 months? Yeah. So I think the -- one of the changes I noticed before the Fortinet Championship is a lot of time I walk in the room with our salespeople and customers, the first question is like, we call the Forti who question, like, who are you guys? And then so I think after that, the PGA event, I think, we are hearing less and less of those. So the brand name is out there, and then, obviously, thereâs still a lot of work to explain the technology advantages. And I think over the years, I think, there are a few drivers on the firewall. One is the continued expanding threat surface. Thereâs a lot of the assets when the customer didnât think a firewall was even needed, right, the smaller offices, home offices, but today, I think, if thereâs critical assets or computing devices, those would be as precious as the computers in the HQ or in the data center because with SD-WAN or VPN, they are all connected. And I think the second driver is basically, I think, on networking side, the speed is still ever increasing. So going back when we started off we were designing for like 10, 100, those are megabits per second devices and now itâs like 400 gigabits, right? So like itâs kind of like Mooreâs Law. So we are seeing that every maybe five years or six years, we have to redesign our ASICs, so basically provides 5 times, 6 times more performance than the last one. So I think that also helps to drive the demand. And then the -- well, the third one is, obviously, the hackers, they change their tactics and then basically requiring a different architecture. I think that continues to drive the demand. So basically, over the years, we are building the features like SD-WAN and Zero Trust. Those are not traditional firewall features. But because we take a holistic approach, basically how we design the product to help the customer and now this kind of become part of the features and I think our customer realized the value in that. So that helps the adoption and continued consolidation. I think thereâs one more driver thatâs been occurring recently and that is insurance companies. Cyber insurance is very difficult to get. We met with -- our CFO met with a cyber insurance company that does cyber and basically, he told -- the insurance company told them that they turn down 95% of the policy request they receive for cyber insurance. Thatâs not a cyber insurance business by the way. Itâs not -- but they canât -- they are trying to understand the risk of -- they really -- a lot of the insurance companies got hurt in the early days of ransomware because they didnât understand how to completely monetize or calculate what their risks were. And the bad guys were basically going into systems, looking up your cyber insurance, seeing what your limit was and then coming back and saying, oh, your limit is $1 million, guess what our ransom is and the insurance companies were paying it out. So cyber insurance right now is a lot of insurance companies are looking at what their risks are. They are dictating to companies that they have to have, not the company specifically, but the types of security. You need to have endpoint security. You need to have this. So they are starting to dictate what companies have to do. So Boards are being creating -- committees and Boards are being created just to study cyber because of that risk for different enterprises. So I think thatâs going to help drive it. Go back to your question about the Magic Quadrant and the market share. If you look five years ago, who -- what companies were in the leader quadrant and where they were five years ago for enterprise firewalls and whoâs there today, Palo and Fortinet has moved up into the right and we have actually moved further up to the right than they have and Cisco, Check Point and others are slowly dropping away to the left. So you are right, it is becoming a two-horse race. But thatâs -- but more importantly, if you look at from a third-party perspective from just Magic Quadrants, we are in seven or eight different Gartner Magic Quadrants, two of leader, SD-WAN and firewall. We are in six other -- five or six other ones, we are in one of the other quadrants. We are in another eight market guides, which are either products that are on their way to become a Magic Quadrant or on their way down from becoming a Magic Quadrant. But why I point that out is thatâs 15 different research reports that Gartner publishes that we are mentioned in and with one operating system. The same operating system across all 15 products. It goes back to the consolidation conversation a minute ago. If you think about how many unique companies are listed in those different Gartner products, uniquely, itâs probably 100 companies. I donât have to take a lot of market share from all of them. I just have to take a little market share from all of them and I am going to be the only one that goes across all 15 products because of our operating system and Michaelâs vision of putting that into a platform and making that work. That was a great overview. So letâs just drill down into it into one of the areas of your operating system. So SD-WAN has been a big driver. You said itâs part of the firewall, itâs part of the operating system. So if you buy a firewall from Fortinet, you get SD-WAN with it. I think the way I think of SD-WAN has always been, itâs really just like a Google Maps where itâs finding the most efficient route from point A to point B over the broader Internet, so you donât have to buy expensive private links. Yet at the start of the pandemic, when everyone was working remotely and SD-WAN was clearly seeing an uptick, we are three years past that now and you are still seeing 45% growth in SD-WAN business. So I am just curious like whatâs sustaining that demand, itâs -- we are already past the obvious catalyst of the pandemic, how are you maintaining that strong growth? I think thereâs maybe a few ways to look at that. I think from SD-WAN perspective, we find thereâs a pretty good market for enterprises with very distributed workforce around world and then they can set up, thereâs like underlay and overlay, help them to basically get the quality of the traditionally very expensive MPLS services from the carrier. So I think the whole sort of industry is shifting towards adopting SD-WAN. I think we are still in the curve that thereâs like more and more adoption and we are in a unique place, like, we are building the security SD-WAN where the customer adopting that solution will be -- get both security, as well as the top notch SD-WAN. But I think before I forget, thereâs actually one more very important aspect which is the -- well, itâs -- you may not see it as a sustainability aspect, because we have the purpose-built ASIC device, itâs very power efficient. So in fact, recently, a lot of the large enterprise and carriers, they pointed to us by deploying our solutions both in the on-prem locations in the cloud, because they can run ASIC-based, a very powerful device, they are seeing the power usage, including data center and the on-prem, our solution is a fraction of what the traditional software only based solution. So I mean thereâs -- I donât think we are reaching the end of the SD-WAN growth curve. I think we are in the middle of it. Thereâs still a ton of opportunities out there. I think the energy consumption was 80% less than a common CPU in terms of our ASICs -- our dedicated ASICs. Okay. Another interesting growth driver on OT security, you briefly touched on it earlier, OT security securing devices that might not be able to support a software agent I think itâs really difficult, it has to be done from a network device or within the network. You had 75% year-over-year growth in OT security last quarter, I am just curious, if a customer wants to buy Fortinet OT security, what are they purchasing? So itâs -- I think itâs -- conception is similar to the IT side. Itâs basically the platform. It usually involves one or another form of the firewall. But sometimes it operates in a slightly different way in the OT environment and then it could involve in like the switch components. And they have physical challenges, a lot of the times, itâs wide temperature range, 40 below temperature up to maybe 70 degrees, 80 degrees and with a strong SOR [ph], the moisture requirements. And then I think in the software wise, they need specialized software, understanding like things like Modbus, kind of difficult to decide for OT protocols as well as the central pieces of control, how you contain the threats, discover like a SIM or like SOR like solution. I mean itâs not so different from the composition of the solution, but then, usually, each piece carries a slightly different flavor to specifically address OT challenges. So you have got a SIM software and a more durable firewall and it sounds like a network switch that people would have to deploy to get your OT security? I know we are running out of time real quick. When I got there in January of 2018, I know Ken was talking about OT back then. We are building OT capabilities to do that security five years, six years ago. And so itâs just now that, that market is starting to ramp up as more of these things are getting connected, some of itâs a 5G world, so more things are getting connected and they need to be protected. And so itâs something we have been focusing on, again, building into our operating system for years. All right. Well, we are running out of time. So what would you leave the audience with in terms of what you are most excited about in 2023? I want to just quickly touch on one of the topics that dear to my heart is the sustainability efforts that we put in. So at Fortinet we have formed the Board level committee, we call the Social Responsibility Committee and I volunteer to lead that committee. Basically, we have overwhelming responses from our employees to putting a lot of initiatives through our sustainability aspects. For example, we pledged the greenhouse gas emission, zero carbon for Scope 1 and 2 by 2030 and we also work with our suppliers on human rights policies and then we work on our packaging to make sure we got rid of those plastics and we replace them with the biodegradable packaging, so that they donât leave like long lasting garbage to the planet. Also, I think I touched earlier our ASIC design and we have a lot of technologies and innovations came from our employees help not just for us, but also for our customers to reduce the carbon output. And then, I think, eventually, we have a lot of initiatives on these and we see that as one of the core strategies that we are going to carry forward, not just grow the business, but also grow it social responsibility. Thatâs great. On behalf of everyone at Wells Fargo thank you so much for coming to the conference and sharing your thoughts today.
EarningCall_1801	Greetings and welcome to the Semtech Corporation Conference Call to discuss the Third Quarter Fiscal Year 2023 Financial Results. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, Semtech's Executive Vice President and Chief Financial Officer. Please note that this conference is being recorded. At this time all participants are in a listen-only made. A question-and-answer session will follow the formal presentation. I will now turn the call over to Semtech's Vice President of Investor Relations, Anojja Shah. Thank you. You may begin. Thank you, John. A press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.com. Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties, please review the safe harbor statement included in today's press release and in the other risk factors section of our most recent periodic reports filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current, as of today only, and Semtech undertakes no obligation to update the information from this call should facts or circumstances change. During this call, all references made to financial results in our remarks will refer to non-GAAP financial measures unless otherwise noted. A discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures are included in today's press release. Thank you, Anojja. Good afternoon, everyone. In Q3 fiscal 2023, in-line with our guidance, Semtech delivered Q3 net revenue of $177.6 million, a sequential decrease of 15% and a year-over-year decrease of 9%. We face a challenging macroeconomic environment and see sustained softness in the consumer market and overall weakness in China, but we are beginning to see signs of stability on several bright spots. Our focus on regional revenue diversification is showing signs of success. We see accelerating adoption in North America and Europe for TriEdge for LoRa and our broad-based industrial and [automotive flotation] [ph] business due to our targeted growth efforts with end customers. Overall, Q3 shipments into Asia, North America, and Europe represented 71%, 15%, and 14% respectively. While this represented a [ship to addresses] [ph] for our distributors and customers, we estimate that approximately 35% of our shipments are consumed in China, 28% in the Americas, so 21% in Europe, and the balance over the rest of the world. Looking at our end markets, our infrastructure end market grew 5% over the prior year, but declined 17% sequentially and represented 39% of total net revenues. Net revenue from the industrial end markets also grew 7% year-over-year, but declined 13% sequentially and represented 41% of total net revenues. As I previously mentioned, we continue to see softness in consumer end markets, where net revenues for high-end consumer decreased 43% over the prior year and 15% sequentially and represented 20% of total net revenues. Approximately 10% of high-end consumer net revenues was attributable to mobile devices and approximately 10% was attributable to other consumer systems. Our sales channel remains consistent with distribution representing approximately 83% of shipments and direct 17% of shipments. Our distributor POS declined during the quarter, but remained balanced with approximately 38% of POS coming from infrastructure, 33% from the industrial segment and 29% coming from high-end consumer end market. So far in Q4, we see signs that our POS is stabilizing and no longer declining. The Q3 bookings decreased sequentially and represented book-to-bill of less than one. Bookings were generally weaker across all regions and end markets. And just as in POS, we are beginning to see stability in bookings over the past month. Our gross margin remains resilient. In Q3, gross margin increased 30 basis points sequentially to 65.5%. This is a new quarterly record, driven mostly by a lower mix of consumer revenue. For Q4, we are projecting a small decline of gross margin to 64.5% at the midpoint, driven by lower absorption due to the softer overall demand environment. We expect gross margins to hover at current levels plus or minus 100 basis points until demand recovers. Q3 operating expenses decreased approximately 5% sequentially to $68 million as we took steps to respond to softening demand. For Q4, while maintaining our investments in new products, we will take additional measures to reduce operating expenses by approximately 10% sequentially in response to the weaker demand environment. Managing our cash flow is a focus in these challenging times. In Q3, cash flow from operations was unusually low at $18 million or 10% of revenue, reflecting elevated use of working capital as accounts receivable increased due to timing of shipments and as we continue to pay for prior period long lead time materials. We expect our cash flow from operations to rebound in Q4 to normal seasonal levels. Cash, cash equivalents, and marketable securities increased approximately $256 million to $618 million. The increase is primarily due to the $319.5 million in convertible notes, we issued to help fund the proposed Sierra Wireless acquisition, slightly offset by a $23 million payment on our existing line of credit. The convertible notes resulted in net cash proceeds of approximately $280 million after expenses, sale of warrants, and the cost of convertible note hedge transactions we entered into in conjunction with the issuance of the notes. These convertible notes carry an interest rate of 1.65% and will mature on November 1, 2027. The conversion price of the notes, including the hedge transactions is $51.15. And on a non-GAAP basis, there will be no dilution below this price. In Q3, we did not repurchase any stock because of our pending acquisition of Sierra Wireless. We have approximately $209 million remaining in our share repurchase authorization. Going forward, we expect to primarily use our cash to pay down the expected debt from completing the Sierra Wireless acquisition. In Q3, accounts receivable increased 13% sequentially due to the timing of shipments and days of sales increased 9 days to 39 days. In Q3, net inventory in absolute dollar terms was up slightly sequentially and days of inventory increased 27 days sequentially to 150 days as we continue to receive previously committed long lead time materials, [indiscernible] by the decline in demand. We expect net inventory to be flat to slightly down in Q4, reflecting the weaker demand environment. As we look forward to the pending acquisition of Sierra Wireless, we remain excited about the growth potential of the two companies when combined. Sierraâs reported revenue is consistent with our expectation. When it completes, the transaction is expected to be immediately accretive to Semtechâs non-GAAP EPS. In summary, our business continues to be adversely impacted by the broad slowdown in China and a sustained weakness in the consumer market. Maintaining our financial health is paramount during these uncertain times. We have a management team that has experience managing through industry downturns, and I'm confident that the proactive actions taken are focused on new products, design wins, working capital management, and geographic diversification of strength in Semtech and prepare us well for the recovery. Thank you, Emeka. Good afternoon, everyone. Let me begin by providing a brief update on our proposed acquisition of Sierra Wireless. I will then share details of our Q3 fiscal year 2023 performance by product group, and then provide details on our outlook for Q4. Regard to our acquisition of Sierra Wireless, as previously announced, we received a second request from the U.S. Department of Justice. We are cooperating fully with the DOJ and providing them with their requested documents. In parallel, together with Sierra, we have made significant headway through integration planning and are prepared to close immediately when approval is accomplished. We continue to be extremely excited by the transformation we can drive in the entire IoT industry by bringing together the ultra-low power long range sensor benefits of LoRa technology together with the low latency, high bandwidth network benefits of cellular technology. Our goal is to enable IoT deployment simplification through end-to-end connectivity and deliver a cloud to chip IoT services platform that will accelerate our customers' digital transition to the Internet of everything. We continue to receive very positive feedback from our customers as they start to recognize the disruptive potential of the combination of the two companies. Combination of optimizing LoRa and cellular technology is a highly strategic opportunity that will position Semtech as the clear leader in the fast growing ultra-low power IoT market. Now, turning to our Q3 performance. Our Q3 net revenue was $177.6 million, slightly above the midpoint of our guidance range. We posted record non-GAAP gross margins of 65.5% and non-GAAP earnings per diluted share of $0.65. Despite the challenging macro environment, we continue to execute well, have solid new product releases, and new design in momentum and are very excited by our future growth prospects across all our target market segments. Let me begin with our Signal Integrity Product Group. Revenue was up 2% from Q3 of fiscal year 2022, and represented 44% of total revenues. As expected, the weak economic environment in China is impacting infrastructure demand negatively. Our hyperscale data center business slowed in Q3 following a strong first half performance. Despite the softer demand, our FiberEdge revenues doubled over the previous quarter as we increased our PMD penetration in the 400 gig active optical cable segment. In addition to solid FiberEdge momentum, our tri edge platform continues to make excellent design and progress in global data centers, predominantly in North America. We are pleased to report tri edge has been selected by a major North American hyperscale data center provider in a new high volume multi-year program to enable low power up, low latency, and low cost interconnects within their data centers. We expect to be in production on this project in the second half of fiscal year 2024. The benefits of tri edge align well with the long-term goals of hyperscalers, focused on lowering the power and cost of their interconnects within their data centers. TriEdge and CopperEdge are starting to gain traction in advanced data centers in North America that are focused on leading edge, artificial intelligence, or high speed computing applications with both low cost and low latency critical requirements. In addition to our current FiberEdge and TriEdge momentum, we continue to invest in new higher performance solutions that will enable further system level innovation within the hyperscale data center market. We recently demonstrated our first 200 gig per channel PAM4 FiberEdge platform. This innovative PMD platform will be used in 800 gigabit and 1.6 terabyte optical modules deployed by hyperscalers. We also recently introduced our ultra-low power, 50 gig per channel TriEdge solution for both ultra-low power 200 gig and 400 gig optical modules. In addition, we are starting to see great interest in our new CopperEdge re-driver platform. Targeted at 100 gig per channel copper interconnects. We expect to announce more significant CopperEdge, TriEdge and FiberEdge design wins throughout FY 2024. We remain confident that our full portfolio of data center platforms, including ClearEdge and TriEdge CDRs, FiberEdge PMDs, and CopperEdge re-drivers will enable us to continue to rapidly grow up our hyperscale data center business nicely over the next several years. In Q3, our PON business also declined sequentially due to weakening demand in China. What was up approximately 36% on an annual basis and is on-track to deliver another record year. We continue to see relative strength in 10 PON, OLTs and ONUs while gigabit PON demand is weakening. While most of our PON revenues today are from China, we are starting to see increasing deployments of 10 gig PON outside China. In addition, we are actively engaged with leading PON system providers globally to our focus on higher bandwidth PON deployments. We expect global PON deployments to continue to accelerate as demand for higher access bandwidth is expected to increase in the future. While weakness in China is a major headwind at this time, we remain confident this business will grow nicely over the next several years as other regions deploy PON solutions and as our China business recovers. Revenue from our wireless space station business was down in Q3, both on a sequential and year-over-year basis. This was mostly driven by economic weakness in China, which negatively impacted 4G and 5G deployments. However, our 5G revenues grew 75% on an annual basis as European customers start to expand their 5G footprint. In Q3, we announced the production release of our TriEdge 5G base station platform targeted at 50 gigabit per second PAM4 front haul links. This TriEdge platform is a bi-directional analog PAM4 CDR with an integrated differential driver, offering ultra-low latency and low power and enables the use of low cost 25 gigabits per optics. to operate at 50 gigabit per second. We already have numerous 5G base station designs with both our ClearEdge and TriEdge platforms and expect continued adoption throughout FY 2024 and initial production revenues in the second half of FY 2024. While overall macroeconomic conditions continue delay the rollout of 5G infrastructure, we are seeing more global deployments driven by European 5G vendors, which will provide more geographical balance in this business. As a result of demand weakness and excess inventory in China, we expect the infrastructure market to remain weak and expect our Signal Integrity Product Group revenues to decline in Q4. However, we still anticipate that our Signal Integrity Product Group would deliver record annual revenues for FY 2023. Moving on to our Protection Product group. In Q3, our Protection revenues were down 27% sequentially and represented 22% of total revenues. Extreme softness from the high-end consumer market negatively impacted our business. Lower revenues from our Asian smartphone customers and broad consumer weakness offset record revenues from our North American smartphone customers. We believe we are very well-positioned in the consumer protection market with a strong USB-C protection portfolio, which is expected to be the high speed interface of choice across most future consumer segments. Our broader industrial protection business, which represents a wide range of end markets across all regions showed resilience in the Americas and Europe markets. We are seeing continued positive traction in the automotive segment as our Ethernet shield, display shield, and antenna shield products are all gaining momentum as our customers integrate more advanced lithography technologies with higher speed interfaces into their vehicles. Our Protection Shield solutions also have solid design win momentum at several of the top global EV makers, which is the fastest growing sub segment of the automotive market. We recently announced our new hot switch platform for industrial and communications applications. This truly innovative system protection platform provides new protection features that will safeguard systems, prolonging the lifespan of electronic devices, and reducing electronic waste. As the overall macro environment improves, we remain well-positioned to grow in the broader protection market with a well-rounded protection portfolio for high speed interfaces such as 10 gig Ethernet, USB Type C, touch displays, and antennas and expect our broader industrial protection business to deliver record revenues in FY 2023. While we are starting to see demand levels stabilize, due to high consumer inventory levels, we expect the protection business to further decline in the fourth quarter. Turning to our Wireless and Sensing Product group. In Q3, revenues from our Wireless and Sensing Product group declined 3% from the same quarter a year ago and represented 34% of our total revenues. Our LoRa enabled revenues grew 36% annually, driven by growth from the smart building, industrial IoT, and smart city segments. LoRa revenues increased nicely in North America and Europe, but remained weak in China due to ongoing COVID lockdowns and general economic softness in the region. LoRa continues to be utilized across a broad range of exciting used cases and we are seeing increasing global adoption of LoRa, due to its ultra-low power, long range, and low cost connectivity. Here are a few exciting announcements from this past quarter. Exeger is integrating lower edge with their unique solar cell technology for indoor and outdoor asset tracking and global supply chain logistics. Combining Semtech's lower edge asset management platform with Exegerâs [powerfoyle solar cell technology] [ph] significantly extends the battery life of asset tracking and environmental sensing devices. CWD introduced a new module combining LoRa and Bluetooth to bring the LoRaWAN capabilities to hazardous work environments such as oil rigs, mines, and construction sites. However, employee safety is the first priority. These easy to deploy IoT modules enable the tracking and monitoring of employees safety. Intent Technologies announced its LoRa enabled smart property solution, which enables improvements in the operating performance of a building is being adopted by Nexity, a leading real estate service provider to optimize performance, improved quality of service, and reduce the carbon footprint in residential and commercial properties. Their platform has already achieved a 10% savings in overall building operational costs. Kiwi Technology introduced a new fully autonomous LoRaWAN-enabled network control unit for gas metering. This new comprehensive MCU will enable multiple remote meter reads per day and allows customers access to their real time and historical gas consumption trends to identify cost savings, and discover waste reduction opportunities. The MCU also anticipates and remotely shuts off gas in potentially dangerous situations. Kiwi Technology expects these meters to remain fully autonomous for 10 years. This week at Amazon's re:Invent Conference, we announced that Amazon Web Services is integrating our LoRa-cloud geolocation capabilities into their AWS IoT core platform, and launching a new service to simplify asset tracking solutions using AWS. Customer adoption is already beginning and we expect this will enable the broad expansion of our LoRa-cloud geolocation services and our LoRa Edge silicon platform in the future. LoRaâs global adoption continues to make very positive progress. And our metrics dashboard indicates solid momentum. These metrics include a number of public LoRaWAN network operators, grew to 178, up from 173 at the end of Q2. In addition to public networks, private networks are also experiencing significant growth as evidenced by many new used cases and applications. We expect approximately 180 public LoRaWAN network operators by the end of FY 2023. There were 5.6 million LoRa Gateways deployed at the end of Q3, ahead of our FY 2023 target of 5.5 million. This was driven by growth in Amazonâs Sidewalk Gateway deployments, which were up 14% sequentially and up 120% annually. And private network gateway deployments, which increased 13% sequentially and 45% on an annual basis. Macro Gateway deployments also increased 10% sequentially and 33% on an annual basis. We expect these global gateway deployments to drive an acceleration in end device attach rates over the next several years as numerous new used cases increasingly adopt low power sensor works. The cumulative number of LoRa end nodes deployed increased 15% sequentially to 280 million at the end of Q3. We expect this number to exceed 300 million cumulative end nodes by the end of FY 2023 with the increased interest in adopting digital technologies to monitor and preserve our natural resources and to help mitigate climate related issues. We expect end node deployments to accelerate rapidly over the next three to five years. Excluding China, we expect our FY 2023 LoRa-enabled end nodes to increase on an annual basis by approximately 60% confirming the increasing attach rate of [LoRaWAN] [ph] devices to install gateways globally. Our LoRa opportunity pipeline at the end of Q3 was approximately $1.1 billion. We anticipate that on average 40% to 50% of the opportunities currently in the pipeline will convert to real deployments over a 24 month timeline. Over 82% of our LoRa opportunity funnel is currently from regions outside of China. In Q4, we expect our wireless and sensing business to decline as weakness in China and a weak consumer business negatively impact both our LoRa and proximity sensing businesses. However, driven by record LoRa-enabled revenues, which we expect will grow approximately 39% in FY 2023, we anticipate our Wireless and Sensing business to deliver another record revenue year in FY 2023, despite very weak consumer revenues. In Q3, we released 12 new products and achieved 2,189 new design wins positioning us very well for future growth as macro trends improve. Looking forward to the fourth quarter of fiscal year 2023, we see continued demand challenges in China resulting in weaker than normal seasonality. However, we are starting to see signs of stability in both demand and POS, including from China. As a result, we expect our Q4 net revenues to be between $145 million and $155 million. To attain the midpoint of our guidance range or approximately $150 million we needed turn orders of approximately 27% at the beginning of Q4. We expect our Q4 non-GAAP earnings to be between $0.44 and $0.52 per diluted share. I will now hand the call back to the operator. Emeka and I are happy to answer any of your questions. Operator? Thank you, sir. [Operator Instructions] Our first question comes from the line of Tore Svanberg with Stifel. Please proceed with your question. Yes, thank you. The first question is on your current number there for the January quarter. So, I think last quarter, I think you expected 0% churns, obviously now quite a bit higher. Does that mean Mohan that kind of like the supply and demand is back in balance? Because I think historically you turn about 20%, 30% on any given quarter. And as a follow-up to that, what gives you the confidence that you can actually achieve the 27% terms? Yes. I think that is correct, Tore. Its supply lead times are starting to normalize and get back to what they kind of historically have been. There are also â there's also inventory in place. So, meeting short lead time orders is not going to be as difficult as it has been in the past. I think also with the POS stabilizing and the general feeling that consumer, for example, has been extremely weak for a long period of time and starting to see some improvement in bookings there gives us that confidence. And as you point out, yes, historically, we've turned 30%, 40% a quarter fairly frequently. Very good. And as a follow-up to Emeka, Emeka when you talk about OpEx next quarter, you mentioned a 10% number, so is that total OpEx down 10% sequentially? And would this sort of be the new run rate going forward for as we model the rest of the year? Yes, it is 10% down sequentially. As you know, Tore, when we start a new fiscal year, there are additional expenses that will come out, right, higher taxes and things like that. So, the operating expenses I would expect going forward, it's probably going to be a little bit up in the first quarter and the first half of next year, but I think the run rate is going to be significantly down from what it was for fiscal year 2023. As a matter of fact, I will probably expect your quarterly run rate to be about $63, $64 million a quarter. Very good. Just one last house-keeping one, you mentioned that 82% of the LoRa funnel is outside of China, which means 18% in the funnel is China. Why would that would be currently as far as revenue is concerned? Revenues are closer to 45% to 50% of total revenues up from China, Tore. Obviously, I think in the last quarter, it's probably a little lower than that, but I think itâs still â most of the â a lot of the revenue is up from China. The funnel obviously takes time to transition into revenue, but the important point there is that we are seeing a lot of success outside China. Now, China also is still doing very well and LoRa is growing in China and I think it will continue to grow in China. But there are other regions, particularly North America, has taken a while to catch up. But I think now if the funnel â if we execute on the funnel transition to revenue, then we'll start to see a little bit more balanced geographical business for LoRa. Hi. This is [indiscernible] on the line for Rick. Thanks for letting me ask a question. So, in regards to your agreement to license to LoRa Cloud to AWS, I was wondering how this affects your end node forecast and the long-term 40% CAGR, is this already embedded in â can we see in the accelerated growth in your 40% CAGR? Thanks. Well, it's kind of embedded in the 40% CAGR, I think because it drives a lot of end use connectivity. The whole goal here is to use AWS' channel and market power and presence to go out and drive more end node connectivity and more assets that need to be tracked and managed and we feel pretty good about the combined company's efforts here and the thinking here and the platform, but certainly, that's the expectation. Obviously, it will drive in addition to lower edge end devices, it would drive cloud services revenues for us and that's significant. Great. Thank you. My second question is on Laura Spectrum. Is there any way you can help parse out how big LoRa is for the unlicensed sub gigahertz spectrum? And how does this compare to the 2.4 gigahertz variety? Thanks. Majority of the revenues are sub gig. The 2.4 gig is relatively new. So, I would say, yes, 90% and above is probably sub gigahertz at the moment, yes. Yeah. Hey, Mohan and Emeka, I've got a couple. Mohan, I'm looking at your commentary. You talked about, both you and Emeka talked about signs of demand stabilization, but when I sort of square that against your commentary, I kind of concur that both industrial and infrastructure are down. So, my question is, if you're seeing signs of stabilization, where are you seeing them? And do you think this is happening because of some of the new products that you guys are launching like TriEdge getting some traction and CopperEdge getting some traction, or are you seeing sort of broadband or sort of broad based, sort of pickup in demand which suggests that maybe you're on your way up from here? Yes. I think obviously, Harsh, we guided down for Q4 and any bookings, POS demand stabilization is really going to impact the first half of next year, right. So, as we start to look at it, I would say that the stabilization is more on the existing business, the existing business in China, looks like it's going to recover in the â starting to recover in the first half. The existing consumer business, which has been down most of the good part of the year. Looks like it's starting to bottom out here. So, hopefully Q1, maybe Q2 will start to see pick up there. Now, you add on top of that some of the new growth engines and design wins I talk about with starting to feel pretty good about certainly the second half of next year from a growth standpoint. But to answer your question, the comment on the stabilization is more on the existing revenues today. Understood. And then you talked about a couple of growth rates for LoRa. So, I just want to understand, you talked about Mohan, I think you said all-in all-out, you ended up with about a 39% growth rate to LoRa for this year, which I think is pretty respectable given your [indiscernible] to China and what's really happening in China? And then you talked about a number ex-China of 60% that I didn't catch. Maybe you could clarify that. And then how are you thinking about â the real question is how are you thinking for growth for next year? Yes. So, the 39% is our estimate for this year's growth. That's correct for LoRa-enabled business. The 60% now refers to end nodes, and I simply commented on the fact that if you extract China, you take out China where the growth has been a little bit slower, end nodes would have grown 60%. So, end nodes as growing 60% in North America and Europe. It actually is â it's about 17% to 20%, including China. So, it's still pretty good, but I think it just shows that the acceleration in other regions is quite good. Next year, a lot is going to depend on the second half. I mean, obviously China continues to be weak. And â but we have some very good things going on like the Amazon announcement we just made, we think sidewalk and some of that is â some of those areas are starting to get some momentum. We have a few headwinds, I mean, really what happened in the last couple of years with the helium gateways is going to give us a little bit of a headwind for growth next year, but still, we haven't given up. We think next year should still be a reasonably â the growth, it won't be close to the 40% CAGR, but I think if we can get some momentum on some of these other used cases, I think we'll still see good growth. Hey Mohan, very helpful and if you don't mind, I'll ask another one and I promise I'll get off the line after this. I had a question on the deal. You've got a second request. So, that changes the timing of the deal. I guess my question is, where do you think the timing of the deal will lie? And then for Emeka, 319 odd million raised, do you think that's enough to close the deal? And then were you looking at converts the entire time or were you looking at straight debt? And then given the interest rates, you sort of pivoted to convert and if these are converts, would you have an intent to buy these bonds back so they actually don't convert and dilute? So, let me start with the timing Harsh, which is obviously out of our control to some extent. I can tell you what we're hoping, which is that towards the end of the year and early next year, we will be closed and we're ready to close and we're ready to move to integration. We're very well prepared for that. We're excited about doing it. And so far, there's no indications that that timeline shouldn't be achievable. And so Harsh with regards to your question, we do have the financing that we need to close the transaction. We have a combination of our line of credit from our commercial banking partners. We have a term loan from our commercial banking partners and then we do have this convertible debt in addition to our internal cash. So the financing is pretty much in place for the acquisition. In terms of what we were looking at, we were looking at all the options. We were looking at everything and we were trying to â we had to make the decision that we thought was best in terms of the cost of capital and things like that. With regards to being able to retire the debt, we just have to see how things play along here. So that we do have a lot of options on what we can do with regards to the [comparable debt] [ph], but I will make those decisions at the right time. Yes. Hi. This is Trevor on for Quinn Bolton. Thanks for letting me ask a question here. So, given your comments on demand stabilization, does this mean you see fiscal 4Q and fiscal 1Q 2024 as the possible revenue trough, with the step-up in the second half of 2024? Thank you. That is the hope from what we see today. We certainly see the second half as being sequentially up from the first half. If you look at FY 2023, we had a very strong first half. Looks like it's going to be a relatively weak second half, but as you see from our comments that we expect FY 2023 to be a record year for us. So, when you look at it as a total, it looks like a pretty good year. Now, going into next year, we know the first half is going to be relatively weak. The question is, how strong is the second half going to be if it comes back and how it comes back. And the main drivers of the weakness have been China and Consumer. There's some inventory build-up I think from the very strong first half. So, as those bleed through and China comes back and consumer starts to strengthen a little bit, we could hopefully see a stronger second half next year. Awesome. Thank you. And you spoke about relative resilience in North America and the EU and broad industrial. Do you expect this resilience to continue moving forward? And is automotive playing a big role in this as well? Well, automotive is one of the stronger segments today for sure and we expect it to continue to be I would say, the other industrial markets in North America and Europe are holding up relatively well. It's all relative consumers. It's been extremely weak, particularly Asian consumer business, I guess, it's well documented that China consumer and Samsung as an example have been very weak. And I would say that broader consumer market and computing market, PCs, laptops, tablets is also very weak. And then China itself is definitely going through some challenges economically and through â still through COVID issues. And so demand is weak. I don't anticipate those will remain, but for sure, at the moment, North America and Europe are stronger regions. Yes. Thanks for taking the question and appreciate all the transparency on what you're seeing in the markets and with the different products group guys. Mohan, I wanted to start just digging a bit deeper into China to understand what you're seeing there. You were early in flagging the weakness that started in China back in August and in interpreting your comments, I'm trying to discern if the signs of stability that you may be seeing in consumer really related to Lunar New Year builds and therefore more of something that might be near term oriented versus something that might be related to product cycles that would be up beyond that? So, can you just go a little bit deeper into what's actually happening in China and the confidence that you have in consumer and elsewhere that we're near a bottom there? Yes, I think, I would say the key thing to remember, Craig, is that it's come down significantly, right. So, consumer and China across the board has come down quite significantly in Q3, comes down again in Q4, so we guide down in Q4. And so, the indications are that Q1 will start to stabilize and we're seeing demand stabilization. So, demand has started to level off. We're also seeing POS starting to improve and also bookings. So, I would say it's fairly broad. I wouldn't say it's one specific thing, but just remember that it's off a very low base rate. So, the hope is now we'll start to see, I think inventory consumed, I think that's the key. So, POS increasing and some of the â even our customers' inventory is starting to flow through over the next two quarters and then we'll start to see, kind of more of a real demand supply environment I think in the Q2, Q3 timeframe hopefully. That's helpful. And then the second question is more of an intermediate term question. As you look out over the course of calendar 2023, really fiscal 2024 for the company, what businesses in the portfolio, do you have confidence that can grow year-on-year? We clearly have a challenging start given where we exit fiscal 2023. But as you look ahead, it seems like Laura would be set up for good growth. You talked about some real momentum in TriEdge. What are the business that you think are going to be year-on-year growers next year? Yes. So, I do think for us the data center business is a good chance of being a very strong grower next year, obviously second half driven, but we mentioned the significant wins actually we have in both TriEdge and FiberEdge in my script. And if you look at that, that second half can certainly drive growth in data center. On the wireless side, it's been fairly muted. So, I think the question there is really more of a macro, kind of comment on 5G base station deployments and some of the 4G stuff coming back. Again, China a key player in that. But that could certainly grow. Again, it's been very weak this fiscal year. So, next year could be a [strong roll up] [ph]. PON has had â we'll have a record year in FY 2023 for us. So, I'm not sure we'll see same level of growth. So, it will grow, but probably it will be a smaller, a lower growth rate versus the other segments. And then the consumer is the big question because I think it's had such a poor fiscal year 2023 that one has to believe that that has a good chance to come back in FY 2024 and that includes our protection business and our proximity sensing business in Asia, particularly in Korea. And then of course, [LoRa] [ph], as I mentioned, if you take out the Helium challenge that we have, the business should grow. And Craig, I also think our broad-based industrial and automotive protection, which is a record â which is expected to have a record this year, should also grow next year. That is the anticipation. Great. And then my last question is for you, Emeka. And it's just a follow-up to comments made three months ago around the capital costs to really the debt interest cost for the square deal. I think three months ago you were thinking 5% to 5.5% would be a reasonable blended interest cost, is that still the expectation or has it changed? I think it's going to move to slightly because of all the increase in the rates at this point depending on where the rates are. At the time we close the transaction, probably expect it to be between 5.5% and 6%. Hey, guys. Thanks for the question. Either of you guys, you know perhaps you can illustrate the weakness we're seeing in China, perhaps you can illustrate it for us. I think for the full-year, you're expecting 34% of end consumption to be in China. I guess the first question is, what's a more normalized number? And then where do you think this trough in Q4? Are we talking like 20%, is it less from that, how sort of deep is this? I guess that's my first question. So, with regards to the consumption by region, it is an estimate, right. We currently have a size that 35% and it is still at that range. Maybe we'll just have to see how the POS and everything continues by the end of the year. But Chris, my gut feel at this time is that it is probably going to be at that level, maybe slightly lower, but I can't really give you a number at this point. Okay. Maybe you can talk about, I think you mentioned inventories in China, I don't know if that was for a specific product or not, but can you talk about that where you think inventories are? I know you've talked about demand weakness, but inventories, is that coming into play here as well? And the reason I mentioned that, is April I think in â the April quarter for you guys can go either way up or down, if there is some inventory being chewed through here, do you think that would indicate perhaps a positive sequential in the April? Yes, I think so. I have to look at it by product group. For sure, in our infrastructure business. And I'm just referring to China now. We had a very, very strong first half across all of our businesses. And I think particularly, PON has perhaps a little bit more inventory than the other segments. And that's reflected in a weaker Q4 expectation, I think. So, yes, I would say, in China, it's infrastructure, data center, and PON mostly a little bit of 4G wireless I think there. And then on the consumer side, again, that's both for protection and proximity sensing. Again, we had a pretty strong previous fiscal year. And I think what we are seeing is that consumers have been fairly soft for the whole year, but particularly I would say in China and Korea. So, those are the two main areas. On the LoRa front, there's â obviously there's some excess inventories from the Helium drop-off there, but I think that will eventually be utilized. The Helium gateway chips are the same chips that can be used for other gateways. So, I'm not so concerned there. It's just more of a macro softness, kind of thing for China. So, we'll see how that plays out. Okay. And at this time, I'm not seeing any further questions. I would like to turn the floor back over to management for any closing remarks. In closing, our global teams are executing well in a challenging economic environment. While we are facing more macroeconomic challenges in Q4, Semtech is a very resilient company and I'm confident that with the solid progress of our exciting growth engines, and the diversified nature of our business, we will successfully manage through the headwinds we currently faced and deliver yet another record year in FY 2023. With that, we appreciate your continued support of Semtech and look forward to updating you all next quarter. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
EarningCall_1802	Good day, and thank you for standing by. Welcome to the Casey's General Stores' Second Quarter Fiscal Year 2023 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, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead. Good morning and thank you for joining us to discuss the results from our second quarter ended October 31, 2022. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer. Before we begin, I'll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company's supply chain, business and integration strategies, plans and synergies, growth opportunities, and performance at our stores. There are a number of known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including but not limited to the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine and related governmental actions as well as other risks, uncertainties and factors which are described in our most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey's disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation of non-GAAP, GAAP financial measures referenced in this call as well as the detailed breakdown of the operating expense increase for the second quarter can be found at our website at www.caseys.com under the Investor Relations link. We'll dive into the strong second quarter results in a moment. But first, I want to thank our team for their commitment to our guests and especially during the holiday season, I'm so grateful for what we've accomplished this quarter and so far this year. This fall we saw our guests head to Casey's for everything they need, from our fast delicious breakfast offering, including fresh bean-to-cup coffee to convenient fill-up or delicious pizza meal occasion. On the heels of last year's breakfast relaunch, our breakfast offering pulled guests in with a fan favorite our loaded Breakfast Burrito as well as our buzzworthy LTO, the ultimate Beer Cheese Breakfast Pizza featuring Busch Light beer cheese sauce. This only a Casey's offerings generated store traffic, online pizza orders, and a lot of conversation about Casey's this fall. In November, we held our Annual Veterans Giving Campaign across all our stores to raise funds for organizations to support veterans and their families. As a veteran myself, I know the great sacrifice that these families have made and the challenges they face. With the help of our generous guests and partners at PepsiCo, we've raised over $1 million to help two outstanding organizations. The Children of Fallen Patriots and Hope For the Warriors. These funds will allow the charities to have an even greater impact on the lives of veterans and their loved ones. Thank you to our vendor partners, each Casey's team member that made the donation ask in our stores, and especially to our guests who truly do good when they shop at Casey's. Now let's discuss the results from the quarter. As you've seen in the press release, we had an excellent second quarter. Diluted EPS finished at $3.67 per share, a 42% increase from the prior year, and was a record high for the second quarter. Inside sales remained strong despite the challenging economic environment, driving inside gross profit up almost 9% to $504 million. The company generated $138 million in net income, an increase of 42% and $272 million in EBITDA, an increase of 25% from the prior year. Our differentiated business model is resilient in these challenging economic conditions as we have strong execution of our strategic plan across grocery and general merchandise, prepared food and dispensed beverage, and fueled with excellent execution by store operations. I would now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 7.9% from second quarter or 14.4% on a two year stack basis with an average margin of 39.8%. Our team did a tremendous job with our vendor partners managing the product mix, in-stock levels, and retail price point adjustments. We saw strong performance in pizza both slices and whole pies as well as alcoholic and non-alcoholic beverages. We were able to partially offset some inside margin pressure in the prepared food and dispensed beverage category through select pricing adjustments and finding the right product mix within the grocery and general merchandise category. Same-store prepared food and dispensed beverage sales were up 10.5% or 15% on a two year stack basis, with an average margin of 56.7% versus 50.6% a year ago. Sales were up due to strong performance in pizza slices and whole pies, as well as cold dispensed beverages. We had better product availability in both cups and donuts, which led to improved performance within the bakery and dispensed beverage categories. We had sequential improvement with margin versus first quarter, but ingredient costs, particularly cheese continued to pressure profit margins. Same-store grocery and general merchandise sales were up 6.9% or 14.2% on a two-year stack basis, with an average margin of 33.3%, which is the same as it was for the year ago period. The second quarter showed excellent results in both non-alcoholic and alcoholic beverages as we continue to see great results by leveraging our approximately 1,500 stores with a liquor license and growing our private label sales. For fuel same-store gallons sold increased 0.3% with a fuel margin of 40.5 cents per gallon. Our diesel business had a great quarter with low double-digit volume growth. We saw cost volatility throughout the quarter and the fuel team navigated through well and continues to appropriately balance profitability and volume as we optimize gross profit dollars. Fuel margin was also positively impacted by the sale of $11.1 million worth of RINs during the quarter. Before I jump into the financials, I would also like to take a minute to acknowledge the team given the very strong performance throughout the entire business. The company showed great resiliency throughout the quarter in all three legs of our business led by store operations performed exceptionally well. Total revenue for the quarter was $4 billion, an increase of $716 million or 22% from the prior year. Total inside sales for the quarter were $1.3 billion which is an increase of $129 million or 11% from the prior year. For the quarter, grocery and general merchandise sales increased by $88 million to $917 million, an increase of 10.6%. Prepared food and dispensed beverage sales rose by $42 million to $351 million, which is an increase of 13.5%. Results were favorably impacted by operating 3% more stores on a year-over-year basis. And our in-stock levels did improve during the quarter versus the prior year, which helped inside sales, especially in prepared food. Second quarter retail fuel sales were up $587 million to $2.6 billion due to a 5% increase in gallons sold to $702 million as well as a 22.6% increase in the average retail price per gallon. That average price of fuel during the period was $3.75 a gallon compared to $3.06 a year ago. As a reminder, we define gross profit as revenue less cost of goods sold but excluding depreciation and amortization. Casey's had gross profit of $811 million in the second quarter, an increase of $93 million or 13% from the prior year. This was driven by higher inside gross profit of $41 million or 8.9% as well as an increase of $52.5 million or 22.7% in fuel gross profit. Inside gross profit margin was 39.8%, down 90 basis points from a year ago. The grocery and general merchandise margin was 33.3%, which was flat with the prior year. The merchandising team has done a good job, given the environment with its ability to offset inflationary pressure via mix management, joint business planning with our partners and retail point - price point adjustments. Prepared food and dispensed beverage margin was 56.7%, and that's down 390 basis points from the prior year. The decreased margin was negatively impacted by commodity costs, specifically cheese, which were $2.24 a pound in the quarter and that compares to $1.96 per pound last year or a 14% increase. This negatively impacted the PF&DB margin by approximately 90 basis points. The category results were impacted by a LIFO charge which had an adverse impact of approximately 25 basis points. Fuel margin for the quarter was 40.5 cents per gallon and up 5.8 cents per gallon from the prior year. Fuel gross profit benefited by $11 million of RINs sales or about 1.5 cents per gallon. Total operating expenses were up 7.7% or $39 million in the second quarter. Approximately 2% of the operating expense increase was due to unit growth as we operated 83 more stores than the prior year period. Same-store credit card fees rose due to higher retail fuel prices and they accounted for about 1% of the operating expense increase in the quarter. Another 1% of the increase was due to a non-cash impairment charge and approximately 1% of the increase is also due to internal fuel expense that rose that's related to our grocery self-distribution business. Increases to same-store employee expenses have been offset by a reduction in-store labor hours specifically in training and overtime. Our store operations team has done outstanding work operating our stores more efficiently without negatively impacting the guest experience, resulting in only a 1.3% growth in same-store operating expense excluding credit card fees. This is an impressive feat considering the inflationary headwinds that are impacting the business right now. Net interest expense was $13.5 million in the quarter, that's the same as the prior year. And as a reminder only 17% of our debt is floating rate, which limits our exposure to rising rates. The effective tax rate for the quarter was 23.6%, and that compares to 25% in the prior year. The decrease was driven by a one-time benefit that we recorded due to an income tax reduction in Iowa. Net income was up versus the prior year to $137.6 million, an increase of 42%. EBITDA for the quarter was $271.7 million compared to $217 million a year ago, that's an increase of 25%. Our financial flexibility remains excellent. On October 31, cash and cash equivalents were $415 million and we have remaining capacity of $469 million on our lines of credit, giving us ample total liquidity of $884 million. Furthermore, we have no significant maturities coming due until fiscal 2026. Our leverage ratio calculated in accordance with our senior notes is now 1.9 times. That's the same as it was prior to the Bucky's and the Circle K acquisitions and it's generally in line with our preferred long-term target. Our balance sheet still has plenty of capacity to make sound strategic investments as they present themselves. For the quarter, net cash generated by operating activities of $210 million less purchases of property and equipment of $95 million resulted in the company generating $115 million in free cash flow compared to $135 million in the prior year. At the December meeting, the Board of Directors voted to maintain the dividend of $0.38 per share per quarter. We will continue to remain balanced in our capital allocation going forward leaning into the many EBITDA and ROIC accretive investment opportunities that are in front of us. We will also stay opportunistic related to our $400 million share repurchase authorization, but we didn't repurchase any shares this quarter. Due to the strong year-to-date performance, we are going to modify certain aspects of our fiscal 2023 outlook. The company now expects same-store inside sales to be up approximately 5% to 7% which is an increase from the previous range of up 4% to 6%. Total operating expense increase is expected to be near the low end of the annual range, which is approximately 9% to 10%. And the tax rate is now expected to be between approximately 24% to 25% for the year. The company is not updating its annual outlook for the following metrics; inside margin is expected to be approximately 40%, the company expects same-store fuel gallons to be flat to up 2%, the company continues to expect to add approximately 80 stores in fiscal 2023, and expects to exceed the stated three-year commitment we have of 345 new units. Interest expense is expected to be approximately $55 million, depreciation and amortization are expected to be approximately $320 million, and the purchase of property, plant and equipment is expected to be between $450 million to $550 million - $450 million to $500 million, excuse me, including approximately $135 million in one-time store remodel costs for recently acquired stores. I would note that capital spending on store openings are back half weighted of the year versus our initial expectations due to ongoing construction delays and local licensing and inspection challenges. As for our November results met our expectations for the current quarter. November inside sales are at the low end of our revised annual guidance. November same-store fuel gallons are comparable to our second quarter results. November fuel margins remain quite elevated and are closer to our first quarter experience than to our second. Our expectations for third quarter operating expense growth were that they will be at or slightly below the low end of our revised annual guidance. And finally, cheese costs are currently a similar headwind in percentage terms to the second quarter. I'd like to again say thank you and congratulations to the entire Casey's team for delivering a great quarter. Due to them we're confident in delivering on our improved fiscal '23 outlook. During the first half of the year, our merchandising team has done an excellent job driving business inside store by offering guests value and quality on products, including our private label program, our revamped breakfast and coffee offering, and our made-from-scratch pizza. The store operations team continues to execute the store simplification plan, was able to do this while efficiently managing operating expenses including reducing same-store labor hours by 3%. For prepared food and dispensed beverage margin, we continue to manage our costs prudently, while holding our relative value proposition for our guests. We're very pleased with the top line growth in PF&DB thus far. With respect to store growth, our business development team is evaluating strong deal flow, and we will remain disciplined with respect to valuations. We're able to leverage our strong balance sheet to achieve this and have unique flexibility to flex our balance sheet if the right opportunity presents itself. This is especially useful in the current macroeconomic environment where there are still inflationary, supply chain, and numerous other pressures. Casey's has historically been resilient in recessionary times as the business model allows for our guests to find quality and value conveniently. Our fuel team has done an excellent job maximizing fuel gross profit dollars, balancing volume and margin. The team has been able to grow gross profit dollars without losing share. The first half of the year has been very volatile for fuel pricing and having a centralized pricing and procurement team has been paramount for the success of the fuel business. On the digital side, orders through our mobile app now represent 66% of all digital revenue, which is primarily driven by whole pies. We've added more grocery and general merchandise items to the app as well. As of October 31, we were at 5.8 million rewards members, adding over 400,000 members in the quarter, because our team continues to drive value for rewards guests. This has resulted in our rewards participation rate reaching 37.8% which is a 600 basis point increase from the prior year's second quarter. As we look ahead to the remainder of fiscal 2023 and beyond, I remain confident in Casey's business model in the phase of uncertain times and believe we can thrive in challenging economic environments. We can adjust to guest needs quickly and the strength of our balance sheet will enable us to act quickly when growth opportunities arise. We're halfway through our fiscal 2023 and we are in a great spot to close out both the fiscal year and our three year strategic plan. And as we close out the current strategic plan, we're excited to host an Investor Day on June 27 in New York where we will be discussing our plans for the next few years. We look forward to sharing with our investors, our vision for fiscal '24 and beyond, so please hold that date. Thank you. [Operator Instructions] Our first question comes from the line of Anthony Bonadio with Wells Fargo. Your line is now open. Yes. Hi, good morning guys. Congrats on the beat. So I just wanted to ask about OpEx for starters. It looks like the revised guidance seems to imply little improvement and maybe even some level of cost acceleration in the back half, especially if I pull out that impairment charge in Q2. Can you just talk about your assumptions there and what might be driving that? Yes, hi, good morning Anthony. This is Steve. I think the - probably the biggest incremental headwind really the only incremental headwind of note that we would be looking at right now would be incremental investment compensation - I'm sorry, incentive compensation for the organization, just given the strong results year-to-date, that's going to be partially offset, if retail prices of fuel continue to trend down, that would be a little less, credit card headwind and OpEx spends than we have been looking at this time last quarter. But generally, beyond those two things, I think most of our operating OpEx assumptions are largely unchanged. Okay, that's helpful. And then just on unit growth. Obviously you guys are running quite a bit below the run rate for that 80 store target for the year. Can you just talk about what gives you confidence in your ability to hit that target? And then how are you currently planning organic openings in the back half? And then what does that imply about your expectations around potential deal flow? Yes, Anthony, this is Darren. Yes, we are confident in getting to that 80 unit number for the year. We are also a little bit of a slow start for sure and a lot of that was just driven on some supply chain and permitting challenges earlier in the year. Most of those had been largely resolved, and we have stores under construction right now. So it's - so that's about half of the 40 units will be NTIs. And as we have a clear line of sight to getting to that number and probably a little bit above that. On the acquisition side, we've got a number of deals that are under agreement. So we just got to get them to close and we have confidence that we will close those and we have a couple of others that we're in advanced stages of - we're just not prepared to talk about right now, but given that we should comfortably get to the 80 store number that we have targeted for the year. I had a question on the consumer and just wanted to hear from you, what behavior changes you might be seeing either during your quarter then possibly in November? I guess I'm asking or thinking about it in the context of the lower prices at the pump. So curious if there's been any change there. And also then inside your store, any changes with downtrading, pack sizes, et cetera? Yes, Bonnie. Just as a reminder, when we look at our guests, we buy [indiscernible] from middle-to-upper income and lower income. So for our guest base, about 72% of our guests make over $50,000 a year. So we put them in the middle-or-upper income and then we have the lower income consumers, I draw that distinction because they're really behaving differently. The middle-to-upper income consumers are really not changing much of their behavior, we still see them coming frequently and buying the products with they traditionally bought with some minimal exceptions for that. With a lower income consumer, we're seeing a couple of different changes that you kind of alluded to, they are certainly shifting more to private label product and seeking out the value there. We see them trading into more ethanol blended fuels, they tend to price the retail cheaper than non-ethanol blended fuels. We're also starting to see some behavior where they're taking different products and using those as meal replacements. So think of a protein shake or enhanced juices as a - as an alternative to a meal. So we'll see some of that. The other thing we're seeing with lower income consumers is this, which actually works out as a benefit to us, is they are ordering less deliveries for pizza. But what they are doing is stopping ordering pizza, they're just simply picking it up at the store, because it's cheaper than having it delivered. So we're starting to see at that lower end where some guests are trading value for convenience. But, overall, we're seeing strong shopper engagement across the board, it's just some different behaviors within each of the categories. That's helpful and then just quick follow-up on that, is that behavior accelerating in any way, Darren? Just again thinking, the last month or two has been pretty consistent some of these pressures that you called out. Yes. I'd say in some respects, it's probably accelerating a little bit from first quarter to second. I would say on the fuel side is moderated a bit, given the fact that retail prices have come down for fuel. So - but by and large, it's been fairly consistent. I want to ask two questions. My first is related to just the relationship between same-store sales and operating expense growth. It is beginning to normalize. You've shown a really solid acceleration in same-store sales growth inside the store as your operating expense growth has moderated. And you talked about I think, Steve, it was you that mentioned that your same-store hours are down. So, I wanted to talk a little bit about maybe the productivity you're seeing in the stores and the additional sales you're extracting from lower labor hours. And then to what extent price is factoring into your same-store sales growth that you've seen in each of your two major merchandise categories? Yes, Ben, this is Darren. With respect to the dynamic of sales growth and labor. We began this fiscal year, we made a concerted effort there. We want to attack OpEx and the primary driver of OpEx for us is in our stores. And so we did a couple of things, we focused on store simplification and on turnover or an - on employee engagement rather with the goal of reducing turnover. And so what we've done is we've found some ways, let's remember different tactics. I'm just making the job of running our stores a little simpler. And at the same time focused on some things that employees were telling us that they want to see from us, and so the combination of those two things have resulted in really the highest engagement scores that we've ever had as a company among our team members overall, and particularly in our stores. And so what that's done is, it's reduced our turnover and so we've seen some sequential improvement in turnover every single month this year. And as a result of that, our overtime hours are down and our training hours down. So our overtime in the second quarter was down about 22% and our training hours were down 25%. So, we were able to maintain the hours of operating the store and just operating it more effectively and at the same time, pull out what I call those non-productive hours that we were spending on overtime and on incremental training because we are turning over people so much. So what gives me a lot of comfort is that we've achieved this OpEx result the right way. We have an impact of the guest experience in a negative way and so we think it's really sustainable. Okay. That's great. My second question is related to merchandise margins. So the prepared food and dispensed beverage margins were down quite a bit in the quarter. Steve, you called out I think you said 90 basis points from cheese and then a 25 basis point LIFO charge. As we look to the balance of the year, given that you've maintained your 40% in-store merchandise sales margin. Is grocery going to be leading the charge in terms of margin improvement in the back half? Is prepared food going to get better as we move through the balance of the year? If you could deconstruct kind of the composition of the implied improvement in merchandise margins as you move through the rest of the fiscal year? Yes, Ben, and good morning. This is Steve. I'll start with that. I expect that we will continue to have sequential improvement in our prepared food margins here as we go through the second half of the year. We are - in prepared foods specifically, we're still looking at low double digit type of inflationary increases generally in that category. And we're running mid-to-high single digit price increases at the moment. And so we will continue to frequently look to address that gap. We want to preserve our value proposition with guests and we think that's certainly been a positive to some of the revenue results that we've had in that category. But we have more work to do, just around the price inflation dynamic. Clearly, cheese is going to continue to be a wildcard for us, but we're consciously paying attention to that gap and making sure that we don't chase commodity inflation in a way that negatively impacts or confuses our guests, but recognizing that ultimately we will continue to close that gap. I would expect on the grocery side, we will stay fairly consistent. We will look at - be looking at a variety of calendar year price increases on our normal schedule with a lot of that centered of store merchandise come January 1 and we will be making price adjustments and at the same time, we have visibility on one of that's contracted and so I would expect that to be relatively constant, but more work on the prepared food side in the second half of the year. Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is now open. Good morning, this is Ben Wood on for Kelly. Thanks for taking our questions. We wanted to start with the fuel side and look at the dynamic between margins and volumes for fuel. To us, this quarter looks like a little stronger volumes in softer margins which is kind of the opposite of what we feel other players in the industry are talking about. Did you guys see an opportunity to take gallon share that prompted you to be a little bit more aggressive? And have your margins run a little lower? I guess - asked different ways, what do you think the market grew for fuel gallons, and are you gaining share there? Yes, Ben, this is Darren. Our stated goal on fuel is to optimize gross profit dollars and so that's always going to be a balance between volume and margin and throughout the quarter - this is a pretty volatile quarter from a cost standpoint. And so we were managing in real time how to stay as competitive as we can, given the margin environment that we are playing with. And so, we feel really good about the balance that the team struck this quarter. Yes, we were lower than the OPIS benchmark on margin by a couple of cents for what that's worth, but, we are also well ahead of the volume number. And I think it's important for us anyway in our business model to make sure that we're striking that right balance, so we're not chasing away guests. Because we have such a robust in-store offer there we want to maintain that traffic. And I think we did a good job of achieving that, and by the way at a $0.40 margin which is pretty robust. With respect to market share given that the Midwest OPIS volume numbers indicated anywhere from 6% to 9% down during the quarter, depending on what month you're looking at and the fact that we were flat. So I would have to conclude that we took some share from somebody, just not sure who that was. Great, thank you. And then if I could just follow up on kind of the OpEx discussion. But in particular to the relationship to the - this quarter to the previous 10% guide. What came in specifically ahead of plan, was it mostly just those labor improvements? And then if you could you just provide a little more color on the decision not to lower full year OpEx guide in light of the significant beat? Is that just conservative or is there some visibility on costs that got spread into the second half? Yes, hi. This is Steve. Certainly when we were looking at OpEx relative to, and I think we had said around 10% was the initial expectation for the quarter. To Darren's earlier commentary, the operating team continues to frankly over-deliver on our own expectations, and the training and the overtime dollars are significant, and those were expensive hours. And so, when we make incremental reductions in those hours, the dollars disproportionately fall through. So I do think we outperformed where we were hoping to land in that respect within the quarter for sure. And then back to the second half of the year I - certainly I believed that the low end of that range is a number that we can deliver against, and we will do our best to come in below that number. And as I think we said on an earlier question, there is incremental incentive compensation that we do need to absorb coming into the second half of the year just given the company's strong performance. So that will be a little bit of a modest headwind. But I feel very good about our ability to land at the bottom end of that range in a worst case scenario. Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our questions and congratulations on another solid quarter. First, can you maybe talk about just what the pricing adjustments in the prepared foods business you noted during the prepared remarks? And do you feel comfortable where you are priced to date based on the current commodity costs? Yes. This is Darren. With respect to pricing in prepared foods, in about the last 14 months, we've taken four different price increases and so we've tried to keep pace to a certain extent with inflation, but we're also trying to balance that with our relative value proposition to our guests. And so, when we look at where we're at today, I think we're in a decent spot. That doesn't mean that we won't take more price action, but what it does mean is that we've had very solid performance from those categories from a volume perspective. And again that's our highest margin category even at current rates. And so, the more we sell at a 56% or 57% or 58% margin, the better for Casey's. So, we're always cognizant of that and we're just trying to strike that right balance. Our consumer insight work tells us that our guests still perceive us as a good value. So we're - we feel like we're striking that right balance for the moment, but we continue to keep an eye on those commodity costs. And when we think those are a little more permanent in nature, then we'll take pricing action to offset that. But right now it's fairly volatile and what we don't want to do is raise prices too much and then have to whipsaw the customer and go backwards. So we feel like we're in a - in an appropriate spot for the moment, and we'll continue to monitor and take pricing action as we think we need to. That's very helpful. Thank you. And then one follow-up from an earlier question, did you see any correlation in acceleration in inside sales and higher volumes, fuel volumes as fuel price is moderated or comes fairly stable and consistent throughout the quarter? Our traffic certainly improved from first quarter to second quarter inside the store and our gallon volume improved over that same period. So there is somewhat of a correlation. I'd be careful to draw a too brighter line on that one because about three quarters of our transactions are non-fuel related. So there's about 25% of those guests that come in for fuel and some of those translate into the store. But I would say, by and large that's a function of - the inside traffic is a function of what we're offering inside the store more so than it is our price for fuel. Good morning everybody. Excuse me. Great quarter. As the price of fuel trends down, is there any effect on the arithmetic to what the cents per gallon might be? Correct, correct. Darren, does - say we get to $2.50 a gallon, does that make it harder for the industry to hold around $0.40 CPG? I don't think it's so much a function of the absolute number as much as it is where the trend is going. When wholesale costs are coming down, they typically drop faster than the retail price. That widens out the margins. So whether you're at $4 a gallon retail or $2 a gallon retail, if the wholesale cost is coming down, that margin is going to widen out a bit. Where we'll start to see the flattening out is when the wholesale costs start to flatten out, and that bottoms out, and then we'll land at more of an equilibrium point. And then if it starts to go up again, then we'll see the opposite effect. So, right now since really the beginning of October, we've experienced a steadily declining wholesale environment. So you would expect those margins to expand. What I would remind everybody of is that we saw the same thing happen last year. In the month of November last year, wholesale costs dropped $0.40 a gallon, and then over the next two months they rose $0.60 a gallon. So we're just - it's a dynamic environment. We just got to keep focused on executing our strategy day-to-day. But I don't think landing at any certain retail price point is going to make it easier or more difficult to maintain margins. Thanks. And then Darren, on the competitive side with some customers quite sensitive to what's happening to the economy. How do you see that affecting your competitors and willingness to price through ingredient costs? Well, I think everybody is playing a different hand right now. With respect to that, I would think that the smaller, perhaps less resilient retailers are going to have to price through more of those commodity costs because they've got to survive. We are in a fortunate position where we can be a little more strategic than that and really focus on the consumer value proposition, which is what we're doing. And I think we're striking a good balance of that right now. Would I love our margin rate to be a little bit higher? Sure, I would. But I like what our gross profit dollar growth has been and it seems to be outpacing most. And we're getting the volume forward as well. And so I think we're growing some loyalty with our guests, which is more important for the long term. Thank you. Our next question comes from the line of Irene Nattel with RBC Capital Markets. Your line is now open. Good morning - around margins versus volumes and whether we're talking about fuel or we're talking about pizza, it sounds as though you're doing really well with these - with your gross profit dollars at slightly lower, but still robust levels of margin. Does that kind of give you pause and make you rethink a little bit some of the margin targets? Yes. Yes, just sort of - if you can get to your growth, if you can continue to gain share and get to your gross profit dollar target with maybe slightly lower margins, but higher volumes. Is that the way we should - is that something that you're thinking through on a go forward basis? We really haven't specified a margin percentage target. I mean, historically we've been right around that 60% margin range for prepared foods and 40% overall. We like to keep that, but we have to be cognizant of the environment we're in right now. And when we're in a, what I would call, a hyper-inflationary environment, there's obviously going to be pressure and we're going to have to try to balance the margin rate desires with our value proposition to the guests and keeping the volume there. So the gross profit dollars are coming right now. Certainly when inflation moderates and we get some time to normalize some things, we'd like to see that margin come up closer to more historic levels, but we're not going to force ourselves into a position where we're managing to a rate that might be artificial and ultimately negatively impact the guest experience. Understood. Thank you. And then just switching gears for a moment to M&A. You mentioned that you're certainly having a lot of very interesting discussions. Can you talk a little bit about sort of the tone of the discussions and any changes in expectation around valuation? Yes, I don't want to get too deep into any conversations we're having specifically there. What I would say is that we've seen a real acceleration in the number of sellers that are out there right now, and so we're in varying discussions with each of them and a lot of those valuation-type discussions really depend on the situation the sellers in right now in the competitive landscape from a buyer's side. Certainly I would expect rising interest rates to have an impact on valuations at some point. It just depends on who those buyers are and what their access to capital is and the strength of their balance sheet today in given time. But that's my expectation here in the foreseeable future is with interest rates where they are, I'd anticipate valuations start to creep down. Hi guys. Thanks for taking my question. Good morning. So, just a broad one on capital a little. You guys have built cash over the past few quarters, you have $415 million of cash right now on your balance sheet at least as far back as my model goes, I think that's a record. Steve mentioned I think $800 million in liquidity and the balance sheet is in great shape. So any thought on acting on your buyback authorization here or really is it more about kind of keeping some dry powder around given your commentary on acquisitions? Yes, well, I think it's all of those, John. We're always talking about what's the right way for us to deploy the capital. Certainly, I think the cash number is a record as well. We think so that we're fortunate to be in that position at the moment. But there is no doubt in the very near term it's largely driven by just the timing of our capital spending and the PP&E that we've guided to where we've had a light first half of the year for the reasons Darren mentioned before. And so we will spend a disproportionate amount of that PP&E guide here in the second half of the year. So, I do think there'll be a draw on the cash balance seasonally. But, third quarter is usually our lowest cash flow generation quarter anyway, it's just because of the winter in our geography. So a lot of that is already earmarked for second half capital spending, but we are certainly conscientious of the fact that the company's profitability remains very strong. And at some point, it doesn't make sense for us. So obviously just sit on a very large cash balance and so we're going to continue to look at the repurchase opportunity that's out there, but just going back to our broader capital allocation right. And anything that we can invest and that we feel confident, it's going to drive EBITDA, our ROIC accretion is where we would go first. I like our leverage position. So I - we may nip and tuck a little bit on the debt side, but I don't think we would make a big move there, necessarily we will tend the dividend and obviously - eventually, then we wouldn't get to share repurchase. But second half of the year will be a heavier CapEx number for us. And so that's really primary factor in our thinking of - what we do as a cash balance, we have right now. Okay, great, thanks, Steve. That's really helpful. And then maybe just another quick one, just hoping for an update on your private label business, unless I missed it, I don't think you mentioned, yes, this morning and just how that's trending and specifically wondering if there is no - has been a significant market share pickup due to consumers switching on inflation and if that can be quantified in any way? Yes, John. We have seen sequential growth in our private label. So kind of being consistent with how we've talked about before, we exited the second quarter at 5.4% mix of private brands. I think that was 5.1% in the first quarter. But that number, the way we've been talking about is always going to be impacted negatively by tobacco and alcohol to a certain extent. Because we're getting those consistent quarterly cost increases in tobacco and so we pass those on to the consumer. So tobacco start - mix starts to have an impact on our ability to grow the private label mix. And by carve tobacco and alcohol out of that, because we don't have any private label products in either of those categories. I just focus on the rest of the store where we have products. We are a 12% mix on sales. I'm sorry, 10% mix on sales, 12% on units, and 13% on gross profit dollars. So we are seeing the private brand portfolio that have a meaningful impact on the categories that participates in and we're still growing. We have another 38 items will be rolling out between now and the end of the year and certainly more in the pipeline for next year. Hi, good morning, and congrats on a nice quarter. Can you make some comments on the value that you bring in your various day parts relative to QSR competition? Can you just talk about the price differential of your offering in light of inflation that is still running high? And it sounds like your peers are mostly passing through these costs, so is that providing an opportunity for Casey's to widen the gap as inflation eventually starts to moderate and you can gain more share? Yes, Krisztina, and the breakfast daypart, we've really tried to balance a couple of things we've leaned both on value and on innovation. And so, if you look at this past quarter, we had the Busch Light Beer Cheese Breakfast Pizza, which was a great innovation we saw tremendous momentum in our breakfast pizza sales as a result of that. We also leaned into our Ultimate Breakfast Burrito, which has been a real popular along with our guests and so pushing that on the innovation side, we're also had a $4 value offer for the more price-conscious consumers. So, I think we were able to balance those between value and innovation. On the value side, a $4 meal deal is a really good value relative to QSR in this space. And so we had a really strong results in breakfast. About 10% growth in the breakfast daypart versus prior year and that was cycling over a 10% from the prior year, so, with the breakfast launch last year. So really strong value proposition, we're seeing that momentum in the breakfast daypart. That's great. And then I just wanted to follow up on the private label discussion. All national brands starting to notice some of the unit losses as you gain some brand and volume share and is that perhaps you driving a different conversation where they're starting to offer some concessions to bring down their prices. Well, it's not really happening yet. Well, you know, that's an ongoing discussion we have with our supplier partners. And that's one of the things that we engage in during our joint business planning is talking about the breadth and depth of assortment. And the cost of goods and how we balance all of those things. And so there is a discussion about space, there is a discussion about cost of goods, there is a discussion about promotional activity. And we pull all of those things together. So, certainly having alternative products, that can offer an incremental value to the guest is important to us. And so, there are national branded suppliers want to stay in a relevant range. So yes, we definitely engaged in those discussions and we're in the process for that right now. Could you - just a second, you mentioned construction being delayed. Does this have any real impact on trying to get the remodel stores, adding the kitchens to the acquisitions, does that push that out a little bit? You know, John, that - the construction delays haven't been so much on the remodel activity from a construction or supply chain standpoint. That's been more driven by permitting. It just takes time depending on the municipality to get through the permitting process on those remodels. Great, thanks. And second one from me, just - can you talk about anything innovation-wise, that's - I know you don't want to say too much competitively, but things have been worked down in prepared food innovation-wise? You're right, John. I don't want to talk too much detail about that. I'll tell you that, our culinary team is hard at work, and we've got some nice innovation lined up for the first half of the calendar year, but that's about all I'm going to say about that one. Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Darren Rebelez for closing remarks. All right. Thank you for taking the time today to join us on the call. We've had a great first half to the fiscal year and are excited to continue that momentum into the second half. And with the holiday season approaching, we wish everyone a warm and safe holiday season, especially our team members who continue to serve our guests and our communities every day.
EarningCall_1803	Ladies and gentlemen, thank you for standing by. And welcome to the Kanzhun Limited Third Quarter 2022 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Wen Bei Wang, Head of Investor Relations. Please go ahead, ma'am. Thank you, operator. Good evening and good morning everyone. Welcome to our third quarter 2022 earnings conference call. Joining me today are our Founder Chairman and CEO Mr. Jonathan Peng Zhao and our Director and the CFO Mr. Phil Yu Zhang. Before we start, we would like to remind you that today's discussion may contain forward-looking statements which are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors may not under the company's control which may cause actual results, performance or achievements of the company to be materially different. The company cautions you not to place undue reliance on forward-looking statements and do not undertake any obligation to update these forward-looking information, except as required by law. During today's call management would also discuss certain non-GAAP financial measures for comparison purposes only. But that -- non-GAAP financial measures and then reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhipin.com. Hello everyone. Welcome to our third quarter 2022 earnings conference call. On behalf of the company and our employees, I would like to express our sincere gratitude to our users, investors and friends for your ongoing trust and support. First, I'd like to share with you our performance for the third quarter. In this quarter, we accorded GAAP revenue of RMB1.82 billion with quarter-on-quarter growth of 6%. Our calculated cash billings which RMB1.24 billion a sequential increase of 26.4%. Benefiting from our enhanced brand recognition and continuous improvement in marketing efficiency. We maintain the rapid growth in our user-base while further improving our profit margin to obtain [indiscernible] over adjusted net income for the third quarter which is gross share-based and compensation expenses, achieved a quarter-on-quarter growth of 5% -- 25% reaching RMB377 million. In this quarter, our user base has been increasing rapidly. As of September 30, the newly verified users achieved 14 million. Verified users is a matter we pay more attention to in our daily operations. Referring to job seekers we posted at least one job expectation or enterprise users we posted at least one job position. Compared with the accumulated more than 8 million newly verified user as of August 15 which we discussed in our last earnings call. And then and we continued our user growth at a sustainable and then within this quarter. Our average MAU of this quarter reached RMB32.4 million hit a record high. And the company's efforts on constantly improving the technology and user-service capability in the past year have started to bear fruit. Let's take a look at some numbers. First, the average monthly number of successful mutual communication between job seekers and enterprise users have hit a record high in this quarter representing a more than 20% year-on-year growth rate and our MAU grew by 12.5% year-on-year. The DAU [ph] ratio remains stable. Another number is that each individual user's achievement, either a job seeker or an enterprise user is still a steady growth. Overall my impression for the third quarter is that we experienced a reboot in both users and growth. There are 2 key factors. At one hand compared to the second quarter many cities started to power from the COVID impact. And another factor is that we can start to acquire new users by end of June. There are 2 data that we can look at in the concept of ruble. First one is our calculated cash billings achieved 26.4% increase compared to the second quarter. And net -- the net debt [ph] our average MAU in the third quarter recorded a sequential growth of over 20%. The performance of blue-collar and gold-collar users was more gratifying. The revenue of urban service industry the -- sorry, the cash billing of the urban service industry for the third quarter recorded a 28% year-on-year growth. And the average DAU of our gold-collar workers for this quarter also increased by approximately 40% year-over-year. The safety operation has always been the most essential cornerstone driving the development of our company. In the third quarter, we continued to improve our safety capabilities in 3 aspects. The first of which is the technique -- technical securities. In September, we were awarded by the China Academy of Information and Communication technology, the first data security management capability certification in the online recruitment industry. And the second is user security. As of October 31, our verification team have finished field visits and inspections to accumulating more than 5 -- 500,000 companies. And the third one is about the operational security. We submitted a due applications in Hong Kong in early October, aiming to ensure sustainability of the capital market conditions. For the last quarter up until now, since the beginning of September, the resurgence of COVID-19 has negatively impacted our business and slowed down enterprise recruitment demand. However, we have observed that recruiting activity to enterprises will recover quickly once the decision is effectively controlled, evidenced by our experience in July and August. We have also seen some opportunities as industry undergoes structural changes. For example, internet and network-related positions, including technology, products, design and operations have become [indiscernible] in driving digital transformation for traditional industries. The high-end manufacturing industries, such as new energy, automobile and semiconductors have been growing fast. And the active job positions in September increased by more than 40% year-over-year. Despite the short-term turbulence, we are still quite confident in our long-term growth, supported by our high efficient business model. The core strength lies in the fact that our model is extremely efficient in the areas of job hunting and recruitment and is suitable for people in different regions and industries. While our service continued to grow in first-tier cities and among white-collar workers, there is still huge growth potential in lower-tier cities and with blue-collar users. We have found out [indiscernible] as our official Asia-Pacific region partner of the 2022 Qatar World Cup. We can further and effectively expand our brand learning through this high-profile and widely covered events, especially among those blue-collar and lower-tier cities. For certain historical period, user growth is always a primary driver for our business long-term and sustainable development. Our platform has a robust scale effect and can support more accurate matching within a larger population. We are still at the stage of focusing on achieving rapid user growth. We expect to obtain at least an additional 100 million users in the next 3 years. We are quite confident of this and we believe that it will be the most effective driver for our business development. There are always cycles in the economy. However, there are almost no cycles in an enterprise efforts to service their customers with sincerity and agility [indiscernible] are always staying true to our core values and original aspiration, doing the right thing in good space at all times is what we have been doing. We have done like this in the third quarter and we will keep doing so going forward. Thanks, Jonathan. Hello, everyone. Thank you for joining our earnings call today. Before I begin, please note that all amounts are in RMB and all comparisons are on a year-on-year basis unless otherwise stated. In this quarter, our business began to recover backed by a strong user growth in the third quarter. Our calculated cash billings recorded a fast rebound with over 26% sequential growth to RMB1.24 billion. Our total revenues being dragged down by the impacted performance in the previous quarters due to new user registration suspension and COVID resurgence in the second quarter recorded a 6% year-over-year, 6% quarter-over-quarter growth to RMB1.18 billion. The number of total paid enterprise customers in trailing 12 months ended September 30, slightly decreased to RMB3.73 million, down 1% from RMB3.77 million of June 30. But quarterly-wise, the number of total paid enterprise customers in the third quarter increased by 15%, compared to the second quarter, mainly due to the increase in small-sized accounts, driven by our active enterprise user growth in the relative mild recovering macro conditions. Revenues from small-sized accounts also contributed a higher sequential recovery compared to other accounts which proved that this SME segment of customers that we particularly specialized in are more resilient in the economy and our customer base mixed with various sized companies, including both large accounts and small medium-sized accounts are in a much balanced and healthy structure. It should help us absorb more impact when facing economic downturns and it can also benefit more and faster from the recovery of a macro environment. Moving on to the cost side. Total operating costs and expenses for the third quarter increased by 16% year-over-year to RMB1.04 billion. Excluding share-based compensation, total operating costs and expenses increased by 9% year-over-year to RMB879 million in the quarter. Cost of revenues increased by 30% year-over-year to RMB201 million, primarily driven by increased server and bandwidth costs in accordance with growing user traffic and increased employee-related expenses as we continue to strengthen our security-related personnel. Sales and marketing expenses decreased by 5% year-over-year to RMB397 million, mainly due to decrease in marketing expenses as a result of our improved brand recognition and marketing efficiencies. R&D expenses increased by 39% year-over-year to RMB419 million due to increased technology-related staff. G&A expenses increased by 27% to RMB156 million, primarily due to increased headcount and increased share-based compensation expenses. Our overall human-related costs remained stable compared to last quarter and we have enhanced the cost control under current market conditions. Excluding share-based compensation expenses, our adjusted net income for the quarter was RMB377 million with an adjusted net margin of about 20 -- 32% which rebounded back to the historical record in the third quarter last year, further demonstrating our high-quality and sustainable operating leverage and profitability. Net cash generated from operating activities was RMB367 million for the quarter, representing a 36% year-on-year growth. As of September 30, 2022, our cash, cash equivalents and short-term investments increased to RMB13.9 billion which would position us well for the future growth. Looking forward, as the near-term resurgence of COVID cases are still at a high level across China which are affecting the recruiting demand of enterprise users we expect our total revenues to be between RMB1.05 billion and RMB1.09 billion in third -- in the fourth quarter, with a slight year-on-year decrease of 3.8% to 0%. Given that there is still the whole month of December before the quarter end, some level of uncertainties are still ahead. However, as Jonathan just mentioned and as you have witnessed from our third quarter results, user growth is the key to our business. Our market-leading position and competitive needs are further strengthened since the resumption of user registration in recent months and our users are still accumulated facts and the online recruitment market in China is proved to be with good room to grow. With the effectiveness of our model being still intact, we are confident that we can ride through the current headwinds and continue our secular growth in China's human resource technology markets. I have 2 questions. First is the -- if we consider that the reopening process to gradually happen in the early spring, so how do you think the recruiting activities you picking up quickly fast? Or do you expect that it will take maybe 1 or 2 months of lead time before these enterprise users to post their jobs? The second question is, if we expect that the reopening to gradually happen in next year, so what's our expectation in terms of the -- your sales, marketing and customer acquisition costs because we believe that certain of the other online recruitment platform will also spend some money to acquire new customers. Considering all this competition and considering that we also have a quite ambitious new user acquisition plan in the next 3 years, how do you think the -- is best level? And what kind of the margin should we expect for the 2023? Thank you for your question. Regarding your first question about the opening, after opening, what will be the recurrent speed for the enterprise equipment. So based on my observations for the past years, majority of enterprises can have a very quick recovery with some very limited exceptions, such as very huge mega enterprises because they may take some time to readjust their expectations for the growth, for the revenue and also for the expenses and for the marketing and human resources and headcount. But for SMEs, they have a relatively much faster coverage. And regarding your second question about our plans for marketing of next year, our marketing efficiency for the digital market will not decrease. As I just mentioned, we are planning for over 100 million new users in the next 3 years. If everything goes normal, we are expecting around 40 million newly registered users next year and that's at the moment the consensus but we will not pay extra amount for that. And in terms of branding, this year, you have already know that we have sponsored the World Cup. And for this year, we have not -- any major marketing events which we can sponsor or to brand -- the brand. So it also will be a normal year. So my [indiscernible] is that the marketing expense as a percentage of revenue for next year will be -- will remain stable and this will not affect our margin in net G&A. And to add a little bit about the -- the reopening is there. First of all, our cash revenue, we would like to gear up and then our accounting revenue because of we need some time to book the revenue, then we would like to see our accounting revenue gradually catch up those cash collections with the reopening. So there is a delay effect. So please remember that. So at the beginning of the recovery, we should pay more attention to the cash revenue and then our accounting revenue continue to gradually catch up. I have 2 questions. First is considering that December is the month when many big enterprises sign annual contract or renew contract with us. Could you maybe share some color on what kind of status that we see across the big contracts? And what percentage of the enterprises may have some upselling potential? And secondly, it's about branding activities around the World Cup. Could you maybe share now? And how should we think about the ROI behind these branding activities and especially considering there are some other recruitment platform also the similar branding activities during the World Cup and how should we compete with them and what is our differentiation? Thank you for your question. Regarding your first question about our signing of annual contract at the end of the year. So it has already been 2 months past for the fourth quarter. And what we have observed in terms of the signing of our key accounts -- we are happy to say that basically, we have signalled customers who have stopped; so it is basically quite good. And in terms of the upsell or dollar amount, the net dollar retention rate of all our key accounts are still continuing. It be above 100%. It is not in fact of our historical results but we still witness this under current circumstances. And about your second question for our sponsorship this World Cup, because we are a very young company, the average age of our employees is around mid. So football is the kind of a sport everybody likes. And you had probably seen from the news and with our data going back, the population on earth has reached more than 8 billion. And I believe that from a perspective of human civilization, if something if a relative [indiscernible] and they are happy to support FIFA. And on top of supporting FIFA, the first thing we consider, it is good business of -- for doing all those marketing campaign and on other channels. So in 2018, the Russia Would Cup, more than 650 million Chinese audience have watched the event. And for the Qatar World Cup this year, we don't have the exact -- I believe that should be -- the audience base will be larger, it should be more than 700 to 800 million. And if we assume, each audience can watch like 4 to 5 games during the whole World Cup event, then there will be more than 4 billion people and who have watched our advertisement. You know that the -- our advertising is quite frequent between the event and so the cost for 1 person to watch our branding is [indiscernible]. So it's a good business considering the vast audience base, the ages who watch the game -- the ages of people who watch the game and the cost is a quite good business. And you noticed that several of our peers have also did the same thing but I believe this is [indiscernible]; so we can give our audience, our customers more choice. They can choose what kind of platforms the best they can. And that's my answer to your question. Thank you. I have few comments. So we also consider that brand advertisement is more like an investment rather than cost or expense item because of the return is better, because of its more effective than traffic acquisition cost and it's long-lasting. So that's probably the very short answer to your question as well. I have 2 questions. First is that if we look at first quarter next year and normally, it's a strong seasonality for recruitment market. So in addition to the World Cup sponsorship that we mentioned already, could management elaborate your plans in user acquisition, marketing and promotions in the first quarter? Do we have a target for user growth in this peak season? And also, how should we think about the margin level in the first quarter? My second question is, it seems the large enterprise customers may have relatively more resilient recruitment budget compared to the SMEs, given the uncertainties in the macro environment. So just wondering what the company consider to maybe shift our strategy or focus towards the key customer side given this backdrop? And also what's your latest thoughts and progress in the mid-to-high-end recruitment segment? Thank you for your questions. About your first question on marketing plans for the first quarter next year. So our World Cup campaign end on December 18 and the Spring Festival will start from January 22 next year and there are only 5 weeks in between. And by end of January, people will go back to work, where the traditional recruitment will start. So there are only 6 weeks in between the World Cup campaign and the Spring Festival. So I may assume the 2 events are fairly connected. And the intensity of our marketing campaign of the World Cup, we are -- we strongly believe that this campaign effect can continue to the Spring Festival. So our marketing plan for the -- after Spring Festival will not require extra money. So on the other hand, we have benefit from the World Cup campaign. And that's part of our strategy. Another part is that for the reopening everybody are concerned, we are also highly focused on that. So our marketing plan, the efficiency and with focus [ph] on our marketing input, we are highly connected to the reopening process. So currently, we are focused on the progress. And on top of our strategy and focus on reopening and [indiscernible] that we will not do a marketing event which have huge and active impact to our market in the first quarter next year. Regarding your second question about our relationship of our key account customers. Currently, we do not have any plan to [indiscernible] our resources to -- towards the key accounts, apart from the SMEs. But I can assure that whenever we would like to strengthen our total resources, we will also increase that for our key account customers. Quite a long period time, the customers in China [indiscernible] on service and that's what we are doing. We are -- we better serve all of our customers, including especially SME. And that's my answer to your question. To the market statistics, in China, more than 90% of the enterprises are small medium-sized companies. So basically, our own company composition is also in the same pattern. So we have more than 80% of our enterprise customers or companies, they are the small medium-sized enterprises. So they are the very important components to our units. And as just mentioned, compared with the peers, we are more specialized in this area. So we definitely will serve them well and try to provide them with better service. So -- but meanwhile, we definitely will also pay more attention to KA accounts because they we have a much balanced structure as just mentioned as well. I have two. First is regarding the paid enterprise user number. We see that this number has a bit decreased again to 3.7 million this quarter. Just wondering if management can share with us the active and [indiscernible] number this quarter? And how did that change on year-on-year on quarter-on-quarter basis? Or how should we see the paying conversion ratio change? How much of that is related with the pandemic and how much is related with the initiative cleaning up action by the company? And how much is related with the natural churn. And second question is related with the blue-collar. Just wondering, can management help us understand how much revenue currently comes from the blue-collar business and the related MAU and paid enterprise number, some like that? And how should we see the future growth for that business? And also under the scheme of reopen, how should we see the growth rate if the blue-collar business could outgrow the white-collar business in the reopen scheme? Okay. Thank you. So I'll answer the paid enterprise customer question first. So the 3.73 million, that number was trailing 12 months paid enterprise customers. So that number reduced mainly because of in the second quarter, the COVID impact reduced our paid enterprise customers in that quarter. And starting from third quarter, we see quick recovery of quarter-over-quarter sequential paid enterprise customer growth. So -- but because of this trailing 12 months, so it's -- the second quarter did have some impact to our -- the total paid enterprise customers, the number. But if you look at the quarter-over-quarter, if you look at all the paid enterprise customer in third quarter versus the paid customer in the second quarter, we see a very [indiscernible] quarter-on-quarter growth. And in terms of the active enterprise customers, that number we see starting from like June-July and in we see gradual recovery. And compared with the second quarter, it's a pretty good sign of business is booming. But starting from September because of the COVID measure, the COVID control measure, we see some like impact to the active enterprise customers' number. And so the similar things with also business in the early fourth quarter of this year. In terms of the paying ratio, paying ratio is, I think, itâs quite stable in second quarter, in third quarter and even in October and November, overall, the paying ratio among the active enterprise customers is quite stable. And the ARPU is also very stable. So the impact is mainly with the total active enterprise customers which is highly related to the COVID control measure. And in July and August, when the COVID measure is not that stringent, we see recovery. So we believe in the coming months, once the COVID is gone, we definitely will see a good come back for the active enterprise customers. So this is the first question. And regarding the blue-collar, I can offer you with some data. In terms of the users of blue-collar, at this moment in terms of the MAU, it accounts for roughly 30% of our total users. And in terms of the revenue contribution, blue-collar accounts for roughly like 26% of our [indiscernible] in third quarter. And on top of sponsors, I would like to submit some data. So for logistic industry, we have seen a 20% year-on-year growth in terms of cash billing. And for other service industry, a 28% year-on-year growth, while our total cash billing compared to last year only grew by 1%. So you can see a blue-collar sector has experienced a very fast increase. And we have quite good confidence that we will acquire additional 100 million new users in the upcoming 3 years which is double the current total user base. And I believe along 2/3 will be what we call traditional blue-collar workers, including logistics, including urban service and manufacturing and et cetera. And that's all for my [indiscernible]. And also, one more thing to mention is that we've resumed the user growth from the end of June and middle of the year normally is not the peak season for blue-collar to find jobs. Normally, season -- seasonality wise it's the spring in the -- after the Spring Festival that is the peak season for the blue-collar to come out to find job. So in upcoming years, because of our [indiscernible] currently we can grow our new users. So we expect that in the peak season of the Spring Festival, we can further grow our blue-collar segment users and customers. Due to time constraint, that concludes today's question-and-answer session. At this time, I will turn the conference back to Wen Bei for any additional or closing remarks. Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or TPG Investor Relations. Thank you.
EarningCall_1804	We're delighted to have our first external speaker, who is Charlie Scharf, President and CEO of Wells Fargo. I think Charlie is well known to everybody here. He's got over three decades of experience working in the financial services industry. He had senior positions at J.P. Morgan, followed by serving as CEO of Visa and Bank of New York, and I think you're now in your third year as CEO of Wells Fargo. So, thank you very, very much for joining us. Look, I thought we could start off with a broader discussion just about the macroeconomic outlook. And I know there's a lot of unknowns. There's a lot of uncertainty. But what's your base case for economic growth next year? How are you thinking about the path for interest rates from here and inflation? And in your answer, I think it would be really interesting to hear what risks you're most focused on, outside of credit normalization. Sure. Well, thank you for having us. It's great to be here. Listen, I think we would probably say the same thing that you hear from others, which is it's an interesting time because we're going into this slowdown, which is clearly happening just from a very broad position of strength, broad meaning, across companies of all sizes and individuals of all sizes. But this constant set of conversations about is there going to be a recession or not, from our standpoint, is kind of irrelevant, in the sense that what we do know is there's going to be a significant slowdown. There's no question about it. When you look at the tools that the Fed has, how powerful that they are, that don't fight the Fed is in fact something that people should just take at face value, especially when they're not competing against fiscal policy. So, our case would be, a slowdown, if you asked our economists, we'd say probably a couple of quarters of a relatively mild recession during 2023. But in our planning, we would say we're expecting a fairly weak economy throughout the entire year and hopeful that it'll be somewhat mild relative to what it could possibly be, but time will tell. In terms of the things that we think about, obviously credit is high upon the spectrum. I know we'll spend a little bit of time talking about what we're seeing in terms of our customers on the consumer side and on the business side. But credit is number one. And we think a lot about making sure that we are protecting franchise deposits, franchise customers as we go through this period of changing betas on the deposit side. I mean, just as a quick follow-up. How has your economic view changed in any way over the last three months? No, I mean what we -- listen, what we see is very consistent, which is there is a slowdown happening. There's no question about it. When you watch CNBC and Bloomberg and read the newspapers, it can be a little bit confusing because the slowdown is uneven across industries. When we look at our own consumer spend information and we talk to the companies that we bank, there's some that are doing quite well, and there's some that are struggling more. And the fact is, people bought a lot of goods, exercised a lot of the freedom they had in discretionary spend over the last couple of years, and those purchases are slowing and you're seeing significant shifts to things like travel and restaurants and entertainment, and some of the things that people want to do. Net-net-net, the growth is shrinking that we've seen in card, albeit they're still growth. Debit card spend is about flat, with transactions being down a little bit, offset by inflation. So, average ticket size is up a little bit. So, all in all, if you just took a snapshot of where we are, it's still quite strong relative to where we could have been at this point. But it doesn't change the belief that these return to normal trends that we see will continue. And some individuals and companies will be more impacted than others. And then, in terms of consumer and corporate balance sheets, have you seen any noticeable changes over the last few months, especially, I guess, on the lower cohorts in terms of liquidity on consumer balance sheets? Yes, I would say -- the one thing, I think, which has surprised me is the fact that it really hasn't changed all that much, and it just does speak to the strength with which people went into this period with. And so, we have seen certainly more stress on the lower end consumer than on the upper end consumer. On the corporate side, again, it's much more industry specific. But it hasn't spread as quickly as we would have thought. And it hasn't deteriorated as quickly as we'd have thought, albeit there is a continuing trend of balances coming down and spend levels coming down. So, again, as we think about what will happen, it's hard to see anything that will stop those trends from continuing. And as long as there's not some material acceleration, it certainly should be all manageable, albeit as we think about where we are in this point in the cycle, we will see normalization. Okay. So, let's talk a little bit about your priorities. You're three years into the job. Can you talk a little bit about what you feel you've achieved so far? Maybe give yourself a scorecard if you want to, but you don't have to. But I think what would be more interesting is to talk about what your broader priorities are now that you're three years into the job, outside of obviously dealing with the consent order that we can talk about shortly. Listen, I feel great about the progress that we've made. I mean, I would say we as a management team, and I particularly, are our own biggest critics. So, I could make the list of all the things that we would have wanted to have done sooner and all the other things. But the fact is the company is just run entirely differently today than it was three years ago. Now a lot of that just has to do with the turmoil that the company had been through and changes in leadership. So, the fact is when you look at the management team, we have -- I forget what, 13 or 14 out of the 17 operating committee members are new to the company. And I think every one of the others who've been at the company for a period of time are in a different role, and roles that they're extremely suited to. We run the company as one. Those of you that have followed Wells Fargo might have known that used to talk about the federal list model, which basically meant that businesses could do whatever they want as long as they were performing well, which might have worked at a certain period of time, but totally ignores the benefits that we get as working as one Wells Fargo across the company. So, we have significant initiatives to leverage the entire franchise and work together, that is what just several of us have as a differentiated value proposition in this country, which is why I feel great about our competitive positioning. The way we're dealing with our problems from the past are also entirely different, and I'll put those into two categories. Number one is just thinking broadly about our responsibility to serve communities and individuals. And we do have historical things that do continue to come up that you read about, which we're still working hard to put behind us. But in terms of how we're acting and how we're behaving, we come in every day really working hard to do the right thing and serve a broad set of kind of individuals and companies, which I think will continue to increase the reputation across the company. And our work on just fixing the infrastructure relative to the risk and control. The amount of time -- you referenced talking more about it, I'd just say the amount of time that it's taking us is certainly a statement of how much work there was to do, but we are making a significant amount of progress, albeit we're not perfect. And there is a lot to do. So, you look at all those things and then probably, other than the risk of control work, the second most important thing is what are we doing about building the franchises. And I think there was a four or five-year period where it wasn't the focus of the company. We were focused on our financial results, but it was really less about growth of the company. And today, when we look at it, we look at all the different lines of business. Every one of them has opportunities to grow. Every one of them has an initiative in place we can go through and talk about each of them if you'd like. But the focus on getting our historical problems behind us as well as investing for the future and building off of the great market positions we have is -- I would say there's an energy and enthusiasm in the company that certainly wasn't there three months ago, and it's because we're bringing things to market. So, look, I appreciate you can't say much on the consent order because it's confidential supervisory information. But maybe you can talk a little bit about how your management team's approach to dealing with the consent order has evolved since you've been at the company. Sure. Listen, I mean, the consent order is -- first of all, we have multiple consent orders that all relate to the same series of things for the most part, which really relate to internal controls built out consistently and effectively across the company. So, aside any individual consent order, our job is to build the appropriate infrastructure for a company of our size and complexity. And I would say that what we've been doing since I've arrived at the company is just accepted that responsibility as a management team, understanding that we have to do all that's necessary. So, we, as a team, spend significant amounts of time every single week going through all that work, making sure it's on track. And our involvement means that everyone in the company has to be involved. So, I probably -- I think when I first got to the company, I said I was probably spending, two-thirds to three-quarters of my time on that. It's less today, but not significantly less. I'd probably say it's 50% to two-thirds of the time. And again, it's not just about fulfilling the consent order which people are focused on. It's us as a management team making sure that we're running the company in a way that those who own the stock or those that we can influence across this country would expect us to. So, we're held to very high standards as we go forward and complete this work. And as we do this, I think we'll certainly come out a better company, but I think we will come out of this with controls that should be amongst the top of the companies out there. And so that's just a fact of life of what we have to do. And then maybe you can just talk a little bit about the management team. I think there's obviously been very significant changes in the management team at Wells Fargo over the last three years. Where have you got to in terms of getting the right people in the right roles? And how do you go about building a cohesive culture? And what do you want the attributes of the firm's culture to look like? So here, too, in terms of how we run the place and the way we work together, our operating committee is a -- we are one cohesive group. We meet at least twice a week and once a month for an entire day. Everyone participates. There aren't fiefdoms across the place where people just talk about their own areas. There is -- I don't want to say, confrontation, but there's a candor which we expect from the entire company that didn't exist at the company before. We are a very polite place. No one was ever expected to push each other in meetings. It was always done a little more privately. And we all understand that we all -- our success will be dictated by the success of the company, not any individual business. Everyone on the operating committee, at least 50% of their compensation is based upon the performance of the entire company, not just their individual performance or their business performance. And ultimately, if something doesn't work right, that will override everything else as well. So, everyone understands that. And so -- now by the way, it's a very collegial group of people. So, if the people on the operating committee here, they would talk about how well people get along, how much they respect each other. And out of that becomes the natural things that we all should be working together that we never focused on before. So, take our consumer bank and our wealth management business, they were run completely separately. And just look at what some of our competitors have done, and I've had -- elsewhere when you look at the affluent customers that exist in your consumer branch and we were treating them the same way as we were treating every other customers, not leveraging the strengths that we had in our Wealth Management business. And now, we've launched something entirely new in Wells Fargo Premier to take a lot of the competitive benefits that we have, we're having one of the biggest wealth management businesses in the country and working in partnership between the two to serve our customers better. When we look at the opportunity to serve our commercial banking clients with investment banking products, I've mentioned this before to some of the of the folks that have followed us since we got here when we got -- when we looked at the company, we saw that we were doing extraordinarily little corporate investment banking product through our commercial bank. And all you need to do is look at what a Goldman has done or a JPMorgan or some of the others and you say, obviously, there's huge potential. And so, we looked at the amount of fees that our customers, our customers, not customers in the markets where we are, we looked at our fees -- our customers and what fees they're paying to the Street, and it was something like $4.5 billion, and we were getting paid a tiny portion of it because we never focused on it. Our bankers didn't have a license. There was never a strong partnership between the two. That's changed dramatically. And that's a significant opportunity. And I mean we can go on and on and just talk about these lines of businesses that we have are artificial boundaries. We need to have them because we do need product expertise. Running a big distributed sales force is very different than running on the consumer side is very different than running a more centralized investment banking business. But these opportunities to work across the company are extremely significant and related to how we think about the company. As I said before, when we look at competitively what we have, they're really -- we believe -- I mean, we do have a lot of strong competitors. We've got a respect for a lot of people, but there are really only a couple of us that have all of the things that we have, which, if we run the place properly, should ultimately benefit our customers and want them to do more with us. And so, as we think about our opportunities to increase the returns of the company and become more efficient, yes, we've got opportunities just on the expense side, but just getting more fee-based business out of this franchise is something that is a meaningful opportunity today that everyone rallies around because when we look at our results and we see what we're doing, it's just -- it's incredibly obvious. Okay. So, let's talk a little bit about the revenue picture, both in the near term, but also as we think about '23 and '24. NII, obviously, has been a very significant driver for revenue growth, obviously, for you, but for the industry more broadly. Deposit betas, though, are increasingly coming into focus, and your deposit betas have been amongst the lowest in the industry, partly because of your -- partly because of the changes you've made in terms of deposit funding, but also because of your skew towards consumer. What are you seeing in terms of deposit betas at the moment? And given that Fed funds is now at 4%, how are you thinking about the evolution of deposit betas as we head into 2023? Sure. So just for those that don't follow us regularly, it's just important to note that we actually entered this rising rate period in a different position than we probably otherwise would have in a way which has benefited our deposit business. Because we have an asset gap with the Federal reserve, we actually had been limited on the deposit side with the strong inflow of deposit and the cash that came along with it. So, really, over the past couple of years with all of the liquidity that's existed in the systems, we've actually had to be fairly choosy, mostly on the wholesale side, almost entirely on the wholesale side, but not entirely about limiting non-operational deposits. And so, as we enter this period, it's -- what we said is we would have expected our deposit betas to be less than others have seen because they haven't had those limitations, and we have seen that. As we sit here today, we've obviously been strong -- significant beneficiaries from rising rates. But there's no question that as time goes on as we sit here today, betas will increase. And I would say not just because of the competitive environment out there. We're not looking at using rate in a way to significantly attract new customers. But we are looking at rate as a way to make sure that we're protecting the franchise value inside the company. And so, there is a deep analysis that you need to do about how much can you get away with in terms of not passing on rate in the shorter term versus what do you lose in the longer term for just not treating customers properly. And so, we're working hard to find the right balance because as rates go up, most customers should get paid in a way that they weren't pay before. And we spend a lot of time looking at the data as to how customers are reacting at different affluence levels, at different deposit concentration levels. And so, that's a very long way of just saying we do expect betas to go up. So, when we look at our own NII, even we certainly would expect next year's net interest income to be higher than this year's net interest income, but I wouldn't take the fourth quarter and analyze it either, and we'll go to spend more time at our fourth quarter earnings call and talk about that. But I wouldn't -- we wouldn't look at it like -- I mean I look at it like it's a natural progression of passing on a portion of the rate increase to those that are really franchise customers of ours. What about the loan growth picture? I mean that's obviously, again, been very strong this year. I think your loan growth is up 6% year-to-date. I think you've talked about loan growth moderating in Q3. What have you seen in Q4? And what are you expecting for next year? And do you think there'll be more of a bifurcation between consumer loan demand and corporate loan demand over the course of the next year? Well, I think, first of all, overall, it really, really is driven by what we see in terms of the strength of the economy or not. I would say we are not significantly pulling back in any way, shape or form in a wholesale way in any one of our businesses. But we are trying to be smart at looking at any kind of credit on the fringes of our credit envelope just to make sure that we're being smart because you can't sit here and say that you expect a slowdown to occur and not to take that into account as you think about what you're willing to underwrite. And so, that's probably a relatively small reduction in the volume relative to what we would have done in the past, but I think it's something that's smart, we think, over a period of time. And like I said, for the most part, it's going to be driven by what we see in the economy. On the commercial side, we're still -- what we're seeing is our customers are nervous. They're nervous about the ability to continue to pass price on as inflation continues to increase their cost of goods sold. They are nervous about the liquidity in the marketplace, nervous to the point of just wanting to ensure that they have liquidity and that they've got the appropriate lines and the ability to borrow from us. And so, again, I would describe that as a continuation of what we've seen, not a marked change, but not something which has surprised us. So, we still continue to see some demand there. And we see demand on the card side where we just have new products, which continue to attract extremely strong credit prospects because of the value propositions that we're offering today. So maybe we can talk a little bit about the fee side of the equation as well. So, wealth management, investment banking, mortgage, obviously, several important initiatives in all of those. Can you talk about either the revenue opportunities or challenges you see in each of those businesses heading into next year? Yes. So, let's put mortgage aside from wealth management and investment banking as you described it. As I referenced earlier, I think, first of all, let me just start with our corporate investment bank. We think the corporate investment bank for us, first of all, has been -- I should say this, this is not a material change in strategy. We were a very strong corporate investment bank, which is important to our company. When you look at our results, we break it out as a separate line of business, and you'll just see how important it's been. We have just not spent a lot of time talking about it for a whole bunch of different reasons. But it's a core part of who we are, what we've been, and we've been very selective about expanding the product set in which we choose to compete, meaning that we have a core set of customers that are predominantly U.S.-based. They are global, so we do have a set of global capabilities, but they're very focused on serving that customer base for the most part. And we've made the shift from using our own balance sheet to being a meaningful representative for them in the public markets. And so that means building an M&A franchise, it means corporate bond underwriting, it means equity underwriting, and you see that in our results. So, the opportunity for us is to be clear about we have the interest continuing to grow that business in a way that takes advantage of the risk we're already taking and get paid more for it. So, as we think about what we should be in the corporate investment bank, we're not talking about any material changes to the risk profile. But again, when you look at the fees and what we get paid to the amount of risk that we take relative to others, it's just not what it should be, and that's opportunity. And that's -- I would say, we're bringing a sharper point to that in terms of how we run the place and what the opportunities are that we have in front of us. So, I think you put all those things together, add to that the middle market opportunity that we have, and we feel great about our prospects to build the business, not in an exponential way, I would describe it as a very linear, well thought out, focused on certain industries and certain products where we have incredibly strong relationships and people want to do more business with us. Wealth management is another place where I would say we've gone from defense to offense. To be fair, the business was -- actually of all the businesses that we've had was probably the most impacted by our name being in the newspaper, much more so even in our consumer business in a lot of ways because of just the knowledge that that customer base and our advisers have and the sensitivity to things being written about us. And so, as our reputation has improved and we brought in a new team there that totally understands the business, that is working to invest properly in the business. I think if you were to talk to our advisers, they would feel very different about what we're bringing to market for them and the products and the things that we're building for them, and you can just see that in terms of a bottoming out of our adviser count and our ability to recruit advisers from the outside that we wouldn't have been able to recruit a couple of years ago. So, we love the platform that we have because we've got a platform within the bank branches, which is significant and underpenetrated. We have our adviser platform where people are Wells Fargo employees with a full product set. We have an independent channel that we have, but hadn't invested in historically as people have become interested in becoming independent. And that's something that we have capabilities in, and we have our digital platform. So, I think when you look at those different pieces we have, people we compete against have some of those, but not all of those. And so, the opportunity to invest and build all those platforms, and we love the wealth space, and we love the platform that we have. Mortgage is just an entirely different creature, just running a big mortgage business inside of a large bank is very different than it was 10 or 15 years ago. The people we compete with are very, very different. The home lending products are important to our customer base, but it is a very, very difficult business to run really well over a cycle. So, we're committed to it, but it won't look like what it looked like in the past. And you see that reflected just in the natural downsizing that we've seen as we've gone through these cycles. And so, while it's important to us, I would not expect that to be something that we would put on the pages would be something significantly different or significant opportunities, albeit it will still be important to us but in a very different way. Okay. So, let's talk about expenses. I know you're going to give a detailed update in January. But bigger picture, how should we think about the trajectory of some of the broader categories of expenses. And look, how is your thought process about the long-term efficiency ratio for the firm evolved over the last year? Yes, I think it's -- so certainly as time goes on, I think we get a much clearer picture of what we see is, what we have to do, and what the opportunities are. There's no question when you look at our business and our company that we feel that the company still is far less efficient than it should be, even though we continue to deliver on the savings that we said we were going to deliver. And so that's both on a gross basis. But we've also seen net decreases in expenses as we have created efficiency, but also continue to invest in the place. So, as we look out over, I'd say, first of all, over the shorter term, we are not looking to save any money when it comes to the risk and control work that we have. And just as a side, that's added billions of dollars to the expense base, billions. It's not incredibly efficient, but it's incredibly important. And our commitment there is to spend whatever is necessary to get the work done as quickly as we can at the highest level of quality that's possible. Now again, we're not just throwing money up against the wall. We're trying to be very smart about adding it where it can pay off, but it is a significant draw of our expenses. The second is on the technology side. And I'd say, we are fighting -- we've been fighting very hard and continue to fight very hard not to use technology in the shorter term as a place to drive just our efficiency ratios lower. There's no question in our minds that we will get much more efficiency out of technology as we continue to build out all of our digital capabilities and migrate things to the cloud. But in the shorter term, we need to invest both in our product capabilities and in the infrastructure to both be competitive but also over the long period to get those saves. So, in those first two categories, as we look out over the longer term, there should be saves there, but we're not close to talking about what those are. Then you take everything else inside the company, and there's no question that we're still incredibly inefficient. And that's where we're getting both the gross and the savings that translate on a net basis to what we see fall to the bottom line. In a very -- as high as attrition has been over the last year, 1.5 years, it's actually made our job somewhat easier relative to being able to just right-size lots of areas of the company. We have a lot more focus on the efficiency of our branches. We're probably several years behind what others have done in terms of just looking at the efficiency of their branch network, not just in terms of the numbers of branches, but staffing inside those branches. When we look at just the processes inside the company, when we look at things that we've created, we still see the ability just to drive expenses downward. And what we've said is we certainly hope and we'll give an update when we get to the end of the quarter, that on a net basis, that continues to trend downward, albeit we still have some of these lumpier legacy things, which are going to come through and will all those things out as they do. And there'll be a point at which revenue should help those numbers as well, because as I said, there's no question when you look at just -- not just our revenue growth, but just the mix of revenue and how much we're getting paid, we're not where we should be. So, we put all those things together and just from a management perspective and we think about what we can impact, we kind of put the interest rate increases to the side. We understand that credit losses are going to go up and let's not fool ourselves. We spend a lot of time focusing on what we can do to impact the company. And the things I mentioned, we think, create a very, very strong platform for increased efficiency and stronger growth that we've really not seen from the company over the last five, six years. You mentioned credit, so let's talk a little bit about that. Obviously, credit losses at 30-year lows. We really didn't see much of a deterioration in the third quarter. So, a couple of things. The first is, are there any specific portfolios that you're monitoring more closely today? What are the leading indicators that you're watching perhaps the most closely? And maybe you can talk a little bit about the sensitivity of the allowance of some of those risk factors, and how we should think about the reserve builds. So, listen, I mean I talked before about some of the things that we're doing, predominantly on the consumer side about just tightening up around the edges, which, again, I think is just you'd expect us to do and it's a smart thing to do. But again, what we see is still extremely strong credit performance on the consumer side with an expected level of normalization. But I would describe it as you do need to -- if you're looking at the graphs of delinquencies and what you do need to make change the scale to really see it, but it is very, very clear. And again, there's nothing in there that would suggest that it's -- the curves are turning in a more negative way. It's a consistent return to normal, and we'll see where that gets to. When we think about our most significant exposures on the wholesale side, I would say, first of all, we're trying to be diligent about looking across all of the different pieces. There're certainly some inflation-sensitive industries that we've been very aggressive in trying to get ahead and working with clients on. And for us, we spend a lot of time looking at our own commercial real estate exposure. When you look at commercial real estate, I would just encourage everyone look beyond the headline number. Not all commercial real estate is the same. You need to look at the type of commercial real estate. So, huge difference in residential versus commercial versus office. Office is the most stressed, but there's also a huge differentiation in office depending on physical location, meaning city by city, location within the city, the -- whether it's an A property or B property or C property, and then the structure of transactions will certainly dictate loss content over a period of time. And so, whether it's LTVs or other structural things that we have in place. So, office is showing deterioration in terms of just what you're seeing in terms of things like occupancy trends like that. Hopefully, we've been thoughtful about it relative to how we think about it in our allowance. And what it translates to in terms of losses over a period of time, I think, will be very uneven across the industry. The industry defined very broadly as large banks, much smaller banks and non-banks, because people have very different types of exposures. Okay. So, we've got a few minutes left, so maybe we can talk about capital. You're actually in a position of excess capital, which is different to some of your peers. Can you talk a little bit about how you're thinking about redeploying that excess capital either in terms of redeploying it back into the business versus returning that? And then perhaps you can comment on how you're thinking about how your capital requirements could evolve over the next few years? Obviously, there's been a few speeches from Michael Barr suggesting that requirements could go up. How does that factor into your thinking in terms of the appropriate level of capital to run with today? Sure. So, as you mentioned, we do have very strong capital levels. We have significant buffers on top of the buffers that the Fed has out there. But we're also just trying to be, quite honestly, very, very conservative relative both to our position as well as what we see in the world. And so, again, what we said on the third quarter that we are trying to put some of these historical matters behind us. I've pointed this out multiple times, it's lumpy. We don't control the timing of it. And we certainly would expect there to be some more of those things in the future. We don't think they impact the ongoing earnings power of the company, but we certainly want to -- those things shouldn't be a capital issue for us. And so, just being smart about not making it an issue or not even having it be a concern for people we think is important. We live in an uncertain environment. And so, I've talked about what we see in terms of a natural progression towards a return to normal and then a downturn, but you never quite know. And again, we just want to be conservative when it comes to capital. And we read the same things that you read. And so, there's no question that there is an ongoing debate about whether banks have the appropriate levels of capital. We certainly feel like we have more than enough capital, but ultimately, it's not our decision. And so, we just don't want to be in a position where we need to just react in a way that surprises everyone if those things come to pass. So, I think we're just trying to be very smart about managing our current capital base. Making sure as we think through the future and how we want to position the company that if there are changes to capital rules that we're not impacted in a way which surprises people. So, I wouldn't call it -- it's not a concern in any way, shape or form, it's just trying to be prudent. And so, we still generate a significant amount of capital. And so, we'll be able to deploy that in terms of increasing dividends and buybacks. And it's just a question of just making sure that we sleep at night really, really well and get through this period in a way that capital never has to be a question. Okay. I actually think with that, we're out of time. So, Charlie, thank you very, very much for joining us. And hopefully, we'll see you again next year.
EarningCall_1805	Hello, ladies and gentlemen. Thank you for standing by for iClick Interactive Asia Group Limited's 2022 Third Quarter Unaudited Financial Results Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded. Hello, everyone, and welcome to 2022 iClick's third quarter unaudited financial results conference call. The company's results were issued earlier today and are posted online. You can download the earnings press release and sign up for our distribution list by visiting the IR section of our website at ir.i-click.com. In addition, during the call management will give their prepared remarks in English. During the Q&A session, we will take questions in both English and in Mandarin, and a third-party translator will provide subsequent translations. Please note that all translations are for convenience purposes only. In case of any translation discrepancy, management's statement in the original language shall prevail. Jian Tang TJ , Chairman, Chief Executive Officer and Co-Founder of iClick will first provide a high-level review of the 2022 third quarter results and share his thoughts on our strategy going forward. Chief Financial Officer, David Zhang, will follow and give us additional insight on the financial results. He will then turn the call back to TJ for closing remarks before the call is open for Q&A. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's 20-F as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that iClick's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. iClick's press release contains a reconciliation of the unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures. I will now turn the call over to our Chairman, Chief Executive Officer and Co-Founder, Jian Tang. TJ, please go ahead. Thank you, Lisa. And welcome to the call everyone. I will first share our strategies and execution over the past quarter and after how we envision our business in the future. We saw improved performance in the third quarter with 16% sequential growth in Enterprise Solutions revenue and a 3% modest uptick in marketing solutions, combining for 8% quarter-over-quarter increase in our total revenues for the quarter. These increases were largely driven by the gradual easing of COVID related lockdowns and containment measures and the associated resumption of business and economic activity. We are also pleased to see the recovery for our Enterprise Solutions business with revenue contribution hitting a new record high of 39%. We remain optimistic about the continued resumption of economic activity and business fundamentals that will drive increased demand for our innovative SaaS plus technologies and services and in turn further sales growth. In addition, we have continued to drive cost optimization across our operations, allowing us to reserve sufficient cash, maintain our core teams and products intact, strengthen our capabilities in offering valuable services to customers and weather the macroeconomic headwinds, we believe this positions iClick for continued market rebound as conditions improve. This strategy is central to our future success, as we believe our core value proposition rests on our ability to remain a leading innovator in the breadth of value our solutions and value. We achieved notable solution implementations and roll out during the quarter that drove exceptional value in assisting clients to accomplish the diverse goals. For example, we collaborated with Jingdong Technology to build a full stack private domain e-commerce solution based upon iClick's Changxun and Jingdong Technology Cloud Service with the inauguration of Jingdong Alliance Commodity Promotion Solution or CPS and JD.KEPLER Supply Chain services. This integrated offering aims to empower retailers in the cosmetics FMCG and affordable luxury apparel industries through all ecosystem smart retail SaaS solutions. We also were recognized through numerous industry awards. For example, we [indiscernible] the first third-party service provider of the first half of 2022 by Alighting Award. We are honored by the strong industry destination, we continue to receive and strive to remain a leader across our industry wide solutions mix. This concludes my opening remarks. And I would now like to turn the call over to our CFO, David Zhang to discuss our third quarter financial results. David, please go ahead. Thank you, TJ. Hello, everyone. I will share our key financial results for third quarter of 2022 compared to the same period of 2021. Revenue for third quarter of 2022 was $41 million, decreased by 53% year-over-year. Looking at the individual business segments, revenue from marketing solutions was $25 million, decreased by 62% compared with the $66.6 million for the third quarter of 2021 as a result of our strategic shift away from some high risk advertising business and overall advertising market slowdown in China. Revenue from our enterprise solutions was $16 million decreased by 21% compared with $20.3 million in third quarter of 2021, mainly due to the challenges from the pandemic and the control management, which affected the progress of our new clients onboarding and solutions implementation in 2022. Gross profit for third quarter of 2022 was $9.2 million compared with $21.7 million for the third quarter of 2021, aligned with the decrease of revenue. Total operating expenses were $20.8 million for the third quarter of 2022 compared with $24.1 million for the third quarter of 2021. The changes were primarily due to decrease in share based compensation, staff costs and promotional expenses. Goodwill impairment of $3.7 million was recorded for third quarter of 2022 for marketing solutions business. This partial non-cash impairment charge represented a shortfall between the carrying value and the estimated fair value of this reporting unit as of September 20, 2022 due to the slowdown of advertising industry. Net loss totaled $19.4 million for third quarter of 2022 compared with $2.6 million for the third quarter of 2021, mainly resulted from operating loss of $11.6 million, excluding impairment of $3.7 million and impairment of equity investments of $3.4 million. As of September 30, 2022, the company had cash and cash equivalents, term deposits and restricted cash of $99.9 million compared with $88.7 million as of December 31, 2021. For the non GAAP measures, adjusted EBITDA for third quarter of 2022 was a loss of $8.5 million, compared with earnings of $3.6 million for third quarter of 2021. Adjusting net loss for third quarter of 2022 was $10.2 million, compared with adjusted net income of $0.8 million in the third quarter of 2021. Gross billing was $61.7 million for the third quarter of 2022, compared with $195.4 million for the third quarter of 2021. For further information, please see more details in the press release we issued today. Thank you, David. While Chinese government's recent announcements suggest signs of easing quarantine requirements and travel restrictions that might bode well for economic activities, supply chain disruptions [indiscernible] lockdowns and geopolitical conflict around the world may still adversely impact consumer sentiment, weigh on company's operations and further curtail business performance in the short term. We are nevertheless cautiously optimistic and expect recovery of consumer segments to be greatly beneficial to the overall economy, as well as our consumer centric total solutions as conditions improve. In the longer term, we remain highly confident in the intact mega trend of digital transformation in China, supporting our strong conviction with the steadfast commitment from the Chinese government. The 20s party Congress report explicitly indicated the importance and acceleration of digital economy development. Therefore, iClick will continue implementing its SaaS plus strategy by further upgrading the product offerings of Enterprise Solutions and enhancing our top tier clients servicing capability so that we can better seize the enormous opportunities ahead and deliver sustainable growth for the future. Before I end my closing remarks, I would like to provide a recap of how our execution in 2022 has been entered by the strategy we defined at the end of last year. Even though parliament regulations, macro environment and geopolitical conflicts has constituted a uncertain operating environment for us since the second half of last year, we have remained resolute in ensuring that we maintain sufficient cash and resources to help us withstand these micro shocks. Our strategy to wind down high operating cash, lower margin and the higher risk business within our Marketing Solutions segments is the basis of this approach. Consequently, our cash and cash equivalents have reached almost $100 million as of the end of September, compared with approximately $89 million at the end of 2021, as well as a reduction in bank borrowings. In addition, in support of the strong long term prospects of the digital transformation trend in China, we have continued to invest in our higher margin Enterprise Solutions, which positions iClick well to capitalize on rebounding economic activity and improved business sentiment and the associated recovery in client demand. Thus, our R&D expenditure has remained relatively constant. This is core to our long term strategy as we believe the investment is what fundamentally will drive our future growth momentum. Lastly, we have in parallel being streamlining our operations and driving cost optimization, reducing expenses in a number of areas. In sum, we are proud of our solid execution with a clear vision to carry iClick forward through these volatile periods. With that, I wish to acknowledge and thank our clients, partners, shareholders and all other stakeholders for our continued support. And of course, all our iClickers who have been so dedicated to the work through [indiscernible]. Backed by our sound management and clear strategies, we believe we will be able to deliver better results and further establish ourselves in the digital transformation market. Thank you all, again, for participating in today's conference call and for your continued support. This concludes my remarks and we will now open the floor for questions. Operator, please go ahead. [Foreign Language] So let me translate myself. Thanks management for taking my question. My first question is regarding the ES business. I'm wondering what would be the impact of COVID on the project implementation of the business in fourth quarter and next year? And my second question is related to the advertising outlook into fourth quarter and next year as well? Thank you. [Foreign Language] [interrupted] Thank you for your question. This is TJ. If I understand correctly, your questions are about the outlook or trends of ES and MS business. Well, compared with Q2, Q3 saw performance in our businesses. I think the reasons are very clear. In the second quarter due to the COVID, a lot of cities were under lockdown. And in Q3, these COVID related control measures were eased. However, the trend -- the future trends for the COVID related control measures still remain unclear. Therefore, many industries, including many of our clients' industries are still prudent in making the investment. Overall speaking, we've seen some slow recovery, but not very strong. Relatively speaking, the ES business has performed better because the demand for ES business is always there. And in our ES business, we help and meet the digitalization needs of our customers by providing them better opportunities to interact with their consumers and manage their digital assets better. So there is always a strong amount of our ES businesses. Therefore, the pipeline is quite good. However, due to the COVID related control measures, some clients' demands have been put off, because it usually takes a rather long time for our clients to make a decision about working with us and then onboarding and then a solution implementation and the lockdown and other control measures have actually delayed the entire process. And therefore -- and also during the onboarding of new clients, it requires a lot of interaction with our clients. But overall speaking, our Q3 performance is better than Q2. Well, as to the Marketing Solutions business or the entire advertising business, weâve seen some kind of recovery in Q3, but not very strong. Actually, this year the entire advertising industry is weak. Since last year, many industries have been adversely affected. In particular, some industries such as the education or the gaming industries just disappear because of the tightening of government regulations. And due to the logistic [CCAP] (ph) facing e-commerce companies, even some big brands have started to adjust their advertising budget. So overall speaking, the Marketing Solutions business remained weak this year. And that's actually is in line with our strategic decision to wind down some value for marketing solutions business. And we can say that we have forecasted this trend and made our choice early this year. [Foreign Language] Thank management for taking my questions. So I have two questions. My first question is for the Enterprise Solutions business. So how [indiscernible] for new and existing clients and how is our client acquisition strategy so far? And my second question is also for the Enterprise Solution business. And how should we view the competition landscape and our competition advantages? Thanks. [Foreign Language] [interrupted] Well, this is David. Let me first take your question about retention compared with Q2, the Q3 saw a good retention rate. You can see that in terms of their customer number, the retention rate was 65% and dollar amount, the retention rate was 95%, quite high level. And many existing customers have contributed more to our sales. And as to the question about competitive landscape, I would like to invite TJ to answer your question. [Foreign Language] [interrupted] Okay. Let me answer your second question about competition landscape. I think in China, the digitalization process is still at its early stage. And there are a lot of players in this track, including SaaS providers, some giant companies and also service providers. And these companies have different business models and customer bases. I think the next three to five years will be key for these companies to build up their competitive advantages. And for us, our advantages lies with the fact that we have accumulated great expertise in serving medium to large sized customers through our MS business and our SaaS plus X product plus service model is very helpful for us to serve this kind of customers. And this is a competitive edge that we have been built up over the past two to three years. And for me, 2B business is very different from 2C business. 2B business is not a market for winner takes all and the digitalization market in China is leading us to accommodate more big players. That's why we think that our SaaS plus X model will have a big room to develop in the future. Great. Thank you for taking my questions. My questions are financial [indiscernible]. The first one is, DSO has dramatically improved, what has led to this much better collections? And can you continue to improve DSO which is still quite high? And then second, can you discuss why the gross margin in the third quarter is lower than the second quarter? Your revenue in both segments is increasing, you have a much better mix of the higher margin enterprise revenue. So I'm trying to understand when we'll start to see the margin recover. [Foreign Language] [interrupted] Let me take two of your questions. The first question, in Q3 our accounts receivable turnover is around 120 days compared with Q2. It's already like 30 to 40 days improvement. And due to the COVID related control measures, a lot of cities were locked down and that's why the current receivable days has increased. But Q3, we've seen some improvement and we have putting a lot of efforts to improve the collection of these receivables. And we also have been maintaining good relationship with valuable customers, trying to increase their contribution to our revenue. And the second question about gross profit margin. The gross profit margin has decreased in Q3 because we have provided more Enterprise Solutions services to existing customers in order to retain these valuable customers. When the economic condition is poor, these customers usually have a higher bargaining power. Therefore, we offer some discounts to them. As to new clients, they may not contribute a lot to our Q3 revenue. Yes, our strategy is to retain those high value â valuable customers so that in the future we'll have the chance to increase their contribution to our revenue. Thank you. Thank you once again for joining us today. If you have any further questions, please feel free to contact iClick's Investor Relations department through the contact information provided on our website. Thank you.
EarningCall_1806	Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals' Q4 and Fiscal 2022 Earnings 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, operator. Good morning, and welcome to the Compass Minerals fiscal 2022 fourth quarter earnings conference. Today, we will discuss our recent results and our outlook for fiscal 2023. We will begin with prepared remarks from our President and CEO, Kevin Crutchfield; and our CFO, Lorin Crenshaw. Joining in for the question-and-answer portion of the call will be George Schuller, our Chief Operations Officer; Jamie Standen, our Chief Commercial Officer; Chris Yandell, our Head of Lithium; and Ryan Bartlett, Senior Vice President, Lithium Commercial & Technology. Before we get started, I will remind everyone that the remarks we make today reflect financial and operational outlook as of today's date, November 30, 2022. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are also available online. The results in our earnings release issued last night and presented during this call reflect only the continuing operations of the business other than amounts pertaining to the condensed consolidated statements of cash flows or unless noted otherwise. The company's fiscal 2022 fourth quarter results and fiscal 2023 outlook in the earnings release and discussed during this earnings call reflects the previously announced change in fiscal year end from December 31st to September 30th. All year-over-year comparisons to fiscal 2022 fourth quarter and fiscal 2022 results refer to the corresponding period ending September 30, 2021. Thanks Brent and good morning, everyone. Thanks for joining the call today. We appreciate your continued interest in Compass Minerals as we work to reposition our company for its accelerated growth, reduced weather dependency, and sustainable value creation by expanding our essentials minerals portfolio into the adjacent markets of lithium and next-generation fire retarget. Fiscal 2022 was challenging from a short-term financial standpoint, but I believe will prove to be transformative in the long-term. We continue to make meaningful strides in all three of our strategic focus areas, building a sustainable culture, delivering on our commitments and leveraging our advantaged assets to create long-term shareholder value. I'll take a few minutes to highlight specific accomplishments in each of these three areas before turning the call over to Lorin to provide more details on our financials for the fourth quarter and full fiscal year and then provide some perspective on our outlook for 2023. Starting with employee culture, we took a number of actions over the course of the fiscal 2022 to provide the tools and training necessary to ensure safe and responsible operations. I would like to salute each of our employees throughout North America and the U.K. for their contributions to the outstanding safety performance the company delivered this year. Through their efforts and supported by an increased focus on behavior-based safety training and engineering solutions, we maintained a consistent safety performance throughout the year. The result was a total case incident rate, or TCIR, of 1.27, reflecting a roughly 56% improvement year-over-year. To be clear, our ultimate goal when it comes to safety is zero harm, meaning no reportable injuries across our platform in a mining and industrial manufacturing environment that's obviously a very difficult target to achieve, but we owe it to our employees and their families to strive for absolute perfection when it comes to safety. We also continue to believe this goal as possible as evidenced by the fact that several of our operating sites with the entire fiscal year with zero injuries. As I've stated previously, I deeply appreciate the level of care, focus, discipline, and collaboration essential to operating safely and responsibly, ensuring that each employee returns home to their family in the same condition as they left. This is and always will remain a top priority for Compass Minerals. When your culture is strong, it provides the foundation for execution, which was our second area of strategic focus, delivering on our commitments or put another way, doing what we said we were going to do. A year ago on this call, I talked about our commitment to protecting our balance sheet, strengthening our core assets, and increasing our focus on the high-growth opportunities in the lithium and next-generation fire retardant market. From a portfolio perspective, we completed the sale of our South America Chemicals business and received the maximum earn-out payment associated with the sale of our South America Specialty Plant Nutrition business using proceeds from both transactions to reduce our debt. To ensure we have the leadership in place to take advantage of our emerging growth opportunities, we bolstered our senior management team with the addition of key executives, including Lorin Crenshaw, Chief Financial Officer; and Chris Yandell, Head of Lithium, deepening our team's financial expertise, industry perspective, and advanced battery supply chain experience. I can't overstate their influence on our achievements this year and thrilled to have them on board and look forward to their continued partnership along this journey. We also brought in the governance acumen of our Board through the appointment of Gareth Joyce, Rich Daly [ph], Ed Dowling, Melissa Miller, Jon Chisholm and Shane Wagon, who collectively enhance the Board's operational, financial, advanced battery supply chain, and human capital management expertise. And with an eye toward the future, we continue to invest in the safe and efficient operation of our core assets through continuing to progress on our Goderich mine plan and a much-needed upgrade to our [Indiscernible] launch mine. Turning to our financial performance for the full year. As I indicated earlier, fiscal 2022 was challenging from a financial and operating perspective for a variety of reasons. As we've discussed on past calls, the inflationary pressures that all industries have had to deal with in 2022 had a particularly acute impact on our Salt segment as the contract architecture of our North American highway business does not allow for the pass-through of inflationary costs in real-time. As a result, our profitability was severely tempered by historic levels of inflation, resulting in higher distribution and production costs. We took actions throughout the year to partially offset some of those effects, primarily through raising price within our consumer and industrial business. However, ultimately, the impact of these efforts fell far short in comparison to the inflationary effects causing the profitability of our Salt segment to come in well below the inherent earnings potential for this business. The most impactful action we could take during the year to restore the profitability of this business was to approach the recent North American highway deicing salt bidding season with a very disciplined strategy, emphasizing value over volume, and that's precisely what we did. As a result, we expect pricing in 2023 to rise on the order of 15% and volumes to decline on the order of 9%. I'm pleased with the team's efforts and expect to see substantial progress in fiscal 2023 as measured by EBITDA per ton rising to match or exceed the $20 per ton in EBITDA, the Salt segment has delivered on average over time, up from approximately $15 EBITDA per ton is delivered in fiscal 2022. Our Plant Nutrition business had a strong year from a profitability perspective. with EBITDA per ton of approximately $245 above the long run average for this business. However, we continue to be challenged throughout the year to deliver production volumes in line with historical levels. On that measure, we fell short of what we believe is the inherent potential for this business. Again, Lorin will provide more color on the financial short. While navigating these short-term challenges to our core businesses, we stayed laser-focused on advancing our third strategic focus area, leveraging our advantaged assets to reposition our company for future growth. One dimension of that repositioning relates to our strategic investment in Fortress North America, a next-generation fire retardant company, focused on reinventing wildfire application technologies to make them safer for the environment and also more effective. The Fortress team had three primary strategic objectives for calendar year 2022; secure adequate capital for full commercialization, bolster the leadership team, and advance each main product, FR-600, FR-200, FR-100, and FR-105, closer to qualification and commercialization. From a funding perspective, our $45 million equity investment this fiscal year increased our stake to roughly 45% and helped position Fortress to build out its manufacturing infrastructure, stockpile inventories of raw goods, and began hiring key stack. From a people standpoint, Fortress made great strides in 2022, naming a Chief Manufacturing and Supply Chain Officer and a Chief of Airbase Operations, who formally served as the U.S. Forest Service Director of Fire and Aviation Management were California Region 5, the U.S. Forest Service largest region in the entire country. They've recently recruited several highly skilled air-based infrastructure and operations managers with decades of experience building and operating air tanker basins. Product-wise, FR-600, a ground retardant was fully qualified in early 2022 and placed on the U.S. Forest Services qualified product groups. Fortress production and successfully provided revenue-producing test volumes for select clients with use cases focused on utility, residential, and commercial properties. FR-200, a liquid concentrate aerial retardant successfully passed all required tests and completed all operational field evaluation requirements, which included successfully air dropping the required 200,000 gallons under live wildfire conditions, which Fortress performed at an air base located in Montana. FR-105, a second-generation dry concentrate aerial retardant has successfully passed all required tests and commenced its operational field evaluation, which we expect to be completed during 2023 fire season. And lastly, FR-100, Fortress' first-generation dry concentrate has passed all required guests have successfully completed its operational field evaluation requirements. We're pleased with the progress that Fortress has made, a couple of important milestones that are not entirely within the team's control, but essential to breaking through are the completion of the Environmental Impact Statement, or EIS, by the U.S. Forest Service and substantially being awarded air-based allocations and attendant contracts. This EIS is scheduled to be updated every 10 years and expired in December of 2021. Our working assumption was that it would be finalized by the end of calendar year 2020. That didn't occur and the EIS is now roughly 11 months behind its regulatory exploration date. We expect the magnesium chloride formulation at the heart of Fortress retardants to be confirmed as acceptable reviews as part of the EIS. As a result, we expect the eventual completion of this study to provide the necessary environmental clearance for Fortress aerial fire targets and to set the stage for bringing their highly effective, more environmentally friendly flame retardant to market. On the lithium project front, most of you are well aware of the significant progress we've made this fiscal year. In September, we provided a comprehensive overview of our strategic path forward to maximize the value of our North America lithium brine resource. As a part of that strategic update, we announced the achievement of five key milestones. First, we announced a $252 million strategic equity investment from Coke Minerals & Trading LLC to advance Phase I of the development of our lithium brine resource, explore opportunities for execution synergies across the company and further align our capital structure with our strategy through additional debt reduction. Second, we shared the selection of Energy Source Minerals with our Phase I DLE technology provider after three years of extensive testing of multiple DLE technologies and providers. We also shared the results, including a technical report summary of our FEL-1 engineering entity, confirming that our project is projected to be highly cost competitive, the lowest by our estimation on the entire domestic lithium cost curve, leveraging our robust existing infrastructure. Fourth, we announced our intention to construct by 2025, the conversion facility at our Ogden, Utah solar evaporation site with a target annual production of 11,000 metric tons of lithium carbonate with an expected NPV of between $626 million to $985 million and an after-tax IRR of between 28% and 36% on estimated development capital of approximately $262 million at an FEL-1 level of accuracy. And finally, we announced the completion of a life cycle assessment, confirming a strong sustainability profile for Phase I of our lithium development. From a valuation perspective, the projected after-tax NPV of Phase I of our lithium project is approximately $626 million, assuming an average lithium carbonate selling price of approximately $16,000 per MT, which equates to nearly 40% of our 30-day average market cap were approximately $15.25 per share. Similarly, the NPV of Phase II of our lithium development is projected to be approximately $1.4 billion, assuming an average lithium hydroxide selling price of approximately $17,000 per MT, equating to roughly 85% of our 30-day average market cap and approximately $34 per share. It's worth noting that the average sales price for lithium products used to calculate these NPVs is but a mere fraction of today's indicative pricing, highlighting the upside leverage our project [Indiscernible]. Together, the growth opportunities we're undertaking clearly represent sizable potential upside for our business and one that we would expect to benefit our employees, community, and our shareholders alike. Overall, we believe the actions we've taken in fiscal 2022 lay the foundation for an increase in the absolute earnings power of Compass Minerals and our long-term earnings growth rate and ultimately in the valuation of our company. With that said, the fact that our stock price is trading at a considerable discount to the value of successfully executing our lithium development suggest a considerable upside potentially. It also likely reflects a measure of skepticism among investors in our view. Our leadership team and employees embrace the execution challenges before us and expect to resolve the current valuation disconnect over time through successful execution. Looking ahead, our focus in 2023 will be to deliver improved overall financial performance and continue advancing our transformation strategy with an emphasis on the following six strategic objectives. Number one, building on the outstanding safety performance of the past 12 months to continue our drive towards zero harm across each of our facilities. Number two, restoring the profitability of our Salt business, the levels we've demonstrated in the past. Number three, developing and executing strategies to improve the reliability and sustainability of our SOP production, which should allow for increased production levels over time. Number four, achieving the commercial and project-related milestones on our road map to advance Phase I of our lithium development. Number five, supporting Fortress North America's efforts to become the first new entrant in the market for fire retardant chemicals in two decades during the upcoming 2023 wildfire season, subject to completion of the EIS. And last, number six, continuing to enhance our financial standing and maintain our overall credit profile. In closing, I'm excited about the path we're on and the sizable opportunity before us as we execute our strategy to accelerate our growth, raise our earnings power and reduce our weather dependency. I believe that we have the right team and the right strategy in place to realize this opportunity and create real value over time. With that, I'll now turn the call over to Lorin, who will discuss our financial performance in greater detail and our outlook for the fiscal 2023 year. Lorin? Thank you, Kevin. On a segment basis, Salt revenue totaled $188.9 million for the fourth quarter, up 18% year-over-year, driven by 15% growth in sales volumes and a 3% increase in average selling price. Both the highway and C&I businesses delivered higher sales volumes versus the prior year. Highway average selling price was up 7% and C&I pricing rose roughly 5% primarily due to continued price increases to offset inflationary pressures. On a full year basis, Salt revenue grew 12% to approximately $1 billion on an 11% increase in sales volumes and 1% increase in average selling price. Despite higher revenue, Salt operating earnings declined 27% to $16.3 million for the quarter and by 34% to $117.4 million for the full year as increased production and distribution costs more than offset revenue growth. From a cost perspective, roughly two-thirds of the full year increase was driven by higher shipping and handling costs, which rose 19% to roughly $28 per ton and one-third by higher all-in production costs, which rose 7% to roughly $43 per ton. The increase in cash cost was primarily driven by inflationary impacts and higher maintenance costs. The increase in shipping and handling costs primarily reflected the combination of inflationary impacts such as fuel surcharges and higher cost to serve our markets due to geographic mix. Turning to our Plant Nutrition segment. Revenue for the fourth quarter grew 17% to $57.8 million, despite a 22% decline in sales volumes on higher pricing. Specifically, average selling price rose 12% sequentially to over $929 per ton and was up 49% year-over-year, reflecting the continued favorable supply/demand dynamics impacting the global fertilizer sector during the period. Operating earnings were $12.6 million, up from a loss of $0.2 million and EBITDA was $21.8 million, more than doubling year-over-year. Higher average selling prices more than offset the impact of lower production volumes on sales and cash costs, resulting in operating margins of 22% and adjusted EBITDA margin of 38%, both up substantially year-over-year. Plant Nutrition's full year results reflected operating earnings of $37.1 million, over 4 times higher than the prior year levels and EBITDA of $72.7 million, up 62% year-over-year, driven by a strong pricing environment. On a consolidated basis, revenue was $249.4 million for the fourth quarter, up 18% year-over-year and rose 9% for the full year. Fourth quarter adjusted consolidated operating earnings increased $2.7 million year-over-year to $5.1 million and declined 42% to $65.3 million for the full year. You'll notice in this quarter's income statement that we've broken out the impact of our equity method investment in Fortress. We currently own approximately 45% of Fortress and pick up our proportionate share of their net income or loss as a non-cash item in our income statement. Adjusted EBITDA from continuing operations includes the drag on earnings related to our early-stage strategic initiatives in lithium and next-generation fire retardant. In the fourth quarter, adjusted EBITDA increased by 6% to $35 million, which includes $4 million of costs for lithium and the non-cash loss related to Fortress. For the full year, adjusted EBITDA from continuing operations was $187.1 million, down 22% year-over-year. This included $13.1 million of costs for those same strategic initiatives. From a leverage standpoint, we ended the year with net leverage of 4.6 times as defined by our credit agreement. Throughout the year, we took several steps to align our financial policy and capital structure with our strategy to accelerate growth and reduce the weather dependency of our earnings profile, including recalibrating our dividend, earmarking $200 million of the net proceeds from the Coke equity investment towards funding Phase I of our lithium development, and approximately $40 million for permanent debt reduction; and finally, completing the divestiture of our South America Chemicals business and applying the net proceeds towards debt reduction. We are thrilled to be fully funded from a lithium development perspective through 2024 and build the approach that we took demonstrated our commitment to funding our growth in a financially prudent manner. From a free cash flow perspective for fiscal 2022 despite the substantially below trend adjusted EBITDA performance and $45 million investment in Fortress, we nevertheless delivered positive free cash flow of approximately $18 million, benefiting from the $51 million in proceeds from the sale of our South America Chemicals business and an $18.5 million earn-out payment associated with the sale of our South America Specialty Plant Nutrition business. Overall, our financial flexibility, liquidity, manageable debt maturity profile, and amended credit facility give us confidence that we are well-positioned to manage through a wide range of potential weather-related outcomes in fiscal 2023. Shifting towards our 2023 earnings outlook, first of all, investors will notice that we have modified our approach to providing adjusted EBITDA guidance from only providing guidance assuming normalized winter weather to providing a range of potential outcomes. Although on average and over time, demand for deicing salt is stable, it's virtually impossible to reliably and accurately forecast in any single year, winter weather activity and deicing sales volumes in the North American and U.K. markets that we serve, given the highly weather-dependent nature of demand. Accordingly, this year, we provided a projected range of potential earnings outcomes that consider various winter weather scenarios, including the potential impacts of mild or strong winter weather. I'll start by framing our expectations for salt and plant nutrition and then lay out the high-level strategic milestones we expect to accomplish for Lithium and Fortress our two primary growth initiatives. Starting with the Salt segment. The 2023 range that we provided reflects our current book of business for fiscal 2023 and then assumes normalized weather conditions and average historical sales to commitment outcomes. Overall, sales volumes for the de-icing business are expected to be down approximately 7% year-over-year, which is consistent with our focus on value over volume during the recent bidding season. As Kevin indicated earlier, we expect North America highway deicing pricing to rise roughly 15% compared to prior year bid season results. This translates into a projected increase in pricing at the Salt segment level of approximately 9% year-over-year. Within our C&I business, we expect pricing to be up a couple of percentage price year-over-year on similar volumes. Under those parameters, we would expect Salt segment EBITDA in the range of $215 million to $255 million in fiscal 2023. Overall, assuming normalized winter weather, we expect our Salt segment to show improved profitability year-over-year to around $20 of EBITDA per ton, up from roughly $15 per ton in fiscal 2022 on higher pricing driven by our successful efforts to pass through inflationary and fuel impacts incurred in fiscal 2022 as part of the recent bidding season and recalibrating our mix toward geographies where we have natural competitive advantages that enhance our profitability. Achieving EBITDA per ton of around $20 or more would reflect a successful restoration of the profitability of this business to historical levels, which was our objective heading into the most recent bidding season. In our earnings release and earnings deck, we have also provided the estimated impact of volume, revenue and EBITDA for the Salt segment during mild and strong winter weather scenarios. These bookings entail significant estimates by management that use an array of information, including historical weather data and sales to commitment outcomes. In Plant Nutrition, higher unit costs, reflecting elevated production costs are expected to result in lower profitability as measured by EBITDA per ton on a year-over-year basis on relatively flat sales volumes. As background, SOP production levels in any given year are ultimately a function of the amount of on time available to harvest between September and May, which are, in turn, a function of the quality of the evaporation season, which occurs between May and September. Unfortunately, the 2022 evaporation season resulted in less potassium deposited in the ponds year-over-year due to less than favorable weather conditions, which will adversely impact our fiscal 2023 production capacity. With a focus on servicing our long-standing customer relationships and maintaining our position as the primary North American producer of SOP. This year, we will purchase potassium chloride as a supplemental feedstock, and effective approach to driving more tons, but one that yields lower than normal margin at current potassium chloride prices. In addition to the increased use of potassium chloride in 2023 compressing our margin, cost per ton are also expected to be higher due to a combination of higher per unit pond processing costs, which have a significant fixed component and incremental costs related to actions we are taking to mitigate the impacts of the ongoing drought at our Ogden facility. Pricing-wise, we expect to continue benefiting from a broadly constructive global fertilizer supply/demand dynamic. Our guidance calls for a modest year-over-year increase in the average SOP price on a full year basis with pricing in the first quarter of 2023 expected to track roughly in line with the fourth quarter of 2022 before moderating each quarter sequentially thereafter. Our view on SOP pricing reflects our best estimate at this time and one that we'll update quarterly throughout the year. In 2023, we will remain focused on implementing both short and long-term solutions to improve our ability to predict annual SOP production levels have open more consistently and reliably through data and science-based approaches that enable us to evaluate the myriad of weather and chemistry conditions impacting production there. In the near-term, we're in the process of further refining engineering controls and design such as raising our dies, improving access to brine, more efficient use of freshwater, and upgrading pumping systems to maximize harvest tons. For the long-term, we have undertaken a detailed review of our holistic end-to-end process designed to optimize our PON chemistry and ultimately ensure more sustainable and reliable SOP production levels, including both PON-based and supplemental potassium feedstock, further solidify Compass Minerals as the leading SOP provider in North America. Overall, we expect the key drivers of this segment's profitability in fiscal 2023 to be production yields and unit costs at our Ogden facility and the impact of global prize market dynamics on SOP pricing and volumes. Based on our current outlook, we expect that the Plant Nutrition segment will generate EBITDA of between $55 million and $70 million. I'll now provide some commentary on a few other financial measures that are important to forecast our business. Starting with CapEx, our capital spending forecast of between $175 million and $230 million is divided into two categories, with sustaining CapEx related to salt and plant nutrition of between $100 million and $110 million and growth CapEx of between $75 million and $120 million earmarked for lithium development. As a reminder, the net proceeds from the Coke equity contribution were received in mid-October and therefore, are not reflected on our 9/30 balance sheet. However, we intend to use those proceeds to fund the lithium-related CapEx and proceeds from our core operations to fund sustaining CapEx. Over the next three years, until late 2025, when we expect Phase I of our lithium development to come online, it will be important to distinguish between free cash flow with and without lithium-related CapEx to maintain an accurate pulse on the results of our core business. We will assist in that regard by breaking out lithium versus non-lithium CapEx in our reporting. On the topic of lithium, I would also note that lithium-related operating expenses are projected to be in the range of $10 million to $12 million this year versus $8 million in fiscal 2022. While in the short run, these costs compress our profitability, they are essential investments, enabling us to execute on an opportunity that we believe represents substantial upside and an exceptional proposition for our stakeholders. Finally, we expect our effective tax rate to be in the range of 30% to 35%, excluding any additional expense related to valuation allowances on deferred tax assets. Now turning to Fortress. In our view, 2023 has the potential to be a breakout year with the company's FR-200 and FR-100 aerial retardants having the greatest potential to impact results. Given that several catalysts are outside of Fortress' direct control; we've chosen not to assume any financial upside for Fortress in our guidance. Instead, we have forecasted our share of its assumed losses, which are included in the corporate facet of our guidance will be around $5 million. However, as Kevin mentioned earlier, if the EIS is approved in time for the 2023 wildfire season and Fortress is a signed basis, 2023 could be the year that the company starts gaining traction. The key 2023 strategic milestones for Fortress are detailed on slide 10 of our earnings presentation. But at a high level, they include advancing commercialization of FRR-600, supporting the EIS process and ensuring operational readiness to deploy FR-200 and FR-100 and upon EIS approval, securing an initial tranche of airbases. Finally, turning to lithium. In September, we laid out a comprehensive strategic plan detailing our path forward to build an 11,000 metric ton battery-grade lithium carbonate production facility expected to come online in 2025. The related transcript technical report, presentation and replay may be found online under the Investor Relations section of our website. We are excited to officially shifted from evaluation mode to execution mode on a strategic journey, we expect to reposition Compass for accelerated growth and reduce weather dependency over time. Over the next several quarters, we expect to accomplish the following strategic milestones, securing additional definitive offtake agreements together equivalent to at least 80% of the 11,000 metric tons of anticipated Phase I battery-grade lithium carbonate production capacity, completing an FEL-2 level engineering estimate for Phase I by March, completing an FEL3-level engineering estimate by June, and achieving mechanical completion of a commercial-scale BLE unit by December 2023. I'd note that we broke ground on this unit in the middle of November, which was slightly ahead of our plan. Finally, for several years, we have issued two snow reports a year, one in January and one in April. These reports have historically summarized winter weather activity as measured by snow events in 11 representative cities in our primary North America highway deicing service area. In fiscal 2023, we will no longer issue stand-alone snow reports as press releases, but will continue to provide perspective on snow events during our first and second quarter earnings calls. The snow events data for the 11 cities is readily available and a reasonable indicator of winter weather conditions in these cities. However, as we have shared in the past, several factors make snow events in these cities and in perfect proxy for our actual quarterly sales to commitment levels, which ultimately are what drives sales volume. For instance, all this data set reflects relatively large cities, for which data is readily available, we don't only serve large cities. We typically serve broad swaths of states that include rural areas, metropolitan areas and everything in between. In addition, certain reasons such as the U.K. are important markets for us, but don't have similar public information that allows us to include these regions in our snow report. Other factors that make the snow report an imperfect proxy include winter severity and year-over-year variations in customer inventory levels. Going forward, we look forward to continuing to provide perspective on snow events with our quarterly earnings results rather than on a stand-alone basis. Hi good morning. This is Alex Chen on for Joel Jackson. Thanks for taking my questions. For my first question, it seems like Salt margins are expected to improve 100 basis points year-over-year. Can you maybe provide all the puts and takes to get to this improvement between 15% higher pricing, cost inflation and other components? And maybe what needs to happen to recover the remaining 500 to 600 basis points of margin to get back to 2021 levels? Yes. Alex, it's Kevin. I'm not sure that I agree totally with your premise, but let me try to address in the context of the guidance we've given. So, we experienced about a 15% price increase across our highway deicing sales for the season, and that's against the backdrop of about, I think, about a 9% reduction in volume on a year-over-year basis. So, our view is that gets us back into the two-handle ZIP code from a margin perspective, EBITDA per ton, and that's also got a fair amount of the inflationary effect that we've experienced in 2021 carrying in, I mean, 2022, carrying into 2023 as well. So, to the extent that, that inflation abates unexpectedly or inconsistent with our plan because we were pretty conservative. You can see that margin expansion replicate our view and kind of where we were in 2021. But look, it's a function of the weather out of our control function of the inflation semi out of our control. So, we're comfortable with the guidance we've given that we're back kind of into that two handle range with potentially some upside based on how the winter unfolds. And I would just add, when the commercial team enters into the bidding season, we're thinking about profit per ton, and your question started with margin. And over the past decade, our average profit per ton has been about $20, and that's what the team has achieved. And so, we've restored the profitability to historical levels on a profit per ton basis and that's the way we entered the bid season. Appreciate that color. Thank you. And for my second question, we've seen diesel prices increase since bid season and river barges are currently challenged. Is there a concern over barge availability this winter? And if you can elaborate on the costs you expect from maybe higher diesel barges issues in fiscal 2023 and if we could expect significant increases in barge-related costs for maybe 2024? Sure. Thanks, Alex, this is Jamie. Obviously, the Lower Miss experienced low levels pretty much over the last six or eight weeks. But over the last few weeks, we've seen a lot of rain in the Midwest the levels have come back up. We had some short-term concerns about it, but now it's pretty well normalized. We've got the barge traffic that we need on a covered barge basis. I would also say, most of our material is already deployed and has been deployed. We started that work-in April and, throughout the summer, we shipped the Upper Miss and then moved down as the season goes along and serve the Ohio River. So, we don't expect any impact this winter. As it relates to rates going forward, we basically have CPI type adjustments in our agreements as well as fuel surcharges. So depending on fuel, we could see perhaps some relief there in 2023. And then, as it relates to CPI, we monitor that closely and would expect perhaps a flat to maybe slightly higher, but that remains to be seen. Thank you for that. And one last question, if I may. Are we correct to assume that implied company-wide fiscal 2023 EBITDA guidance is around $220 million to $230 million, after adjusting for corporate costs? And maybe you could talk a bit about why only the segment EBITDA guidance is provided and not company-wide guidance? Yeah. So, thanks for that question. So, we've taken a different approach to earnings guidance this year that really reflects the reality that, although over a long period of time this business is stable and delivers profitability and volumes at, what I would call, the middle of the bell curve, when you think about snow days. In any given year, the earnings profile ranges, and so what we've done is provide investors more information than we ever have with respect to the range of potential outcomes in terms of the earnings power of the business. And the way you get to an EBITDA is simply to add the segments and subtract corporate expenses, that's the way we've always done it. But rather than focus on a specific numeric adjusted EBITDA, we're providing a range of potential outcomes. And so, in that 2023 range on slide 17, the midpoint is on the order of 220, and on the high side it approaches in a strong winter, 270. But our focus is on having a conversation about earnings power as opposed to just a normalized earnings number. And so that's the way I'd look at it. Thanks so much. There was a lot of snow in Buffalo recently, and there has been some snow in the Midwest. How's your first quarter looking, sort of year-over-year, when you look at November volumes versus history? Have things been unusually strong or are they normal or weak? Yes. Jeff, I'll come in, and let Jamie provide some additional color. I mean, yes, Buffalo got hammered, I don't know, something on the order of 40 inches. We would prefer 10 4-inch snows as opposed to one, 40-inch level obviously. But I think, we'd say that the season thus far is off to a pretty good start. We're early in just a couple of months, but so far so good. Anything you'd add, Jamie? I'd say, yeah. It is certainly early. We do like the flow; we like the order book. We're already refilling some depots. We've seen nice weather, kind of Northern Illinois, Wisconsin, Western Michigan, which has been great to see that start. Historically, a bit early, it does need to continue throughout the season obviously. And then, don't forget about the West. We've seen a lot of snowfall in Sierras, the Rockies. We do sell rock salt in the West as well out of Ogden. So that bodes well for drought conditions and lake levels there, as well on the operations side. So, really feel pretty good about how we've started the season. No. We feel like we're tracking right in line with our plan. This start feels a little bit ahead. But again, the season is long, and a bulk of the activity -- winter weather activity for our first quarter, the December quarter, occurs in the month of December. So, we're just right at the line there. And I would just say, it goes back to the whole bell curve. Every month is a statistical data point on that bell curve. So it would be entirely premature to speculate about how the next couple of months are going to transpire, but we're off to a good start in terms of mother nature. I wasn't asking you to speculate, I was just asking you to speak in retrospect in terms of what has happened. Yeah, in terms -- so in your commentary on Plant Nutrition, what did you say about first quarter plant nutrition prices? Did you say that they would be roughly flat versus the fourth quarter or flat versus the first quarter of 2022? We said it'd be flat versus the fourth quarter. For the quarter we just reported -- that's right, before then moderating throughout the year. In terms of cash taxes, I think, a number in the 20% or 25% range is a good number to use as far as our accounts payables or at the end of the year. Okay. And then lastly, you talked about prioritizing sort of value over volume in salt. What does that really mean? Does it mean that you don't want to ship unprofitable tons or they are profitable tons that you do want to ship, but they are profitable tons that you don't want to capture because the margin you find insufficient? Can you explain what the value over volume approach means? Yeah, our focus this year, Jeff, was to - we felt like there was value in the marketplace, and we wanted to try to optimize/maximize that value, which we think we did across the board. And the other thing we did was, we moved some of our business to more logical areas where we have geographical competitive advantages relative to some of the more difficult areas to get to certain parts of Illinois and Pennsylvania, for example. So we think we optimized our book with a focus on the restoration of more historical margins, something with a two-handle on it. And I think the team did a good job, and this is a two, three-year journey as well. So this is year one of kind of that recapture. So, that's how to find value over volume. Yes. Hi. Good morning. I had a couple of clarification questions first, and then I hope that I had a couple of questions about the lithium project. But earlier in the Q&A, I think Lorin might have mentioned a $220 million kind of base case midpoint kind of target for your fiscal year 2023 adjusted EBITDA. And I'm just wondering if we should make some adjustments to that that would move the number a little higher in particular. I was thinking of stock-based compensation for starters, but is that 220 number the midpoint of the base-case assumptions and whatnot, or should we -- are there some adjustments that we need to make in addition to that? Sure. So, I wouldn't suggest any adjustments related to stock-based comp. But as you think about the earnings power of our business, we've restored salt to where it is, and if you want to think about earnings power, I would underscore that. There is roughly $20 million of expense embedded in that $220 million number related to lithium and Fortress, which are investments that we're making that we fully expect to engender returns to investors. But at the moment, it's about a $20 million drag on that $220 million related to those two businesses. Our Plant Nutrition business has averaged kind of in the mid-70s of EBITDA over the past decade, and we're projecting it to be about in that sort of low-60 mark. And so, from an earnings power perspective, those are the kinds of things I would think about, and then I would think about Fortress. When we think about Fortress and earnings power, as we said on the last earnings call, this is about $300 million addressable market. And if you look at the monopoly that is currently in play and you look at those margins, it's about a $90 million profit pool that's implied. And so, as we get market share in that business, that would add to that earnings power. So, those are the kind of things that I would think about from a long-term perspective. Okay. Thank you for that. And then, just one other thing. It's been a few quarters, but we haven't really had an update on the major upgrading program at Goderich. And as you think about the fiscal year 2023, I mean, could you just maybe update us on how things are going on underground there and whether there is a meaningful improvement in the underground mining efficiency, let's say, fiscal year 2023 versus fiscal year 2022? Thank you. Yes, David. I mean, I would just say, and George is in here and he can add color, but we continue to advance the new mine plant, as we discussed on a number of occasions before, the first step in that is creating these new permanent long-term 50-year of roadways to connect the existing shaft system with the mine works out in the West. And those are kind of on the order of about 50% complete. So that's the first step in a long series of steps to reposition the mine. And then, George and his team are also developing the West to set these rooms as we've described before to maintain quality and good mining conditions and that sort of thing. So, we continue to progress, it's a plan that we're implementing, it will take a number of years, but I would say that the progress is on track. Would you want to add anything to that, George? Yes. Maybe just a little bit there, and thanks David, George Schuller. I think, as Kevin highlighted, Goderich has continued to be on track and continued to meet and exceed expectations starting with safety in our growth there as far as our new mine development and the existing assets, or existing parts of the mine that we have, so at this stage, I'd say we're on track, maybe slightly ahead of being on-track for that. I think when Kevin laid this out couple of years ago started, said it was probably a four to five-year journey for us to get there. So, we're tracking extremely well there, and again really no negatives, expect to see that progress in the next, I'll call it, two, 2.5 years. Okay. Great. I have a couple of questions on the lithium project. I'll ask them both here. Firstly, regarding the binding agreement with LG., congratulations on that. I mean, I do recall there was another party, Ford Motor, that signed the preliminary MoU. Should we be expecting something similar from Ford Motor regarding a binding agreement? And would that be kind of the main piece of the puzzle to get to that 80% target, I guess, of committed sales from the Phase 1 production that I believe was mentioned in your earlier remarks? So that would be one question. Second question would be about the Koch Industries' investment. And I'm just wondering, does their investment come with any future optionality? So, in other words, might they have a right of first refusal if you were to pursue additional investment down the road? Or does their purchase price should they choose to make further investments as their purchase price cap, or any other optionality regarding the Koch investment that we should keep in mind as this project progresses over the next several years? Thank you. I'll hit -- weâll hit those questions in reverse, David, there. What you see is what you get with the Koch investment. They made an investment in the company, $252 million, which resulted in an ownership stake on the order of 17.5% or so, so they are a large investor. We actually think of them as a partner. They bring a lot of tools to the table from our perspective, not only in regards to lithium and the OPD Group. But also the big bulk commodities mover, we think there could be synergies with overlaps in transportation, procurement, bulk commodity types of things. So, we view them as partnership, and there's no more to the partnership than BCI. No hidden first rights of refusal or anything like that. And then, with respect to Ford, I'll let Ryan add color, but we continue to progress the agreement with Ford and we'll just see how it goes. Anything you want to add to that, Ryan? Yes, David, this is Ryan. I would just say that LG early on has proven to be a very collaborative partner, and we're excited for the deal that we put down with them. We do continue to progress discussions with Ford, as well as with other potential customers to get to that 80% of Phase 1 volume. So, as we have updates for that, we'll provide them. Thank you. Good morning. Kevin, looking at Slide 12, congrats on the DLE breaking ground. What's the limiting factor in perhaps pulling forward lithium carbonate conversion facility to an earlier start date here? Yes. So, thank you again for recognizing that we did break ground earlier this month with regards to our DLE commercial unit that we're looking to for verification of scalability. As far as pulling the project forward, what we're really doing is we're moving forward on proving out scalability of DLE with our 400 GPM unit, which we anticipate to be mechanical completion by the end of 2023. During that time, we're also progressing with our FEL-2 on the entire East side. We expect that to be complete at end of March next year. And the FEL-3 aspect, we expect it to be complete by the end of June next year. That really allows us to start some of the earlier ground work we'd have to do with regards to the overall East side. In addition, what we're going to get out of that is the net equipment that we'd have to buy for the conversion facility to may be long lead. So, we're looking at a multitude of different angles of how we kind of crash schedule and accelerate that. But currently the schedule that we have with regards to being operational in 2025 remains our realistic schedule. Understood. And just on DLE, once the commercial, once it's mechanically complete in late 2023. What's the process to validate the technology during 2024? What are the steps you will be doing during that year to validate that it actually does work? So, during -- once we finish mechanical completion, we'll go into commissioning and startup. What we really want to do is go back to look at our results with regards to what we accomplished in the previous pilot programs. And then we'll look at that with regards to what we anticipate coming out from a feed type ratio that we've talked about in September. We talked about how we basically increased our lithium and rejected the magnesium, and then we have a certain magnesium content at lithium yield that we expect coming out of DLE, that's the verification that we'll be looking for, as well as operability and kind of mechanical design aspects of it that we can improve as we go into the overall field restriction. Yeah. Maybe â this is Ryan, I'll just add on to what Chris said there. We will have a very specific DLE, or design of experiments, that would mimic what we've done with the other pilot plants that have proven to scale ESM's ILiAD technology. And what we're looking for is really the ability to match what we've seen with those other scales. We remain highly confident that, we'll be able to do that with this full scale commercial unit, and we're excited to get it up and running. Great. I guess, one more question. Just maybe Lorin on shipping and handling costs, what should we expect for 2023? Have you seen any relief at all in some of these salt shipping and handling cost metrics? Yes. I think, for the full year number, around say $30 is a good number to use. And we've, through our commercial team's success in the bidding process, been able to capture our best estimate of what those costs are going to be. To the extent that, we see continued inflation, we will run the same playbook that we ran last year, which is to raise prices in our C&I businesses as we are able to and to recoup any inflation as we've proven that we can do through next year's bidding season. We are also, from a fuel perspective, exploring a hedging program that would allow us to mute the impact on some fraction of our fuel cost. Jamie? Yeah. I would just clarify, as you think about the full year maybe approaching that $30 range for salt we're talking specifically, and then it would be a little more front-end loaded. So there'll be a bit higher in our first and second quarters, and then it should be kind of taper off as we get into the second half of the year. As for plant nutrition, most of that material moves via rail, rates and volumes are down, so unit costs are up. There is a fixed component of shipping and handling in our Plant Nutrition business. So you would expect to see higher shipping and handling in the Plant Nutrition business. Couple of clarification questions. I guess, just following up -- thanks for the topic -- from the last question. The guidance for the Salt segment on the cost side, I just wanted to make sure, are you sort of assuming same costs from 2022 that include the fuel surcharges as well and are those fuel surcharges still in place with your suppliers? Nothing has changed in terms of the contract architecture in terms of the fuel surcharges. When we enter into the bidding season, we are assuming that nothing changes and so nothing has changed there. And so as I said earlier, for the salt business you're looking at something like $30 for the full-year for logistics, and maybe something more like $40 for cash costs. Is there more to your question? Yeah. Thank you. And then, in the Koch mining relationship, I know you were just talking about before, but has anything been figured out yet in terms of -- if there is any savings for 2023 in terms of logistics or anything or is that going to take a while for them to get more involved? Yeah. So we are currently in the process of going through all the opportunities. The key opportunities would reside in logistics, transportation overlap kind of partnering on big contracts -- big transportation contracts on the procurement side as it relates to some inputs around bags and pallets. We see some real opportunity there. And then across our footprint of our depots, they have terminals we have depots that are operated by terminal operators. And we're looking at optimization there to generate some value. So, those are the key areas, but we're just not ready to quantify anything yet, but the discussions are going well. Got it. And then just a quick one on the fourth quarter highway salt volumes. They seem pretty strong. I was just wondering, was that pre-buying for this season or were there a bunch of customers maybe taking advantage of the lower pricing from last year's contracts? Yeah, there's a couple of things going on there. We were still delivering into some of last year's contract. So, you saw a little bit of incremental volume related to kind of the Illinois, Indiana area to be clear that actually ended up being pre-filled because those don't end up getting rebid, as well as the kind of a strategic decision to pull some direct barge and vessel shipments forward instead of trying to sell them in season, getting some of our certain commercial customers to take them a little bit earlier. So we had some volume shift into the September quarter as well. So those are the main drivers there. Hi. Good morning, everyone. Thanks for taking my question. I wanted to ask -- first of all, I really appreciate the winter weather range guidance. That's extremely helpful. so thank you for that. But looking at the four scenarios, I noticed that EBITDA per ton was basically flat in the strong winter scenario versus the upper-end of guidance. Is there any sort of operating leverage that would be occurring from the strong winter weather, how you think about that? Yeah. If you look at the midpoint of the 2023 range on that slide, and I'll let George elaborate, it implies about $20 a metric ton of EBITDA. And you do see a $1 increase in the strong winter you do see some benefit from absorption in a strong scenario. But George, maybe you can elaborate on the dynamics that drive perhaps even greater profitability in an extremely strong winter. Yeah. I mean, look, just -- if I was just going to pick certain operations, I mean, things that drive that, I think you've heard Kevin say this in some of the previous earnings calls, our flexibility to flex up is substantial in our operations, specifically a place like Goderich mine. So, with the strong winter, we have flexibility to go up several hundred thousand tons very effectively in a short period of time without adding labor, without additional equipment, that is very beneficial to us in the milder winter, I'll call it. We also have the availability to flex down based on what we might do with some of our labor practices and maintenance practices and those types of things that allow us to kind of bid into that range. Hi, Seth. One other point, I would just color for you, as you think about a strong winter, one of the reasons we don't have immediate leverage is by virtue of our contract structure, which is the customer has a 20% call option on anything over 100%. So, our price stays flat through 120%, and that's beyond the 120% is when we would begin to experience spot market conditions where that to occur. So, I think, most of the leverage up to that 20% is on, as Lorin said and George, fixed cost absorption. Hopefully, that makes some sense. That's really helpful. Thank you. And then, my other question is on plant nutrition. Can you walk through how should we think about the percent of production coming from the ponds versus MOP conversion, and how do you expect this to evolve in the future? Yes. Look, I'll go ahead and jump on that one. Seth, this to George, again, I think maybe starting with that pond base versus what's actually coming from KCL or MOP, that is something that we've undertaken for a period of time now for, I'd say, the last six to eight months. What we're trying to do is to actually look at the assets that we have and trying to look at what the sustainable tons will be coming out of that pond. There's no question of the impacts of the drought over the last couple of years have had an impact on our pond-based tons. But again, as long as it's economically viable, KCL will be added to achieve more, I'll call it, what I would call more historical type numbers coming out of the Ogden facility. As it relates to 2023, it's probably -- it's less than 10% of the production would be expected to come from KCL.
EarningCall_1807	Good afternoon, and welcome to Dave and Buster's Entertainment, Inc. Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After todayâs presentation, there will be an opportunity to ask question. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Corey Hatton, Vice President of Investor Relations and Treasurer. Please go ahead, sir. Thank you, operator, and welcome to everyone on the line. Leading today's call is our Chief Executive Officer, Chris Morris; and Michael Quartieri, our Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. This call is being recorded on behalf of Dave & Buster's Entertainment, Inc. and is copyrighted. Before we begin the discussion on our company's results, I'd like to call your attention to the fact that in our remarks and our responses to questions, certain items may be discussed, which are not entirely based on historical fact. Any of these items should be considered forward-looking statements relating to future events within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Information on the various risk factors and uncertainties have been published in our filings with the SEC which are available on our website. In addition, our remarks today will include references to financial measures that are not defined under Generally Accepted Accounting Principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP measure contained in our earnings announcement released this afternoon, which is also available on our website. Also, pro forma financials including main event for the trailing four quarters ended October 30, 2022 are available at the bottom of the Events and Presentations section of our IR website. Okay. Thank you, Cory, and good afternoon, everyone, and thank you for joining our call today. We are pleased to report strong financial results for the third quarter, which are clearly indicative of the progress we are making on our growth strategy. We delivered record revenue for the quarter, driven by double-digit comparable sales growth, which in turn led to record adjusted EBITDA for the quarter despite the challenging macro and inflationary environment. I want to recognize the outstanding effort of our teams, both in the field and here in our support center that produce these record results as we continue the work of integration to become a more efficient organization. Since our last analyst call, our team has been focused on three key work streams; one, effectively managing the merger integration; two, long-term strategic planning; and three, managing sales and profitability in the near term to offset the ongoing inflationary pressure in our business. I'm pleased to say we are ahead of schedule and exceeding in all three areas. As it relates to our merger integration, our team's excellence in execution has accelerated the pace of realizing the anticipated benefits. To-date, over $17 million of annualized synergies were implemented and we continue to be confident in our $25 million target. The pace of implementing these synergies has accelerated as we swiftly addressed all redundant staffing continue to combine our purchasing power to offset inflation and move toward combining the best-in-class systems across both brands. We are moving -- we are moving aggressively to fully capture synergy opportunities, implementing superior operating initiatives and leveraging the scale of our combined operations. Secondly, our teams have been aggressively focused on developing our long-term strategic plan to further cement the Dave & Buster's and Main Event brands as undeniable leaders in location-based entertainment and add meaningful long-term shareholder value. Based on a thorough strategic review of the business, anchored and deep consumer research and spending considerable time learning directly from our operators, our core brand position for our Dave & Buster's brand going forward will bring greater focus to executing adult occasions aged 21 to 39, who are visiting our locations to have a great time with their squad. These crew connectors, as we like to call them, are energized by social situations and in the now on culture and social trends happening at the time. Over the months and years to come, this refined brand positioning will guide our marketing strategy, entertainment innovation pipeline, food and beverage offering, store design and layout and tech-enabled hospitality model. This long-term holistic approach to managing the business anchored in strategic planning and operational execution led to the successful reinvigoration of the Main Event brand, and we're excited to apply the same approach to the larger Dave & Buster's enterprise. We look forward to sharing more details with you at our Investor Day in the early part of next year. Lastly, our teams have been focused on mitigating inflationary pressures with thoughtful pricing and increased operating efficiencies. Despite ongoing inflationary cost pressure in the business, we have made great progress and continue to find opportunities to manage our cost and increase our profitability. In addition to the work on cost controls, we are very pleased with the top line momentum throughout our portfolio. As indicated by our third quarter results, guests continue to visit and spend at healthy rates. On the marketing front, in Q3, we launched our National winners watch football campaign, featuring Kansas City Chiefs great Travis Kelce, designed to drive awareness of Dave & Buster's as a great football viewing destination, which contributed to our strong Q3 performance. In November, we recently completed our Eat & Play Combo promotion at Dave & Buster's. We've had tremendous success with our local focus on World Cup Watch activations and are excited about the launch of our impossible holiday hangout contest, which will bring together four friends from around the country to spend the holiday together at Dave & Buster's in Kansas City. As we head into Q4, our Special Event sales teams and operating teams are aggressively focused on delivering a strong holiday banker season. We are optimistic that the upcoming holiday season will provide additional momentum as we enter the New Year as our Special Event's business has nearly recovered to pre-COVID levels. We are excited about the future of this organization. We have two industry-leading brands in Dave & Buster's and Main Event. These brands have exceptional business models, strong assets and talented teams, bringing these brands together under one umbrella presents our company with exceptional growth opportunities, which will benefit all stakeholders. We have a clear line of sight on the strategic opportunities ahead for the Dave & Buster's brand and a world-class management team with a proven track record of superior execution. We believe there is meaningful upside potential for this company and our stakeholders, and we are working diligently to realize that potential. Let me take a minute to recap a few growth initiatives that have me excited about the opportunity in front of us. The continued development and rollout of our improved hospitality-based service model. The brand awareness work that's driving innovation of our product offering and in turn, how we approach the refresh program for our stores. The continued recovery of our special event business, our development pipeline of new stores for both brands, our progress on developing our international franchisee network, the tenacity of our teams to identify and implement our synergy opportunities, and last but certainly not least, the proven capabilities of the executive management team which gives me confidence in our ability to succeed. To put it succinctly, everywhere we look, we are seeing significant growth opportunities, and we are poised to unlock long-term shareholder value. Thanks, Chris. We're pleased with our financial results for the third quarter and encouraged by the trends continuing into the fourth quarter. Amidst considerable economic uncertainty, we remain focused on successfully managing our newly combined business, which generated record revenue of $481 million and produced a record $90 million of adjusted EBITDA in the third quarter, which I'll remind you is holistically our seasonally softest quarter of the fiscal year. We produced an 18.7% adjusted EBITDA margin in the third quarter, which represents a 320 basis point improvement above the 15.5% margin of the third quarter of 2019. We continue to be laser-focused on optimizing our cost structure and unlocking our synergy target of $25 million from the combination with Main Event. With regards to pro forma comparable store sales figures, I'd like to direct you to the supplemental schedule titled December 2022 supplemental pro forma financial data posted in the Events and Presentations section on our IR website. I'd like to highlight that the strong comp sales figures in the third quarter of 13.3% versus 2021 and 17.5% comp versus 2019 on a consolidated basis. Notably, our SMB business has continued to improve with our tailored new menu offerings and SMB represents an increasing mix of our total revenue versus the prior year period. Additionally, our special events business continues to provide tremendous upside, as it continues to normalize the pre-pandemic levels with the pro forma combined comps down only 6.7% this quarter versus 2019 in comparison to last quarter when it was comping down 13.4% versus 2019. We generated $68 million in operating cash flow during the quarter, contributing to an ending cash balance of $108 million for total liquidity of almost $600 million when combined with the undrawn revolving credit facility. We ended the quarter with a net total leverage ratio of 2.2 times. Turning to capital spending. We invested a total of $64 million in capital additions and opened three new Dave & Buster stores, one in Lynnwood, Washington, one in Long Beach, California and the other in Bakersfield, California. We plan to open one new Dave & Buster's branded store and two Main Event branded stores in the fourth quarter of fiscal 2022. Finally, let me update you on comparable store sales through the first five weeks of the quarter. Pro forma combined comparable store sales has increased 3.1% compared to the same period in 2021 and 9.2% compared to the same period in 2019. We estimate that the calendar shift of the holiday season as it specifically relates to our special events business in 2022 versus 2019 for this five-week period represents a temporary negative 3% overall comp headwind, which will reverse in the remaining weeks of December. To summarize, we are excited about the strong execution in our business, our progress capturing synergies, the numerous growth opportunities for us to pursue and the talent and experience of our team to drive growth despite the challenging macroeconomic environment. We remain focused on closely managing costs and capital spending to ensure we strategically unlock the maximum value of these two great brands and deliver the highest returns possible for our shareholders. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Andy Barish with Jefferies. Please go ahead. Yes. Hey, guys. Happy holidays. Just a couple of thoughts on the top line, if you could. Were you pleased with Eat & Play in November, I guess, firstly? And then secondly, can you talk to us about sort of the importance of December for the quarter and any quantification maybe on how we should think about sort of seasonality versus the 3Q as you kind of look at average unit volumes? Hey, Andy, this is Chris. I'll start and let Q kind of fill in some additional color. So happy holidays to you as well. I appreciate that. In terms of Eat & Play, what I'd tell you is that we're pleased with the trends in our business on top line, and that includes the month of November. When we look at our entire arsenal of marketing activities, the ones that I walk you through, first, the NFL campaign, we felt that did a very nice job bringing awareness to the sports viewing. We continue to see nice sales results on the weekends, which we think is a combination of, first, the campaign, we believe was successful. And secondly, our operators are very keenly focused on maximizing throughput on the weekend. And so we think that, that helps. The Eat & Play Combo in November, we're pleased with. As we look at really trying to understand the contribution that promotion had the data is a little murky. But overall, we're pleased that we did it. We have no regrets. The thing I'll tell you about that particular platform is it's part of -- it's one of those promotions that is identifiable to the D&B experience. And over time, there's a lot of brand equity, a lot of promotional equity in that particular campaign. And so I wouldn't look to see us to continue to do it. But we'll -- going forward, we'll be very selective when we do it as opposed to kind of an always-on type of promotion, but no regrets at all in November. And then as Q walked you through, as we think through our Q4 sales performance, overall, we're pleased. When you make the adjustments for the timing there's still considerable momentum in this business on both brands. And the December period is a very important period, as you mentioned, because of the majority of our sales during that period for the Main Event brand and a significant portion of the sales for the Dave & Buster's brand comes from Special Events. And our teams are laser-focused on maximizing the opportunity on special Events. It's been a couple of years since that demand has been there. The demand is back, and we intend to optimize that. And so we've got the teams focused. We're selling and our operators are ready to execute -- and we -- at this point in time, we are approaching pre-COVID levels, which we're very pleased about. Yes. Andy, just 1 other thought just on the timing and what you see in the first five weeks. So, if you think about our Special Events business, the peak of that takes place in the three-week period leading up to the Christmas holiday. And so in 2022, this peak consists of the week of December 5th, the current week that we're in, the 12th and the 19th. But if you go back and look at 2019, the Christmas holiday was on a Tuesday, Wednesday, which caused that three-week period to push forward. So, the weeks were really December 2nd, 9th and 16th. So the difference between just December 2nd versus December 5th in this period is significant to us, and that's what's causing about a 3% headwind in our comp store sales for just this five-week period. We'll get the benefit of that on the back end as we get closer to that Christmas holiday week, we'll pick up that extra piece of business at that point. And so overall, for the month of December, when you take this noise out between the five weeks in the full quarter, we're extremely pleased with the level of work that we're seeing by our sales team and what we think we will experience from the special events business as a whole for the month of December. Thank you. This is Jake. I had a question on just so we can understand the trends. I think you're reporting same-store sales just for Dave & Buster's because the Main Event stores, I don't think are considered comp base, and then you're giving us pro forma. The guidance is in pro forma, but I think you're going to be reporting just the same-store sales for Dave & Busters if I got that right. Can you give us what the quarter-to-date was for Dave & Buster's as it relates to the 13.6% versus 2019 that you reported in the third quarter? Yes, I think just for prospective purposes, when we look and we manage the business, we're managing it as one consolidated entity. We have one management team in place we do look at both brands as having a slightly different offering but the way we allocate the resources accordingly, we put both in that same vein. So, from our perspective, what we're trying to do is get to a point where we are combining on the consolidated business as a whole because we are redeploying assets between both brands accordingly on a daily basis. : Okay. And just I'm trying to think about the trends here. And it looks like just as we -- the first five weeks of the third quarter, for Dave & Buster's alone, I think that's all you provided at the time was 17.6% and then you reported 13.6% guidance is for -- even on a consolidated basis, significant deceleration we're not guidance but the quarter-to-date, even when we're making that three-point adjustment to 12% versus the 17.5%. There does seem to be a deceleration going on. I guess your thoughts on whatâs driving that. The Eat & Play when you ran in April, drove a really massive, pretty really strong result in same-store sales doesn't seem to be repeating. What do you think is driving the -- it seems like what it looks like is decelerating momentum. Well, I think I've taken to a point, if you're looking versus 2021, you do have the impact of the delta variant coming to a close kind of the end of October, which November had a nice bump. If you recall during our earnings call a year ago, when we founded it on November, we had comp store sales at Dave & Busters, which was 14-plus percent for that month alone on the walk-in business. So from a 2021 perspective, we are lapping that at this point in time. When you look at the balance of the year in that 2021 period, then Omicron hit and the business fell off dramatically. So we do expect to have a much easier comp for the December, January period as we go forward. Well, I was talking versus 2019, start of the third quarter at 17.6% and then it was 13.6% for the quarter and now it's closer to 12% consolidated. So there's a deceleration versus 2019. Is there -- what do you think is driving that? I would just look at just overall trends in the business. I think from a back-to-school perspective, there are economic issues that are out there, although we don't see it as much. I mean to talk about comp store sales at the levels that we are versus I think it's still a remarkable component of this business that shows the strength of the overall business in itself. Agreed. And just one question on the -- as we think about the quarter-to-date and then we think about, I believe the comment was that -- or maybe you can confirm that you expect the special events business to be above 2019 levels, so kind of no longer a drag. But should we think of the whole quarter if demand kind of levels remain the same, we would think about the quarters being higher than the quarter-to-date just as you consider the lift that you have, I think, probably some visibility on for the special events. Should we think about the quarter as higher than what the quarter-to-date is just given that dynamic? The short answer is yes. I mean if you look at quarter-to-date sales, just adjusting for the holiday mismatch, which as Mike said, we expect that mismatch to recover as we move into December, that alone would tell you that we expect the quarter-to-date number to end up better than the five weeks. But then you factor that into just the strength in the business, the focus on special events, the pacing that we're on right now to deliver on Special Events, we feel great. We feel great about the business. We feel great about the trends and excited that we're in a position in the year in a really high note. Hey, good afternoon. Thanks for taking the questions. My first one, I was curious if you think there's any reason to believe recognizing kind of that the overall momentum of the business is still strong, that there has been a touch of a slowdown. Do you think there's any reason to believe that you're seeing any pushback from some of the pricing or some of the pricing adjustments at the game level maybe that you made, do you have kind of any metrics or data points that you're watching to gauge that? Yes. So, we certainly have the metrics to -- anytime we raise prices, that's something that we take very seriously. And so, we're always going back and doing the postmortem analysis. We're not seeing -- no, we're not seeing any pushback or negative reaction or change in consumer behavior related to the price increases. So, in fact, we still feel like that there is room in some aspects of our business to continue to raise prices. So nothing there. I guess, I would just point you back to the comments that we've been making is that, there's still -- the underlying trends in this business are still very good. Okay, great. And then on the synergies and the integration, what exactly do you have left to do there? And you talked about the $17 million annualized, I believe. How much of the $25 million do you actually expect to realize this year on a reported basis? Okay. So first part of your question, what's left to do. I'll kind of walk you through what's been done and where we're headed. So immediate actions that were taken at the end of Q2 were really around the head count where we got rid of the duplicative nature of you don't need two chief financial officers. You don't need two CEOs and the like. So those decisions were made quickly and implemented swiftly. The next phase that you're seeing right now, which gave us the confidence to up the ante from $20 million to $25 million is really around our supply chain, where we've been able to combine the purchasing power of both brands, renegotiate contracts. That work is now done, and we're now entering the next phase of that component, which is around taking certain contracts out to bid. And so that RFP process takes a little bit longer, much more demanding on the procurement team rather than just looking at contracts, consolidating and eliminating the one that's least favorable for us. The next phase, which I call the more longer toll -- tempt full is really around more systems related and more foundational structural items that we need to make changes to. Consolidating, whether it's the POS system, back-office accounting systems, HR systems, combining 401(k) plans. It's that type of work that's in process. And that's the long lease time that takes the 18 to 24 months that we quoted previously when we started this process. As far as what we think we're going to experience or see come through, I think, it's at least like directionally about $6 million coming through in that period. A lot of that is what we're seeing in our food and beverage costing, which is helping to offset a lot of the inflationary factors that we've seen before. Okay. Perfect. Extremely helpful. And if I could just squeeze one last quick one in here. You gave the update on 4Q openings. Is there any change in the way you're thinking about the 23 store openings, or I just didn't hear an update to that. Thanks. No, not at this time. We are very mindful of the timing as it relates to any supply chain issues, getting governmental approvals at the local level for permitting and things, to that effect. So the 15 to 17 that we've talked about earlier in the last quarter is still in place, but we'll be providing more details and updates when we get to our Investor Day coming up in the April time frame. Hi. Thanks and good evening. I just wanted to circle back to the comps and some of the combined versus brand trends. I mean the two brands have obviously been generating very different levels of AUVs versus 2019. And I think it's important to try to maintain at least a little perspective, at least in the near term on how the two businesses are trending, because one was up 30% and 40% and one was up, say, 10%, what have you on the D&B side. So I guess, just in the spirit of reducing the risk of any confusion, could you provide any breakdown between the quarter-to-date comp, D&B and Main Event and maybe give us some perspective on average weekly sales, understanding their special events moving around, but just to try to keep us all on the same page, given the moving pieces here. Yes. Look, I'll give it to you the best that I can. So if you're looking at the quarter-to-date from an average weekly sales perspective. And again, we're working with both brands. It's about 183,000 that is comparable to what we've seen previously. It's the same kind of basic 184,000 that you saw in Q3. So the weekly average of what we're seeing is fairly consistent with that level of, call it, differentiation or split between the main event in the Dave & Buster's brand that you saw back in Q3 that we showed in the detail to help everybody get their arms around what Main Event is and to help you guys with your modeling perspective. Now if you -- I'll add on to, if you're looking at the consolidated average weekly sales for 2021 for both brands, on a consolidated basis, that would be about 177,000. And if you're looking back to 2019, that number is about 171,000. So there is meaningful growth in the quarter during that period, just the different brands are, I would say, sticking in line with the trajectories that we saw previously. Okay. Perhaps you'd be willing that maybe, okay, we'll stay to the combined. So versus 2019, Europe, I think you said 17.5% on a combined three-year comp in the third -- in this quarter you just reported, and that's slow to say, maybe in the 12 now if you make the Special Events adjustment. Has the -- so you've moderated, let's say, underlying by, call it, 500 basis points. I don't know if you'd agree with that high level, but around 500 bps on a -- versus 2019. Is one brand decelerating more than the other? Can you provide any qualitative perspective on Main Event versus D&B that three-year trend, one versus the other? Yes. So there's no noticeable difference between the trends. This is -- what you're seeing is just last quarter, we provided the details for Main Event to aid investors and analysts in the modeling since Main Event was not public before. Now rolling into the Dave & Buster's, we thought it was necessary to provide that detail, so you could adjust. And then going forward, I appreciate where you're coming from, one in more detail. But going forward, this is the disclosures that we've elected to pursue -- and it's reflective of how as Q said, or as I said, it's reflective of how we're managing the business. Main Event is 20% of our business. We don't want to get into providing granular data -- we don't provide that across any different regions. And we're focused on managing the entire enterprise, and this is how we're looking at the business, and this is how we want to communicate the business. To the extent that there ever is a material shift between the two brands, and it's -- and we deem that it's necessary to talk about that, then we will do so. just as we have done in the past. So, the trends heading into five weeks for Q4, proportionately between the two brands as comparable to where we've been this just -- but this is the disclosure that we're going with going forward. Okay. Understood. Fair enough. My follow-up, I guess, is on the margin front. And I guess I'll take the other OpEx line here. saw quite a bit of leverage on the other OpEx line, I guess, versus our expectations or compared to what you saw in last quarter, we're trying to base it out a little bit. Can you just kind of at a high level, move through some of the puts and takes? I know sometimes there are swings in marketing, swings in R&M and other spend levels that might show up in that line. Mike, any help on sort of the puts and takes on that line in the quarter would be very helpful. Thank you. Yes. I think from a puts and takes perspective, I think we continue to see higher costs this area. Two components of that. Part of it is external janitorial services as we -- as we've talked about before, as we reopened post-pandemic, finding labor was difficult, so we did a lot of outsourcing at that point. As we are seeing today a recovery in the labor market where we've got 12% more job applicants for physicians today than we saw a year ago, we are able to now start going back on a strategic basis and looking and evaluating whether those costs are better off in-house versus external. So, there is that piece of business that's going. We continue to see higher costs around security wage inflation there has not come down. When you're asked to include security from the local municipality because of certain areas that they have got back on, that is a cost that we're absorbing, and we want to do that. Because we take the safety of our customers, first and foremost, as one of the most important table stakes they have and choosing to come to a Dave & Buster's or a Main Event. We also look at things from a repairs and maintenance perspective. We are looking through -- if you kind of go back post pandemic, there was a lot of deferred maintenance in the building. So some people have come back and we have made a little bit more of investment there on the R&M side from an expense perspective. Now, the recovery aspects of what's offsetting some of that is the utility costs that we spoke about before, it was a very hot summer that we all had extreme higher energy costs that we had to deal with, not only from the usage, but also from a rate perspective, that utilization is obviously coming down as we get to the cooler months of the winter time. And so those are pretty much the four puts and takes that we have. Thanks. I have a couple of questions for you guys. So, can you just update us on what you're seeing from the lower-income consumer? How large is this cohort for you guys? And how are they behaving? Sure, I'll take that. We've â we're constantly trying to understand our business, understand the trends and certainly understanding how our guest profiles are impacting our business. And there's really nothing noteworthy there. We -- there's still strength in our business across all demos. We're not seeing -- we haven't seen a disproportionate shift in trends on a lower end consumer. Okay. And then just really two modeling ones. The first is simple, which is which -- what interest rate should we be using in the model, considering the movement in rates out there. And then you guys were talking about 25% commodity inflation. Last time we heard from you. What's the update there? Let me start off with commodity inflation. So if you're looking at 21, I should say, versus 21. In Q2, we were up 17%. In Q3, we're only up 9%. And a lot of piece of that is the work that we've been doing around our synergies and really driving home on the renegotiation of contracts and combined purchasing power to lower our commodity costs at that point. When you look at our interest rate, remember, we've got the 7.625 notes that are outstanding. And when you're looking at LIBOR -- or sorry, LIBOR -- SOFR, where at SOFR plus 500 is the term loan. So you could just look at the forward yield curve for SOFR for the next year, and that will give you your interest rate. Hi, good afternoon. I guess the question on the spend per card. I know that it's been quite elevated kind of in the early innings coming out of the pandemic for Dave & Buster's. How has that been trending now as we've gotten to maybe a more normalized pandemic status with the consumer? Yes, we are at a same consistent level of what we saw coming out of the pandemic. So if you look at it over the last year, we've seen no decline in the average transaction value of the power card of kiosks. Right. And then on the EBITDA margin, I know you've been targeting 200 basis points over 2019, I want to confirm that that's also a target for the fourth quarter. And then beyond kind of this current quarter, I assume we're not going to be talking about 2019 anymore. I think things become a little bit more apples-to-apples when we get into 2023. I'm just curious on the Dave & Buster's business, given that you guys have fresh eyes on the business, there had been a lot of volatility pre-pandemic with comps negative. I mean what do you consider a win for Dave & Buster's? Is it slightly positive comps, mid-single? Like what's the winning scenario here as you think about data busters and more of a kind of steady-state environment, what we're not talking about the consumer still getting back to normal patterns. Well, I'll handle the first part of your question in regards to margin. Yes, I'm getting pretty tired of talking about 2019 levels as well. But as you do look back to 2021, you still see whether it's the Delta variant or the Omicron variant, it just makes for a noisy comparison. So that's why we've been providing 2021 and 2019. The 200 basis point commitment that was given a year plus ago, we still remain committed that that's what we'll be able to achieve on this Q4 period. And then, Sharon, in terms of defining the win, look, we're here to grow this business. We want to -- we're maniacal about growing our business through just a very sharp focus on the guest experience and driving revenue through the way we manage, the way we manage our business and manage the throughput and focus on guest satisfaction. And so, really, I guess, what defines winning is just the magnitude of the growth. We want to grow as much as possible in all areas of the business. So starting, we're very focused on growing our guest counts and maximizing our revenue opportunity. So we want to grow our check and we want to do it in a way where it's very profitable, and we flow dollars to the bottom line and maximize EBITDA and open as many stores as we can in the future. So I don't know exactly how to answer your question. I can tell you that we're -- we believe right now we are winning. We're pleased with the results that we're seeing in the fourth quarter. And as we look through the noise of this holiday mismatch and what we're seeing on special events coming into December, we're in a winning position right now. And so, it's really just, in terms of -- we always want more. And so, as we move forward, this is a team that is completely focused on maximizing every single growth opportunity, but doing it the right way to lead to sustainable results. Hopefully, that answers your question. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Chris Morris, Chief Executive Officer, for any closing remarks. Please, go ahead. All right. Thank you, operator. In closing, we'd like to again commend our team for the exceptional results they continue to produce at our stores across the country, and for all the hard work being done at our Dallas support center to integrate the Main Event business and optimize the infrastructure to support the bright future of these two phenomenal brands. Thank you for joining. We look forward to keeping you apprised of our continued progress on growth initiatives, and we look forward to hosting you at our Investor Day in the early part of the year. So happy holidays, everybody. Thank you.
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EarningCall_1809	Good day, and welcome to Pure Storage Third Quarter Fiscal Year 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been muted during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] At this time, I would like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead. Thank you. Good afternoon everyone, and welcome to the Pure's third quarter fiscal 2023 earnings conference call. On the call we have Charlie Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie's and Kevan's prepared remarks we'll take questions. Our press release was issued after close of market and is posted on our website where this call has been simultaneously webcast. Slide which accompanying this webcast can be downloaded at investor.purestorage.com. On this call today we will make forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings and competitive industry and economic trends. Any forward-looking statements that we make are based on facts and assumptions as of today and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenues, remaining performance obligations or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage. Our fourth quarter of fiscal '23 quite period begins at the close of business Friday, January 20, 2023. Thanks Paul. Hello, everyone and welcome to the call. We hope that our fellow Americans had a wonderful Thanksgiving holiday, and that our non-U.S. listeners had a wrestle few days while everyone in the U.S. was offline. We are once again pleased with our quarterly results, showing a year-over-year revenue growth of 20% and subscription ARR growth of 30%, surpassing $1 billion for the first time. Our portfolio of subscription products had a strong quarter with Evergreen//One achieving record results. Our new products including FlashArray//C, FlashArray//XL, and FlashBlade S also saw excellent growth this past quarter. FlashBlade S our newest product is off to a great start in its first full quarter sales. The number of S systems sold were above our plan and petabytes sold were well above our plan. We're also seeing S customers taking advantage of the increased performance and scale choosing to purchase larger systems than the prior generation. Pure continues to lead the industry in product innovation having released a record number of new products and services this year, including FlashArray//XL, FlashBlade S, Pure Fusion, Portworx data services and Evergreen//Flex. We are proud to share that this innovation has once again been recognized with Gartner's highest rankings in their magic quadrant, Pure was named the leader for the ninth consecutive year for primary storage and a leader for distributed file systems and object storage, significantly increasing flash blades ranking year-over-year. Pure's unique value proposition of advanced technology, low total cost of ownership, industry leading energy savings, combined with powerful performance is the reason that leading edge technology and hyperscale cloud companies increasingly choose to rely on Pure. This past quarter as planned, we were pleased to ship the second phase of Meta's build out of their research super cluster or RSC. As a reminder, our shipments for Meta's RSC consists of both FlashBlade and FlashArray//C. Meta relies on Pure's FlashBlade to provide lightning fast data delivery to their NVIDIA GPUs and FlashArray//C to provide performance oriented and cost effective bulk data storage at 1/10, the space power and cooling of a disk alternative. NAND cost per bit continues to approach that of magnetic disks. Because of Pure's unique intellectual property, Pure's QLC based systems are now competitive with hybrid disk based systems on a price per bit level years ahead of the commodity crossover point. We expect that the currently anticipated improvements in Pure's NAND economics this coming here will enable Pure to deliver our QLC based products at prices competitive with most near line disk arrays on a total cost of ownership basis. We believe strongly that the days of the hard disk in the data center are over. Customers that do not take advantage of Pure's QLC products to replace disk systems are choosing the more expensive and energy intensive options. New enterprise customers this quarter include a large global telco, a large global payment processor, and a major energy provider. Existing customers like Vertafore, a leading provider of modern insurance technology continue to expand their relationship with Pure, relying on the combination of technology performance, total cost of ownership and an Evergreen customer experience to fuel their data dependent business objectives. This past quarter significant numbers of enterprise companies specifically chose Pure for our exceptionally low power space and cooling performance. This has been especially evident in Europe, where not only energy prices, but energy security is a major concern. As mentioned, we saw strong growth in both new and existing Evergreen customers this quarter. Evergreen's flexible approach to both consumption and pricing is helping customers of every size, deal with the uncertainties that businesses and organizations face in the current environment. Many new customers also cited energy savings as a new important benefit. Also this quarter, we saw several large telco customers purchase our portfolio to support projects ranging from 5G deployment to modernizing infrastructure. For example, one of the largest telecommunication providers in Asia increased their Pure portfolio including their FlashArray//C footprint, furthering their commitment to environmental sustainability, while accelerating their transformation and services offerings to their customers. Looking ahead to world economic conditions, we continue to see instances of longer sales cycles in the enterprise segment, and expect that enterprises will continue to exercise caution in spending over the next year. We believe that this focus on spending uniquely favors Pure Storage in the quarters ahead. The combination of Pure's Evergreen offerings, best-in-class power space and cooling, and operating simplicity results in significantly lower operating costs for enterprise customers. Given challenging economic and energy situations around the world, more enterprises are focused on total cost of ownership and the area where Pure excels. As we look forward, we are keeping our eyes on a number of macroeconomic factors, in particular inflation, slower economic growth, and lingering supply chain disruptions. Considering the current economic uncertainty, we plan to thoughtfully invest in our expansion, while continuing to deliver strong operating results. Despite the challenges and uncertainties of the current business environment, we remain confident in our ability to take share and outpace the market, while delivering products, solutions and services to customers that exceed their expectations. Thank you, Charlie. Through solid execution, we delivered strong financial results in Q3, growing revenue 20% and increasing our operating profits by over 50%, while navigating the effects of the macroeconomic environment. Substantial revenue from sales to Meta also contributed to our financial results this quarter. Our customers which now exceed 11,000, and represent 58% of the Fortune 500, leverage our portfolio of innovative data storage and management products and subscription services to drive optimal business outcomes and performance. Revenue performance growth and demand our FlashArray//C and FlashBlade S solutions, both leveraging QLC Flash was very strong this quarter. Our leadership in Flash management, enabled by our software and declining cost of Flash is accelerating our progress and replacing traditional disk solutions in substantially reducing data center, energy consumption. We also continue to be pleased with meaningful contributions from new business as we acquired approximately 390 new customers this quarter including across the telecom industry. Subscription annual recurring revenue or subscription ARR exceeded 1 billion this quarter, growing 30% year-over-year. Record sales of Evergreen//One in Q3 represent a key driver of our subscription ARR growth. Remaining performance obligations or RPO grew 26% to $1.6 billion. Similar to the remarks we made in previous quarters, our RPO growth is impacted by product shipments for an outstanding commitment with one of our global system integrators. Excluding these product shipments, RPO grew 31% year-over-year. Our headcount has increased to nearly 4,900 employees and our investments in talent continue to be disciplined and focused around our key business objectives. Total revenue for the quarter grew 20% to $676 million. For Q3, U.S. revenue was $493 million, an increase of 21% year-over-year with international revenue, which continues to be impacted by foreign exchange headwinds growing 19% year-over-year to $183 million. Product revenue grew 15% and subscription services revenue increased 30%. Subscription services comprise 36% of total revenue for the quarter. Contributions from both product and subscription services gross margins continue to be strong, as total gross margins were 70.9% in Q3. Sales of our larger configuration systems and new FlashBlade S contributed to slightly higher product gross margins of 70.1%. Subscription services gross margins were 72.3%. Our strong Q3 operating profit of 107 million and operating margin of 15.9% were driven by a combination of factors including strong gross margins. We ended the quarter with approximately $1.5 billion in cash and investments. Cash flow from operations was $155 million in Q3, resulting from the combination of strong sales, collections and operating profit. Capital expenditures trended higher this quarter at nearly $40 million due to deliveries of test equipment, which had previously been on backorder. In Q3, we returned approximately $24.5 million in capital to repurchase approximately 900,000 shares of stock. This represents a lower level of repurchase activity than recent quarters as a result of the fixed trading plan parameters that were in place throughout the quarter. We would expect that share repurchase volume will increase next quarter. We have approximately $100 million remaining from our $215 million share repurchase program. Now, turning to guidance, we estimate revenue for Q4 to be approximately $810 million up 14% year-over-year. For comparison purposes, a couple of reminders, our Q4 of last year, included an additional week a revenue of approximately $20 million as a result of FY '22, including 53 weeks. Also, from our previous remarks, approximately $60 million of product revenue recognized in the first quarter of FY '23 had been forecasted to close in the second half of the year. Adjusting for this impact of seasonality, our expected revenue growth in the second half of FY '23 would have been nearly 21% year-over-year. For FY '23, we are reiterating our annual revenue guidance of approximately $2.75 billion, an increase of 26% versus FY '22. Our operating profits remained solid, which is reflected in our Q4 operating profit outlook of $130 million or operating margin of approximately 16%. As a result of our performance in Q3 and outlook for Q4, we are increasing our operating profit outlook for the full year to $430 million. Operating margins are expected to be approximately 15.6%, reflecting a significant expansion from 10.8% last year. Revenue growth and strong product and subscription services gross margins have contributed to our strong operating profit and operating margin outlook for this year. During the first half of the year, our operating profits also benefited from less travel, higher attrition and slower than anticipated hiring. We do not expect that our operating profits will continue to benefit from these tailwinds next year. While the remains too early to provide guidance for FY '24, our current preliminary view is for operating margins to remain robust, around 14% to 15%. In closing, through our unwavering commitment to innovation, and customer service, we continue to be in a unique position of creating valuable outcomes for our customers, including dramatically reducing energy consumption and e-waste. With the strength of our portfolio of products and the power of our evergreen offerings, the opportunities in front of us remain compelling. Thanks, Kevan. Before we begin the Q&A, I'll please ask you to limit yourself to one question consisting of one part so we can get to as many people as possible. Operator, let's get started. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Amit Daryanani with Evercore. Amit, your line is now open. Perfect. Thank you and congrats on the print book. I guess my question is, Charlie, do you believe the print and the guide you provided is fairly impressive especially in comparison to the commentary, I think some of your peers like Dell and NetApp recently. So I'd love to just understand, what do you think is driving this contrast within your peers? I don't think you both have a sizable backlog, for example, that could be helping you. So would be great to just hear what you think is enabling the divergence of performance at Pure versus -- at Pure versus your peers? And then, what do you think the durability of the divergence [indiscernible] as you go forward? Thank you. Thank you, Amit, and hope you're well. Thank you for the question. Well, Amit, I think it's a based on a variety of different things, but fundamentally upon our core strategy. So, the core strategy, first of all, is to drive an all Flash data environment in the data center and to be able to provide a product that's very modern in terms of its software capabilities and management abilities. We have consistently grown market share, since the day that we were founded, that is based on the fact that, we have all the vendors developed a software stack that focused on the benefits of using a Pure semiconductor versus just refilling disk oriented architectures with SSDs. And that's allowed us to provide a product that's simpler to operate uses less power, space, power and cooling requires far less labor is far more reliable, and more performance than competitive products that are out there. And to this day, our competitors still compete with SSD alternatives. Secondly, it's based on a much broader portfolio, we believe. Going from, our roots or our initial product, which was block oriented to now having file and object based systems. And then thirdly, it's now starting to pursue our replacements for secondary tier disk alternatives. So, this allows us a lot of market allows us to expand into a lot of market adjacencies and allows a lot of elasticity in our market as flat prices decline. So, we're very excited about this. Finally, what I'll mention is, once we penetrate an account, our ability to expand in that account is very large because of the improved experience that our customers have. When I repeat to our team that our Net Promoter Score, the most important number in the Company, that's, it's the experience of our customers that allow us really broad expansion capabilities in an account once we penetrate. So, I think you add those things together, it allows us to continue to operate as a share taker in this market, in this $50 billion market. And as you well know, we're still coming up upon 3 billion in terms of our total revenue. So lots of growth opportunities in the future. Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Meta, your line is now open. Maybe a question for me of, clearly you are highlighting that some of the memory pricing getting cheaper is helping with the QLC this conversion. So just wanted to kind of get a sense of what kind of traction you're seeing with either very large enterprises or hyperscalers with that motion, and whether you're seeing kind of some shortening of sales cycles as we kind of get closer to some of these conversion points? Yes, let me address the hyperscaler first. Obviously, we I spoke about Meta in my initial remarks, the fact that we were able to deliver FlashArray//C for their bulk data, requirements at a price point that competed with their own software running on -- their, what would have been their disk arrays, really speaks to the power of the being able to use QLC and Flash to compete with disk. And now that environment also benefited from the lower power and lower space requirements. And I think that's part of what will allow Flash to compete against a disk in this environment, are increasingly in this environment, as the Flash prices start to -- NAND costs start to come down. We're seeing the same in large enterprises, although I would say that that's in an earlier phase right now, but FlashArray//C has been an incredible grower for us, and that does compete largely with the hybrid disk market, and we think we'll be able to go after the non-hybrid, that is the what's called the near line market, as we go into this New Year. So, we believe that, thirdly, the power while we've been speaking about the lower power requirements and cooling requirements for many years, this is the first year and starting in Europe, but also Asia, where we're seeing companies say it specifically because of the power savings, that they're buying Pure products or getting them initially to start with Pure products. So we think it's going to become an even bigger issue as we go forward. So, we are starting to see that now in large enterprise. Charlie, I was wondering, if you could share some color around the outlook on IT spending into 2023, particularly for the storage market? And some of your competitors are talking about that being down on a year-on-year basis. You mentioned your confidence in your ability to take share and outgrow that market. So curious if you could give us some high-level thoughts of what those trends look like if storage is going to grow or decline and how much you can outgrow that market? And what's embedded in that inside of that operating margin of 14% to 15%? Thank you. Yes, let me start with sort of our view on GDP in general, and then go into what we think will happen in the IT side with storage. So for GDP in general, obviously, there are a lot of different analysts out there, speaking about, the current economic environment and how that their prognostication for next year. The way we're looking at it is a roughly flat U.S. economy next year, and perhaps a slightly recessionary international economy, obviously, varying a lot, country by country. And as we go into that, we're seeing IT spending, a holding steady, maybe it's slightly up relative to the overall GDP growth. But in addition to that, what we are looking at is storage, remaining relatively healthy relative to the rest of the IT economy. So, we actually believe that storage might be up a moderately next year. That being said, you're correct. In terms of our own results, we believe we'll be continuing to take market share. And we believe that we similar to this quarter versus our competitors, we believe that we'll be able to stay in the double digit growth area. Perhaps a bit more moderate than our overall growth this year, but we believe still solidly well into the double digits. I want to ask about the, your visibility beyond this quarter, I am not asking specific for financial guidance for calendar '23. But previously, you talk about having good visibility and then pipeline the second half of the year, and that there are some delays, but not known permanent pause. I also think you mentioned you could still be on one quarter. So how would you characterize the pipeline in the first half of next year at this point? And maybe comment on demand trends between the Enterprise versus Commercial customers? Thanks. Sure. Generally, our ability to have visibility in the pipeline extends about two quarters, so current quarter plus one current quarter plus two. So you're asking and that would extend to through Q1 of next year, not our Q1 that is of next year. And generally, we don't necessarily have visibility three quarters out just to be really clear. So I can't really speak about the first half from a visibility perspective. What I would say is visibility into our Q4 the remainder of this year and visibility into Q1 of next year remains quite good. So, that will form if you will, that will go into forming our view of next fiscal year. We're in the middle of planning right now. So difficult to give you any further insight into that. But as I said that our visibility into Q plus 1, Q plus 2 remains fairly good. Maybe just a follow-up to Kevan's comments about preliminary margins next year and Charlie's comments about growth being well into the double-digits next year. I know you mentioned Kevan, that there's going to be some items that are not going to repeat this year, excuse me in fiscal '23 versus this year. But just quickly, kind of doing top back of the envelope math, they would suggest that you're sort of incremental margins next year are going to be under pretty material pressure. If your margins are going to come in at 14% to 15%, can you kind of walk us through what's really the incremental spend categories or spend that you're looking at next year given where you are and sort of where the long term operating model should shake out over the medium term? Yes, I'd appreciate that David. Look, we're quite pleased with the overall margin expansion that we've seen this year. And really key drivers of that being are strong revenue growth and product gross margins and subscription services gross margins. And I've talked about the fact that we did have some tailwinds. And we're thinking that it's approximately 1.5, 1.5 points to our operating profits this year. And really, it's kind of in three areas. We've talked about, as we were exiting last year, early in first half, we had higher attrition levels. And that really continued through Q1 and Q2. So, obviously, there's a benefit a pickup there. And then, there was slower than planned hiring during the first half as well. Now, we've made really good progress as you've seen on our hiring of talent, particularly in Q2 and this quarter. And obviously, that that's going to play into to next year in terms of how we're thinking about it. But then, in addition to that, we are planning for an increase in travel costs slightly. For example, we're doing our first in person sales kickoff in the New Year. We haven't had that in two years, so years or three years. So obviously, we're considering that as we're looking at our operating margin and profits for next year. Just a quick follow-up for the Charlie and the team. You have done a good job of expanding margin very diligently, keeping the OpEx very reasonable, and realizing margin expansion. I just want to get an update on the strategy looking into the next one to two year. Especially into next calendar year perhaps as enterprise budgets are more constrained. How is that strategy going to evolve? Are you going to spend more to capture more dollars of revenue? Or the strategies to remain focused on having more leverage in a P&L? And I'm not asking for a guide, but it would just be helpful if you could give us an update our strategy changes into a rather challenging macro environment? Absolutely, and it's a very fair question, Mehdi. So, we are consistently focused on revenue growth. That being said, we never like to go back on margin and largely because it's about operational discipline. About being a high performing company with good internal practices. We should be able to grow at an optimal rate, while at the same time being diligent in terms of delivering good operating margin. Now, that being said, as we go into next year, we've increased a lot on our headcount already, and we'll be seeing the full impact of that next year. We want to continue investing in our quota bearing heads. So we'll continue making that investment. We want to continue obviously in developing good core product, but we're going to be very diligent and focused, and we also want to be just thoughtful about potential pitfalls in the economy as we go forward. So, we want to stay agile as well, in terms of, our ability to be flexible in the way we spend money or how much money we spend, given that the economy is uncertain. So, we are going to prioritize revenue growth, but at the same time, we want to make sure we can deliver, good results on the bottom line. Provided just very generic color regarding the contribution from Meta's research SuperCluster, can you give a little bit more detail around that? And more importantly, trying to get a sense as far as what is the revenue growth excluding Meta? You're right. Well, let me give it a start and then Kevan will give you and fill in some of the details. So first of all, we did ship the vast majority of the second phase of our Meta program this past quarter. We were very pleased to be able to do so. The relationship remains very strong and we look forward to continuing to build good strength and good business with Meta as we go forward. So, Kevan, I know there's a lot behind this quarter so perhaps you can provide some additions to this. Yes. So, I'll touch on the financial comparison and Nehal I hope you're doing well. When you think about the economics of our Phase 2 shipments to Meta, when comparing that to our Phase 1 shipments back in Q3 of last year, without getting into specifics, we did make some modifications to the deal structure of Phase 2, which actually resulted in less revenue and improved product gross margins, because obviously, you see the strength of our product gross margins this quarter, especially compared to Q3 of last year. If we'd use the same deal structure for Phase 2 that we used in, in Phase 1 revenue growth, frankly, would have been aligned with the remarks I made earlier in the year. Also, our product gross margin profile would have been similar to what we saw in Q3 of FY '22. So hopefully, that's helpful for you, Nehal in terms of how we're thinking about it. I wanted to see how you're thinking about product gross margins in light of the idea that memory prices appear to have come down and look like they'll be down meaningfully over at least the next several quarters, and I appreciate the fact that there are other inputs but I imagine that's a pretty significant contributor to your bill of materials. So, I'm just wondering, if you're expecting maybe some price deflation or responses from others in your competitive space, cutting prices. What are you assuming in terms of the inputs for product gross margin? Yes, I mean a great, but complex question. As you know, we have a lot of experience in this now, especially and frankly, probably, for me, especially not coming in and not originally being in this market. I've had now five years experience of how this operates. And of course, as you well know, costs and prices operate on different timeframes, and they're not 100% connected to one another. We compete with companies that utilize SSDs, and therefore don't yet, are not exposed specifically, to the raw, the costs of raw Flash whereas we are. Our point of view on this is that as always, we tend to have advanced opportunity with a lower costs compared to our competitors, which doesn't mean that they won't discount in the market. So I suppose that we believe that we will see pricing come down sometime in the future, maybe not right away, we'll see prices start to come down. Overall a good thing for us, it allows us to go after more of the disk market. One of the things that's very different this time around is that these, this round of NAND reductions is going to make Flash especially with our products on the QLC side with FlashArray//C and S, much more competitive with Pure disk based products. And to be direct, we're going to use any cost reductions we see to go after that market. So, it's always hard to predict gross margins with any level of exactitude, but you should expect us to stay within the range that we identified, and use cost savings that we have there to focus on the disk side. And if I could jump in, I think it's really important here to you know, just again, emphasize, the sustained and structural advantages that Pure has and being able to use the raw NAND Flash versus really being limited to enterprise SSDs such as most of our larger competitors are, especially in terms of navigating some of the near-term cost of volatility. And these advantages really go back to our direct Flash technology, which is the result of over a decade of software and hardware IP, and it gives us a sustained, structural advantages over the competitive set in terms of will A, being able to source a raw commodity NAND versus the higher priced enterprise SSDs, which don't always travel in line with one another in terms of the short-term. Number two, to be able to make much more efficient use of that NAND have faster time to market and just realize and deliver to customers significant reliability and performance advantages. And so, you'll add it all up, I think this set of advantages was a huge benefit in the early days. But as we look at today's technology set, QLC the roadmaps beyond QLC in terms of cost effective NAND, it's just absolutely requisite to be able to deliver that technology to customers and reliable performance efficient manner. As we think about modeling for next year. It looks like you're going to come up against some tough comps with Meta and so, are their expectations for contributions from that customer next year? And then, as related to that in terms of other hyperscale opportunities, could you update us on what that pipeline looks like? Absolutely. So on Meta, as we've identified, we ship Phase 2, by Meta's own blog, they had indicated an exabyte to be shipped in total. So, there's still more to be completed in that project for the RSC. There's no further guidance we can give you on the timing of that right now. We just don't have that for certain. So unfortunately, we're not able to provide additional insight into that. And in terms of other hyperscalers conversations continue, where we're optimistic that we will see realizable opportunities there, but again too early to be able to put any real guidance on that. Charlie and Kevan, thanks for taking my question. Very interest to op margins of 16% last quarter, and your guidance of 14% to 15% for next year. I'm just wondering, what would the op margin last quarter, has been without Meta in the mix? And kind of you mentioned that you cannot quantify Meta revenue but you kind of highlighted that 14% to 15% op margin is a guidance. I'm going to curious, how to think about that with Meta in the mix because my understanding is Meta is op margin accretive since you don't go to the channel. Any color there would be helpful. Hey, Chris, this is Kevan. Look, when we think about Meta from an operating margin perspective, I think it'd be good to be thinking about that in terms of the Company profile on operating margins. I don't think that's a detractor or positive force. Where we saw the benefit was really on product gross margin, and again that that was a result of using a different deal structure. But I think from a company profile, operating margin standpoint, I would put that in that category. I do want to correct one statement, however, which is that in fact, we do use, we do have a partner with Meta. It's an integration partner. And so, there is economics involved in that. Yes, you've talked about having a little bit better success on the hiring side. As we look at Q4, where is that, is that kind of equally distributed across R&D and sales and marketing? I would say that while we're continuing to hire in both and in particular on the R&D side, we are expanding overseas, largely to take advantage of overall lower cost profile. And to make it more, to be honest to be just much more balanced as a company between our onshore and offshore headcount in R&D, we're really very much focused on the quota bearing head side in terms of our expansion in sales and marketing. I believe that to continue the growth we have to continue to improve our capacity on the sales side, so we'll be continuing to invest there. Yes. Thank you, Paul. Pure continues I think as you can see it outpace our industry in both innovation and customer satisfaction. And now our advantages and total cost of ownership, energy efficiency, price performance are setting the pace in this new economy, and they're going to make and they are making it the preferred choice for leading organizations around the world. I remain confident that we will continue to take share and outperform the market as we've done since the very first day of our founding. I want to thank again, our dedicated employees, our partners, our suppliers, and our especially our customers for choosing to partner with Pure are the world's best data storage and management solutions. This concludes today's Pure Storage third quarter fiscal year 2023 financial results call. Thank you for your participation. You may now disconnect your line.
EarningCall_1810	Good day, and welcome to the Biocept Third Quarter Financial Results Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note that this event is being recorded. This is Jody Cain with LHA. Thank you for participating in today's call. Joining me from Biocept are Sam Riccitelli, Chairman and Interim President and Chief Executive Officer; and Antonino Morales, Interim Chief Financial Officer. During this call, management will be making a number of forward-looking statements within the meaning of the private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical facts and generally can be identified by terms such as anticipates, estimates, believes, could, expects, intends, may, plans, potential, predicts, projects, should, will, would or the negative of those terms. Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those statements, as well as performance or achievements that are implied by the forward-looking statements. In particular, there is significant uncertainty about the duration, severity and impact of the COVID-19 pandemic. This means results could change at any time and the contemplated impact of COVID-19 on Biocept's operations, financial results and outlook is the best estimate based on the information available for today's discussion. For details about these risks, please see the Company's SEC filings, including the Company's quarterly report on form 10-Q for the period ended September 30 2022 filed with the SEC on November 21 2022. The content of this call contains time-sensitive information that is accurate only as of today November 28, 2022. Except as required by law, Biocept disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Thank you, Jody, and good afternoon, everyone. It has been about nine months since Antonino and I assumed our current operating roles at Biocept, and more than five months since our last investment community conference call. We're delighted to be speaking with you today for an update on our business and our recent financial performance. Antonino will speak to the numbers in a moment. But before we begin, I'd like to thank him and his team, both internal colleagues and external professionals for their hard work in getting our Forms 10-Q for the second and third quarters of this year finalized and filed. The list of companies that have completed two 10-Q filings and 11 days cannot be long, and we are certainly not happy being on this list. It truly took heroic efforts, and many, many hours were devoted to completing those documents. And as of last Monday, we are current with our SEC filings. I'd also like to thank everyone joining us today for their patience with the scheduling of this call, but we chose to delay the call a bit rather than compete with the Thanksgiving holiday. In terms of the business, I'm pleased to share progress in our goal to establish Biocept as a leader in the emerging category of diagnosing cancers that have metastasized to the central nervous system. We are well positioned to achieve this goal with our CNSide assay, which is the first commercially available product to measure CNS biomarker status in real time. As a laboratory-developed test, CNSide is analytically validated and run commercially in our CLIA-certified CAP-accredited laboratory here in San Diego. As an update, following a College of American Pathologists or CAP inspection last month, our labs CAP accreditation has been renewed for the next two years. We recently announced that CNSide is now validated to detect and quantify tumor cells and the cerebrospinal fluid of patients with melanoma, who are confirmed or suspected of having leptomeningeal disease. This is a devastating complication in which metastatic cancer spreads to the membrane surrounding the brain and spinal cord. This validation expands the commercial use of CNSide beyond breast cancer, non-small cell lung cancer and other carcinomas to now include melanoma, which gives the third most common tumor type in CNS metastasis. The importance of detecting CNS metastases cannot be overstated, as targeted therapies can oftentimes reduce or resolve the debilitating symptoms and extend life expectancy. That said, the current standards of care, which are CSF cytology and clinical evaluation via MRI, have limited sensitivity and specificity, which creates challenges for physicians in managing the disease and determining the best course of treatment. In pilot studies, CNSide continues to demonstrate high levels of sensitivity and specificity. Additionally, CNSide is both qualitative and quantitative, which are key advantages in monitoring the response of leptomeningeal tumors to treatment and improving the ability to make or change treatment decisions. Our first application for CNSide represents a major commercial opportunity for Biocept. We estimate the annual market opportunity of $1.2 billion in the U.S. and $2 billion globally. We plan to explore the use of CNSide for additional indications that could further expand this market opportunity, including for other diseases beyond cancers that affect the CNS. Since CNSide's early access launch about 2.5 years ago, we have continuously reported consecutive quarterly increases in ordering volume. I'm pleased to report this trend continued into the third quarter, with CNSide volume increasing 8% sequentially and up 176% over the prior year. Our customer base has also expanded with 28 of the elite 64 National Cancer Institute-designated cancer centers having ordered CNSide. We expect some slowdown in ordering during this year's fourth quarter as historically, cancer testing is impacted by the holiday season. During our last call in June, we introduced three initiatives to achieve our goal of becoming a leader in neurological tumor diagnostics. Today, I'm pleased to share our progress against each of them. Our first initiative is to drive the generation of significantly more evidence demonstrating the clinical utility of CNSide. We plan to use this evidence to support reimbursement and the incorporation of CNSide into clinical care guidelines, which we believe will broaden physician adoption. Starting with our company-sponsored 4C clinical trial, the patient enrollment is now open at the first clinical site, with the second site expected to be cleared before year-end or in early 2023. The 4C study is a two-part prospective clinical trial. Now we'll enroll patients with breast or non-small cell lung cancer, who have suspected or confirmed leptomeningeal metastases. The trial is designed to compare CNSide with conventional care techniques such as CSF cytology and radiologies. The goal of the 4C trial is to further evaluate the performance of CNSide in monitoring the response to treatment in a prospective clinical trial setting and to assess the impact of CNSide on treatment decisions made by physicians. This trial is focused on demonstrating clinical utility, which is based on how and to what extent physicians find value in the detection of disease and how CNSide influences them in their decision-making. We believe evidence of clinical utility will support higher reimbursement decisions, as well as achieving standard-of-care status. Earlier this month, we announced participation in an investigator-initiated study to better understand their development and progression of metastatic breast cancer and brain metastases and/or leptomeningeal disease. This 20-patient pilot study is being conducted by leading breast oncologists, Doctors Michelle Melisko and Laura Huppert, from the University of California, San Francisco, under a grants from the California Breast Cancer Research Program and the University of California, San Francisco Brain Spore. The study is designed to identify biomarkers associated with CNS metastases, enabling a better understanding of treatment response, prognosis and treatment resistance that may improve the management of CNS disease in patients with metastatic breast cancer. Results from cerebrospinal fluid using Biocept's CNSide assay and match patient blood samples will be analyzed and compared to detect and characterize cancer in CSF, with the goal of identifying new targets and to guide therapeutic decisions. This study is notable for several reasons. First, it is being conducted by oncologists rather than by neuro-oncologists, signaling that our test is gaining awareness beyond the neuro-oncology community. Second, the California Breast Cancer Research Program and the Breast Cancer Program at UCSF are part of the Biden administration cancer moonshots, which is aimed to accelerate progress against cancer. Third, and perhaps most importantly, we expect that results will demonstrate the vastly superior ability of CNSide, compared with blood to detect and quantify tumor cells in the CNS. We intend to solicit and fund additional investigator-initiated trials, including some that may lead to expanded CNSide market opportunities. I'm also pleased to announce that three posters featuring CNSide were selected for presentation at the Society of Neuro-Oncology Annual Meeting, which took place earlier this month. This is the premier Neuro-Oncology conference, and these presentations are important in generating further awareness and interest in CNSide amongst our core customer group, as well as biopharma companies that are conducting studies with neuro-oncology therapeutics. One of our posters covered HER2 heterogeneity observation in metastatic tumor, with this data currently being prepared for publication in a peer-review journal. The other two posters provided compelling data demonstrating CNSide's capability in CNS primary tumors, an area we intend to further evaluate for expansion. Of note, these studies were presented by leading neuro-oncology key opinion leaders, Dr. Priya Kumthekar of Northwestern University and Dr. Santosh Kesari at Providence Southern California. Our second initiative is to focus on leveraging CNSide to drive collaboration with biopharma companies that are seeking to develop new treatments or expand the use for existing treatments for CNS tumors. The ability of sense to capture and characterize circulating tumor cells in cerebrospinal fluid enables the identification of biomarker targets that are susceptible to approved and investigational therapies. Additionally, the ability to quantitatively monitor the level of cancer cells in the CSF during treatment can indicate therapeutic response. CNSide may provide an observational endpoint for these trials and, subject to inclusion in standard of care guidelines, has the potential to become an efficacy endpoint indicator for therapies undergoing clinical investigations. As you may have seen, we announced our first biopharma collaboration in June with Plus Therapeutics to use CNSide in the RESPECT LN Phase I/IIa trial to evaluate response to treatment and treatment efficacy of rhenium-186 nanoliposome in patients with leptomeningeal disease. We also announced our first CNSide biopharma collaboration revenues in the second quarter. We continue to pursue additional collaborations through a robust funnel of potential leads having identified more than 50 relevant opportunities. And our third initiative is to identify additional technologies, products and services we can in-license or acquire that can augment our offerings to neuro-oncologists. We are very early in this process, yet remain excited about the prospects. As an update on our COVID-19 business, we do not anticipate providing this testing service much beyond the end of 2022. It's notable that we have received more than 1 million samples for COVID-19 testing since we began offering this service in June 2020, with the resulting gross profit helping to fund our CNSide activities. As previously announced, we have judiciously exited most of our blood-based oncology diagnostic businesses to focus our resources on CNSide. However, we continue to support existing diagnostic and biopharma company collaborations that still require some aspects of our prior blood-based programs. Thanks, Sam, and thanks, everyone, for joining us today. As mentioned, we recently became current with our quarterly SEC filings. Although we filed our 10-Q for the second quarter on November 10, and we filed our 10-Q for the third quarter on November 21 today, I will focus my remarks on our Q3 and nine month financial results. Starting with our third quarter results. Net revenues for the three months ended September 30, 2022, were $5.6 million, which included $4.7 million in COVID-19 test revenue. This compares with net revenues for third quarter of 2021 of $17.5 million, which included $16.5 million in COVID-19 test revenue. We accessioned 49,874 commercial samples during Q3 of 2022, compared with 152,796 commercial samples during the prior year period, with the decline due primarily to lower COVID-19 testing volume. Cost of revenues for the third quarter of 2022 was $5.8 million, compared with $11.3 million a year ago, with the decrease primarily related to lower COVID-19 testing volume. R&D expenses for the third quarter of 2022 were $1.4 million, which compared with $1.3 million for the third quarter of 2021. G&A expenses for the third quarter of 2022 were $3 million, compared with $3.5 million for the third quarter of 2021, with the decrease primarily due to lower stock-based compensation and lower headcount. Sales and marketing expenses for this year's third quarter were $1 million compared with $1.9 million a year ago, with the decrease due primarily to reduction in sales commissions expense. Net loss attributable to common stockholders for the third quarter of 2022 was $5.1 million or $0.33 per share. This compares with the net loss attributable to common stockholders for the third quarter of 2021 of $0.6 million or $0.04 per share. Turning to our nine month results. Net revenues for the nine months of 2022 were $36.1 million, which compares with $47.3 million for the first nine months of 2021. Operating expenses for the first nine months of 2022 were $49.5 million and included cost of revenues of $24.1 million, R&D expenses of $4.9 million, G&A expenses of $4.2 million and sales and marketing expenses of $6.3 million, with G&A $3.5 million of expenses were nonrecurring. Net loss attributable to common stockholders for the first nine months of this year was $13.6 million or $0.80 per share. This compares with net income attributable to common stockholders for the first nine months of 2021 of $0.1 million or $0.01 per share. We reported cash of $18 million as of September 30, 2022. Thanks, Antonino. I want to mention that last month, we hosted our second KOL Webinar, this one featuring neuro-oncologist, Dr. Priya Kumthekar from Northwestern University and Dr. Seema Nagpal from Stanford University. Both discussed the real-world use of CNSide in their practices and at their institutions. We invite you to watch this compelling webinar, which is available on the CNSide page on biocept.com. Now before opening the call to your questions, let me summarize by stating that our goal is to establish leadership in the emerging category of neurological tumor diagnostics. We intend to generate the requisite clinical utility evidence that will support inside reimbursement and adoption into patient care guidelines. We are also focused on forming collaborations with biopharma companies that are developing treatments for CNS tumors. We faced several near-term milestones, including the following: we expect to announce our second revenue-generating biopharma collaboration, either later this year or early next year. We plan to open an additional center in the 4C clinical trial, again, either later this year or early next year. We have one investigator-initiated trial with CNSide already underway and are seeking opportunities for additional independent trials. And we expect CNSide clinical study results to be published in a peer-reviewed journal sometime in the first half of 2023. Lastly, I want to welcome Biocept's newest Director, Quyen Dao-Haddock, as a CPA with more than 20 years of financial and accounting experience. Quyen will be a valuable addition to our Board and also as a member of our Audit Committee. In closing, we believe Biocept is on an optimal path for growth and building shareholder value. We look forward to sharing our progress on the goals on upcoming quarterly calls. And as always, we are committed to improving patient treatment choices and clinical outcomes. While we are waiting for the first question, with the accounting review now completed and our SEC filings up to date, we look forward to keeping you abreast of our progress by resuming our practice of holding quarterly conference calls. Also, Antonino and I will be in San Francisco during the Annual JPMorgan Healthcare Conference and are available for one-on-one meetings January 9 through the 11. Please contact LHA if you would like to schedule some time with us. Hi, good afternoon. I have a couple of questions. First is what does the expense base look like after you exit COVID testing, assuming that, that will occur at the end of the year? Yes. That -- in anticipation of the exit of the COVID, we had started reducing our expense base not only from the operating side and headcounts. And we had incurred some expense to make that happen this year, and you'll see some improvements in the expenses going forward after the fourth quarter, but there will be definitely reductions in the expense base. Okay. Fair enough. The next couple of questions are interrelated, and they relate to CNSide and your ability to expand use of it the designated national cancer centers. So how are you trying to touch the cancer centers that have yet to order? What are the gating factors for you in doing so beyond the obvious that you have probably a minimal number of people out making calls? And finally, what experience have you had with repeat orders of late? So many good questions in there, Kemp. As you may or may not be aware, we have a relatively small commercial organization in the field right now. We're not fully covering the geography of the U.S. We're focused mostly in the Midwest, the South, the Southeast and in the Northeast. We have three FTEs there, and we have a leader in that group and who's also helping us on the commercial side itself, who's carrying a bag himself a bit. And essentially, meetings like we just had at SNOW are big forums for us, where we try to touch base with all of the KOLs that we have been interacting with, including those who have not yet ordered. I would describe the NCI centers much like I would describe most of the buying universe for health care products. There are early adopters. There are late adopters. There are middle to late adopters. So I think we've done a very good job at identifying those folks that were willing to try something brand new because of perhaps compassionate use issues or just the desperation they have in helping to manage these patients. And so we continue to call on these centers with our small group, it is a collaboration between inside and outside folks. Our medical team spends a lot of time interacting with KOLs, explaining how the test works and what it can provide to these caregivers. So hopefully, some of that gives you a little color on how we go about getting the NCI centers. We're seeing a nice pace of adoption, just had -- several just start here in the last period of time. So we're now off to 28. So hopefully, that gives you some color, Kemp. Did I answer all your questions? So we're seeing relatively good performance there. I don't have any off-hand statistics for that other than track -- you can track the number of physicians who order every quarter. You can attract -- you can also track the trends -- the positive trends that weâre seeing in cases per client that's been steadily increasing. So those kinds of metrics are all contained in our investor deck. So those kinds of things give us great assurance that the test is sticky once the clinicians have some experience with it. And this will conclude our question-and-answer session. I'd like to turn the conference back over to Sam Riccitelli for any closing remarks. Once again, I'd like to thank everyone for participating on today's call and for your interest in Biocept. We look forward to providing an update during our next conference call in March 2023 when we report our 2022 fourth quarter and full year financial results. Thanks again, and have a great day.
EarningCall_1811	Welcome to Workday's Third Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the call. During the Q&A, please limit your questions to one. With that, I will now hand it over to Justin Furby, Vice President of Investor Relations. Thank you. Justin, you may begin. [Technical Difficulty] and Chano Fernandez, our co-CEOs; Barbara Larson, our CFO; Pete Schlampp, our Chief Strategy Officer; and Doug Robinson, our Co-President. Following prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions, including those related to the impacts of the ongoing COVID-19 pandemic and recent macroeconomic events on our business and global economic conditions. Please refer to the press release and the Risk Factors and documents we file with the Securities and Exchange Commission, including our 2022 Annual Report on Form 10-K and our most recent quarterly report on Form 10-Q for additional information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, in our investor presentation and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Additionally, our quarterly investor presentation will be posted on our Investor Relations website following this call. Also, the customers' page of our website includes a list of selected customers and is updated monthly. Our fourth quarter fiscal 2023 quiet period begins on January 15, 2023. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2022. Thank you, Justin, and welcome to Workday's third quarter fiscal 2023 earnings conference call. I'm happy to report that we had a solid Q3 as we once again outperformed across our key operating metrics. There is no question that the macro environment presents increased uncertainty. But as we've said before, we are well-positioned in this type of environment because our cloud finance and HR solutions are truly mission-critical. As our Q3 results showed, more and more organizations are selecting Workday as their trusted partner to help them successfully navigate today's changing world. We remain confident in our ability to capitalize on the opportunity ahead and are pleased to announce our first ever share repurchase program and up to $500 million under authorization. This program will help reduce the rate of our share dilution going forward and is driven by our belief that our share price is undervalued given the long-term growth opportunity ahead. Barbara will share details shortly, but know that we feel confident that we reach a scale where we can roll-out this repurchase program, while continuing to prioritize investing for long-term profitable growth. With that, I'd like to share some highlights from the quarter. In Q3, we further solidified our position as a leader in Cloud HR with notable new HCM customers, including Intermountain Health, SGS and Texas Roadhouse. In addition, we had several key HCM go-lives, including Best Buy, Canadian Tire Corporation and the State of Oklahoma. For Workday Financial Management, we continue to see strong demand and momentum in Q3. Key new wins included a Fortune 200 provider of information technology solutions, Cincinnati Children's Hospital Medical Center, EZCorp and Thomas Jefferson University. It's important to note that each of these customers have also selected us for HCM, reinforcing the power of the full Workday platform providing further evidence that companies are going all in with us. Key financial management go-lives during the quarter included City of Baltimore and Medical University of South Carolina. Q3 also saw us get back in person for Workday Rising, our annual customer conference for the first time since 2019. We had nearly 16,000 in-person and virtual attendees and it was great to experience the energy and see firsthand our community is growing and evolving. This was highlighted by the fact that this year's event has a large percentage of senior leaders, finance and IT attendees ever. One big takeaway from Rising is that our innovation story is resonating with customers as we evolve to be more open and connected. While we've traditionally targeted the offices as CHRO and CFO, we have placed increased focus recently on the office of the CIO, which presents another growth opportunity for us. One solution in particular, that was a popular topic among IT attendees was where to Workday Extend. Workday Extend lets customers and partners build their own unique solutions on top of Workday, which is a huge point of emphasis for CIOs and in their eyes, positions us even more as a true platform player. While we announced several availability at Workday Extend in 2020 we've continued to see accelerated demand for it over the last year as the need for organizations to quickly innovate and adapt in today's business environment increases. We also announced new more personalized UX enhancements that meet every type of work they use and the natural flow of their work such as mobile devices, Microsoft Teams and Slack, which helps us to address another CIO priority as they are more focused than ever on driving increased employee engagement. And finally, we further reinforced our leadership in artificial intelligence and machine learning with the announcement of next-generation skills technology that allows customers to more easily and securely bring skills data in and out of Workday. This helps customers leverage the full power of machine learning to gain deeper insights into their workforce skills and deliver more personalized employee experiences. In closing, we once again delivered a solid quarter with strength across a number of key growth initiatives, showcasing why Workday is the backbone of digital business. And while we expect that the macro uncertainty will cause our growth to moderate in the near-term, we continue to believe we are well-positioned to navigate this environment and emerge even stronger. Driving constant innovation to address our customers' evolving needs has always been key to our success and will continue to be our focus in this environment. Thank you, Aneel, and thank you to everyone for joining today's call. I want to start off by offering my sincere thanks to the more than 17,500 workmates that help us deliver another solid quarter. Your relentless focus on the customer continues to push us and the broader Workday community forward. Great job, team. I've been on the road a lot the last few months, including Workday Rising in Europe, which has wrapped up in Stockholm and Workday Rising in US back in September. I've had the opportunity to spend time with hundreds of customers and prospects, and there are a couple of key themes emerging. First, despite all the challenges that companies are facing today, they increasingly realize the present need to modernize their HR and financial systems. The executives that I speak with have different viewpoints on what the macroeconomic climate will look like in the year ahead. But one thing they agree on is that the change is constant and it's nearly impossible to navigate with legacy systems. Second, there is a clear desire to consolidate and prioritize spend across a new organization's more strategic technology vendors. Given our positioning as the backbone of digital business across HR and finance, this trend has led to more and more companies going all in with Workday as they look to harness the power of their data across the enterprise. And when I look at our solid Q3 results across both the large and medium enterprise is a direct validation of these themes being seen across organizations of all sizes. From a geographic standpoint, we saw solid results across North America, with a number of CoreHR and FINS wins that Aneel mentioned, in addition to several strategic expansions across the Fortune 500. APA also outperformed with wins at Bank of Queensland, Fletcher Building, Ono Pharmaceutical and Trip.com, to name a few. And in EMEA, we had a number of important wins and expansions, including SGS, Alliance Medical Group and Equiniti. Our customer base sales team once again saw outstanding growth, a direct reflection of the trust that customers are placing in us and a validation of our strategy. We drove very strong renewal rates in Q3, and we closed a number of strategic expansions at companies such as Accenture, University of Maryland, the state of Nebraska, Pick n Pay, Puma and VF Corporation. As we shared at our recent Analyst Day, our customer base momentum is being driven by our broad portfolio. Solutions such as journeys, help and talent optimization, for example, are seeing strong adoption as customers look to support employee experience. While our scheduling, time tracking and payroll solutions are all resonating as customers increasingly focused on labor optimization and other products such as Planning, Extend, Accounting Center, VNDLY and our Spend Management solutions are all contributed to this quarter's strength across the customer base. Our industry focus continues to pay off. In Q3, nowhere was this more evident than the health care vertical where we had a strong growth in new ACV and where we surpassed $0.5 billion in annual recurring revenue. By far, the two largest costs for health care organizations are labor and materials. And by leveraging our full suite of HCM, FINS and supply chain solutions, they are able to help optimize spend across these critical areas. In fact, all of our larger Q3 health care wins were full suite, and including Workday's supply chain management. We also saw healthy momentum within the professional services industry, highlighted by the aforementioned expansion at Accenture, as we continue to co-innovate across the quality platform, including significant new developments in the skills cloud, public cloud and accessibility. Other strategic wins in the professional services industry included KNOWSCIENCE [ph] and REIT Global [ph], which was a full suite win. Our expanding partner ecosystem is also becoming an increasingly important driver of our growth. Key to our strategy is driving core innovation across the platform, which increases the differentiation of our solutions, enables even faster innovation to address real-time customer challenges and allows our partners to leverage their deep industry and solution insights to differentiate in the market. Examples of recent partner-driven innovation built on the Workday platform include Accenture's digital revenue operations solution, which integrates CPQ capabilities with Workday's billing and revenue automation, to enable seamless quote-to-cash functionality for software and technology companies. Another great example is employee document management, built by partner Kainos on Workday Extend, which provides our customers with advanced document generation, access control storage and finally, tuned document retention rules. These are just a few several solutions that were recently released by our partner ecosystem, and we have those and more on the road map. As we move into our fourth quarter, the environment remains uncertain, which has led to increased scrutiny and the lengthening of certain sales cycles, particularly with the net new opportunities. While we arenât immune to these and see signs that it will persist into next year, we are confident in our diverse pipeline and are focused on executing in Q4 and laying a strong foundation for FY 2024 and beyond. Thanks, Chano, and good afternoon, everyone. As Aneel and Chano mentioned, we delivered solid Q3 results in the face of continued economic uncertainty, a testament to strong execution across the company, as well as the strategic and mission-critical nature of our solutions. Subscription revenue in Q3 was $1.43 billion, up 22% year-over-year, and professional services revenue was $167 million, up 7%. Total revenue outside of the US was $394 million, representing 25% of total revenue. 24-month backlog at the end of the third quarter was $8.62 billion, growth of 21%. The result was driven by solid new business sales and strong renewals, with gross and net revenue retention rates over 95% and over 100%, respectively. Total subscription revenue backlog at the end of Q3 was $14.10 billion, up 28%. Our non-GAAP operating income for the third quarter was $314 million, resulting in non-GAAP operating margin of 19.7%. Margin overachievement was driven by revenue outperformance, favorable cost variances across the business and the timing of certain expenses shifting into Q4. Q3 operating cash flow was $409 million, growth of 6%. Our cash flow this quarter was impacted by a $55 million semiannual interest payment associated with our Q1 debt offering. We also paid off the principal balance on our $1.15 billion convertible debt with cash in October, resulting in a reduction to our non-GAAP diluted share count of roughly 8 million shares. Given the late Q3 timing, this share count reduction will be fully reflected in our non-GAAP weighted average share count in Q4. During the quarter, we successfully added approximately 600 net new employees, ending Q3 with a global workforce of more than 17,500. We expect a strong moderation of hiring as we move into Q4, but we'll continue to add key talent across strategic growth areas of the business, notably go-to-market and product and technology. Overall, we're extremely proud of the strong company-wide performance in Q3, and we're focused on executing in Q4, our seasonally strongest quarter of the year. Now, turning to guidance, which reflects both the continued momentum in our business, while also balancing an uncertain macro environment. With that context, our guidance for FY '23 subscription revenue is now $5.555 billion to $5.557 billion, representing 22% year-over-year growth. We expect Q4 subscription revenue to be $1.483 billion to $1.485 billion, 21% year-over-year growth. We now expect professional services revenue to be $645 million in FY '23, with the slight reduction driven by the delay of a large project. For Q4, we expect professional services revenue of $147 million. We expect 24-month backlog to grow approximately 19% year-over-year in Q4. We expect Q4 non-GAAP operating margin of approximately 17.5%, which includes some expenses that shifted out of Q3. Our FY '23 non-GAAP operating margin guidance is now 19.2%. GAAP operating margins for both the fourth quarter and the full year are expected to be approximately 23 percentage points lower than the non-GAAP margins. This includes a change to our employee stock plan that will take effect in Q4 to provide more flexibility to our employees during the open trading window each quarter. Our vesting date will move from the 15th to the 5th of each month for all outstanding grants, resulting in an acceleration of stock-based compensation expense of approximately $30 million in Q4. This change will result in reduced stock-based compensation expense by the same amount over the next few years and has no impact on our dilution. The FY '23 non-GAAP tax rate remains at 19%. We are maintaining our FY '23 guidance for operating cash flow of $1.64 billion, but are reducing our capital expenditures outlook to approximately $375 million, reflecting the timing of certain data center and real estate investments being pushed out to future periods. And as Aneel mentioned, we are pleased to announce a share repurchase program with authority to repurchase up to $500 million in shares over an 18-month period. We will continue to prioritize allocating capital towards organic innovation, followed by targeted M&A, but given our strong balance sheet and free cash flow, we intend to use a portion of our capital towards the repurchase of shares, enabling us to partially offset future dilution from employee stock programs. This repurchase program is a direct reflection of our confidence in the business and our view that our shares are currently undervalued. While we are early in our planning cycle for next year and have an important Q4 ahead, we'd like to provide a preliminary view of FY 2024. As discussed at our Financial Analyst Day, we have a significant long-term opportunity and multiple growth levers that drive our goal of sustaining 20% plus subscription revenue growth on our path to $10 billion in revenue. While this remains our multiyear goal, given the continued macro uncertainty, we believe it's prudent to provide a preliminary FY 2024 subscription revenue range of approximately $6.5 billion to $6.6 billion or 17% to 19% year-over-year growth. This outlook takes into account the lengthening of sales cycles that we're currently seeing impact our net new business. From a margin standpoint, we currently expect FY 2024 non-GAAP operating margin expansion of 150 to 200 basis points from FY 2023 levels, placing us firmly on track to our target of 25% non-GAAP operating margin and 35% operating cash flow margin at $10 billion in revenue. The expected margin expansion is driven by the scalability of our model, a strong moderation of hiring, and ongoing expense discipline. We plan to operate the business with agility, and we'll continue to appropriately balance growth investments based on what we see in the underlying market environment. Thank you. Weâll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Kash Rangan with Goldman Sachs. Please proceed with your question. Thank you so much and fabulous, fabulous quarter given the macroeconomic conditions. I was wondering if you could give us some perspective. In some sense, this is a recession that everybody has been expecting, nobody's going to be surprised. I was wondering if you could offer some insights into how Workday has been able to execute so well during a tough time and other software companies are facing headwinds. And to the extent we get some relief next year, if the economy does improve, could you do even better considering that your results are actually quite impressive? Thank you so much. Well, I don't think we'll comment next year just quite yet, Kash, but thank you for the kind comments. I think the value proposition of our products works in a downturn just as it does in a good market just like we did in 2008, 2009 and every other downturn. Chano, do you want to add anything? No, I think I agree with what you said, Aneel. I believe the mission-critical applications of our solutions really resonates with our customers as they are modernized in their HR and finance solution. And as I said in my comments as well, Kash, there is a consolidation of spend across strategic vendors, and we clearly are being one of those these days. Yes. Thanks very much and I'll echo the congrats on a really nice quarter in a tough environment. I guess, Chano, you talked about some deal cycles extending. I was just wondering if you could talk a little bit about what you're seeing at the top of the funnel. Obviously, you guys sort of came out perhaps of the COVID recession a little bit later than some others. I think there's a fear out there that once we get through this current wave of deals in your pipeline that there might be some sort of cliff in terms of net new billings. But it sounds like you guys feel pretty good about your pipeline. So I was wondering if you could just sort of expand on that? Thanks. Thank you for your question, Kirk. Overall, companies continue to prioritize HCM and financials transformations, and we see ongoing momentum in important growth areas like our customer base team. What is a clear market trend, as I said, towards consolidation of vendors and as well the medium enterprise. There's good pipeline momentum, but maybe, Doug, you can add some color in terms of pipeline and deal dynamics overall? Yes. I think well, you captured two of it, which is I described, Kirk, as -- we've got a diversity of revenue streams. So as Chano mentioned, medium enterprise performed well. Weâve got the customer base motion. And that was a theme that I certainly heard at our customer conference is our large customers wanting to consolidate rationalize number of suppliers and expand their footprint with us. So I think that certainly helps. In terms of like top of the funnel sort of the core of your question, it's really interesting in that our Q3 pipeline build, so the pipe we're building now, which is largely about next year, met our internal targets. So we're seeing project formation. At the same time, we're seeing some projects elongate. So I think Chano mentioned this, but they tend to be large enterprise net new. Those projects have extra steps to complete. At the same time, at the top end, the starting of projects is meeting the goals that we've established internally. Yes. Thank you very much and I'll add my congrats. I'm interested in whether it's possible that the volatility of this type of environment where you have so many vectors moving around inflation, interest rates, FX, supply chain issues. Is it possible that it's coming together in a way that really elevates the Workday value prop with integrated planning, cloud-based, maybe more so than in the smooth sailing environment that we had in the last decade, because as Kash mentioned, you're navigating your way through this very well. I'm just wondering if you see any effect of that. Maybe it's increasing some of your win rates and maybe it builds up a little pent-up demand for some time in the future when the environment starts to improve? Well, I guess, I'd start with I wish that was the case across the Board. We definitely see some -- you see in a downturn, you see some movement to -- well, I got to get on the right stuff to help me manage through these volatile environments. At the same time, there are other customers that are just cautious in making new decisions. And so I think they tend to balance each other out. I'm not sure there's a -- I'm not sure it's a big boost for us or a big negative for us. We're all seeing the same environment. But there are definitely customers who are behind on making the transition. I feel like this is a catalyst to make that transition. And then there are others who already made the transition that maybe think, 'Hey, let's be cautious on follow-on purchases. Chano, anything to add? Thanks. This is Josh Baer on for Keith. I was hoping you could expand a bit on the macro assumptions that are embedded in that FY 2024 subscription revenue guidance range. Just wondering what areas get worse? What stays the same when thinking about different geographies as well as new business from new logos or expansion and renewals from existing customers? Thanks. Hi, Josh, thanks for your question. So the guidance range that we provided is our best view at this time. It takes into account the continued momentum across important growth areas such as customer base, medium enterprise, but also balancing that with lengthening sales cycles that we're seeing impact our business, particularly our net new opportunities. So given the uncertain environment, we provided an estimated subscription revenue range with that low-end of the range, assuming a larger impact to sales cycles than we're currently seeing today. Hey, guys. Thanks for taking my question. I'll extend my congratulations not only on the quarter, but on the prescriptiveness of the guide, both on top and bottom line in what is clearly a very uncertain and tenuous environment. So I guess maybe just the first one, if we look at the patterns emerging in the sales cycles in the business, I guess, Aneel or Chano, can you guys compare and contrast this with -- from a pipeline perspective going into 4Q, what are you expecting the impact to be in your biggest quarter on bookings on new ACV growth on -- and maybe FINS versus HCM specifically where you feel a little bit better or compare and contrast that, I think would be super helpful. Well, let me just offer a high-level commentary. I spent a lot of time with other CEOs and this is not 2008, 2009. No one sees the world coming to an end like they did at that time. I think right now, we're in a world of caution, where no one's quite sure what's going to happen, but things don't feel really bad. And so -- but caution and stopping can sometimes look the same. And so it's kind of hard to predict right now. Every CEO I talked to is still relatively feeling positive about their business, but worried about the economic underpinnings of what the Fed is doing and the potential recession. And so, I think, the word that I keep coming back to is everybody is cautious. And I don't know how that -- Chano, how do you think that reflects in the pipeline in Q4 and other quarters, but it's -- this is not an end-of-the-world scenario, not at least yet, like 2008, 2009. Yes. Thank you, Alex, for your question. I would say, first, when it comes to HCM or FINS, we don't see any significant difference between one or the other. So they're proportionally impacted given the macro environment. When it comes to Q4, I would say we had the pipeline to execute on the quarter. Of course, that usually will not manifest as a prioritization because those projects have been already prioritized, but it may happen some lengthening of sales cycles as we said before, particularly on net new deals and opportunities that they're more scrutinized on those, right? And Doug already commented on the growth pipeline for next year. Perfect. And then, I guess, if I think about what you're saying around net new and how well I think you're doing on renewals and selling into the base specifically, is it fair to assume that in the near term, there could be a bit more bookings concentration coming from existing customers? And kind of how well -- how important is that dynamic that informs some of your margin commentary for next year, given it should be a little bit easier, it should be a little bit more predictable to sell into the base? Yes, Alex, it is fair to assume that there will be more concentration on the customer base and areas like medium enterprise, as we said before. And then hence, we'll put more focus on both marketing environments and sales go-to-market environment into those areas, of course, that will potentially provide higher yield on these times. Hi, thanks guys. Maybe building off Alex's last question there. I mean there's lots of interesting partner commentary in the script. I'm curious about the level of collaboration you have with partners on what they're working on with Extend or an industry accelerators. And assuming you have visibility there, maybe you could talk a bit about like where you draw the line on what Workday might own or build directly versus what you let go to partners? Sure. Thanks again for that question. As you heard us talk about the momentum with Extend that we've seen recently has been great. We talked about that a lot, both in Stockholm and in Orlando at our user conferences this year, now over 750 applications in production. When it comes to where that momentum is coming from, it is customers and it is partners as well. Partners are beginning to build on the Extend platform and Extend Workday applications as well as build net new applications that connect with HCM and financials. So far, the -- our customers have been getting value through both of those. The question of where do we draw the line between what is ours and what is our partners, I'll hand over to Chano. Yes, I think, as we commented on some of my prepared remarks, I mean clearly driving co-innovation with our partners across the platform is very critically important. You would say, where you draw the line when something is kind of would define or I would define the last mile in a particular industry or we need some more content-driven specific understanding of that value-add in that industry with a partner, there's where we see an opportunity to collaborate with our partners. I mentioned some of these solutions that we're building with -- for different industries, like the revenue operation solution, again, that is very critical to the software and technology companies. There are others that would be a bit more, let's say, across industries like the document management -- employee document management that I provided on. But honestly, we don't see that as a core, let's say, value add from us in terms of building that solution. But of course, it's adding value to our customers there and partners take just advantage of the maturity of Extend to bring that value add that is resonating with our customers. So, we're really pleased, as you can imagine, that customer partners can differentiate and bring additional offering to our customers. Yes, makes sense. And then, Barbara, maybe I could sneak in a follow-up for you. The buyback is great to see us analysts always ask for more. Why not be more aggressive given where the stock is, the strength of the balance sheet, expected cash generation next year? Like what were the considerations there? I'll answer that one because I think Barbara probably wanted to do more. You just don't know what you're going into a tough economic environment and cash is king. And so we wanted to be conservative. And if we come out in a good market environment in the next six to nine months, you definitely could see more, but there's just a balance of risk. Hey, thank you. Congrats from me as well. Chano, the one thing that we're seeing in the industry at the moment is that there seems to be more money in HR post-pandemic with a great reshuffle, et cetera. Could that -- are you seeing that in terms of like interest of pockets over customers are? And do you think that's kind of more a short-term thing and we're at the back part of that trend, or do you think HR HCM strategically is having a new position in the enterprise? Thank you. Thank you, Raimo for your question. I think both of them to be ones has some good tailwind out of the pandemic. But clearly, of course, that nets out of balance out with the macro environment we are living into. But I would say that now the financial transformations we see those in the market, and they are taking place as we speak. As a dynamic of companies having a tough time to just navigate through their finance modernization or honestly doing simple things like closing their books online in terms of many legacy platforms and in terms of a lot of manual processes that could just not happen once you were not in the office. Clearly, employee engagement as a whole in HCM, the skills area, all the machine learning and AI that we're bringing to those processes are obviously value-add to the companies to see and want to take advantage of and continue to be a great tailwind for the HCM value proposition as a whole. Yes. And then one follow-up is if you think about selling in this kind of slightly more tougher environment, can you talk a little bit maybe about the steps you're taking in terms of sales execution to kind of make sure you continue to deliver in this market. I'm thinking about higher pipeline coverage kind of making sure you kind of -- you time the deals better, et cetera. Like where are we on that journey of implementing these kind of recession handbook kind of selling kind of policies that we used to take out in the older days? Yeah, sure. I think Aneel or you, Chano, might have mentioned it after Q1, but we pivoted to our ROI-based and TCO-based way to engage with customers right at Q1. Of course, we've always done business cases with our customers. But entering a tougher environments, it comes down to TCO, hard dollars that you can take out, system rationalization productivity. So I think it's showing up really focusing with our customers on the HR side. So there's no doubt, tight labor markets. And so that's driving, I think, the TCO on that side of it. And it was touched on earlier by Aneel. We had a really good Q3 as it relates to financials. So FINS plus performed well. And those are ROI-driven as well. And those are companies looking for sure, it might start with an aging -- retiring older systems, but it pivots pretty quickly when they engage with us to that plan, execute, analyze and offering up more business agility in an uncertain environment. So those are the things from a go-to-market, from a field deployed resources standpoint that we're spending a lot of time with customers on the business case. Great. Thank you so much. I wanted to ask a question around backlog for next year. I think, Chano, you made some comments that you feel good about Q4 pipelines heading into Q4. And the question on everyone's mind is really what about next year. There's a lot of moving parts. In your conversations with office of CFO, office of HR, what are they saying with regard to budgets for next year? Do you feel pretty confident that you can sustain this kind of growth into next year as well? Well, Brad, thank you for your question. Right now, we're exactly on those discussions, right, where companies are going through their planning and budgeting cycles, and it is a question of prioritization of projects. And we're having those discussions that, that was commenting on that are really TCO and ROI-based, right? So clearly, here where you see some different scenarios on our guidance, particularly depending on what happens on some of the new local sales cycles that might put some lengthening. And clearly, even though they might be building right now, maybe fall outside of next year or some of them that just may be pushing forward. But right now, we're having most of those discussions. Overall, we feel good given the momentum we have and given the momentum on the new pipeline build and the conversations we're engaging with the strength of our customer base, our medium enterprise and the diversity of our business, as Doug has commented. But clearly, we are cautiously monitoring what's going on in the environment. Thanks, Chano. And then one more, if I may, please. Just on the verticals. You called out some strength in financials, healthcare. Is there a case to be made that perhaps you guys have more exposure to more resilient verticals with those in particular public sector education kind of less affected by perhaps the macro? We're pretty diversified across all the industries and some have held up better than others. When I look at what's happening in Silicon Valley, we definitely have a bunch of tech companies, but we're not exposed to tech the way maybe a newer company might be where they got a huge amount of exposure to just tech companies. So, -- and our tech companies tend to be the mature large company. So, I don't think there's any particular sector that's held us up. I would say financial services is strong, though. The one beneficiary of rising interest rates is the financial services sector and they continue to grow, and we have a very strong presence there. Thanks. Aneel, just to follow-up on the verticals. A number of the partners have been talking about strength in state and local government and higher ed. I'm curious if you could drill in on those two, give us a sense of what you're seeing right now in both those sectors. Yes. So both performed well in the quarter. We had a number of students or student deals, which for a while there, we were doing a number of financials, HCM on the higher ed side, but we took down some student deals in the quarter and showed really nice growth in Q3. And so we feel good about both of those verticals right now. Barbara, can I just follow-up real quick on international? It was the lowest growth in five quarters. Is there anything to point out in Europe versus the US, kind of, just the classic still over what we've been hearing, or is there anything specific on an execution? Can you just compare and contrast what you're seeing? I would say, clearly, the environment is more uncertain in Europe. Obviously, on top of everything else going on in the world, we have energy as a big challenge. And where we see, let's say, an increase signs of deals and sell cycles lengthening that things to happen in Europe. And I would say, in general, we are more cautious overall what's going there in the near relative terms than in other markets and other segments. Hi everyone. Thanks for taking my questions and I guess this one will be relatively straightforward as you all called out slowness in the enterprise segment, a couple of different times. We talked about the mid-market being, I guess, relatively untouched. Can you help us kind of understand maybe what's going on in the mid-market to not really see any weakness today? I think that's an interesting kind of a change, at least relative to what we're seeing out there. And then as we think about the guidance within the mid-market, is the slowness or maybe additional macro uncertainty that's impacting the low end of the guidance, do you have some sort of conservatism baked into any potential slowdown in the mid-market also impacting that guidance? Thank you. Yes, I guess we've not said that the mid-market is not impacted. What we said is that, of course, we had overall more strength in the medium enterprise and in the customer base. If you look at what it tends to happen more scrutiny around either the business case or additional approvals. Clearly, those are on the larger deals and larger companies that we usually -- we tend to see it more. Our value proposition is strong and resonates and quicker time to value fixed cost of implementations, very predictive ones across HCM and finance in the mid-market, brings good ROI, brings good total cost of ownership in terms of the financials and main transformation as a whole, and that is a value proposition that mid-market is taking the same on a faster clip as they are modernizing and they're assisting on their platforms. Ladies and gentlemen, thank you for your participation in today's conference. This will conclude Workday's third quarter fiscal year 2023 earnings call. Thank you again for joining us.
EarningCall_1812	Good morning, welcome to Ollieâs Bargain Outlet Conference Call to discuss the Financial Results for the Third Quarter Fiscal Year 2022. Currently all participants are in a listen-only mode. Later we will conduct a question-and-answer session and interactive instructions will follow at that time. Please be advised this call is being recorded and the reproduction of this call in whole or in part is not permitted without expressed written authorization of Ollieâs. Joining us on the call today from Ollieâs management are John Swygert, Chief Executive Officer and Interim Chief Financial Officer; and Eric van der Valk, Executive Vice President and Chief Operating Officer; and Rob Helm, Senior Vice President, Chief Financial Officer. Thank you. Good morning, and welcome to Ollieâs third quarter conference call. A press release covering the companyâs financial results was issued this morning and a copy of that press release can be found in the Investor Relations section on the companyâs website. I want to remind everyone that managementâs remarks on this call may contain forward-looking statements, including, but are not limited to, predictions, expectations or estimates and the actual results could differe materially from these mentioned on todayâs call. Any such items, including with respect to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements, which speak only as of today, and we undertake no obligation to update or revise them for any new information or future events. Factors that might affect future results may not be in our control and are discussed in our SEC filings. We encourage you to review these filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q, as well as our earnings release issued earlier today for a more detailed discription of these factors. We will be referring to certain non-GAAP financial measures on today's call, that we believe may be important for investors to assess our operating performance. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings release. Thanks, Lynn, and hello, everyone. Thank you for joining our call today. Before we begin, I would like to welcome Rob Helm, our new Chief Financial Officer to the Ollie's family. Rob has a strong track record in the consumer retail sector and I am confident his ability to be a valued contributor to Ollie's and look forward to working with him for many years. Our third quarter total sales increased 9% over last year and comparable store sales increased 1.9%. While we were pleased with our overall sales results for the quarter, we were tracking to the low end of our comp guidance until we experienced softness in business during the last two weeks of October. During the quarter, more than half of our departments generated positive comparable store sales. We saw particular strength in lawn & garden, hardware, food, health & beauty aids and sporting goods. We were pleased with the significant improvement in our gross margin rate, compared to last quarter. This was driven by lower supply chain costs and improved merchandise margin. We continue to invest in price to motivate consumers as the competitive environment is highly promotional. As consumers need to save on everyday essentials, we are seeing continued strength in our consumable categories. We believe we are well positioned to thrive in the current environment and we have tremendous deals in our stores and in the pipeline. The closeout market remains extremely favorable with deals, deals and more deals. We are seeing incredible opportunities across all of our categories and the availability of deals continue to grow from both new and existing vendors. At this point, we see no slowdown in sight, we sell good stuff cheap and this type of environment allows us to emphasize our compelling value proposition to consumers. Moving to real estate, we had a busy quarter opening 15 new stores and closing one due to a relocation, which reopened early in the fourth quarter. We ended the quarter with 463 stores in 29 states, compared to 426 last year. While store opening challenges persist, we have opened 39 stores as of today, bringing us to a store count of 467 with one additional store opening plan in January. We remain pleased with the productivity levels of our new stores overall. New stores are the engine for our sales growth. We continue to face challenges in the market today with permitting and construction and as a result, we expect to open approximately 45 stores in 2023, our long-term plan is to open between 50 stores and 55 stores annually and are confident that our model can support over 1,050 stores in total. In terms of remodels, we are pleased with the results of our store remodel program. We have tested several different layouts and continue to learn what works best for our customers. We have remodeled 15 stores so far this year and plan to complete between five to 10 more by the end of the fiscal year for a total of 20 stores to 25 stores. Turning to our supply chain, we are well positioned to benefit from the improvements we have made to our supply chain over the past year. The environment is more favorable as pressure on transportation continues to ease, compared to last year in the first half of 2022. We're in a strong position to service our stores during the peak holiday selling season. To support our new store growth, we are finalizing plans to open our fourth distribution center in the Midwest and have agreed to purchase land in Princeton, Illinois. Together with the expansion of our York, Pennsylvania distribution center next year, our distribution center network will be able to support over 700 stores. We expect to complete the expansion of our York distribution center in the first half of 2023 and the fourth distribution center by the end of the second quarter of 2024. On the marketing front, we have made progress on enhancing brand awareness to attract new customers and motivate existing customers. As part of our 40th anniversary celebration, we unveiled a 16 foot seven inche bobblehead of our Mascot Ollie, which won the Guinness World Record for the world's largest bobblehead. This event created a lot of buzz for our brand and generated over 1,200 news mentions through our online, TV and newspaper outlets. Our 40th birthday events, including our America's biggest cheap skate contest, combined with our enormous bobblehead led to over 1 billion impressions of our brand. We invite you to visit the Ollie's bobblehead and display at our Harrisburg, Pennsylvania store. We are excited by the results we are seeing from our social media strategy to test micro and nano influencers on platforms such as TikTok, Facebook and Instagram, which will begin in the second quarter. We will continue to invest in and build on all forms of digital marketing. Ollie's Army continues to perform very well and accounted for over 80% of our sales and grew 5.2% during the quarter. Our busiest and most exciting night of the year Ollie's Army Night is this Sunday, December 11. We are thrilled once again to open our doors exclusively to Ollie's Army members. Our teams have worked tirelessly to fill our stores with tremendous deals for this special night and we can't wait to welcome our loyal bargainauts. Come join us for a great evening of fun and bargains. If you're not on the -- if you're not on Ollieâs, I remember, there's still time to enlist in sharing the fun and special savings. We hope to see you there. Our civilian database, which was -- which is comprised of non-Ollie's Army shoppers also continues to grow. In October, we began testing targeted direct mailings to these customers as part of our efforts to expand our customer base. We are encouraged with the progress we made during the third quarter, we recognize that consumers are facing significant inflationary pressures and remain focused on what we can control, which is delivering great deals to our customers. Although the environment remains uncertain, we were pleased with our Black Friday sales as customers responded favorably to our in-store deals. Our quarter-to-date comp store sales trends are running in line with our updated guidance. We have a lot of business still in front of us and believe we are in great inventory position to finish the season strong. In closing, we are a high growth company in one of the most attractive sectors in retail, extreme value and we believe we have the scale, the know-how and the relationships to benefit from the continued disruption in the marketplace. We have tremendous runway to expand our footprint and we believe the value proposition of our business model supports our long-term growth plans. I'll now turn the call over to Rob to take you through our financial results and Q4 outlook in more detail. Thanks, John. And good morning, everyone. I'd like to start off by thanking John and Eric and the rest of the team at Ollie's for the warm welcome. While I've only been here for a few weeks, I've been really impressed with the caliber of our team and the dedication of our associates. For the third quarter, net sales totaled $418 million, an increase of 9% from the prior year. Comparable store sales increased 1.9% in the quarter compared to last year. During the quarter, we opened 15 new stores and closed one store, ending the quarter with 463 stores in 29 states, an 8.7% increase in store count year-over-year. Since the end of the third quarter, we've opened an additional four stores. Gross profit margin declined 40 basis points to 39.4% compared to 39.8% in Q3 last year due to higher supply chain costs and slightly lower merchandise margin. We were pleased with our significant gross margin improvement from the second quarter, primarily driven by lower supply chain costs, which were meaningfully lower than the first half of the year. We also benefited from a higher merchandise margin compared to the second quarter. SG&A expenses as a percentage of net sales increased to 29.9%, compared to 29.7% in the prior year. The 20 basis point increase was primarily due to the deleverage of our fixed expenses related to higher selling costs, partially offset by our disciplined expense control. Operating income totaled $30 million for the quarter, flat to last year. Operating margin decreased 80 basis points to 7.1% due to higher supply chain costs, a slightly lower merchandise margin and higher selling costs. Adjusted net income was $23 million and adjusted earnings per share was $0.37, compared to $0.34 last year. Adjusted EBITDA was $39 million, and adjusted EBITDA margin decreased 50 basis points to 9.4% for the quarter. Inventories increased 11% to $524 million in the quarter compared with $472 million a year ago, primarily due to the increased number of stores, the timing of merchandise receipts and higher supply chain costs. In addition, it is important to note that our inventories at the end of Q3 2021 were lower than our historical level due to the supply chain disruption. Our balance sheet cash remains strong with $182 million in cash on hand and no outstanding borrowings under our revolving credit facility. Capital expenditures totaled $15 million primarily for new and existing stores and the expansion of the York distribution center. This compares with $12 million in the prior year. During the quarter, we invested $20 million has purchased shares of our common stock. Moving on to our outlook for the fourth quarter. We have a lot of business ahead of us, including Ollie's Army Night and believe we are well positioned to deliver great deals to our customers. However, given the uncertainty and unpredictability of the current environment, we are adjusting our expectations for the fourth quarter. We now expect total net sales of $540 million to $550 million, comp store sales of flat to 2%. Gross margin rate in the range of 38.2% to 38.4%, operating income of $66 million to $70 million, adjusted net income of $49 million to $52 million and adjusted earnings per share of $0.78 to $0.83, both of which exclude excess tax benefits related to stock-based compensation. For the full-year, we now expect total net sales of $1.817 billion to $1.827 billion, comp store sales of negative 3.8% to negative 3.3%, the opening of 40 new stores, less two relocations and one closure. Full-year gross margin of approximately 36.1% to 36.2%, operating income of $129.5 million to $133.5 million, adjusted net income of $98.8 million to $101.8 million and adjusted earnings per share of $1.57 to $1.62, both of which exclude excess tax benefits related to stock-based compensation. An annual effective tax rate of 24% and which excludes the tax benefits related to stock-based compensation and diluted weighted average shares outstanding of approximately $63 million. We expect capital expenditures in the range of $55 million related to new stores, our York distribution center expansion, costs related to our fourth distribution center, store level initiatives and IT projects. Hi. This is Taylor Zick on for Brad Thomas. I appreciate you taking the question. I was wondering if you could talk a little bit more about the cadence of the sales during the quarter? And then if you can talk anymore about the -- how the holiday is shaping up more specifically? Thanks. Sure. With regards to the overall cadence of the quarter, as I said initially, our trends are running really, really strong and at the low-end of our guidance until the end of the 11th week of the 13 week quarter. We had some slowdown in business mainly related to warmer weather and obviously we're locked and loaded for the cold weather at this point in time and that did not come out in the Q3 perspective. But obviously, looking at the overall the quarter was actually August and September were pretty much in line with each other and October was definitely the drag on the overall quarter. And as we said, we're liking the way the fourth quarter is shaping up. We had a strong Black Friday day and a Black Friday weekend and we continue to see some nice trends in the business. So we're obviously pretty comfortable where we're sitting today and we feel good with the business. Got it. Thank you. If I could just squeeze one more in, can you talk about how the toy and maybe the seasonal or maybe just generally how the discretionary items are performing versus the more stable items? Yes. Obviously, thereâs just a couple of questions there, toys is a seasonal item, as well as holiday. So and then we have a ton more discretionary items within our stores. Discretionary is performing well, as you can note in our top selling departments lawn & garden and hardware are definitely under discretionary front those were our top two departments in the quarter. So we're definitely seeing some pressure on some discretionary items that are higher ticket, but we believe the value proposition we're providing is pretty strong and the consumers are responding as well with what we're offering. With regards to toys, obviously, last year was a little unique to where there's a lot of supply chain disruptions. People were worried that there was going to be a shortage of holiday goods. So we believe the toy sales were pulled forward a little bit into Q3 last year. So it was made a little bit of a tougher Q3 for us. There's still 17 shopping days to go for the rest of the holiday period. We're in very good shape with toys and we feel like we're in the season pretty strong. Hi. This is Matt Edgar on for Peter. Thanks for taking our questions. Just real quickly, how is the closeout backdrop, kind of, changing sequentially? I know you mentioned that you're getting more and more closeouts, but just how is it changing and then how is the margin on those closeouts changing? Appreciate it. Yes, the overall closeout business has been strong. I will tell you it is getting stronger, the deals are getting bigger and we're seeing some positive movement there. As we had expected, I don't think this is a surprise to us we had -- obviously, we can't call out the timing of deals, but we are seeing some nice flow in some categories that we're excited about. We're seeing good activity in the flooring department, automotive, believe it or not lawn & garden, domestics and housewares are our biggest contributors right now to the deal flow. Closeout margin profile is pretty consistent year-over-year. We feel real good with where we're sitting on the margin profile of the deals. We think we're going to continue to see momentum in the business as we move forward here. Great. That's good to hear. And then I guess maybe you just answered this on you can't really talk to timing, but how long do you think this elevated closeout environment can last? We never know that answer to be honest with you. Closeouts have been pretty good for 40-years. So I would tell you the closeout business is pretty strong, I think the -- what we're seeing today and the overall inventory challenges that people are facing and a lot of goods that are sitting in the warehouses. I would tell you, I think we have pretty good runway through at least the first half of â23 through â23. Hey, good morning and thanks for taking my questions. I'm curious if you're seeing anything -- hey John, I'm curious if you're seeing anything this year that changes your philosophy around the long term algo for the business? I think in the past we've talked about 1% to 2% annual comps and 39% to 40% gross margin. I understand there's some things that can swing that gross margin around. But I'm curious if just given there's been some volatility this year understandable given the environment we're in, but any changes here to the long-term algo? Yes, I think Jason, the answer on that would be, I don't think the answer is no. I would tell you, I'm pretty excited about 2023 coming up, because I think we're getting back to more normalized cadence and more normalized business model and people can get their lives back to normal. So, which I think will bode well for us and everyone else in the business. I don't think that the long-term algo has changed at all. I'll call it choppiness in 2023 for us to get back to our normal algo margin may be a little bit lower on â23 than I'd like to be, but I think we'll get there by â24. As we said, the store growth, I'd like to be a 50 to 55, just with the permitting and construction challenges, I think â23 will be, call it 45 stores. So we'll have a little bit of slowness in â23 with regards to long-term algo, but I think we are right back to it and that's intact. Got it. That's great to hear. And can you just remind us how the business performed through the last recession in â08, â09 period? And just curious going forward assuming your -- the low income customer remains under some pressure. To what extent do you expect to see some trade down and could that be potentially a greater benefit going forward? Yes, going back to the 2008, 2009 period, obviously, it's a long time ago, I think was very different than it is today. But we obviously experienced about an 8% comp store sales in 2009, which was very strong. But customers responded to the deals we had in the pipeline and what we offered to the customer. And they were under significant financial pressure. This one I think is a little different, people have had a lot of time at home. They've not spent as much money as they had previously and also they didn't -- we haven't had a real shock to the financial system like we had in 2008, 2009, but there's obviously the inflationary pressures are going to put continued pressure on folks at the lower income and middle income ranges. And I think the -- this the annualization of the heating bills and whatnot are going to create pressure there. So we should see some favorableness come back to us. Jason? It's Eric, I'll just jump in on trade down. We're seeing a similar trend in Q3, similar to Q2. We're encouraged that the customer, the higher income customer is trading down. we're continuing to see the lower income, fixed income consumers trade out. It's still a marginal benefit to us, similar to Q2, so slightly favorable. So hopefully that trend continues, we see stabilization of that fixed lower income consumer and the continued trade down of the higher income consumer moving forward. John, you mentioned -- a couple of things for you. Q4 gross margin guidance came down. Can you maybe just provide a bit more color on that? And then you mentioned in response to another question that the 2023 gross margin people lower and you'd like it to be. Could you provide more color there as well and sort of how we should be thinking about it? I guess the whole thing right is that and you're buying product, what I would expect to be at a very good rate, but yet there is still margin pressure. So maybe could you just wrap it all together for us as you sort of think about those two items in Q4 and â23? Yes, Ed. Obviously, we're coming off of Q2, which was probably the lowest margin we've ever delivered to the street at a 31% in change, which was severely disappointing. So we obviously had said we expected to be at close to 39.4% for this quarter and we delivered that number. So we've done a lot of work to get back to where we think we should be. The Q4 slight change on the margins really related to deleveraging with the pull back on the sales from our last guide from a 3% to 5% down to 0% to 2%. So that's just leverage -- the deleveraging of supply chain costs that we have to deal with for that quarter, which is temporary, it will come back to us. With regards to 2023, we are seeing great deal flow. I do think we have some opportunity in the margin, but I don't want to get ahead of ourselves and set ourselves up for disappointment we're going some nice improvement in the margin for â23 versus â22. I don't think we're going to see -- I'd love to see a 40% then if I can get it, I'm going to get it and deliver it, but I'm probably closer to let's call it a 39% right now with regards to full-year 2023. I want to get a little more time under our belt to see how the supply chain costs shake out here in Q4. And if we think we can do better than the 39%, we will definitely give you a better guide in the upcoming call in March, but I don't think you're looking at a 36%, 37%, I think we'll be closer to 40% than not. Okay. And then just another bigger picture question for you, you're getting great deals today, your flyer is robust. The question is though is that consumers don't really seem to be responding in a way that historically, we would have expected, I guess. Why do you think that is the case? And what does that mean even for next year? Yes, I think the consumers are responding Ed, obviously the number one department we have lawn & garden, so that's a total discretionary department and consumers responded pretty well to that hardware, as well as discretionary and they responded pretty well to that. So I think they're responding, I just think that we're operating in a highly inflationary environment as we continue to say it's an uncertain environment. Itâs a very promotional environment, so everyone's fighting for everyone's dollars. So I think that am I disappointing that we didn't keep our 3.5% comp going in the quarter? But we had some weather that impacted us that we know was not something structurally wrong with the business. And the cold weather is going to come. We'll get those sales back. So we feel like we're well positioned and we're continuing to move forward. And I think we're getting back to a more stable operating environment and the companies on the right track and continuing to deliver increased earnings to the shareholders. Thanks. I wanted to come back to the gross margins for Q4. And just to understand, so it looks like you're guiding to about 75 basis points to 100 basis points below expectation. And some of that would be explained by the downside, I think, of roughly $17 million of lower sales forecasted for Q4. But I needed understand, you know, are some of the categories underperforming toys in particular, you're running a 15% off promotion ahead of Ollie's Army Night. I don't think that's consistent with what you've done historically. Historically toy promotions have always come after Ollie's Army Night? So I wanted to just understand whether or not there's certain categories, toys maybe being one of them where you talked about in the prior, kind of, buyout deal that toys are I think like 40% of that deal, but just wanted to understand if some of this is was more products that you brought in that maybe aren't moving as well as you had hoped as opposed to just pressure on your consumer? Yes. Jeremy, with regards to the Q4 margin, I would tell you, it's 100% attributable to the deleveraging of sales. The merch margin, we expect that to actually be up year-over-year, so there's not a compression in the merch margin from Q4 of â22 to â21. So it's the implied margin guide that we're given is really related to the $17 million, $18 million of lower sales volume for the quarter. With regards to our promotional event for toys, as you know, we're operating the highly promotional environment. Everybody is being very aggressive what the seasonal in toy items right now. We don't have a toy issue, we're trying to take advantage of the holiday period where people are shopping very heavily. And what I think all that's going to do for us is we'll have less markdowns on the post holiday period than we normally do and we're getting some nice impact from the overall promotional environment we're running today for a five day period. So I'm not too worried about that. I think we're just changing dollars. And I think we'll be changing less dollars in markdowns where it -- once all set all done. So I think we're very comfortable with where we're sitting in our inventory position. Okay. And then just a follow-up question on the York D.C. expansion. Can you give us a sense for what the potential impact on margins might be and the first half of the year or if it would carry on into the second half of the year? Good morning. Thanks for taking the question. Understanding it's been a very dynamic environment. Just kind of looking back the last couple of quarters, comps relative to guidance have underperformed and recognizing you were at the low-end in most of the quarter until the late Q3 -- late October softness. Just curious of the underperformance, sort of, how much would you attribute to kind of execution versus more external dynamics? And how you incorporated those learnings in setting the Q4 guidance? Yes. I think, Eric, with regards to execution, I don't think any of it was execution. I think it's just the external factors we're all dealing with. It's not just Ollie's, it's everyone who's out there. So there's challenges with the consumer. The consumer is under significant pressure with inflation. So we're just dealing in a very uncertain environment and I think we're navigating pretty well. I'm not ashamed of a 1.9% comp and two quarters of real positive comps. So we're just going to build off of that and continue to move forward. So I think we're in good position to execute Q4. Obviously, we're taking the guide down a little bit from where we were before. And I think it's just a prudent thing to do with all the uncertainty in the highly promotional environment we're running in. But I think we're navigating very well. I think we're locked and loaded for the remaining 17-days here at the holiday and I think we're going to come around at the holiday and ready to go. So I think we're in good shape. And then just -- this year -- last year obviously around this time, Omicron was becoming a headwind and certainly impacted store traffic and was lack of visibility on the timing of inventory receipts, sort of, how are you going to market different this holiday season versus last year? And can you just remind us, sort of, what the comp cadence was in Q4 last year? Yes, Eric, with regards to the -- you're correct with the resurgence of Omicron for last year, and I do think that does provide some upside for us on other retailers later in the holiday season. So it's something that I think is a positive. We've not really baked that into our numbers. We've kind of just let that be at this point in time. So I think the inventory position we're in today versus last year from a seasonal perspective is much stronger and I think we have an opportunity to finish pretty strong as we round up the holiday season. So I think the lessons we've learned is to just be conservative and move forward with what we're seeing and guiding with where we're at so far quarter-to-date. Good morning. Thanks so much for taking my questions. So to start when you see deals of the magnitude of the one that you heavily advertised this quarter? How long does it typically take for you to sell through them? We expect to see much in the way of further tailwinds in 4Q? Or is the bulk of the lift from that one already taken place? No. The sell-through of that item and those deals that are that large, they take a while to sell through. But obviously, the tapering of the velocity does start to taper down. But we have -- we're still in pretty good inventory shape going into Q4 with that deal and we'll benefit from that deal pretty well. But I got to remind everyone that, that deal is -- while it was exciting, what we promote it, we make it bigger than life. It's not that large relative to our total inventory and our total sales velocity for Q2 and Q3 combined, but it's very meaningful, but it's not the end all be all there. Sorry Okay. So back to my follow-up, so we've seen some states put out their own stimulus programs recently. Are you expecting for that to have much of an impact on your comps? Or is it too small to really make the needle much? My guess is it's probably too little to move the needle a whole lot for us. It's not that meaningful from what we've seen so far and what we're thinking. First, I wanted to ask about sales per foot, sales per store in Q3. They were a little bit below 2019 levels. I know there's been, I guess, some volatility throughout this year. But I'm just curious how you view that in the broader context of your customer counts, your loyalty membership base. I guess I don't know if you would expect it to be higher or just because of the macro or in a period of depression relative in â19 despite some of the uplift you've had in the prior two years. I don't know of any framing around that would be great? Yes, Michael, I think you're spot on with that, the way we're looking at it. I think there's obviously macro headwinds that we're all dealing with, with regards to â19. We were, call it, 99.2%, 99.3% of 2019 from a comparable basis. So just barely off if we would have maintained the velocity of our sales through the quarter without the last two weeks, we've been somewhere in the neighborhood of, call it, 101 or something of that nature that we had planned to be. So there's, I think, just macro pressures going on that we're all rebuilding to and a lot of consumer is under pressure. So we're navigating through that. But I don't I'm not -- we're not coming out with a negative 5%, negative 10%, negative 15%. We're in pretty good shape. I think we're going to continue to see some momentum in our business as we move forward and go into â23. So we're looking forward more so that the deal flow is strong and we have the right item, the right deal to motivate the consumer. Okay, thanks. And a follow-up on the supply chain cost, the distribution transportation backdrop. It is easy. You mentioned that. Can you size up, I guess, when we might begin to see some of those benefits roll through the P&L, as far as you guys move to more contracts in the last year given the volatility? Is that something that we would expect beyond just the lapping of kind of artificially lower cost this year beyond that, just the actual reduction in or the easing in the background how that might play out in â23 or is that more of a â24 dynamic? Yes. I think we're definitely seeing some easing in the supply chain cost. But with regards to the overall -- and we did obviously see a pretty large improvement in the gross margin from Q2 to Q3. It was about 600 basis points in supply chain. So we started to see the easing relatively speaking, take place in the Q3 period. I think Q4 is just -- it's a moderate easing and then the big is going to happen in Qs one and two of next year. But I still think we're operating at an elevated supply chain cost at this point in time just because all the investments we had to make in wages in the four walls. So there's still going to be an elevated component there and supply chain costs aren't back down to where they were pre-COVID. So we all have a little bit of elevation there that I think is more permanent in nature that we've got to get a little bit better on the merch margin to offset it. Yes. I think, Michael, in terms of how we're structured on the international transportation side, we very much like how we're structured. It's been favorable for this contract season and we like that the market is a little more favorable as well, a lot more favorable when you compare year-over-year. So the stars are aligning real well moving into 2023 in terms of our business strategy. Hey, so comps in the third quarter on a three-year geometric stack, turn negative. Fourth quarter guidance calls for a similar trend. I guess, what exactly, if you could maybe help us is the bridge from today's negative trend line, and we have seen sequential improvement broadly with closeout inventory versus positive comps next year. Is it traffic would improve? Is it something with ticket, do we need macro to improve? Just struggling with the bridge between the three-year Geometric negative in 3Q, guided negative in 4Q and then positive comps for next year with it seems like closeout inventory having improved. Yes. Matt, the closeout inventory and the closeout opportunities definitely have improved. I think the macro backdrop we don't have the timing on yet is when does the trade down start to outpace the trade out of the lower income consumer. So I do believe that, that's absolutely coming. I can't tell you if it's coming here at the end of Q4, if it's coming in Q1 of next year. But I do -- we have seen some of it start, but I don't know exactly when it's going to kick in. We are positioned to capitalize on it. And I believe we're right on the cusp from our perspective. We definitely have seen some improvement in the trends from Black Friday forward. So we're optimistic that we're starting to see some breakthrough. But obviously, we're not going to get ahead of ourselves at this point in time, we want to see some true numbers come out. And I think we're there. I think we'll get there, and I think we'll be there soon. Okay. And then just a follow-up on expenses, so implied SG&A rate in the -- seems to be high 20s this year. How best to think about maybe puts and takes with SG&A wages and investments as we think about next year? Yes. SG&A definitely is under pressure, Matt, and has been our historical, call it, 25%, 25.3%, 25.5% is definitely something I don't think we get back to at this point in time. I'm looking more probably 26%-ish in the SG&A front â23 going forward. Maybe a tad bit higher, but not much, but it's definitely -- I think we'll do better than this year with what we're looking at. So it's just the pressures we're dealing with on the wage front and utility costs or something we have to absorb and deal with. Hey, thanks guys. You mentioned the 39% gross margin for next year is where you think you might shake out. But I'm kind of curious how you think about the promotional environment that you'll be playing in â23 versus what you're playing in today and how you think about the sales gross margin trade-off just from a high-level perspective, I guess, implicit in that 39% gross margin, you've got to have some sort of comp assumption. Curious what you think that is? And just what happens? How do you react if the environment gets more promotional? Do you look to preserve margins or drive sales? Thanks. Yes. Paul, we're obviously -- the way we price and the way we go to market is we price below all the fancy stores in a pretty big way. So the promotional activity doesn't make us change to impact our margin, as I explained earlier with regards to even toys. We're shifting the timing of markdowns. I don't think we're shifting the increase of overall markdown rate because we're already priced strong, and we're just clearing more inventory earlier than later. I don't think 2023 is going to be as promotional as this year has been but we'll be prepared for it if it does happen, and we price off of the market. So if the market is being promotional, we're going to be focused on that, and our merchants are going to go to market with knowing that there is still very active and we're going to price below that. So we're always in everyday value. We don't play the high-low game, obviously, and we give them the best price upfront and that builds the loyalty with the customer. So I think that the value wins in the way we run our business. Got it. Then just one follow-up on me. You guys marketed that fancy store buy, which you talked about. I think it was part of the reason that gross margins fell a bit short in the second quarter, but I'm curious if that buy has performed, as well as you had anticipated? And how much of the benefit on the margin side was the third quarter event versus the fourth quarter event? Yes. The overall deal performed well. We're very pleased with the deal and we're excited how it performed. And as I said earlier, it's not the MLB all. There's a lot of deals we have in our pipeline and a lot of departments that performed very, very well outside of these categories. But the deal was strong, definitely impacted the margin in Q3. And obviously, it has opportunities to impact the margin in Q4. So as I said a few minutes ago, is the shortfall in the margin in Q4 is not related to the merch margins. It's all sitting in supply chain and deleveraging fixed costs. So the margin, I think, is in good shape, and we feel we're in a good position here. And I'm not showing any further questions at this time. I'd like to turn the call back over to John for any closing remarks. Over the past 40-years, we've grown to over 10,500 team members who are working harder than ever. We know the holiday season places extra demands on our associates, and I sincerely thank them all for what they do, not only at this time of year, but every day. It's the combined experience, passion, commitment of the team that makes Ollie successful.
EarningCall_1813	Hi, everyone and thank you for joining us. My name is Shannon Cross, and Iâm the IT hardware analyst here at Credit Suisse. Today, I am pleased to be joined by Chuck Whitten, who is the Co-COO of Dell Technologies. So prior to getting started, Dell has asked me to read the following novel. This discussion may refer to non-GAAP results, including non-GAAP operating income, non-GAAP diluted earnings per share, non-GAAP operating expenses and adjusted free cash flow. For a reconciliation to the most direct comparable GAAP measures, please consult the slides labeled supplemental non-GAAP measures in the performance review available on the fiscal 2023 Q3 results page on investors.delltechnologies.com. Dell Technologiesâ statements that relate to future results and events are forward-looking statements and are based on Dell Technologiesâ current expectations. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including those discussed in Dell Technologiesâ periodic reports filed with the SEC. Dell Technologies assumes no obligation to update its forward-looking statement. With that Chuck, would you like to introduce yourself and tell us a little bit about your role at Dell and why you joined the company? Sure. And thanks for reading that. I know that we ate into a chunk of our time there. So yes, Chuck Whitten, I am the Co-Chief Operating Officer. Iâve been with Dell a little over a year, but you should sort of think of me a bit as a Dell Insider, I had worked with the company for over a decade as a strategic adviser at Bain. My responsibilities are running the business for Michael. So alongside Jeff Clarke, I oversee our Infrastructure Solutions Group, our Client Solutions Group, global operations, and we are responsible for setting strategic priorities across the leadership team, including our strategies for cloud and our new business development. Great. So, your most recent earnings call was a bit subdued, to put it mildly. Can you provide some color on what you are seeing in the current macro? On a segment basis, maybe we can discuss what you are hearing from customers as they start to set their 2023 budgets? Well, sure. So last week, we reported Q3 earnings. We had record $2.4 billion of operating income and EPS of $2.30. That was up 39%. That was against the backdrop of a revenue decline of 6%. So that will give a bit of a feel for the dynamics. If I go by business, major business, the Q3 performance was very consistent with what we previewed in our Q2 earnings call. So the PC business continues to be challenged â consumer more challenged than commercial, our business in the quarter was down 17%. The server business continued to moderate over the course of Q3. And we had previewed that in Q2. I would say it maybe slowed even more than we anticipated in Q3 and our 14% revenue growth was driven by a reduction in our backlog. And so that explains our sort of performance in the server business. And then storage hung in there. It performed while we were up 11% on a P&L basis. We saw strength in multiple storage types, high-end hyperconverged infrastructure. PowerStore grew nicely and weâll talk about that later, I believe. So thatâs the kind of broad dynamics. Look, by texture, geography, vertical, customer size. It was largely consistent. That performance, there is a few places I might call out as being slightly different than that average. China for, I think, reasons everybody understand a much more challenged environment. We saw strength in some verticals like energy, the U.S. government segment, medium business performed better than perhaps the average. But overall, it was relatively uniform dynamics. And what we heard from customers was very similar to what we heard in Q2, just a lot of caution entering the environment. I am revisiting my forward hiring. I am looking to reprioritize within my existing IT budgets. No one is saying I am throwing overboard my digital transformation investments. I am completely rethinking my technology strategy, but at minimum, at the moment of sort of caution and reflection from customers. Against that, we performed really well. Our business has an advantaged model. We, given our large direct sales force, see these demand trends, I think, faster than the industry and it allows us to react and we like to say we focus on what we can control. So the first thing we can control is our cost position. If you look Q1 to Q2, our OpEx declined sequentially 3%. If you look Q2 to Q3, it declined 6%. We took $300 million out of OpEx since Q1. That contributed to our profitability. Our low inventory model also drives access to deflationary components faster than the rest of the market. And so you saw that play out in our profitability as well in Q3. Our gross margins were 23.7%, very good profitability, thatâs up 200 basis points. And then we focus on gaining share. So we gained share in the commercial PC business in Q3. Thatâs 35 of 39 quarters. We expect when IDC reports results here in December, we will gain share in server and storage. And so again, itâs a challenging and a certain backdrop, but we are going to focus on what we can control. Maybe could you clarify the guidance that you gave for fiscal 2024, which â I know you didnât give guidance, you gave directional commentary, but it ended up with guidance, so perhaps that would be helpful? And then also, how do we think about free cash flow challenged this year for reasons I think we have discussed in the past, but then looking forward, is this something where you will see a significant bounce back or given the challenges with PCs at least in the first half of the year, is that going to be a bit more difficult to attain? Yes, sure. Let me start with guidance and maybe the upfront caveat, which is obvious is we are just into our Q4. It is an incredibly uncertain market and dynamic to forecast, particularly as you go into the back half of next year, but we thought it was prudent to offer some bit of guide on how we are thinking about next year. And so we said principally two things. First is, you should expect our revenue trajectory next year to be below normal sequentials and then to help you sort of think through what is below normal sequentials thing. I think Tom gave some helpful guidance in the Q&A. If you take our Q4 guidance of $23 billion to $24 billion, thatâs down 16% at the midpoint. And then you look at our second half performance, our Q3 actuals in that guide, I think you will find yourself somewhere around down 11% for the second half of the year. Thatâs probably a good starting point for how you should think about next year. And so that was the guidance we gave. Again, with the caveat, itâs a very uncertain dynamic. On cash flow, look, we donât guide on free cash flow, but I think you characterized the dynamics correctly. Look, we are a very enviable free cash flow generating business. If you look at the last 4 years, excluding VMware, we generate on average about $6 billion in free cash flow. Thatâs a combination of our growth and our negative cash conversion cycle. Obviously, in this environment, that negative cash conversion cycle works against us as we had sequential declines. And so what you would have seen is about $400 million in Q3 of cash flow from operations. I think we are trailing 12 months something like $3.9 billion, so down from our historic averages. Underneath that, you would see us primarily carrying higher inventory. Couple of reasons for that, I think one, obvious weâve come through a relatively unique last couple of years of supply shortages. Our business is principally the assembly of kits. And so shortages of things like NIC cards can hold up a $10,000 server. So we have held more inventory to meet customer needs. I think thatâs obvious and will work its way down over time. And then in Q3, we made some strategic purchases that we thought were economically advantageous for the company and thatâs our Q3 inventory. What it is not is a permanent change in the way we think about our working capital management. And so we are going to continue to press hard on our working capital when the market rebounds and we start to see sequential growth again, I think you will see our cash conversion cycle and our cash generation come back to what one would expect. Our long-term framework and commitment is that we are going to generate free cash flow in greater than 100% of our net income and thatâs still our expectations over time. How are you thinking about the PC industry, I mean short-term, lots of pressure? But from a longer term perspective, I mean, there is kind of two camps. There is one side says we go back to 250 million units annually. Another is we have reset the bar. And so maybe itâs 275, maybe itâs 300 once things sort of wash out. How â and I know no one has the correct crystal ball or you would be going to Vegas and not be sitting here. So like how do you think about it generally as you are putting together your plans? Yes. Well, look, I think my headline is I think we have seen a pre-foundry set in usage. But I think maybe one observation, I think we as an industry â and by the way, we have been guilty of this, Shannon, I have done a disservice in talking about aggregate units, because not all units are created equal in our industry and not all units have behaved the same way over the last couple of years. So let me give a few observations. Letâs just stay with IDC data, so we all have a common currency. If you look at a commercial unit on an ASP basis versus a chrome unit, itâs 3.5x more valuable on an ASP basis. If you look at a high price band consumer unit versus a mainstream consumer unit on an ASP basis, itâs 2.5x more valuable and chrome and mainstream consumer have been the most elastic up and down in this market. And so for us in our business that is principally centered on the commercial PC business. I think itâs helpful to look at units of commercial, excluding chrome and revenue as well. And I think when you unpack that, you are going to see the profound change in usage that we have seen. That profound change in usage is hybrid work. 75% of companies are now in a hybrid model. That means more notebooks with a faster refresh cycle. It also means richer configurations, more peripherals. It is not just a productivity device. It is our telephony. It is our videoconferencing equipment. And what we hear from customers time and time again is this matters to our employees now. And so we continue to hear itâs a CIO level issue and they are going to continue to invest in the end user experience. So there is a lot of reasons to be bullish about that market. If you pullback to the data again, stay on IDC, their latest 2023 forecast, you will see that market, the total market up 2019 to 2023, 5% on a unit basis and 15% on a revenue basis. Thatâs the change in usage. Thatâs more commercial units. Thatâs richer configurations. Thatâs what we believe is going to happen. So despite the caution and pause right now, we are very bullish on the PC â commercial PC market long-term. Is there a way to think about the absolute gross profit dollars per PC and how thatâs changed pre-pandemic to now for your commercial devices? I mean, prices have gone up, but configurations have become a little more rich, I donât knowâ¦ Yes. And we donât give a lot of detail or guidance on that. But look, what I can tell you is letâs look at the ASPs in our business that increased in Q3 in the PC space. It was a combination of three factors: improving mix, not just commercial to consumer but within in our commercial business, I think more 7 series than 5 series or more workstations than mainstream. It was richer configurations across all of those and it was more attached, so more peripherals, more services, more of our displays. For us, it was a third, a third, a third. So, I mean there is a real material change in the underlying content thatâs going into devices and they attach around it. Thatâs good for us as the leader in the commercial space. No, that makes sense. Maybe if we can move to the server market, obviously, you benefited from backlog this last quarter, you saw more weakness maybe than you expected as you went through the quarter. How are you thinking about the server market and pricing as you look forward to 2023? Yes. Well, maybe on the market side, I think you said it in my opening, look itâs been a challenged market. Itâs moderating in growth. Itâs probably not surprising if you pull the lens back a little bit. As the market leader, we have just seen eight consecutive quarters of server growth. The industry has had high levels of backlog given shortages. And so I think you sort of put yourself in the shoes of an IT decision-maker. They are â looking at the macro uncertainty, they are saying, well, I have consumed a lot of compute. I maybe have more coming from the industry thatâs on order. Letâs take a moment of reflection as we rack and stack our priorities. What have I consumed? What do I need? I think that feels like the digestion cycle we are in right now. Again, no one is canceling out right. They are digital transformation investments, but thatâs the pause we feel. When that rebounds, I donât have a crystal ball. And if you have the answer, Iâd love it. Look, pricing is a really important topic, because I think itâs another one we have to unpack very similar to what we just did with the PC industry. There are two trends that elevated our ASPs again in Q3 in the server business. One is content rate. So, content rate has continually increased in this market, thatâs more SSDs, memory, richer GPUs. Itâs the workloads that are â the servers are being asked to run. And thatâs been a long-term trend. And then itâs commodity inflation and pricing for that. Back to my big animal pictures of what contributed to what in our business in Q3, two-thirds of the ASP increase was content rate. So thatâs an important and hopefully very durable part of the market. One-third of it is related to commodity inflation. So look, in our forward guide, both for Q4 and next year, anytime you see a slowing demand environment in a deflationary environment, you should expect pricing pressure. So we are not assuming anything heroic about the way sort of ASPs hold up. I would say we have been very disciplined in testing elasticity out there. And weâre going to continue to be disciplined on that. Price is not necessarily the lever right now. I go out and pull given that I think what weâre facing right now is fundamentally a demand issue of â and reflection on digestion. No, that makes sense. Moving to storage and everyone here probably had a fun night last night looking at NetApp. The storage has been resilient, I think, for lack of a better term for the last several quarters. And then we had the NetApp results. Youâve done well with PowerStore. How are you thinking about the market? How is PowerStore performing relative to your expectations? Yes. Well, look, as I said, our business held up very well in Q3. We were plus 11% on a P&L basis, and we saw pretty broad demand across the storage types. So we called out high-end hyper converged infrastructure. Iâd say, unstructured PowerStore continued to grow. Look, our advantage in this market has been the breadth of our portfolio. So weâre number one across all storage types, high end, mid-range, entry, all flash, unstructured data protection, hyper, you name it. We lead in it. So that just gives us a position in the market, no matter the storage architecture or where the pockets of growth are, we tend to see it. It held up well in Q3. To your specific question, look, PowerStore, itâs a really important product for us. Itâs our marquee mid-range product, the first modern storage architecture put out in many, many years by us and by the industry. And itâs the space that we focus on because it is the place we have given up the most share. And it has performed exceptionally well. So they encourage â itâs, I think, the fastest-growing storage architecture upon the first 6 to 12 months of launch, it is growing healthy now, good double-digit growth. But I think most importantly, itâs attracting new customers to Dell, and weâre seeing repeat buying. So in Q3, 24% of customers were new to Dell that bought PowerStore and 45% of customers were a repeat buyer of PowerStores. So itâs just an encouraging trend. And so Look right now, as you look at our sort of forward guidance, we expect another seasonally strong storage quarter as always. And weâre going to continue to focus on relative share gain. Our last â I think last results for Q2, which were announced, we gained 300 basis points a share. It was widespread across all storage categories, weâre expecting to, again, gain share when you see the Q3 results announced here in a couple of weeks or a week. When you say new to Dell, is there a way to think about ones where youâve lost the share, they left sort of the EMC world and they went to somebody else and they have come back? Or is the repeat buyer was the... Well, yes, new to Dell â 24% would be â havenât bought storage from us in some period of time in multiple years, right? Maybe back in the day, they bought something. But no, itâs a new acquisition for us of a customer. And the 48% are those that have deployed PowerStore and said, I need more of that, which is great. And Iâve been a big proponent of hybrid cloud and infrastructure service, which would be your Project APEX over the last â since I launched, I guess. And â to me, it seems like this is the best way for hardware companies to compete against the cloud because at least you can walk in and say, hereâs how you can price it ratably and hereâs how Amazon is pricing it, maybe we can have an actually apples-to-apples discussion. So can you talk a bit about how Dell is thinking about? I know you talked â youâre talking more about Project APEX than you have prior, I think, in Infrastructure as a Service and how that fits in with your product portfolio? Yes, you bet. So look, as you said, itâs undeniable customers want to talk to us about flexible consumption. They also want to talk to us about financial flexibility broadly. And weâve had, given our direct relationships and our large Dell Financial Services capabilities. Dialogues like this for many years. In fact, our Dell Financial Services business, our leasing business grew 17% in originations in Q3. Itâs a countercyclical part of our business. So itâs a good asset. But on APEX specifically, look, we weâve been trying to solve two customer requests, right? One is, hey, I want a common cloud-like experience across my multi-cloud, multi-data center, multi-edge environment. And I want flexible ways to consume. So I want the option to buy infrastructure. I want the option to subscribe to infrastructure, and I want the option to subscribe to infrastructure with your managed services on top of it. The latter two are where we have APEX focused. And as you said, we started talking more about it. Itâs been very successful. In Q2, we announced the milestone. We crossed the $1 billion ARR mark. In Q3, it continues to grow ARR at a healthy clip. Weâre adding hundreds of customers to the franchise. Itâs a very good product. And weâre focused on extending the offer set. And so you would have seen since August us announced a whole series of new APEX offers things like APEX, VMC, Tanzu support, APEX containers for OpenShift, APEX Data Storage Services target for the data protection backup, APEX high-performance compute. And so â weâre not looking to force customers down any one of those three routes I described, but we are offering kind of choice, and we will continue to add to the portfolio of managed service. Itâs a very important part of our infrastructure strategy. How is the margin profile of APEX contract or solution relative to going to more of a transactional sale? And Iâm just wondering because itâs â I joke about â I donât think about my iPhone costing $1,200, which I would â in theory, you would never want to spend that amount of money on the device in your pocket. But I think about it $65 a month, so itâs much easier for me to â for them to upsell me because I think about it ratably. Is that something that also carries through, especially? We havenât talked a lot about the margin profile, but you would imagine itâs the similar sort of dynamics as a software company, right? Or your phone there where look, it is it is a higher-margin lifetime value opportunity for us. It gives customers the financial flexibility to not deploy as much cash upfront. But over time, there is value in that flexibility that they are paid for, and thatâs reflected in the margin. And switching over to sales, Iâm just curious, how does Dell think about the channel now? Because over the years â and the same thing as some of your peers have done it, we love the channel. We want to go direct. We obviously you give up margin, but you also get benefits from going to the channel because there is obviously a significant increase in reach. So whatâs your current thought on the best go-to-market strategy? Weâre proudly omni-channel is how I would say it. So if you look at, call it, roughly $100 billion trailing 12 months, 50% is our direct sales force and 50% is the channel. And itâs exactly what you say. The channel brings us reach. They cover geographies that we donât â maybe donât cover as deeply. They bring us new customers and geographies where we both work together. And so when we do it right, itâs additive and itâs multiplicative, and thatâs kind of been the dynamic. We havenât really changed our channel strategy or posture regarding that. You are right that in pockets of our business, we will make more money when we sell direct, a PC business where we sell our services and we attach our peripherals is a very lucrative business for us. But weâre very transparent with the channel on that as well. And so if they bring us new customers, they sell our services, right? Itâs a multiplicative opportunity. And so we have a really â look, we have a competitively advantaged, I think, go-to-market engine with 32,000 sales makers and over 200,000 channel partners. So weâre, as I said, probably omni-channel. Is there any way to enhance dell.com? And Iâm just thinking in light of the current macro environment where costs are scrutinized heavily to try to do more. I donât know if you call them inside sales, but. Yes. And the reality of it is, is both our physical sales makers. So we have many, many, many inside sales reps that cover â extend reach and think can form a customer environment versus our outside sales that are hunters. But dell.comâs an incredibly important asset as is our premier pages, which are sort of pages that are set up for our individual enterprise customers to be able to order online. And so look, from a margin standpoint in our business, the more we can eliminate human touches throughout the process, whether thatâs a physical sales maker or thatâs the friction that comes with now I need another server, do I pick up the phone and call a rep or do I go into my premier page? Online modernization has been a big push of ours, and itâs contributing to our enhanced margin performance. Our sales makers love it too because there is nothing like having your customer buy while you sleep, right? And it just sort of extends our productivity. So thinking about your product portfolio and again, with the cash situation right now, youâre probably not itching or maybe you are, but itâs in to run out and make a big acquisition. But in theory, if this is a downturn, itâs the potential is that some of the companies you might acquire their valuations go down. So maybe itâs strike will hold or something. How are you thinking about acquisitions? And are there areas in the portfolio that you think you could enhance either organically or inorganically? Yes. Well, look, we think M&A is part of any good growth strategy. And frankly, I think it should be in all seasons, right? Good markets, down markets, I think we have an evergreen M&A strategy, so weâre always looking. Weâve said a few things about our M&A strategy. One is it should be strategic, and it shouldnât surprise anybody at the places that weâre looking. So weâve talked about our aspirations in new or very related markets to our core business like multi-cloud, the edge, telecommunications. Those are the types of spaces that you would imagine us needing to extend our capabilities. Two, our principal objective is extending our innovation and talent agendas in those spaces. And then three, look, the reality is the circumstances around the EMC transaction, as an example. Big transformational sizable deals. Itâs pretty unique circumstances. So weâre much more focused on these strategic talent and technology acquisitions in those spaces. You are right, obviously, in the public markets right now, there is been a reset in valuations. The spaces Iâm describing are often in the private markets, some of those are still stickier, but weâre constantly looking, and youâll see us being an acquirer in those spaces. So is there a way to think about the amount of software content that you bring to commerce? Because I think one of the things that hardware companies sometimes get knocked by is that they show up with a box. And nobodyâs in opinion, especially like on the storage side with the margins you get, nobody is paying you that for a box. they are paying that for everything you bring to the table. When you think about it internally at Dell, do you think about the software sort of separate? Or how is it managed about it from an outside perspective looking in? Yes. I think youâre right. I think that modern infrastructure is software, right? And you look at our â our storage business, we command the margins because of the software assets that we have in the space. And you see some of our assets that are pure software and easy to understand and products like our software-defined storage asset, PowerFlex or data protection assets or our thrusts in multi-cloud like Project Alpine, which is putting our file block and object storage software. But yes, internally of Dell, we tend to think of it, look, itâs these solutions, itâs software. And you â if I contrast to a public cloud conversation, public cloud is providing infrastructure, physical hardware and software, thatâs â we do the same. We do it on-premise. And so I do think there is a fair nudge in your question of, is there a way to â for us to maybe help investors understand a little bit more the rich software assets we have because they are so key to our multi-cloud ambitions, and they are so key to how weâre winning in storage. There is probably work to do there so that you donât have too many people think of it, hey, itâs just a box. At one point HP did that, and then they ended up with autonomy. So there are some challenges with â with how you look at things, but I agree it could be helpful. What â just on our last question maybe is because I think itâs important and I think itâs also underappreciated is can you talk about the telco opportunity, the Dell seen? Sure. Weâve had a large business in telco for years, but principally with the IT departments of telco because the network itself has been closed, right? And now as operators have logically said, hey, my business model requires me to spend maybe less on the network and start to adopt modern cloud like open architecture, weâre a natural player in that space, right? And whether itâs Open RAN or itâs just the modernization of their network. They need industry standards. Cloud operating models broaden that we provide more open standard infrastructure than anybody. And so weâve invested in a telecom business unit. Our goal is to drive incremental growth above what we do with the sort of our existing business in telco and itâs â and weâre having a lot of success in those dialogues. You can go read our press of the many architectural wins that weâve had with operators around the world that are looking to sort of reduce the cost ultimately of their network. And so given our combination of assets, and infrastructure and our global services layer, which is very important in sort of bringing those components together if youâre going to go to an open network, we think we have a real play there. It will take some time to play out, but itâs an important investment as well. Great. Well, maybe just in the last few â last minute or so, if you want to talk a little bit about what youâre â Iâd like to end things on a positive note. What youâre most excited about now that youâve joined Dell officially and looking forward in the next years? Yes, look, look, I would just leave everybody with â we have an amazing opportunity as a company. We performed exceptionally well in the last few years. Q3 was â we performed very, very well in a very difficult environment. We generated high levels of profitability. We gained share. We manage our cost, I think, quickly and decisively given our advantaged demand signal. So thatâs what we mean when we say this business is positioned to outperform in any market environment. I think itâs a great time for investors to take a look at us. I think we have leadership positions in our core markets. I think we have a balance sheet that allows us to both invest and return capital to shareholders at an attractive rate. And I see lots of growth opportunities around the business. So no better time than right now to take a look at us.
EarningCall_1814	Thank you, Chad, and good afternoon. I'd like to remind everyone that comments made today may include forward-looking statements. which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today, and the company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release and the recent filings with the SEC. During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed today with the SEC and posted to the Investor Relations section of JOANN's Web site at investors.joann.com. On the call today from JOANN are Wade Miquelon, President and Chief Executive Officer; and Scott Sekella, Chief Financial Officer. During the question-and-answer portion of the call, we'll also be joined by Chris DiTullio, JOANN's Executive Vice President and Chief Customer Officer. Thank you, Ajay. Good afternoon, and welcome to JOANN's Third Quarter Fiscal 2023 Earnings Call. I'd like to first ask those on the call to join me extending a very warm welcome to our new Chief Financial Officer, Scott Sekella. Scott brings more than 20 years of experience in finance for several multinational brands, most recently serving as Vice President, Corporate FP&A, Head at Under Armour. It's remarkable to me how fast Scott has hit the ground running, and we are very excited to have Scott on board as a senior executive. In the days ahead, I look forward to introducing Scott to many of you in the analyst, investor and lender communities. As we entered the peak of our holiday season, I want to take a minute to thank our more than 21,000 hard-working team members at JOANN for their dedication to our organization's success. I also want to acknowledge the continued support of our customers and to express my gratitude to all the loyal selling and crafting enthusiasts who could need to support JOANN despite unique challenges many are experiencing during this difficult economic climate. In the third quarter, while our results showed some internal signs of strengthening, overall, we were disappointed. Our sales comparison versus last year was a decline of 7.9% and versus fiscal year '20, which was our pre-pandemic year, our sales declined by 1.1%. Gross profit dollars on an adjusted basis were down 9.3% versus last year and increased by 5.5% versus fiscal year '20. As stated on the Q2 earnings call, our sales comparison have progressively strengthened through the end of Q2 and as we entered into Q3. However, midway through our third quarter, this trend worsened. This slowing was not incompatible with what our blind data illustrates for the specialty retail industry overall. This slowing was primarily caused by fewer items per basket as opposed to a downturn in customer traffic trends overall. Further, this reduction in items per basket was skewed to both our lower end database customers and our customers not in our database. During the third quarter, we continued to see strength in many large and important parts of our business, such as fashion apparel, special occasions, needle arts and fleece categories. In addition, our Halloween seasonal business grew approximately 8% and related categories performed very well. However, the fall seasonal decor and floral categories underperformed, as customers seem much less inclined to indulge and decorate versus the prior year. Additionally, consistent with broader industry trends in this category, we experienced a meaningful slowdown in our craft technology business. Our general belief is that the ongoing inflationary environment has continued to pressure our customers' level of discretionary spending. We've talked many times about JOANN's resiliency through recessionary times. However, what I feel is a bit nuanced of the extreme inflationary factor, which has not been seen in 4 years. Increasingly, we're seeing that consumers are feeling the sting of inflation, but the recent shift in shopping behavior has skewed much more towards essentials and basics with less emphasis on discretionary purchases. These budget-conscious consumers have been under a prolonged period of stress for many months now, and they are getting more selective with their purchases. Fortunately, there are some signs that these inflationary trends are beginning to side even as we potentially head into something more typical of a recessionary environment in the short-term. During the quarter, we continued to advance our key strategies, including enhancing our store experience, which, among other things, includes our journey to refresh our current and relocate stores. We had 13 grand openings in the quarter in which all but one was either relocation where we're able to increase our square footage or enter into a net new market force altogether. On balance, we're very pleased with the results of these locations as we were able to showcase the full breadth of the JOANN brand in a way which we could not in our previous smaller footprints. We have four additional stores opening in the fourth quarter to complete this year's projects. Our second core strategy is to enhance our multichannel proposition. Our omni-channel efforts yielded an additional bright spot in the quarter with sales representing over 11% penetration of JOANN's sales, plus 40 basis points to last year and over 600 basis points to fiscal year '20. Omni revenue continued to outpace total sales for the quarter with a moderate 4% decline compared to last year. Backing out the challenged technology business, which penetrates higher online, sales were flat for the quarter. We've been able to maintain much of our COVID lift to our online business as Q3 sales increased 126% as compared to fiscal year '20. Importantly, over the past few days, we have worked hard to improve our omni profitability. The past few years -- sorry about that, our profitability and that trend continues with respect to both our gross and our net omni margin. To further enable our omni efforts in October, we officially began filling orders out of our multipurpose distribution center in West Jefferson, Ohio. This distribution center will enable us to reduce split shipments, improve line fill rates and expand our assortment tail. We are ramping up the production capability as we speak. And the impact of this holiday season will be nominal. However, we anticipate that the impact on value creation will grow substantially and meaningfully over time. Also related to our online business and online selling competitors shut down near the end of Q3, and we are very encouraged by the sales increases that we are seeing thus far. Now let me shift to what we are seeing as we are in and moving through Q4. We remain cautiously optimistic about our fourth quarter, which we call is our largest and most important quarter due to the seasonality of our business. We typically provide more inter-quarter color for Q4 on this earnings call than we do for other quarters, simply given how material it is to our annual results. As we are now in the midst of the holiday season and less than 2 weeks from Christmas, I have a high-level of conviction that we have been doing the right things right with respect to what we can control in order to win the day with our customers. Our assortments are relevant, our in-stocks are strong and our promotional offers are competitive. Based on the voice of the customer and our Net Promoter Scores, our operating metrics, including our customer service remain at all-time high comparison levels at JOANN, even despite the labor pressures that JOANN and most service lead companies are experiencing. November started slower than we anticipated, and indeed, there seems to have been some cycling of last year's fear of missing out from clogged supply chains, leading to an early consumer holiday shopping spree. Having said that, our pace has picked up with our Black Friday and Cyber Monday events and continued momentum into December. We anticipate finishing the fourth quarter with solid sales momentum as we move out of this fiscal year into next. Now let me shift to a few of our major focus areas moving forward. There is no denying the fact that the current inflationary environment has driven massive annual cost increases and has taken a significant toll on both our cash flow as well as our operating earnings. Fortunately, we are seeing stabilization across our cost structure and deflationary opportunities are now arising based on healing supply chain, stabilized commodity prices and the strength of the dollar. To be successful, we are rethinking and taking fresh eyes to all costs and are working to root out anything that is not adding imminent value. I can assure you we will leave no stone unturned in order to strengthen our balance sheet and return to the company to double-digit EBITDA margins as soon as possible, while maintaining our focus on a strong customer experience. In that vein, in October, we launched a program that we have coined as focus, simplify and grow, which is targeting approximately $200 million in annual cost reductions to be fully delivered by early fiscal 2025. We anticipate that 50% of these savings will be supply chain related, 30% will be from COGS improvements and the balance will be from reductions to overhead costs. We also expect additional cash savings from other adjustments we are making to the business in areas such as capital expenditures and working capital. Of note, we anticipate the majority of supply chain savings to come from reductions in ocean freight costs and the majority of these savings will offset the phase out of the ocean freight adjustment, which we have been making over the past five quarters in which we anticipate will be fully eliminated in the first half of fiscal year '24. While we are off to a good start, it's still early in the process, and therefore, we will be providing updates on this effort in future quarters. I also want to comment briefly on our dividend. As announced in our earnings release, we made the decision to pause our quarterly cash dividend payments. As a public company, our dividend has been an important part of our capital allocation strategy. This decision was not made lightly. However, we find ourselves in a period of record inflation, rapidly rising interest rates and a more likely than not recession. No priority can be more important in working to ensure that we can successfully weather any storm, while not compromising on the most critical business investments. Business investments that are critical to winning with our customers and also creating significant shareholder value long-term. We fundamentally remain committed to returning capital to shareholders and being responsive to the needs of all of our key stakeholders and this pause does not preclude us from resuming our dividend at a later date. I would like to close out with some very exciting words regarding two of our Blue Ocean initiatives, the first of which is the SINGER DITTO, our 50-50 joint venture with SINGER, Viking and PFAFF. DITTO is a revolutionary product and platform for sewers and craft enthusiasts everywhere. We have been working on this initiative for over 4 years and now nearing launch during New York's Fashion Week in February. Units are in production and being shipped as we speak and we will be launching in the United States in mid Q1 of the next fiscal year. As I've said many times, traditional sewing patterns are both the heart of selling projects as well as the most painful part of the process, as the format is literally not changed since the 1800s, in fact, since the days of Abraham Lincoln. Our patented DITTO system will allow customers to turn patterning into the most fun part of the sewing process using an AI platform integrated with a digital laser projector system that will enable a multitude of designs and permutations and literally take so is from ideation to sewing in minutes versus hours. Of note, DITTO receives one of the highest ever purchase intent scores by our external design partner, a partner who has over 1,300 commercialized patents. There are about 30 million households in the U.S. alone that actively sew in a much greater number in the 180 plus countries SINGER, Viking and PFAFF and their respective dealers operate in. We believe that many of these sewing households would like to have access a DITTO. In fact, DITTO has been vetted with expert [indiscernible], design students and beginner sewers and crafters and the like and acceptance excitement across the various constituents is universal. In the coming months, we are working on a way to bring the best brand to life to DITTO for all of our stakeholders so that you can see it in action firsthand and get a better idea as to why this is so revolutionary. The second Blue Ocean, I will briefly mention today is our wholesale initiative, which is in the early innings, but exceeding our internal expectations based on revenue contribution. We signed up over 200 new B2B customers in the third quarter and we have significant momentum with additional customers as well. The commercial website for our marketplace platform is scheduled to launch over the next 2 months. This website will provide greater operating efficiencies with added checkout capabilities for our B2B wholesale customers. So let me just close by thanking all of you for listening today. While we have faced a series of challenges over the past few years, including Section 301 tariffs, record inflation and rapidly rising interest rates, we have also had many reasons to be optimistic. JOANN, starting with our stores, has a highly resonant and differentiated customer proposition that is very hard to replicate. Our omni business continues to gain momentum and is prime for significant profitable growth. Input costs, including supply chain costs, have reached an inflection point from highly inflationary to deflationary and we are organizing to capitalize on the reversing trend and capture significant value. And lastly, our Blue Ocean growth initiatives are now coming to fruition and hold the promise to create significant value. DITTO specifically has potential to take an entire sewing industry to an entirely new level of technology, engagement and fun. These initiatives, combined with our recent business momentum give me optimism that we are on the right path as we transition from fiscal 2023 into fiscal 2024. Good afternoon, and thank you Wade for the introduction and a warm welcome. I'm very excited to join the JOANN team and eager to meet many of you joining us on the call today. JOANN's leadership position in the sewing and crafting industry is certainly well documented. Although I joined the organization recently, I've been particularly impressed by JOANN's strong cultural foundation, and I look forward to the opportunity to contribute to JOANN's continued success. As an organization, JOANN has experienced significant external cost pressures over several years now. More recently, we've also seen a noticeable shift in spending patterns by consumers who are prioritizing consumer staples and essentials over discretionary items. In what is now an increasingly uncertain economic environment, we are taking the opportunity to reset our cost structure simplify and streamline our operations and refocus our efforts for growth opportunities in areas that will maximize our long-term profitability. We also intend to capitalize on the stronger dollar in our sourcing efforts and take advantage of easing supply chain costs to generate greater operational efficiencies. We firmly believe that recent challenges provide us with the unique opportunity to carefully reassess our existing operations and nothing is off limits. As Wade mentioned, we launched our focus Simplified Grow initiative and are targeting approximately $200 million of annualized cost savings by the early portion of fiscal 2025. I'm excited to see how the organization has embraced this challenge and tackled it head on. These initiatives are intended to combat inflationary pressures we have experienced and create financial flexibility during these uncertain times. I would now like to recap our third quarter results and then provide some additional color about our near-term outlook. As Wade touched on earlier, we experienced some deceleration in our sales trends during Q3 as the quarter progressed, particularly towards the end of the quarter. Net sales for our third quarter totaled $562.8 million, a decline of 7.9% compared to last year with total comp sales decreasing by 8%. Relative to pre-pandemic levels in the third quarter of fiscal 2020, our total comp sales were slightly negative, declining by 1.1% over the corresponding period. While Halloween was a significant bright spot in Q3, we experienced some pullback in demand for fall seasonal categories as well as continued softness in our craft technology business. Our average ticket increased by 1% in the third quarter over last year, driven by price increases and partially offset by fewer items per basket. Our e-commerce or omni-channel business declined by 4.4% versus last year. Our omni business continues to outpace our overall sales performance and has more than doubled relative to pre-pandemic levels. Going forward, our new multipurpose distribution center remains the cornerstone of our online strategy, and we are focused on bringing it to full capability. Over the long-term, it will drive significant operational efficiencies, improve fill rates and reduce split orders. On a GAAP basis, our gross profit in Q3 was $281 million, a decrease of 11.9% from last year and a decline of 1% from pre-pandemic levels in fiscal 2020. We absorbed $18.5 million of excess import costs during the quarter. While this figure reflects a $7.2 million increase over last year, the amount was lower than expected as we continued to benefit from improving conditions in the spot market. After adjusting for excess import freight costs for both corresponding periods, our gross profit of $299.5 million declined by 9.3% from last year. Our core merchandising or POS margin was slightly higher compared to last year in spite of deeper promotional activity that we incurred late in the quarter in relation to fall, seasonal and floral categories. While up close to 5% from last year, our average unit retail metric moderated slightly in Q3 on a sequential basis due to increased promotional intensity. Concurrently, our average unit cost increased on a sequential basis. However, these costs were anticipated. As we communicated in our previous earnings call, we've continued to experience spillover effects from higher inventory costs incurred during the peak period of last year's supply chain headwinds. It typically takes 6 months or more for inventory costs to work their way through our P&L. Once we complete the process of renegotiating our contracts for next year, we expect the outlook for average unit cost to improve in fiscal 2024. Our gross margin on a GAAP basis was 49.9% in Q3, a decrease of 230 basis points from last year. In addition to the impact of excess import costs, we experienced higher domestic freight expense as a result of higher carrier rates and fuel costs. Since we are now cycling the impact of extremely high ocean freight costs from the back half of last year, the year-over-year decline in our GAAP gross margin was much more moderate in Q3 and compared to the 730 basis point decline in the prior quarter. After adjusting for excess import freight costs, adjusted gross margin of 53.2% and represents a decrease of 80 basis points from last year, driven by the timing of clearance activity, increased carrier and fuel rates as well as [indiscernible]. On a sequential basis, the decline in our adjusted gross margin in Q3 was more moderate compared to the 150 basis point decline in the prior quarter. As Wade mentioned in his remarks, we are encouraged by the fact that we are finally reaching an inflection point with regards to supply chain costs and cost of goods inflation. Of particular note, excess import freight costs have now effectively transitioned from headwinds to tailwinds and we expect that will be clearly reflected in the fourth quarter from a P&L perspective. That said, we realized $32 million of cash benefit from lower ocean freight rates in Q3. The fourth quarter of fiscal 2023 represents the first of what we expect will be several consecutive quarters of P&L benefit from improving ocean freight rates. In Q4, ocean freight expenses are expected to be around $15 million to $20 million favorable relative to last year from a P&L perspective. On a cash basis, we also expect to realize $15 million to $20 million of improvement in the fourth quarter from lower ocean freight expenses based on favorable comparisons to last year and ongoing improvements in the spot market. Turning to expenses. Our selling, general and administrative expenses increased by 4.4% from last year. Although we managed to optimize store labor hour successfully during the quarter, our operating expenses were negatively impacted by higher preopening and closing expenses relative to last year and incremental cost for our new multipurpose distribution center in West Jefferson, Ohio. We also cycled a significant reduction to incentive compensation from last year, resulting in unfavorable year-over-year comparisons as well as experienced higher stock-based compensation expenses from a change in our retirement policy. Our net loss in Q3 was $17.5 million compared to a net income of $22.8 million over the same period last year. Adjusted EBITDA in the third quarter was $40.2 million compared to $72.6 million last year. Moving on to our balance sheet. Our cash and cash equivalents were $27.5 million at the end of the quarter. As of October 29, we had $74.5 million of availability on our revolving credit facility. Our long-term debt net at the end of Q3 was close to $1.1 billion reflecting an increase of $209 million from the same period last year and a leverage ratio of 6.6x is measured by net debt relative to credit facility adjusted EBITDA on a trailing 12-month basis. The majority of this increase in borrowing was driven by higher import freight costs that we've absorbed on a cumulative basis over the past year. Our inventory at the end of the third quarter was nearly flat year-over-year and lower than we anticipated on our last earnings call. We continue to manage our inventory receipts in line with current business trends. The plans that we previously outlined to lower inventory receipts in the back half remain on track. You'll recall, on last quarter's call, we indicated that during the back half of fiscal 2023, we would generate a significant amount of cash flow with a particular emphasis on fourth quarter. We still expect the fourth quarter to be cash flow generative, but not to the extent we previously expected. We previously indicated we expected net debt to be in the low to mid $800 million range. We now anticipate around mid $900 million for our year-end net debt. Approximately half of the increase is due to lower sales in the back half while the majority of the remaining increase is related to timing of inventory receipts. This timing impact will now positively impact Q1 of fiscal 2024 instead of fiscal 2023 as previously expected. We have also narrowed our capital spending plans to a range of $65 million to $70 million for fiscal year 2023. The total number of store projects remains unchanged for fiscal 2023. Through the end of the third quarter, we completed 30 projects with another four planned for the fourth quarter. Consistent with our intense focus on capital allocation, we will continue to assess the macro environment and adjust our capital spending in fiscal 2024 accordingly. Overall, we remain committed to enhancing the in-store experience and our store refresh program remains a key part of this growth strategy. As Wade mentioned, we've carefully made a decision to pause our dividend at this time to focus on strengthening the balance sheet and improving liquidity. I also want to clarify that the cash impact from the pause in our dividend is incremental to the $200 million of planned cost reduction. The steps we are taking to streamline our operations are intended to both respond to a rapidly evolving consumer backdrop and to offset the wide range of cost pressures we have -- that have taken shape for several years now. To recap, we are focused on cash generation and are positioning our business for a significantly improved cash flow outlook in fiscal 2024. It's also clear that consumers are being more selective and demanding more value in the current economic environment, which is defined by continued uncertainty and by a noticeable pullback in discretionary spending. These challenges provide us with a fresh opportunity to reset the bar through cost optimization and to better position ourselves for growth once demand and economic conditions begin to normalize. Hi. Good afternoon. So in terms of your savings, the $200 million program you expect to achieve by early fiscal year 2025, do you have a sense for what you may be able to achieve during fiscal year '24 at this point? Yes. We aren't putting out specific numbers, but I would suspect it would be very substantive. I would hope more than half. I mean we already have a lot of runway on the supply chain savings, as spot rates are normalizing, in particular, that's a very, very big number. But as we go forward in future calls, we are going to try to provide a little bit more guidance in terms of the cadence of this. But we are actually starting to incur savings on all the three core work streams. Some will take longer than others. But I think supply chain is one that can be most immediately realized. I would also though just warn you that, first, we're going to see the cash benefit of these then we are going to see the P&L benefit, because some of these things such as ocean freight and COGS, in particular, those two items work their way through our inventory. So there can be a six-month lag before some time to the cash benefit to the time of the P&L benefit. Yes. Hi, William. It's Scott. Yes, I just want to reiterate what Wade said there, particularly at the end that we do expect to see this impact on a cash basis first and more significantly than on an EBITDA basis in fiscal 2024, because with both ocean and those product cost savings, which is a good chunk of that $200 million, that's going to need to roll through the balance sheet. And oftentimes, those costs take 6 months or more to impact from an EBITDA perspective. Great. That makes sense. And then just a second question for me. It sounds like it's the more discretionary, I assume higher ticket items, which may be experiencing greater softness. I guess, is that the case and are you seeing divergent trends between arts and crafts versus your core sewing products? Yes. I'll say a few things, and maybe Chris can build on it. I think it's -- what we see is one is in kind of the technology sector. I think some of what we see there is I don't think is a factor as much discretionary spend is the fact that there was just so much -- so many sales during the pandemic. So you had a little bit of saturation on the core products that will eventually work its way through. But I think where we are seeing kind of the tightening is actually really in our seasonal product, not the basic so much, but it's the -- in particular, it was the fall decor. We have a strong Halloween with the fall decor where people chose not to spend the money to decorate as well as some of the other seasonal floral items that go with that. But on the core basics, we are seeing actually pretty strong steady demand. Yes, I'd agree Wade and -- hi, William, it's Chris. One of the things that we are seeing is our core customer is really strong and strengthening, especially the more advanced sewer, the more advanced crafter on both sides of the house. So we are seeing some very good underlying trends in a number of our categories, both in craft and sewing. It's just that we are also, at the same time, dealing with some headwinds from those pandemic boosted categories over the past couple of years in craft technology and then more cotton-related fabrics, which were the two categories that really had the biggest boost over 2020, 2021 calendar. I'd also say as we sit here, I read on as we look at the fall of decor, it appears that people were less inclined to spend money there. But on the holiday sales, there, I think a bit of that way I talked about that fear of missing out where they were waiting a little bit longer than last year, looking for deals versus last year. People were afraid there wouldn't be anything to buy because of supply chains. And I think that's part of why we are saying that our most recent read here is showing some pretty good signs of traction. Hey, everybody. Thanks for taking my question. Just a quick clarification. On the $200 million of cost savings, I think you said some of this is from the excess import freight costs that was already recognized. One, is that correct? So, Paul, it's Scott. Yes, I mean, a good chunk of the $200 million is going to be from reduced ocean freight, but we haven't really recognized that. We are just going to see the first P&L benefit here in Q4 around $15 million to $20 million. It was -- the ocean freight was still a headwind from a P&L perspective in Q3. And so recall, a lot of these savings will eliminate our add back real cash savings with elimination of add back, which we are going to phase out next year. And then how far below what we've called normalized will remain to be seen as we get through it. Again, we are pretty encouraged by the current spot markets out there and some of the other signs, but not everything will be in the adjusted EBITDA component. Okay. Thanks. And secondly, can you just comment maybe on the promotional environment you're seeing? Has it become deeper following Black Friday events? And how is it kind of progress to the holiday season? And what are you expecting that to look like into next year? Thanks. Sure, Paul. It's Chris. The promotional environment in many ways is still a very rational environment that we've talked about. I would say the one area being the exception, I would say, from both us and competitors has been some of the seasonal categories that we referenced. So whether that was fall product in Q3 or some holiday product here in Q4, that's been where we've chosen to be competitive and aggressive and ensuring we win the day. But I would say on the balance of our business, which, again, most of our business is basic versus being seasonal, still pretty rational. Yes, I just would add on our media competitor space, last year, it was hard to get products in. One of our competitors was very thin, product came in a little bit later. This year, I think everybody has had a lot of product in stock. And so I think it's been an environment where there's plenty to buy out, a lot more than it was a year ago. Hey, thanks for taking my question. On the $200 million in cost savings that you've targeted, how much of that are you expecting to come from you from macro things such as the spot rate improving, et cetera? And how much of it do you need to drive internally with your own execution? Probably, if I had to just kind of swag it, I'd probably say about 30% to 40% is kind of macro. These are those spot markets moving. It doesn't mean it's just going to hand it to you. There's still a lot of work -- and then even on the COGS side, right, why you've got input cost and other things moving. There's a lot of work to do there to open up new bidding sources. So that probably you might have your own math. But I probably would say 40% kind of macro, 60% heavier lifting than that. Yes. I would agree. This is Scott. I would agree with the 40%. A big chunk of this is going to come from the product cost side, which is a lot of individual negotiations and discussions as well as just attacking our cost structure overall. And is it fair to say that those cost cuts at this point, you don't expect those to lead to lower pricing? I mean we are separating the two. I think right now, we feel that we've been -- we are pretty competitive out there in terms of our offers and we make adjustments where it need to be, but I don't feel right now that we feel that we are not competitive. So I really kind of separate A from B. We have incurred over the past 2 years on an annualized basis over $200 million of incremental costs, if you add it up. And now at least relative to our business, all the kind of core underpinnings all the input and feedstocks are moving in a deflationary manner. And so we are going to go clawback. Good afternoon and thank you for taking my question. I wanted to ask on the $200 million. Are there any savings related to stores that have changed your plan to open stores or take on remodel projects or any changes in labor as it relates to store base? Yes. So two things, and Scott can go into more detail. we are going to have a capital and working capital cash savings apart from the $200 million over and beyond as well as the dividend over and beyond. So the $200 million is a component of the total cash that we will be driving. We are going to adjust the number of stores and [indiscernible] we do, although we are not turning the engine off for example. I would say there are some -- we say that everything is on the table, but one of the things that's very sacred to us is making sure they have a great in-store experience. So we are not going to do anything on our store labor front that's going to compromise where we are right now, which is kind of actually in some of the [indiscernible] for that customer service metric. It doesn't mean there might be some opportunity there, but that's something that we are going to protect at all costs. Hi, Cristina, it's Scott. Just to reiterate Wade's point, part of our initiatives, looking at how do we optimize store labor without sacrificing that in-store experience. And that could mean reducing, that could also mean increasing to drive incremental top line. So we will be taking a look at all of that. And then my second question is in relation to the debt balance. So I understood your point that with lower sales there'll be -- and the timing of the inventory, you won't get to that 800 to 850 target. But when do you think you can get there? And do you have any target you can share as far as reducing debt in the next 12 to 18 months. Yes. So we will provide more color on fiscal 2024 on our next call. But like I said, we do plan to end the year around the mid-900s. And with the cash generation that we are planning from the Focus, Simplify grow, from the working capital initiatives and the capital expenditures, just to name a few, we do expect to pay down debt in fiscal 2024, but not ready to give more color on exactly how much, but I do expect it to come down in fiscal 2024. I think part of what [indiscernible] little bit more visible on where the world is going, right? When you look at the pace of increases of rates about the fastest in 30 or 40 years, when you look at the inflation, which I believe is turning is the warmest turn for our inputs. It's also, I think, turning for the consumer. I just take a little bit of time to just make sure we understand where the world is going. I mean we didn't take it lightly. But on the other hand, we absolutely want to be ahead of it and drive cash relentlessly just to make sure that we can weather any storm if, in fact, there is a storm. But there is a lot of uncertainty out in the world. I actually have said this many times, I'll say it again, but worst thing for our business is stagflation, which I think relative to our business, that's where we've been stuck to last year. I take a recession over stagflation because a consumer being squeezed and inflation from all angles is a much tougher picture than having inflation down and have some compression on growth. So not that, that recession is the fact of certainty either, but I think we just want to make sure that we are doing everything possible to strengthen the balance sheet, generate as much cash as we can to also invest in the core initiatives. We talked a little about the Blue Oceans. We've got an incredible opportunity there, our omni business is actually very, very strong and getting the underpinning engine here running is going to open up a lot of opportunity. Our core customer proposition is pretty strong too, and we will be at the first quarter cycling what was a really tough 2-year comp. So I think we'll start to gain some momentum there, too. But we just want to make sure we don't get put into a position where, again, with rising rates, inflation, consumer squeeze everything where we don't have room to invest in the things that are going to make us great longer term as well. So I don't know Iâve answered your question, but I think it's just over the next year, let's just see where the macro environment unfolds. But we are going to [technical difficulty] and hope for the best here. Hi. Thanks for taking my questions. First, do you guys have any sense of how your market share is trending versus your peers? We have several ways we triangulate. As you know, these are very fragmented industries, there's no clear read. From everything we can gather, we've held our own across the board kind of everywhere with a few core categories, we think we've actually built up some meaningful share. I'm not going to comment on what those are. but we are pretty certain that we haven't given anything up. Okay. And in terms of inventory, do you have a sense for -- like how do you feel about your current inventory levels? Do you guys feel that there will be any need to sort of go deeper into promotions to reduce inventory? And do you have a sense of that -- if you're in the same situation as your competitor is there? Hi. It's Chris. So from an inventory standpoint, we feel good about our quality. Some of the actions that we took in terms of moving up our Black Friday event to start a little bit earlier than it did last year. We are happy with those results and happy with the sell-throughs we are seeing in our holiday product, which is really -- that's what's maybe the risk opportunity for the quarter, but we feel good about our current position. And from a clearance and a basic standpoint, we are as clean as we were in Q3 and continue to see that being the case for the [indiscernible]. At a level we quoted in Q3 was about 5% earmarked for that. It's about the same now. That is pretty much for this business as low as we've ever been. So we are in very good stead. Yes. I think that we see competitors being aggressive in similar categories as us. And some competitors, it's a larger percentage of their business than it is of ours. So I think for us, we feel good about the actions we've taken and the quality of the inventory. Yes. I think we are -- again, where we've seen maybe more of that aggressiveness is a rational place to be, whereas last year there was -- the last year [indiscernible] product this year, there's a lot more of that seasonal holiday products. So everybody wants to move that. But again, the vast majority of our product, the basics to day and day out, we are not seeing that. And then lastly, any additional color you guys can cite on how like the Christmas season is progressing and how seasonal and 4Q have trended through Black Friday and through now? Sure. The month, I think, started hard for a lot of folks in retail. As I looked across the spectrum, you saw a number of companies pull their Black Friday events forward starting earlier. We certainly had a competitor do that we did as well. And we've seen the customer respond to those promotions, whether it was Black Friday or Cyber Monday. And so far, the momentum has been similar in the month of December. Hey, guys. Thanks for taking our questions. I was just curious if you could talk through some of the gross margin buckets in the quarter outside of the 145 basis point excess freight headwind? Yes. So if you -- hi, David, it's Scott. If you look at Q3 gross margin on an adjusted basis, we were down 80 bps year-over-year. If I break that down from a POS standpoint, we were up 10 bps because our AUR was slightly higher than our AUC. Clearance reserves, though were unfavorable 40 bps. Then from the domestic freight side, we had increased carrier and fuel rates, which were about unfavorable 30 bps, and then increased split ships were unfavorable about 15 bps. Got it. That's helpful. And then with the cost savings efforts, curious how you're thinking about SG&A in Q4 relative to prior expectations for being kind of flat in the second half? Yes, I mean a lot of the Focus, Simplify Grow impacts SG&A will be more in fiscal '24 than Q4. I do -- I expect Q4 SG&A to be a little bit in line with how Q3 progressed. Q3 was up year-over-year, as we mentioned with the new distribution center. The other piece is where we are lapping some favorable incentive comp, and then we had to change our stock-based compensation due to a change in retirement policy. I expect overall incentive comp to be slightly favorable in Q4 versus a year ago as we lap some of the items there. Hi. Thanks for taking the questions. With regard to the $200 million in cost savings, did you say already what the cost or the expense of achieving the $200 million will be over the 18-month period? So -- hi, John, it's Scott. So at this point, we are not planning or anticipating restructuring charges or anything like that. There could be some as we get into it, but nothing that we've identified at this point. But as Wade said, as we go through the program, we will keep you updated. And if we do incur some, we will obviously let you know. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. I would just like to thank all of you for your generous listening and dialing in today. We work hard every day [indiscernible] all of our constituents and we will keep doing it. I think we've got a great opportunity here. It's ours to go get and we are after it. Thank you.
EarningCall_1815	Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Aesthetic Medical International Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. On the call today from Aesthetic Medical International are Dr. Pengwu Zhou, Chairman and Chief Executive Officer; Mr. Toby Wu, Chief Financial Officer; and Mr. Derrick Shi, Investor Relations Associate Director. Dr. Zhou will review the business operations and the company highlights, followed by Mr. Toby Wu, who will introduce the company's financial performance. They will all be available to answer your questions during the Q&A session that follows. Before we get started, I'd like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections and our plans and prospects. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law. Our discussion today will include non-IFRS financial measures, including EBITDA, adjusted loss and adjusted EBITDA. You should not consider EBITDA, adjusted EBITDA or adjusted loss as a substitute for or superior to net income prepared in accordance with IFRS. Furthermore, because of non-IFRS, measures are not prepared in accordance with IFRS, they are susceptible to varying calculations and may not be comparable to other similarly titled measures presented by other companies. You are encouraged to review the company's financial information in its entirety and not rely on a single financial measure. At this time, I would like to turn the call over to Dr. Pengwu Zhou, Chairman and CEO of Aesthetic Medical International. His opening remarks will be delivered in English by Investor Relations Associate Director, Mr. Derrick Shi. Thank you, everyone, for joining the call today. The third quarter of 2022 was still clouded by the uncertainties arising from the resurgence of COVID-19 pandemic. To migrate the impact on people's daily living and business operations, the country has adjusted its strategy of prevention and control measures from a board coverage of a region to a more precise implementation of specific areas with shortened lockdown period. Yet Shenzhen was placed under lockdown, and three of the group's treatment centers were forced to close temporary in September, which affected our customer traffic. As a result, revenue of this quarter slightly decreased by 0.3% year-over-year. [Foreign Language] During the period, the company has strived to enhance its operating efficiency by adjusting marketing strategies and streamlining business operations. In terms of marketing, we have started collaborating with key opinion leaders and head into live streaming e-commerce. This was successful and effective in expanding target audience to younger generation who had strong demand in self-care and aesthetic-related consumption. This is reflected by a 27.8% year-on-year decrease in selling expenses during the third quarter. [Foreign Language] In terms of operations, we have further strengthened our training program, which was launched in the second quarter. Besides offering them with the latest standardized operating procedure, we have further equipped them with the latest aesthetic medical market trends and product offerings, ensuring the best-in-class services are provided to our customers. We have also engaged with mystery shoppers in this quarter to better evaluate the service quality, of which they will discretely visit each treatment centers and provide assessment on user experience for management's review. As at the date, 25 mystery shoppers' assessments and feedback have been received. During the time being, we have also begun the renovation of the first floor of one of our flagship hospitals, Shenzhen Pengai Aesthetic Medical Hospital, which is expected to be completed by the end of this year. We believe that these measures will provide customers with a better service experience, laying a strong foundation to support our business, scalability and sustainable growth in the long run. [Foreign Language] The company is committed to becoming a professional and reliable non-surgical aesthetic medical service provider. We remain prudent to conduct regular assessment on treatment centers and divest non-performing centers. During this quarter, we divested the Shenzhen Pengai Aesthetic Medical Hospital and non-Shenzhen Pengai Aesthetic Medical Hospital, and expects to receive cash inflows of RMB 4.6 million and RMB 3.0 million from Shenzhen Pengai and non-Shenzhen Pengai, respectively. [Foreign Language] We believe we see aforementioned strategies, we can further enhance our core competencies, improve brand equity and eventually drive profitability. [Foreign Language] Thank you again for all your support and attention. And I would like now to turn the call to our CFO, Toby Wu to introduce the financials and operations for the third quarter of 2022. Toby, please go ahead. Okay. Thank you, Dr. Zhou, and thank you Derrick. Hi, everyone. I will summarize some of our key unaudited financial results and operation results for the third quarter ended September 30, 2022. In the third quarter of 2022, total revenue decreased 0.3% year-on-year to RMB 167 million, primarily attributable to the divestment of underperforming assets in the 2021 and the first 3 quarters of 2022 and the temporary closure of several treatment centers due to the pandemic preventative requirements in the third quarter of 2022. Gross profit was RMB 86.6 million, representing an increase of 22.5% year-on-year. Gross profit margin was increase of 9.6 percentage points from 41.8% to 51.8%. The increase was attributable to the implementation of stringent cost control of the aesthetic medical consumables, as well as the value-added service provided by the Group's professional doctors to enhance the service quality of non-surgical aesthetic medical business. Selling expenses was RMB 61.5 million, representing 36.8% of the company's total revenue in the third quarter of 2022. Selling expenses as of revenue decreased by 14 percentage points year-on-year. The reduction in the selling expenses and its contribution was mainly as a result of the company's strategic shift of marketing focus on lower-cost online marketing channels, such as the private domain customer reach and social media live streaming, to alleviate the rising customer acquisition costs under the impact of COVID-19 pandemic. General and admin expenses were RMB 45.5 million, representing a decrease of 12.6%, primarily due to the divestment of underperforming assets in the 2021 and the first three quarters of 2022. As a result of the foregoing, the company recorded a loss of RMB 52.4 million for the third quarter of 2022 compared with a loss of RMB 30.3 million in the third quarter of 2021. Basic and diluted loss per share was both loss of RMB 0.6 in the third quarter of 2022, compared with the basic and diluted loss per share of RMB 0.22 in the third quarter of 2021. EBITDA for the third quarter of 2022 was a loss of RMB 38.1 million compared with a loss of RMB 43.1 million in the third quarter of 2021. Adjusted EBITDA for the third quarter of 2022 was RMB 10.6 million, rebounded from a loss of RMB 30 million in the third quarter of 2021. Adjusted loss after tax for the third quarter of 2022 narrowed to RMB 3.7 million, compared with a loss of RMB 17.2 million in the third quarter of 2021. In terms of our operating performance, as a result of a temporary business and suspension of several treatment centers in the third quarter of 2022, the company recorded a decrease of 13.5% year-on-year in the total active customers. The company recorded an increase in the number of treatment cases of 4.7% year-on-year. And the number of treatment cases in the retained treatment centers increased by 37% year-on-year. The increase was primarily driven by the increasing demand of non-surgical aesthetic medical treatments around the young generation as well as the effectiveness of company's newly introduced package promotion. Total number of non-surgical aesthetic medical treatments as a percentage of a total number of aesthetic treatments increased by 5.8 percentage points. Average spending per customer increased by 15.2% from RMB 2,529 in third quarter of 2021 to RMB 2,915 in the third quarter of 2022, primarily driven by the sales of high-end bio-stimulating fillers. As of September 30, 2022, cash and cash equivalent was RMB 20.4 million. Looking ahead, we will continue to implement a aforementioned strategy. We will dedicate to provide better and quality service to our customers and delivering sustainable long-term growth. This concludes our prepared remarks. Thank you for joining us on today's call. We will now open the call to the questions. Operator, please go ahead. I'm Jesper's colleague. I just wanted to thank you management for their sharing. I actually have two questions. My first question is about customers. So we noticed that the number of customers have decreased. What were the reasons for the decrease? And is there any strategy to acquire new customers and to retain existing customers? Hi [Jesper], this is Derrick. And thank you for your question. Yes, we have seen that the number of customers have been decreasing in comparison with the third quarter in 2021. The main reason of the decreasing is that we have invested in some agencies in 2021, and also in the first 3 quarters in 2022. And the other reason is that we tend to allocate more resources in our treatment center in Greater Bay Area. So we have allocated more cash in training the employees instead of spending in advertising. And the strategies that we are trying to retain our customers is that we will introduce SOP training to our employees, and then inculcate core values to them. And the last is to do the renovation for one of our flagship hospital so that we could provide better customer experience to retain those customers. Thank you. Thank you, operator. On behalf of our entire management team, I would like to thank everyone again for joining us today. If you have any questions, please contact us through e-mail at ir@pengai.com.cn or reach our IR Counsel, DLK Advisory at ir@dlkadvisory.com. And I have one more advertisement for our company that we provide one-stop aesthetic medical treatment with genuine equipment and consumables. So welcome all the investors and analysts to visit our hospital all over China, and hope you have a great experience here. And thank you operator, please go ahead. Perfect. I actually have one more follow-up question. So we all noticed that the COVID situation remains uncertain, and there's lockdowns and that could potentially affect the company's business. So I just want to know, is there any measures in place to alleviate the risk? Okay. Thank you, [Jesper]. Yes, we noticed that the activity of government is to limit the spread of COVID-19. So firstly, we will actively coordinate with government pandemic prevention measures. For example, we will set a front desk to guide the customers to scan the site code, and measure their body temperature to prevent the customer affected by COVID, and then we will take advantage of our online marketing while our face-to-face consultation is impacted. For example, we will use a video call between our doctors and customers. And lastly, we will be providing prudent expansion during this period. So we won't have many loss-making agencies in comparison to the previous time. Yes. Actually, one last question, please. And we saw the Chinese government actually has introduced quite a lot of policies on how aesthetic medical industry should operate and advertise. So what's the company's view on these regulations? And how will they affect our business operations? Thank you, Jesper. Yes, the good thing is that we know the bottom line of the government, how they will regulate our industry. And we know the execute. And we will have the target to conduct our business in a healthy and long-term way. And as you know, the AIH was founded by Dr. Zhou. And so we have being at the forefront of industry in terms of compliance. So we are confident that we will be impacted much -- will have much smaller impact than our competitors. And that's it. And we just learned from that you guys have a plan to further dispose centers in Shenzhen. But I mean, Shenzhen is our core area, and why should we make this such a decision to -- for the two potential centers to be divested? We want to know apart from these, do we have other targets to further dispose other assets? Eva, thank you for your question. Yes, we have disclosed that, we are planning to divese one of our clinic in Shenzhen. And we think the main reason is that the clinic is located in Futian district, where it is frequently affected by COVID-19 lockdown. And we are unable to waive the rental from our private landlord. So in consideration of the cash flow and the healthy development of our financial aspects, we decide to divese it in the next few months. [Operator Instructions] Right. Seeing there are no further questions, let me turn the call back once again to Mr. Derrick Shi to repeat his closing remarks. Okay. Thank you, operator. Thank you, everyone, for joining the call today. And thank you, Jesper and Eva for your helpful questions. And I think that's it for today's call. And operator, please go ahead. Thank you, everyone, for attending Aesthetic Medical International's third quarter of 2022 earnings conference call. This concludes our call today. We thank you for -- thank you all for listening. Goodbye.
EarningCall_1816	Good day ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter 2022 Financial Results Conference Call. As a reminder, interested people can join the call live by dialing in: (+1) 412-717-9633, then passcode 39252103#. Once again, if ypu would like to join the call live on the phone please dial (+1) 412-717-9633, then passcode 39252103# in addition to the link alerady provided to join via video. At this time, all participants are in a listen-only mode. Following the introduction, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. Joining us today on the call are Mr. Antonio Achille Natuzziâs Chief Executive Officer; Mr. Pasquale Natuzzi, Founder and Executive Chairman; then Mr. Jason Camp, President of Natuzzi Americas; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. Thank you, Kevin, and good day to everyone. Thank you for joining the Natuzzi's conference call for the third quarter 2022 financial results. After a brief introduction, we will give room for a Q&A session. Before proceeding, we'd like to advise our listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States securities laws. Obviously, actual results might differ materially from those in the forward-looking statements, because of risks and uncertainties that can affect our results of operations and financial condition. Please refer to our most recent annual report on Form 20-F filed with the SEC for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. Thank you, Piero, and good afternoon, everyone. Thank you for joining our third quarter press release. Let me share a few highlight on the third quarter, but also as we are pacing at the end of the nine months of 2022. The third quarter closed with a positive tone both in term of revenue. We reported revenue of EUR160 million, which means an increase of almost 50% versus 2021 that, as you remember, was a strong year for us with an increase of 30% versus 2020 and an increase of 32% versus the year 2019, which can be considered the last year or normality before the pandemic. I also would like to flesh out the growth of the branded business. As you know, Natuzzi operate two main brands: Natuzzi Italia and Natuzzi Edition. And that revenue were EUR103 million with an increase, which is higher than the average increase of the total revenue or 22.5% versus 2021 and 57.6% versus 2019. This means that the branded business is growing faster than the overall revenue, which is very consistent with the strategy that Pasquale Natuzzi, our Chairman, initiated a decade ago to transform the company to a brand lifestyle company and a retail company. One of the priority we gave ourself with also my new mandate is working on marginality to extract more value to give investor in the business, but we extract more value also for the benefit of the investor, majority investor and every invested. When it comes to marginality, we closed the quarter with 37.7% margin, which compare with 36.6% of 2021 and with 28.7% of 2019, so versus 2019, almost 10 additional percentage points of marginality, this in a year which has been still characterized by significant increase in cost in some of the materials and a true spike in the energy cost. So as a result of those element, let's say, our continued growth and a better marginality, we closed the third quarter with EUR4.1 million profit, which compare with a loss of EUR0.4 million of the quarter -- or the third quarter last year and a profit -- and a loss of EUR8.7 million in 2019, so quite a significant improvement during the quarter. If we look at the nine months of 2022, the profit has been of EUR6.7 million, which compare with EUR4.3 million in 2021 first nine months. It's important those to remember that in 2021, Natuzzi as all, let's say, major company benefit for COVID-related measure that in our case in the first nine months amounted to EUR4.2 million. So if we want to compare the profit of the first nine months of 2022 versus 2021, the improvement netting the one-off COVID-related measure has been very significant, clearly much more significant versus where the first nine months ended with a loss of EUR19.5 million. When we look at profit per American Depositary Receipt, which is basically what everyone of you owns, that means that we closed with EUR0.50 of profit per share per ADR, per American Depositary Receipt, which is to be compared with a loss of EUR0.35 in 2021 and EUR1.05 in 2022. So from the very beginning, we discussed in our call that the priority for our business is to create value for our shareholder and for our employees and for our customer, and this is somehow happening. Cash-wise, we're close to a position which is very similar to what we had at the end of last year. Last year, we closed with EUR53.5 million cash. This quarter, we closed with EUR53 million, so almost exactly the same. This despite the fact we are having some more inventory due to the slowing of the business. So in essence, I hope you appreciate our effort to manage the company in a way to extract more value and to have a more tight cash management. Clearly, it's very early day. We don't want to be celebrating any success, but I believe the numbers show that the work is paying some results. I want to also like in a very candid manner that the trend that we already discussed in the last press release, which means the slowing down of the business since April has not reverted the trend. So both in our retail and the business with our clients, we see a pace of new order which are below our expectation, which means our budget. We keep comparing notes with the remaining player in the industry, and we see this is quite a general trend given whatever is happening around us, which I believe at this point is even redundant to repeat. We don't take, of course, this as an excuse. We are working very hard. We're also taking some changing in our organization, most notably in our wholesale team in U.S. and also in our European emerging market team to reinforce our team and to make sure we stay closer to our existing clients and also to reinsert new clients selectively through strengthen our pipeline of business. This a bit the executive summary. So I would say, a quarter which end up on a positive note. Unfortunately we're experimenting quite a strong headwinds, which is not helping our turnaround. We're very committed to continue the growth journey, which is part of our five-year plan. But we need to acknowledge that this is happening in a market context, which is not necessarily favorable.We know the industry is difficult. So we definitely hope it's not going to be lasting forever. We're working so that despite these headwinds, we keep our business up and our factory busy. Just providing an additional few highlights on our cost structure before opening to Q&A, when it come to G&A, there's been a better absorption and also SG&A given our business leverage. When it come to raw material, it's noticeable, the spike in energy. As I mentioned before, we had an extra cost of EUR2.8 million for energy. Material is a bit a multifaceted dynamics. Labor is improving the cost. Fabric and metallic part steel on the rise, because those industry themself use a lot of energy in the production. And so they pass the additional cost to their client, which in the circumstances are players like us. The other point -- note is transportation, which is normalizing, not yet at the level of 2019, but especially from China to U.S. and get on to us has been steadily reducing and allowing us to be competitive again from those platform. This is a bit the executive summary I wanted to provide. Let me stop here for observation and question as usually. Thank you. Now weâll be conducting question-and-answer session. [Operator Instructions] Our first question today is coming from David Kanen. Your line is now live. Okay. Well, first, congratulations, I know the quarter didn't turn out exactly as you would like and to your long-term potential, but to earn EUR0.50 per ADR is certainly an accomplishment and demonstrates how undervalued the company is. So congratulations, and it's encouraging what the potential is long-term? So a couple of questions, one of your comments in the press release is in response to the tough market conditions. We've launched a set of actions to lower the cost of our G&A, tightly managed our working capital and protect our cash position. So could you speak specifically to what's going on in terms of lowering the cost of G&A? And implicitly, what it tells me is that there's more leverage in our financial model to the upside during periods of normalization. But if you could just quantify that for us and give us some specific success to the areas that you're targeting? Okay. Well, thank you for the positive note and encouragement, Dave. We know that you have been a long-term investors and hence, that's come from a deep understanding of our business. That's highly appreciated. So when it come on the management of our cost, we went back to basic in the sense that in 2019, the company, also with external support of McKinsey, put together a process to manage in a tight way the restructuring cost, looking at any individual dollar, which has been spent across all category, which include purchase, transformation cost, industrial cost, G&A, the quarter cost. So we have replicated that methodology internally. I was part, of course, of the McKinsey team there. So a lot of people also here are already black belt on that methodology. So we have a weekly meeting, and we have accounted around 13 responsible, which, as you can imagine, are the typical functional responsible. And we have put down a citizen initiative to tightly manage the different costs and also the working capital. So I can give you a few example. One is really around streamlining and accelerating the restructuring in the quarter, where we identified potential to accelerate the rightsizing over the quarter also as a way to allow to bring in new capabilities. We are looking at all possible way to reduce the impact of an additional energy cost on our factories, so we are reramping all our factory. We are reviewing the processes. When we come to working capital, we are applying a lot of scrutinity at all the different working capital that we have in the company, which means the raw material that we have, which means also the finished product that we have in some of our geography, so we are having really a tight management of those items to ensure that there is no cash trapped in those area. We are addressing also some more structural opportunity like the simplification of our offering where we want to be very compelling and appealing to their consumer, but we also acknowledge that there is a lot of -- that can be done to simplify the covering assortment, the way in which we make intermediate stock on that level. So it's a kind of holistic approach managed with a tight methodology where every week, we appreciate the progress, we intervene to change and resolve situation will need to be accelerated. So can you quantify what the cost savings are in terms of millions? Is it a low single-digit, mid single-digit or high single-digit number when it's fully implemented? So Jason, please, can you put mute. We are receiving a notif for all of the message or whatever you're getting from. So I think if we just look at the third quarter, also to compensate a slowdown in the revenue, we're looking at, I would say, a material potential impact, so in the order of EUR3 million, EUR4 million for a quarter, which doesn't mean that we'll increase the EBIT, but it means that we'll also allow us to counterbalance the negative effect of the loss of revenue momentum. So I believe this is a company which has sustained, we know that. We've always been mentioning the opportunity around restructuring. This is a company which has an opportunity to manage in a more tight ways business and the opportunity per se of that can be quite substantial, quite substantial on the early days. It can be quite substantial. Okay. And then in the press release, you referred to the impairment of a trade receivable, which increased SG&A. What was the dollar amount of that? So we're spending a lot of time looking at both kind of how we're comparing to â21 and to â19. And so when you look at year-to-date, we're trending down eight to 21 and plus 50 to 2019 year-to-date. Okay, and then final question. Antonio, you've referred in the past to your Factory 4.0 sequential rollout. Can you give us an update on that? In the past, you referred to a mid to high single-digit improvement in gross margin once that's implemented. Where are we? And when do you expect that to be fully rolled out? So I confirm that is the range of the potential [Foreign Language], which means that if the factory are quietly saturated, they operate with the right level of saturation that in our business means 80% plus the application of that approach of working, which more than technology as a way of -- having a lean manufacturing way of organizing the floor can produce the, kind of, result. The plan is to roll out that most -- most of our factory -- Italian factory by next year and as we're also considering a potential relocation of the factory in China to make sure the new plant can be fitting this new approach of working. And then the next wave will be Romania and our Brazil operation, so that can be the benefit. I need to be, again, candid here because before modeling the benefit in the margin, we need to acknowledge that the reduction in volume is also translating in reduction of factory utilization, which being a fixed cost business, of course, has a direct impact on the cost per minute. So we are even working harder on the Factory 4.0, because we see it not only in the long term something we believe -- deeply believe on there's an opportunity to enhance margin, but also as an opportunity short term to counter fight the potential negative impact on cost per minute deriving for -- from a lower-capacity utilization of our factories. Well, we're definitely going to talk to before holiday. For us, holiday -- we will do holiday after the plan is completed. In 2027, we do holidays. Thank you. [Operator Instructions] If there are no further questions at this time, I'll turn the floor back over for any further or closing comments. Hi, I feel I've spoken enough. I leave the floor open maybe also if Pasquale want to comment or Piero or Jason, then I will do a summary myself. But I also want to leave the floor -- open for the Chairman and the rest of the team if they want to comment anything. And then I do my final remark. You gave plenty clear explanation, Antonio, for what we are doing and what is happening. So I'm -- probably what we missed regard -- what we missed to explain [indiscernible] is that in order also to reduce G&A, we are reviewing the organization, consolidating some organization like, for example, the Southwest Europe market, together with [Technical Difficulty] market under a single regional manager and also aggregating and synergizing the customer care and other function. So, I mean, you know, reviewing the organization aggregation certainly will allow us to improve the service, improve -- I mean and reduce the cost. This is something that we are following. For the rest, you gave all the major explanation, Antonio, okay? So in closing, I want to restate how committed we are. We're really working as one team with just one strategy. The Chairman, myself, you see Jason, our leader in North America, but also the remaining of our team, we're very cohesive, we're very committed on the long-term plan. We know that there are challenges ahead of us, but we are very equipped for those challenges. We have a good cash position. We ensure the company is managed adequately on that front. And as I mentioned before, we're going to be stepping up in term of aggressiveness on cost reduction as due to this phase. And as everyone you have seen is doing also starting from the large digital company in U.S. So this is, let's say, third quarter result. In term of strategy long-term, nothing has changed, we're still committed to make Natuzzi the most successful high-end European brand globally. I believe that with the current strength of the brand, the current heritage of the brand, this is something is due and is also achievable. Having said that, thank you so much for your attention. I wish you a great continuation of the day, and I hope to reconnect soon in our next press release. Thank you. That does conclude today's conference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
EarningCall_1817	Good morning. My name is Amanda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Victoria's Secret & Company's Third Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. All parties will remain in a listen-only mode until the question-and-answer session of today's call. I would now like to turn the call over to Mr. Kevin Wynk, Vice President of External Financial Reporting and Investor Relations at Victoria's Secret & Company. Kevin, you may begin. Thank you, Amanda. Good morning, and welcome to Victoria's Secret & Co.'s third quarter earnings conference call for the period ending October 29, 2022. As a matter of formality, I would like to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statement found in our SEC filings and in our press releases. Joining me on the call today is CEO, Martin Waters; and CFO, TJ Johnson. We are available today for up to 45 minutes to answer any questions. Certain results we discuss on the call today are adjusted results and exclude the special items described in our press release in our SEC filings. Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are also included in our press release our SEC filings, the investor presentation posted on the Investors section of our website. Thanks. Thanks, Kevin, and good morning, everyone. Before we dive right into the quarter, I want to first share my gratitude during this holiday season for our associates and partners around the world for their hard work and dedication. I'm especially thankful for the team's continued commitment to the revolution of our brand and our strategy, and I'm delighted by the connections we're making and deepening with our customers as we aspire to become a Victoria's Secret where everyone feels seen respected and valued. After nearly 1.5 years as an independent company, we continue to make significant progress towards our transformation. We've created a solid financial platform with our new, more agile operating structure, driven by our two category-defining brands and merchandise leadership positions in intimates and Beauty. For the third consecutive quarter, we've seen growth compared to last year in our domestic market share for the intimates category. We remain energized by our customers' response to our brand repositioning, but of course, recognize that this transformation is a journey and there's still more to do. For the third quarter in what continued to be a very challenging macroeconomic environment, we were able to deliver operating income and earnings per diluted share results above our guidance. This represents our fifth consecutive quarter since the separation that we've delivered adjusted operating income and adjusted earnings per share with results within or above guidance. We believe this type of performance continues to demonstrate the strength of our brand repositioning, our domestic share, market share leadership and growth in the intimates category. In addition, the financial platform that we've created, supported by our team's relentless focus on execution, allow us to deliver better-than-expected results even in this challenging environment. We remain steadfast in our belief that we've stabilized our business model to weather difficult times and are positioned for significant operating leverage in more normal economic times. Turning to our third quarter results. Our operating income of $43 million and earnings per diluted share of $0.29 were both, as I said, above our guidance range. Sales declined 9% in the quarter compared to last year, which was in line with our expectation. Traffic was up in our stores in the quarter, and AURs remained healthy and at or near record highs in most categories, enabling us to drive profitable sales. However, average basket sizes and conversion rates were down in the quarter, highlighting our customer who's very cautious and cost-conscious in this current environment. From a merchandise category perspective, Beauty was our best-performing category and significantly outperformed the balance of the business, followed by bras, whose performance was in line with the overall business. Panties and apparel performance in the quarter lagged behind the balance of the business amidst an extremely promotional environment in those categories. Our international business continues to be a bright spot with sales up more than 40% in the quarter compared to last year. The international business has been profitable in each of the last three quarters with most lines of business and countries performing well. I'm encouraged with the rate of progress we're making in all parts of our international business, and we continue to be optimistic about growth for our partners around the world. TJ and I recently visited and spent a few days with our teams, partners and vendors in the Far East, including our partners in the China joint venture business, Regina Miracle. We've made substantial progress stabilizing our business and growing digital sales in China with Regina. After years of significant losses, I'm expecting the China business will breakeven in spring '23. Aside from our financials over the last 90 days, we've executed several key actions in support of our strategy and positioning for the long term, including: We signed a definitive agreement to acquire Adore Me, a digitally native technology-first intimates brand. We believe the deal will strategically position us for growth by allowing us to leverage Adore Me's expertise and technology to continue to improve the Victoria's Secret and PINK shopping experience and accelerate the modernization of the VS & Co digital platform. Secondly, we launched our Undefinable campaign to cement the brand's continued commitment to welcoming and championing all women. We delivered newness and innovation with the launch of So Obsessed, our new push-up bra, which provides the fit and shaping of a traditional wide bra in an extremely comfortable wireless frame. We further enhanced the shopping experience by expanding our bra fit services with the launch of a new bra fit technology that will help customers more easily find their right size when shopping in the Victoria's Secret app. We continue to expand our channels of distribution and began featuring a portion of our PINK apparel assortment in our Amazon storefront. We expanded our Store of the Future fleet to 23 stores, 12 in the U.S. and 11 internationally, and we continue to make progress on our ESG journey by publishing in November, our ESG materiality assessment and strategy. Looking at the balance of the year, we remain mindful of the continued economic headwinds and pressure on our customer that will likely drive a highly promotional retail environment. As such, we expect continued sales and margin volatility. We believe we are well positioned for the holiday season, and we're confident in our ability to navigate this shifting landscape by aggressively pursuing our share of customer spending to optimize sales and margin and at the same time being extremely diligent on costs and on inventory management. For the fourth quarter, we expect sales to decrease in the high single-digit range compared to the fourth quarter last year, and we're forecasting operating income to be in the range of $240 million to $290 million. I expect you're all likely to hear my take on our holiday performance thus far. Well, here's my take. The start of November up until the Black Friday weekend seemed to be very much a continuation of the trend from the third quarter, a reflection of a very cautious customer in a challenging economic environment. However, since Black Friday, our customers have responded positively, and we've been very pleased with an uptick in the trend and our level of performance. Our stores have been some of the busiest in the mall, and our promotional levels were appropriately aggressive with increased traffic and conversion both in stores and online. That being said, there are still many very important days ahead in the month of December, where we make the overwhelming majority of our profits for the fourth quarter. Our guidance for the quarter reflects our results to-date and the expectations that we'll need to be aggressive in December to get our fair share and more of consumer spending this holiday season. For the full year, we expect sales to decrease 6% to 7%, and forecast adjusted operating income to be in the range of $525 million to $575 million or approximately 8% to 9% of retail sales. Given today's challenging macroeconomic environment, we believe an adjusted operating income rate in the high single digits demonstrates stabilization of our business and represents a solid base. We will leverage more when normal macro trends return in North America. We're committed to optimizing our performance in the current challenging environment by focusing on what's within our control: Our brand transformation being best at bras, enhancing the customer experience and a relentless focus on costs and inventory management. At our Investor Day in October, we discussed our strategic growth plan, which we believe outlined significant runway ahead guided by our three principles: Number one, to strengthen the core; number two, to ignite growth; number three, to transform the foundation of our company. Led by our two category-defining brands, a merchandise leadership position in intimates and Beauty and a global business position to increase market share, our goal is clear, to be the world's leading fashion retailer of intimate apparel. Our focus as leaders and as a company is on ensuring we're a future-facing business that becomes more and more culturally relevant in this shifting consumer environment. We're confident in our opportunities and remain committed to delivering long-term sustainable value for our shareholders. I wanted to get your view on what it is that the customers are really responding to? And your thoughts on can you drive sales with newness? Or does the environment require that you have to promote to really drive this conversion? Lorraine, it's a great question. I think the short answer is yes and yes. We know that when we've given the customer newness that she's responded really well to it. So the So Obsessed -- is a great example of that, which had an immediate impact and was extremely positive. The Shack It within the PINK assortment blew out within the first week of being in the store. The Bare fragrance launch was an immediate, hit went straight to number one even ahead of Bombshell America's number one selling fragrance. So newness works, no question. That said, in these difficult times, she is looking for a deal and she's looking for help, and she's looking at best brands in the market to recognize that times are difficult and to give her a helping hand. And so as customers were out over Black Friday weekend, and they're stocking up looking to buy Christmas gifts, then it's a fight. And we made the decision that it was appropriate to be more promotional than we had been in the previous year, to be more promotional than we have been in the balance of Q3 in order to make sure that we were fighting as hard as we possibly could. And we feel good about that choice. We were all out in stores in different markets across the U.S. And everybody reported back at the end of the day and on Monday morning with about the same take, which is the customer is hungry for good value on great merchandise, and that's what we're striving to do. So in our guidance for the balance of the quarter, we provided for the opportunity to give her great value. I hope that helps, Lorraine. And then one follow-up. Can you talk through the pace of the recovery in freight costs and then also the pace of the additional $250 million of cost savings that you outlined at the Analyst Day? Yes. Lorraine, this is TJ. I'll take that one. As we mentioned in the prepared remarks, third quarter freight costs were relatively consistent year-over-year. And what I'm referring to is the incremental supply chain costs that we have articulated really over the last 12 months. So starting in the third quarter of 2021, all the way through the spring season, we estimated about an incremental $300 million worth of supply chain cost or headwinds. And that looked like higher ocean rates, higher air rates, more difficult raw material price increases from an inflationary perspective. Our need, so to speak, to be almost entirely dependent on airing merchandise into our stores, particularly in the holiday season last year, so that was a 12-month runway, Q3 '21 through Q2 of '22 of about $300 million. Through the third quarter, we start to anniversary that activity, and we saw that the impact was relatively similar year-over-year at about $50 million that was embedded in our guidance and in our results. As we move into fourth quarter, given that both ocean and air rates have now moderated significantly, given that we've been able to put more of our merchandise on both and take less -- or take merchandise off of airplanes, which is a good thing for the business. We believe we'll recognize about an incremental $65 million of good news or lower supply chain costs in the fourth quarter. We think that number gets probably closer to about $100 million as we move into the spring season. So of the $300 million, we think through the next, call it, nine months, the stabilization of rates and our ability to move between airplanes and ocean containers will abate about half of the incremental cost in total. Where do costs go from there? I think from our perspective, that's a TBD. How much of this is sticky long term? How far do rates continue to go down? We know we're pressing everything that we can do from an ocean perspective and less reliance on airplanes. So to answer your question, about half of the $300 million of incremental costs, we think, comes back to us in -- starting in the fourth quarter and continuing on through the spring season. Yes. Thank you for reminding me. The $250 million of incremental cost savings that we articulated at the Investor Day, that's really a forward look for the business. So it started in a small way here in the fall season. Will grow in 2023. But from a $250 million perspective, I would think of it as growing from '23 to '24 to '25. As a reminder, there were three elements to that. The first element was really about product cost, and that looks like raw materials, finished goods, how we move goods between raw materials and finished goods from a freight perspective, lower-duty opportunities, et cetera. So the cost of goods sold was the biggest part of the $250 million. The second biggest cost was really, I'll call it, modernizing the Company or kind of transforming from being a high-cost operator to a low-cost operator, and that looks like changes in terms of people and processes in our stores, distribution centers and here in the office in Columbus, New York and around the world. And then the third bucket, as you'll recall, was lower indirect procurement costs, which is really your non-merchandise costs across the business. So the $250 million is different than in the supply chain headwinds that we talked about earlier. These are new initiatives for the business that have started here in the fall season, will grow in 2023 and grow in 2024 and '25. This is Kate on for Ike. I wanted to dig in a bit more on the merch margin performance in 3Q and maybe more on 4Q. Could you just parse out by category what you saw in terms of bra, panties and apparel? Would you say that the majority of the degradation in 3Q and maybe what you're anticipating in 4Q would be in the apparel part of the business, while maybe the intimate side is holding up better? Just trying to think of the performance of core lingerie versus apparel. And then I have one follow-up. Yes. I think good question. Thank you, Kate. From a margin perspective, as Martin mentioned, it's our intention to be -- to get our fair share across the mall and be appropriately aggressive to make sure we're capturing our fair share of traffic, and we're doing everything we can to try to increase conversion on the traffic that's out there. From a category perspective, I think when you kind of look at our promotions that have transpired over the last few weeks and months, those category promotions tend to be a little more focused on apparel, a little more focused maybe in panties but -- and generally, across the store, we want to make sure that we're being appropriately aggressive on not just categories, but also giftable product this time of year, again, to get that basket started and try to build on conversion. So it's less about -- it's not what you might be seeing at other retailers that feels more like a liquidation. This is really about how do we use the strength in our product, the strength in our margin profile to try to drive traffic and increase conversion. So, we feel very good about our inventory position and the glide paths that we're on. Again, I want to underline, this is not liquidation activity. This is using our product strength and product promotion to try to drive traffic and conversion. Okay. Great. And then, TJ, I guess just one follow-up. As we're looking ahead to next fiscal year, I understand obviously you're not going to want to guide, but you talked about some of the easing supply chain pressures. Is there a reason why maybe why we shouldn't think about gross margins being up next fiscal year as inventories are in a better place, you're last seen some of the excess promotions here in the back half and some of the freight headwind flip the other way? Yes. I think from our perspective, you're correct, we are not giving guidance. But as we think about 2023, I'll pivot back to the Investor Day and really the messaging and the story remains the same, Kate. I think we're very focused on strengthening the core, which, as you'll recall, we do need some improvement in the North American side of the business and particularly in the economic environment for our customer. We continue to be focused on growing our market share from an intimate and beauty perspective. Clearly, we had very good performance from an international perspective. So if you think about the excite growth pillar that we talked about. International is strong. New business development continues to progress, particularly with our success of Beauty on Amazon and increasing points of distribution and the sort of the future, we continue to be excited about. So, all of those growth opportunities remain intact for 2023. However, we do believe we need some help from the economy from a North American perspective. When we think about the margin, just focusing in on your question for a moment, we do expect to have some tailwind as we go into spring season, particularly around freight rates and freight opportunity year-over-year. I think the overall gross margin performance and rate performance, there will be some level of impact on where do sales go because we do anticipate that from an economic perspective, I think most people believe that the challenges in North America will continue in the spring. So what kind of deleverage does that create on the base? And then where does the promotional environment go in the mall. I think you're correct in assuming that most retailers seem to be in a much better inventory position coming out of the fall season. So does the promotional activity across the mall subside. And does it go lower than where it was in Q3 and Q4. I think that's the TBD. We'll see where that goes. We will want to be competitive in the mall though, to continue to focus on traffic and conversion, but we do have some tailwinds from a freight perspective. So we're really going to have to wait, Kate, to see where trends go and how do we continue to remain to be competitive on the mall and continue to gain share. Great. So Martin, could you expand on the lower conversion rates that you're seeing in both stores and digital. I guess what gives you confidence that this is macro and not tied to product or pricing? Is there a competitive element in underwear that impacted trends this quarter? And then, TJ, to your point, as we turn the printer post holiday, I guess what are the puts and takes to consider as it relates to revenues relative to this year? Meaning, do we need macro improvement to stem the level of revenue decline? Or just maybe if you could walk through the initiatives on the top line and if growth is reasonable as we think about next year? Yes, I'll take the first part of that. Of course, it's something we think about on a daily basis as we look at our results, how are we getting our fair share. Are we overperforming, or underperforming relative to the market? And when conversion is down and sales are down, generally, it's an extreme cause for concern. So we go to the other indicators that we can find. Market share is a good one, not the only one, but it's a good one. And our market share was up a nudge for the third quarter relative to where it was last year in intimates. That's driven by strength in bras, so growth in bra market share and ever a slight reduction in share in panty. So within that, we could be satisfied with the overall performance of intimates, but look hard at the panty business and say, gosh, that's a really promotional category. We're losing a little bit of ground. We've got to work harder. So that's just one indicator. Another indicator we look at is the white balls tracker, which indicates that purchase intent was higher for Victoria's than it was before. We look at our traffic relative to mall traffic to the extent we can get it and that other retailers share with us and landlord share with us, and that looks like it's tracking. So we look across the dashboard and say, should we be satisfied? Should we be pleased? Should we be concerned? And I think we're holding our own. Honestly, I think we're there or thereabouts in the mix, and we've got it all to play for. December is the most important month of the year. We feel very well set up in terms of inventory, in terms of promotions, in terms of the activity we've got in the pipe. So it's all focused on execution right now. That's what we get paid to do, and that's what we're focused on. TJ, do you want to take the second part? Yes. I think the second part, Matt, from a macro perspective as we think about revenues going into next year, really what we talked about -- remind everybody what we talked about at the Investor Day. Again, the North American side of the business, we do need to see some level of improvement. We believe from a macro perspective when does that come. And candidly, we'll start to anniversary some of the challenges towards the end of the first quarter, what trend then unfolds in second quarter when you're comping the comp, so to speak, from a macro perspective. I think that's all in front of all of us as retailers. Do we have initiatives going on in the business to try to buck the trend? Absolutely, we do. As Martin mentioned, again, our core focus on being best at bras, a relook in terms of how do we make sure we're getting the appropriate amount of traction and growth in the panty business. So intimates in total, which is about a little over 50% of our business, that's our core. That's our best at, how do we continue to grow market share. From a beauty perspective, clearly, we continue to launch new fragrances, and all they really do is go to the top of the chart, so to speak. So we feel very good about the Beauty business and continued newness and refresh in that business and growing it as a percent of the mix in the store. We talked about at the Investor Day, starting to deemphasize a little bit some of the apparel parts of our business again, focusing more into core intimates, core beauty and growing the things that are working the best for us. I think additionally, I want to underline again the international growth in the first three quarters of 2023 as the world is starting to open back up again, we're seeing very strong performance there. We can see a pipeline of both country growth, store growth, digital growth internationally for the foreseeable future out through 2023, 2024. So we feel very good about the international part of the business. New business development. Greg and his team have done a great job starting to grow our Amazon business. We think that's an opportunity going forward in the Store of the Future. I could keep going down the list of initiatives that we talked about at Investor Day, but that was only six weeks ago. All of those are still in place. All of those are still on track, and we feel very good about those. Thanks everyone. Morning. I hope you and your family had a nice Thanksgiving. So can you -- staying aside the $65 million, could you just speak to any of the expected composition of the 4Q gross margin, so within guidance? So just thinking through parsing out the other levers. And then, Martin, so you said AUR was healthy. Any way to, I guess, quantify or just give us context what that means? And I assume the implication is that UPTs were down. So if AUR is healthy, UPT is pressured, what does that tell you about using promotions? I guess, like it sounds like people are willing to pay what you said. They're just buying fewer units? Or do you think it might be reflecting the idea that maybe they just overpurchased over the last couple of years, and they're still working through the excess and then just need fewer things? So I would love your view on that. Yes, I think from an AUR perspective, Simeon, we still feel very good about the AUR positioning of the business. And really what we're talking about is from a ticket perspective, we feel very good about where we are. What we're really talking about is how do we use that strength in ticket and strengthen margin profile of the business, and if the net AUR needs to change a little bit here in the fourth quarter, to continue to get the kind of conversion that we want and the kind of basket growth that we would like to see and traffic growth we'd like to see, we want to use that strength. Again, doesn't necessarily mean that we have to be at this level of promotion for all four quarters of the year. That's not what we're talking about. But clearly, in the fourth quarter, when it's our Super Bowl, we need to do everything we can do to make sure we're getting our fair share. In terms of your question around overpurchasing or overproducing in the past, I'm not necessarily sure we're thinking about it that way. I think we're thinking about it as there is a very competitive environment across the mall. There are others in our view, that are in much different inventory position than we are and are more in a liquidation mode. Our position of strength from an inventory perspective is not a liquidation. It's about how do we make sure that we're getting profitable sales in a difficult environment. Yes. I'll just piggyback that a little bit, TJ. I think you've covered it. But units per transaction are down. Basket size is down. Like TJ said, I don't think we were overperforming in the past. But I do recognize that the customer has different categories to choose from. All of the dollars that are available should come out and say, I'm going to point those at the intimate apparel category. There's just dollars in the wallet. And other categories have come back stronger than they were in previous years, and that's a reflection of times changing being more open now than we were during COVID time. So what I go to is looking at our performance relative to the market in which we compete. And the market's down. We're down and the market's down. It will come back. I think the most important thing is to make sure that we're super competitive, and that we're giving her the best possible offer that we can in terms of newness and in terms of value. So that's where we're focused right now, control what we can control. Perfect. Yes, I thought the AUR being healthy was the interesting point in light of all of the commentary. That's just what I was asking about. I wanted to focus kind of on some of the supply chain challenges. I know Victoria's is known for its -- react strategy. That's really been an advantage in the past but has been pretty impaired over the last year. So is that contributing to some of the sales pressure? Or how should we think about that? And maybe where does it stand in terms of the progress to being fully back to the read and react advantage? Or when do you think that normalizes? Yes, happy to take that. Thanks, Alex. We don't think about the supply chain being impaired, to be honest. We feel like we performed very well during COVID in a very difficult competitive environment in base of supply. We got the goods that we needed. We had to pay a bit more for them because of the freight challenges, but we've got more than our fair share of what was available in the base of supply. So we feel that we did very well during that COVID period. As it relates to the current period where supply chain pressures are really behind us, TJ mentioned there was some cost in the third quarter that starts to go away during the fourth quarter. So the cost is substantially behind us, and the difficulty of the supply chain is substantially behind us. Where it really bites is in our ability to enter a new season open. And I've said previously that when the business is at its best, we would start the fall season about 60% bought and about 40% open. We didn't get quite back to that level this fall. We were more like 70%, bought, 30% open. But we don't get to spend that 30% is open because with the economic outlook, the way that it is, and sales being pressured, it would be unwise to spend those open dollars. So we're more like 80-20, 80% committed, 20% open. When does it get back to completely normal? I would guess, towards the middle of the year, we would expect to be at full capacity on read and react. There is no structural change in the base of supply or the way that we do business that indicates that it won't do. So it's just a question of us being very careful in the way that we place our orders and the amount of commitment that we make and being agile in our ability to switch out of boats and into airplanes if something is checking faster than we anticipated it to do. So I hope that gives you a bit more color on the question. In broad outline, I would say we would expect '23 to be substantially normalized from a supply chain perspective. Great. That sounds like a nice tailwind for next year. Maybe just taking a step back, one more for me, that's a bigger picture. Can you just walk us through kind of the puts and takes around kind of that high single-digit margin this year on an EBIT level and how you see the path to kind of that mid-teens longer-term target from here? Yes. I think, Alex, just the Investor Day, we kind of stepped through this. And from our view, nothing's really changed in the last six weeks. So we've maintained our guidance for the current year from an operating income and rate perspective. So if you think about, take the high end of the range, just to keep the math simple at 9%, what we talked about in terms of the path to 15%, the first -- the next percent of 9% plus 1%, the plus 1% is really where we're focused on strengthening the core. That's the best at bras, that's North America, that's growing the intimate share, that's growing Beauty share, that's starting to mix a little lighter on the apparel side, those initiatives that we talked about at the Investor Day. The next two points, so nine plus one, plus two, the next two points is really the igniting growth pillar. That looks like international growth, which happened in the third quarter, and we feel very good about the outlook for fourth quarter in 2023. It looks like new business development, whether it's new partners, new channels of distribution, et cetera, or all of the above. It looks like continuing to focus on Store of the Future, growing the store base from a Store of the future perspective, renovating stores into the Store of the Future format that is well on track, and we're pleased with the results to date. And then the last three points, so nine plus one, plus two, plus three equals 15. The last three points is the $250 million of efficiency opportunity and that transforming the foundation bucket. I spoke about that earlier. That looks like cost of goods sold opportunity, modernizing the Company from an efficiency standpoint in terms of people and processes and then also indirect procurement. So nothing's really changed in the past from 8% or 9% here in the current year that mid-teens from an initiative perspective or anything different strategically. I do think it's important to note, Martin mentioned it in his prepared remarks, something that is new and different that we are waiting on approval for -- from an HSR perspective is the announcement of the acquisition of the Adore Me. We'll have more to say about that when that happens. But clearly, that's a growth opportunity for the business and a transforming opportunity for the business that was originally contemplated at the Investor Day. I wanted to do one kind of follow-up on the near-term recent acceleration. Having a hard time taking out, is it the kind of accelerated promotionality if you guys kind of really lean into the value and seeing the customer respond to that or the Black Friday acceleration? Or do you think it's more shopping, consumers returning to kind of historical shopping patterns more centralized around the holiday period? I'd love to just if you have any thoughts around that, and I have a couple of quick follow-ups. I'll take a shot at that, and it's really looking in the crystal ball and guessing what's going to happen. It logics to me that when the customer is pressured in a very tough economic environment that she gravitates towards opportunities to save money. And Black Friday and Cyber Monday are opportunities to save money. So was I surprised that it was a strong Black Friday and a strong Cyber Monday? No, I was not surprised about that at all. What I don't know is whether this is the beginning of a new trend, and the whole of December is going to follow it in that way. I doubt it. Because I think when we look at previous patterns of difficult economic times, customers gravitate to deals and then she spends up and then she waits for the next round of deals. So I just think we're in for a tough December all around across retail, and we need to be prepared to sharpen our elbows and fight as hard as we can. Because as I said before, it's not just about winning within our category, it's about taking dollars to our category rather than to somebody else's. So that's about the only forecast that I can give you, Omar. You should be assured that we're taking it on a day-to-day basis with all over our results, even intraday results we're agile and we're able to change and pivot as needed. We have strong plans and we have contingencies in place and we'll be prepared to make sure that we get whatever is available and out there. TJ, do you want to add anything or... Yes. I agree with everything that Martin mentioned there, and the one add I would have is really an acknowledgment to the team both here and across the country in our stores. Being prepared for Black Friday weekend, I think most reports out there and certainly, what we look at from a mall perspective or mall traffic, the mall was very busy. We actually think that we were one of the busier stores in the mall. And I think that's been reported, and we're seeing that in the numbers. So the lift in traffic that we saw, we think, was a little bit better than the mall. And we think that's a little -- that's directly correlated to the preparedness programs that Martin mentioned on the part of the team. Very helpful color. Yes, that's very helpful color. Maybe quickly, any thoughts on why Beauty is so strong? And then Martin, important details in the store of the future for people who haven't been in one? Yes. So why would Beauty be stronger than other categories? So I think it reflects the fact that the market is more open. So you're more likely to wear a fragrance when you're going out to party, or to work out -- than being at home. And the reality is that people are more out and about right now than they were this time last year. So it kind of logics to me and my Beauty team will be listening to this and saying, but what about the newness? What about all the great content that we developed. And so I would give a nod to that also that we have got some terrific merchandise out there. The Bare fragrance is truly groundbreaking innovative and unique in some respects. And so yes, it's a function of the fact that the team did a really good job, and it's also a function of the fact that Beauty is a stronger category across the board this year than last. Store of the Future, thank you for asking. We feel very good about Store of the Future. We've got 12 of the 16 that we plan to open in North America open. And they're doing well. They're performing at high single-digit better than the control group. The store presents as being less intimidating, easier to shop, lighter, brighter. The merchandise is the hero rather than the environment being the hero. It's less overwhelming. From a business perspective, it's lower CapEx. It's typically smaller stores. We don't need the amount of square footage to the previous management thought that we needed. So it's a more efficient, less intimidating, more attractive environment. And there are some neat technologies in there that are really helping. The Crave technology that we have in the fitting room has been extremely well received. That, I think, is the highlight of the Store of the Future. And we'll continue to evolve it as we put more down on the ground. One part of that initiative is changing our dependence on malls to have a focus on off-mall locations where we've been underpenetrated, and we're very pleased with the performance of those off-mall locations that indicate that they could be a very good backfill to downward pressure that there will be on some D and E malls across the United States. If we can replace some of that real estate with off-mall real estate, that will be a good thing for us. So in many respects, from many perspectives, the Store of the Future is a really good initiative and we're very pleased with the results so far. Martin, my first question for you is, how are you assessing and measuring marketing success? How do you know that it's working to acquire sort of younger millennial, Gen Z customers? That's my first one. And then for both of you, inventory, you can see on the balance sheet starts to spike last year in the fourth quarter, right, over 35% for the next three subsequent quarters. So a lot of that was safety stock and kind of the change in the model mix, et cetera. And maybe this is TJ. So how much of that was in transit? How much of that was unavailable for sale won't be repurchased again? And then from a unit perspective and I can appreciate the difficulty of this, but how do you drive kind of those positive sales, if that's what we're contemplating in this marketplace, if you don't have that unit velocity? So how are you building in that flexibility to either be promotional if you need to be or to back off and drive full price sales if you need to be? Yes. Great questions. So how do you know if marketing is working as the sort of classic question through the ages. Good news is that it's easier to tell where the marketing is working now than it was a decade ago. So we will have multiple creatives at any given point in time, and the algorithms in the system respond and push the best creative. So the creative that is the best, that is the most well received rises to the top. So spending marketing dollars is more efficient now than ever it was previously. And I do apologize, again, at this time, we are having technical difficulties, we will be back with you in just one moment. I don't know how much you heard. I was in a monolog, and then somebody came in and said the line cut. It wasn't me I promise. Let me start again. What I was saying is that marketing is now significantly more dynamic than ever it was in the past. So we have multiple creatives out at any given point in time, and the algorithms work out, which is the better and push those harder than others. So it's a more efficient way of spending money than previously. But the last big campaign that we had was the Undefinable campaign, which was really about our dedication to evolving and listening and reinforcing. The beauty is in the eye of the beholder. That's the individual's right to define not a company's about our commitment to welcoming and celebrating her on her terms, not on our terms, and that generated 500 million media impressions, which is off the charts and was 87% positive in our readout, which is extremely strong. So, we have metrics that indicate how successful individual campaigns are, and we adjust accordingly. So, we feel good about where we are. That said, if you look at the 13% who are less positive, there is a significant demand in our base of consumers with people bring back the old way of doing business. We like Victoria's as was. And the reality is that as a very broad appeal brand as such that we are, that customers expect multiple things from us. They expect us to be very sexy and very provocative. They expect us to be leading in comfort. They expect us to be democratic and inclusive. And we'll be all of those things in our broad communication of the brand. So, we think that we're on a good track. The indicators suggest that we're on a good track, and we're determined to proceed with high energy. So, I hope that helps, Adrienne. Yes. Adrienne, if I understood your question right on inventories, let me try to address how it's been flowing. So, you are correct that coming out of last year and the timing of when we received inventory due to supply chain challenges that certainly made fourth quarter last year difficult. As we move into 2022, and supply chain started to get incrementally better from a flow perspective, it gave us the confidence that we could start taking merchandise off of airplanes and start putting it on boats. That did cause dislocation in terms of when it shows up on our balance sheet, to your point, because it starts to show up in, in transit before it's actually received in the distribution center as it's coming here on boats, lead times there, obviously, are longer than airplanes. So, we've been working against that all year long from a balance sheet perspective. The good news is being a financially stable company, generating our own cash and having a strong balance sheet. It gave us the flexibility to do that and start to lower overall costs and increase our flexibility, as Martin mentioned, earlier. As we think about exiting this year, we do think the majority of that timing difference on inventory receipt has started to work its way through the system. We think we will end this year with inventories on a dollar basis on the balance sheet up in the mid-single-digit range. Again, from a model mix perspective, we take that into account. We think inventories will actually be down mid-single digits. And we start to fully anniversary it as we get into early 2023. So, we think we have the opportunity to exit 2022 with -- and enter spring with inventory dollars down in the mid-single digits when we take into account model mix. Now having said that, we go into 2023, we do believe having that inventory flexibility, having the flexibility to chase goods, start to get back closer to that 60-40 mix, as Martin mentioned, gives us the opportunity to chase winners, cut losers and be much more efficient with our inventory. I think additionally, we have opportunity as we enter into next year to start to see incrementally a little bit of improvement on inventory turnover, as I mentioned because of the timing of inventory and being more in position. So [Technical Difficulty] entering next year [Technical Difficulty] with inventory levels down and the ability to chase than where we have been in the last 12 months. That's extremely helpful. Just two housekeeping. What was deleverage in the quarter? And what was digital percent of sales? Thank you very much and best of luck for holiday. The B&O deleverage in the quarter was 80 basis points. And then the percent of sales, we'll have to do some math here. We'll get that. Just curious on Adore Me acquisition, congratulations on the deal. Any ways you can leverage that business for next year as you think about modernizing Victoria's Secret? Any comment would be helpful. Yes. Thanks for the question. We're super excited about Adore Me. It's a terrific company. When TJ and I talk about it externally, we talk about it as being a two-for-one deal. It's like it's a stand-alone business that is incredibly successful and growing, and pointing at the value sector of the market that we don't currently compete in, and that gives us a great source of growth. And secondly, it's a technology company where we can leverage some of their great capability and skill set inside of our larger base of customers. And so, there's two very good reasons for us to be a good owner for that brand. We talked previously about there being three parts to the rationale for the deal. Number one is enhancing the customer experience in VS and PINK by leveraging the two technologies of Try On at Home and subscription businesses, and we're going to work incredibly hard to stand those both up during the early part of 2023, assuming the deal closes as we expect it will. And secondly, putting tech at the heart of everything that we do, that company has been built on a tech foundation, very different from the way that our company has been built. And so, working closely with Morgan and the incredible team at Adore Me we'll find ways to bring technology to the heart of everything we do and transform the foundation of our company modernizing for the future. And then the third is just the engine for growth that it provides, particularly targeting that $7 billion segment of the market that we call value where Victoria's and PINK don't currently compete. So lots of good reasons for us to be a very good owner for that business, and I'm glad you asked. Thank you. I guess, all that remains is for us to wish everybody a very healthy and happy holidays, and thank you for your interest in our business.
EarningCall_1818	All right. Good morning, everyone. I am Dara Mohsenian, Morgan Stanley's household products and beverage analyst. I am thrilled to welcome you all here today back to Morgan Stanley's Global Consumer & Retail Conference. I am really pleased to lead off our conference this year with Procter & Gamble. Thanks for being here, guys. So, first, let me start with Morgan Stanley disclosures. Please see the Morgan Stanley research website at www.morganstanley.com for our research disclosures. And if you have any questions, you can reach out to your Morgan Stanley representative. And we are going to hear Procter's disclosures. P&G would like to remind you that today's 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. Additionally, the company has posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP and other financial measures. Great. So, with that, I am very pleased to welcome Andre Schulten, Procter & Gamble's CFO, to this fireside chat; as well as John Chevalier, the Senior VP of Investor Relations. Procters had a strong track record of success the last few years on the back of a series of execution changes over the last decade, but certainly a lot of industry volatility and cost challenges here, so an interesting time to have you guys here. Again, thanks for being here. So, I thought maybe first, we could start off talking about product superiority, Andre. It's obviously been something which has been very important in your success the last few years. You guys have talked about the fact that you moved up to 80% of the portfolio being superior recently, that's versus 30% if you go back and look five years ago. How do you continue to push the needle there? A, on that 80% continue to push superiority beyond where it is and maybe the other 20%, how do you drive incremental superiority there? So, just how do you think about that as an organization given you have already had a lot of success continuing to sort of push the envelope there? Yeah. Thanks for having us, Dara. Good morning, everyone. Look, superiority, the way we define it is by default a dynamic concept. So, we can't stand still, because superiority will evolve. It will evolve with the consumer preferences changing. It will evolve with retailer requirements changing. So, by default, the concept of what we call superiority isn't static. It is dynamic. So, when we reach 80% of superiority across the five vectors that we have defined, which is product, package, communication, in-market execution, and value for both consumers and retailers, then we need to ask ourselves, what is next, and that's really the question that we have been asking and you heard us talk about it at Investor Day. And so, when you go through the list and I start with maybe product and packaging, the concept there needs to evolve in the sense that we believe instant gratification will become a significantly bigger component of how consumers perceive our products. So, we call it the immediate wow or the first use wow. And the idea here is that the product has to be so good that when the consumer uses it for the first time, it's obvious to them that they have bought the best possible proposition in terms of efficacy and use experience that they could possibly get in the market. Examples for that are when we think about Olay Moisture, for example, the way the texture feels and the perfume evolves, that needs to lead to an immediate wow effect when she uses it for the first time. When we think about fabric enhancer, for example, the first use needs to be overwhelmingly refreshing and fresh scent on the laundry when it comes out of the dryer. So, those type of immediate wows are something we want to focus on. It's also relevant because that's the way that consumers share their experience with our product in social media, which becomes a bigger and bigger part of the social influence of marketing. The second component is habit formation. You hear us talk about wanting to drive market growth. Habit formation in our categories is a very important component of driving market growth. So, many of our products still require education for the consumer on how to get the best efficacy out of the product. So, hair conditioner, for example, educating consumers on the right dosing of hair conditioner is both a delight for the consumer, because the experience will be so much better, but it is also a big, big consumption driver. Educating consumers on the benefits of daily use of Head & Shoulders to their scalp health is another big increase in usage, but also in terms of efficacy. So, habit formation is the second component where we want to involve -- evolve. Innovating on the core, while innovating on more, and more means new jobs to be done or different jobs to be done. So, when you think about dishwash detergent, for example, our dishwash soap, we innovated on the core with the easy squeeze bottle, the ketchup bottle that you turn upside down, which increases the usage delight for consumers from the first drop to the last drop. But we also innovated on a new job to be done, more and more consumers want to rinse their dishes on the go. So, Dawn Powerwash where you just spray, you have a higher efficacy soap is the solution there. Both in combination, we are able to grow share more than 2 points in the very saturated U.S. dish market. So, innovation on both the core business while serving new jobs to be done is the third dimension how we think about superiority evolving. And the last one is sustainability, environmental sustainability. We believe consumers will demand higher sustainability solutions, better sustainability solutions, but they won't be willing to compromise product performance as they look for sustainability. So, we believe that innovating across both sustainable solutions from a product packaging and end-use standpoint, as well as sustainability integrated in the IMP, into our Innovation Master Plan is going to be a critical component. So, we are going to reset superiority, as we are not going to talk about 80% anymore, it's going to be lower, can't tell you what yet. But there's room to grow. Just quickly on media, you heard us talk about our digital media interventions. That's another element of superiority. We are able to better target consumers. We are able to qualify content in a day now via our digital tools and our digital databases. That allows us to drive better content, but it also allows us to schedule content more intentionally. So, you as a consumer, don't have to see the same Tide commercial three times in the same game, but we can target more accurately to avoid annoying consumers but also more effectively control our spend. So, there's many dimensions where we still drive superiority. The key thing I want you to take away is we will reset and it will require more investment to stay ahead, because ultimately, we want to grow markets and increase that moat. Great. That's helpful. And thinking about category growth here, obviously, we have seen outsized pricing drive better-than-expected category growth globally. I understand it will be different by region. But in general, category growth has been coming in better than expected due to both the outsized pricing, but also fairly limited demand elasticity. As you look out, certainly implied in your guidance is a return to category growth and I understand that's prudent short-term. But just thinking about the long-term over the next couple of years in the HPC category in general, might there be some hope that we are more at the upper end of that category growth range with some of these pricing tailwinds. And as you think through the next couple of years, obviously, pricing will tail off. Hopefully, volumes recover, but that's a bit uncertain. So, how do you think about also the volume recovery potentially over the next couple of years, both for the category, as well as Procter & Gamble? Yeah. We have seen relatively healthy category growth over the last few years, more in the range of 4%, 5%. And then, in the most recent period, as you know, we expect the category to be growing more in the range of 3% to 4%, and that, obviously, is all price mix driven, right? The volume component is negative, somewhere in the range of minus 2% to minus 3%, and then you have a heavy price/mix component with all the inflation-based pricing that's going in. I think, over the coming years, we have to rebalance the growth algorithm, because obviously, a declining volume base, purely price-driven growth is not going to be sustainable. Our job within that, as P&G, we view as driving growth. Driving growth, we are driving household penetration, driving usage location, driving new jobs to be done via the innovation and the superiority that I talked about. So, that will be part of what we are focused on in the near future. I think over the next 12 months to 18 months, we will -- as pricing annualizes and kind of gets into the base, I would expect that the price component will decrease over time and the volume component will strengthen. We have some effects that also are mechanical. China, hopefully, reopening here sequentially over time will add back volume. Russia-Ukraine conflict annualizing will become the base component. And then consumers having used up their pantry inventory over the next few months will also strengthen their need to go and repurchase again. So, I think the balance will move back to a couple of points of volume growth, a couple of points of price/mix. And price/mix in our results has been a steady component of growth. I think over the last 17 years or 45 quarters, 46 quarters, you remind me which one it is, we have been able to add price mix of 1 point to 2 points to the growth equation. So, it always is there, but I think we need to again focus on driving both physical penetration, physical usage, and then a healthy price/mix component. Okay. Great. And then, coming off the recent Analyst Day, you really stressed an evolution in supply chain with Supply Chain 3.0. You talked a lot more about digitizing P&G. Just give us a general sense, right, those topics are a little more nebulous to outsiders and hard to grasp. You outlined some pretty solid productivity over the next few years. But help us understand in those areas, what sort of incremental in the next few years relative to what you have realized the last few years, is it sort of a big step up as you think about it either in terms of productivity, organizational effectiveness, and how you think about the yield from those areas? Yeah. Look, weâve delivered two $10 billion productivity programs back-to-back. And the intention of Supply Chain 3.0, the organization effectiveness work we are doing, is ultimately to remain at a level of productivity that is relatively consistent with that, which allows us to drive the growth algorithm that we think we need to drive, and enable that 50 basis points to 70 basis points margin expansion year-over-year, while continuing to invest in superiority in innovation and drive market growth. So, the program, just to give you a few components here, right, from a supply chain standpoint, weâve made a significant investment in digital capability in our supply chain over the last years. And what we have been talking about is now leveraging those investments to drive not only productivity, but in the best case, all of the programs that will drive productivity and cost effectiveness will also have an impact on superiority. So, to give you a few examples, we talked at Investor Day about automation being a big opportunity, automation in our distribution centers and supply warehouses, which is a significant opportunity for cost reduction, but also a significant opportunity in terms of driving resilience of the supply chain. We have developed digital capability to reformulate our products to have more flexibility between different input materials and input suppliers without an impact on the quality of the product that is consumer noticeable. That gives us leverage. That will drive, one, supply resiliency, because we now can have more options available instead of single source materials, and it will also drive cost. We have invested in synchronizing the supply chain and the -- all the way from the shelf demand signal to our Tier 2, Tier 3, Tier 4 suppliers. That allows us to take waste out of the system, reduce inventories and free up cash. And what all of those have in common is they deliver cost reduction, but when you think about it, they also deliver improvements in supply chain resilience, on-shelf availability, quality, ability to react to retailersâ needs more quickly. So, ideally, we combine that productivity program with an improvement in superiority. Media, the very same idea, our digital capability weâve developed in the media space by bringing media buying in-house and using our own consumer databases to better target consumers allows us to reduce spend, but it also allows us to target consumers when and if they are most receptive to these messages, avoid duplication and avoid annoying consumers with irrelevant content. Last example I will give you, we talked about is, weâve developed capability to use images of shelf orchestration in stores in combination with point-of-sales data in those same stores to basically use build algorithms that on retailerâs own shopper behavior illustrate what the most optimal shelf set is. So, based on their own shopperâs behavior, we can illustrate what is the right shelf orchestration, what are the right SKUs across the entire category that should be on the shelf, where should they be, how many phasing should they have. And if you think about that, that again allows us to drive shelf productivity, ideally reduce the number of shelf keeping units, but it also improves shopability and the experience for our retailers and our customers. So that's the idea there. But the idea from a pure cost standpoint is to stay in that same range that we have delivered historically. It's just giving you confidence that we have got the building blocks to get there. Right. Okay. And can you help us benchmark where you think you are versus peers on digitization, supply chain? Obviously, you don't have complete insight, but I am sure you do benchmarking work and these efforts generally sound pretty impressive. Is it sort of increasing the gap versus peers going forward? Do you think its work that is more specific to P&G and you are increasing that gap? How do you think about it, assuming there's a gap to begin with? I don't think about it that way. For us, what's most relevant is the output, and so, that's what we are focused on. If I want to point to the output in the Counter Customer Survey, we have been number one in terms of supply chain for, I think, seven years in a row. So that's a pretty good indication of what we do seem to be meeting retailersâ needs. That's no laurel to rest on. There are still tons of work to do. So, what I will focus on is, is our on-shelf availability better than the balance of the industry? Is our response time better than the industry? Can we operate the entire supply chain, including retailer warehouses at lower inventory levels, to be more cash efficient? That's what we are focusing on there, right? It's really the output measures versus the input measures. Great. Okay. And then, maybe getting back to pricing, we talked about the outsized pricing in the category earlier. It's been such an important driver of industry and Procter results recently. Can you give us thoughts on consumer demand elasticity? That pricing, has it changed at all? It seems to be ramping up in Europe, maybe less so in the U.S. But just thoughts around consumer demand elasticity? And competitively, any big concerns out there, how do you think about the price gaps today in Procter versus the categories you are in? And then also maybe just an update on any pushback from retailers if that's changed at all? So, consumer competitive, retailerâ¦ Yeah. Look, I mean, starting with the consumer, weâve been positively surprised and actually reaffirmed in our strategy of superiority with price elasticities and the consumer reaction weâve seen. As we have taken pricing around the world -- and we have priced slightly ahead of the market, not significantly. But as we have seen pricing come through, really the concept of superiority came to life, because the elasticities weâve observed in the U.S., in Europe and in other parts of the world were significantly more favorable than we would have anticipated, which speaks to, I think, the strength of the portfolio, the fact that the superiority idea in and of itself is working, but also the work weâve done on price points, price ladders, different tiers, seems to be paying dividends. So, that's the good news. The U.S. is holding up remarkably well. We are not seeing any shift in terms of those price elasticities. They still hold at a more favorable level. In Europe, as you point out, there are, I think, the pressure on the consumer and the general nervousness with winter coming, energy prices rising, there is nervousness in the consumer, and you can sense it across the retail environment. Our categories are no exception to that. So, we see a return to elasticities that are more in line with what we would have expected in the first place. Nothing that is different from our assumptions, because as we have -- many times we always plan on historic elasticities going forward. So, whatever is actual we take, whatever we assume going forward is back to historical level. So, still favorable, but a little bit more tension clearly in Europe as you would have expected. From a retail environment, look, every discussion with every retailer as it should be is centered around, do we need to take that pricing? Show me the logic for the pricing? And show me why I should believe that, that pricing will not harm my business and your business? And again, the idea of superiority, the favorable elasticities we have been able to show and the productivity that our brands and SKUs show on shelf are a good basis for those discussions. So, weâve not really encountered pushback. All discussions around pricing are tough, as they should be, but they remain very constructive in all regions where we have to take them. So, at this point in time, weâve seen good acceptance of price increases and actually very good pass-through of price increases across the retail environment. Dara, one thing I'd add is that, as part of those conversations from the very beginning, we talked about the approach of trying to match up price increases with new innovation as much as we possibly could, and I think that's helped facilitate some of those conversations and reassure our retail partners that we are still doing things to grow categories not just taking straight price increases whenever we could avoid doing that. I think that may have differentiated us a bit from the way some others have approached it. Right, okay. And it seems like, generally, weâve seen from a competitor perspective, there's been a bit more focus around category growth than sort of market share. Is that a fair characterization of the competitive environment as you think about things regionally, anything that stands out, or are you pretty comfortable with where you stand from a price gap standpoint at this point? No. I think the competitive environment, everybody is seeing the same pressures, right, which is -- and the pressure is such that you can't -- there's no viable strategy to do anything but try to pass through the commodity cost pressures and inflation pressures. So, I think that's helped the environment. If you look at the U.S. category average pricing in the range of 8%, we may be 1 point higher than that. If you look at Europe, category average pricing around 8.5%, we might be 1 point, 1.5 points higher. So, generally, the market has moved in parallel, which makes sense given the overall cost pressures that everyone is trying to recover. Okay. And there's been a lot of investor angst over potential consumer trade down, obviously, given, A, first, the pressures on the consumer at this point. We talked about Europe is even worse, but globally to some extent, and obviously, a shift to branded products over the last few years during COVID. And with Procterâs price premiums, it's been even more pronounced focus for you guys from an investor standpoint. So, just curious if you can give us an update there. It looks like private label share gains have happened, but at pretty moderate levels. How do you think about that level of risk to Procter's portfolio? And maybe some examples of how things have played out so far, right? There's some clear evidence here in the last few quarters already. So, what are you actually sort of seeing? And in theory, how are you positioned versus past cycles or position versus private label, in general? Yeah. I think the portfolio that we have structured across different price points, across different price tiers and across all channels, including dollar channel or hard discounters, in Europe is really helping us, and that's coming through in the results. Private label shares, maybe starting with the U.S. Private label shares are up year-over-year moderately, call it 30 basis points, 40 basis points, nothing significant. But it's driven by more base period dynamics than sequential share growth. And I was looking yesterday at the [cover] (ph) channel data, for example, and private label share sequentially over the past one month, three months, six months, 12 months, private label shares in absolute are flat in all categories, but two. I think, in Wipes, they are up by 20 basis points, and in panty liners, they are up by 20 basis points. Other than that, private label shares in absolute are flat. They are up versus year ago because that's when private label had the biggest issues in terms of supplying the market. So, U.S., I think, is holding very nicely. There's higher propensity on private label in Europe, obviously, and we see a little bit more growth on private label in some of the European markets. Part of that is driven by the fact that private label just needs to take more pricing relative to their base price because of their relative cost structure. So, there's a mathematical effect versus the volume base. But in general, private label is a little bit higher, nothing I think that would compromise our ability to grow. So, in general, our brand strength, our position in market is still strong in all markets, even when we see temporary private label growth. So, I wouldn't be too worried. In terms of trade down from premium to mid-tier, we also don't see any broad-based trade down. Again, there are effects in some categories. Youâve seen our laundry shares being under pressure from a value share component. This was partly supply driven. We have been talking about this. But if you look at the consumer behavior on shelf, the volume share is actually very stable, has been very stable and has been actually now growing more than 1 point in cover channels over the past four weeks on laundry and the volume share on Tide is up more than 2 points on fabric enhancers. So, not nervous about trade down in the U.S. yet, watching private label closely in Europe, but nothing disruptive happening at this point. Great. That's helpful. Maybe we could switch to the cost side. Obviously, some of the key commodities, like resin, spot prices have come off quite a bit, and looking ahead, there's been some enthusiasm around that and what it could eventually mean to gross margins. What we have heard from you guys and others is don't get too excited. That's not necessarily a complete flow through to your P&L when you consider the third-party pricing, et cetera, and there are also some delays and lags in terms of timing. So, just help us better understand that. Is it that, maybe some of the commodities that aren't tracked or cost, maybe not commodities, are still holding up more and that's why potentially this big spot pullback isn't flowing through as quickly as some might have hoped? Is it more that you can't bank on it and there's a lot of volatility and eventually flow through over time? Just how do you think about that? Because there seems to be a little bit of disconnect between sort of the investment community expectations and what we are hearing from the company side. So, help us think through that? Yeah. The core fact here is, we don't buy the commodities, right? We don't buy oil. We don't buy polypropylene. We don't buy polyethylene. We buy the raw pack materials that our suppliers are using those input costs. And when we look at our contracts, the way they are structured, they are still starting to roll over some of the inflationary pressures that our suppliers have experienced over the past 12 months to 18 months, and they have experienced a lot of those commodity input cost factors and have partially passed it on, but some contracts are still rolling over. So that is still happening. There's maintenance cost, because again, weâve overstretched our suppliers for an extended period of time in order to get cases out, maintenance has been delayed, maintenance cost is kicking in, labor inflation. So, all of those elements are still passing through, so there is a delay and simply an input cost reduction doesn't immediately translate into P&L help on our side. There's also still within the broad mix of commodities that our suppliers are using, there is still up and down within the basket, right? Some of those commodities are still constrained. China is still down to a large degree. So, until China fully reopens, there will be pressure on some commodities that are critical in our business. So that's another component that we see. So, at this point in time, I think, the trend we all want to see, the rays of sunshine, not yet. Okay. All right. On the horizon, but not yet. Okay. That's helpful. And then, just as you think about recovery of some of the gross margin compression in the last few years. I know you look more at gross profit dollars than gross margin percentage per se. But how do you think about the recovery path looking out over the next few years? Is there visibility that you can recover a decent chunk of that, and how do you think about that? And I am sure that ties into the product superiority, and pricing we talked about earlier, but just how do you think about that conceptually? Yeah. As you say, I think, our primary focus right now is to recover the gross margin dollars, right? Recover the cost impact and ensure that that happens in the most constructive way by protecting top-line growth and market growth and our share position in the market. So that will continue to be the priority, I would say, for this fiscal year and probably into next fiscal year. In the long run, we will return to our growth algorithm, right, mid-single digits on top-line, mid-to-high singles on bottom-line, which requires 50 basis points to 70 basis points of margin expansion. That will require the productivity effort that I was describing, because the only way for us to deliver that margin expansion and continue to invest in that new superiority is productivity. So, but our firm intent is to go back to 50 basis points to 70 basis points margin expansion on a going basis. I won't tell you when exactly that happens, but we will get back. Dara, I mean, Andre said everything except the one word, balance, right? And this has been the core tenet in how weâve been trying to go-to-market, how we operate the business. I don't think that changes. It's just a matter of, if we get an environment that does have a more level cost structure, ideally if the rays of sunshine do come through and they roll over some maybe, that expansion can go a little faster, but it's still going to be about balance. Right. Okay. Maybe we can talk about on the margin side also, the marketing line and how you think about that, if we do get a cost environment that's better that starts to flow through, FX potentially a little better than you last guided, is sort of the propensity generally to reinvest in the marketing line, which has worked so well over the last few years. How do you sort of think about that, both short-term, but also longer-term as you look out over the next couple of years? The reality is there's been less ability to do that in the last year with some of the cost pressures and unfavorable FX. So, sort of curious from here as you look going forward, where things stand on that front? Yeah. Look, our commitment in the communication vector of superiority and that translates into media investment is to not compromise the model, right? So, first of all, what we are doing now is to ensure that on every brand and every category country combination, we try to achieve sufficient levels of frequency, sufficient levels of reach with the right quality content and that's really the discussion that is permeating the entire company right now to ensure that we don't give on that vector. And we believe we can do that. What allows us to do that and still deliver the results is the productivity work and that capability rollout that we have been talking about in terms of targeting capability, content creation, qualification, that allows us to deliver that reach and frequency at better cost and bringing media buying in-house is a significant leverage to that line of the P&L. So that's the starting point. I think it will be interesting to see how far we can push this, Dara, because I see the capability that we have built and we are building only at its infancy. We are learning every day on how to further optimize our media spend, how to further optimize our content, and how to do this quicker and read in-market result more quickly, which I think will give us more leverage to drive productivity, but it will also increase the ROI of every dollar that we spend. So, where that exactly comes out? I would expect more investment will make sense given the higher ROI, but the principle is we will be sufficient and I would expect us to test what the boundaries are in certain category country combinations, especially those where you have the highest opportunity to build market. So, when you think about fabric enhancers or when you think about electric toothbrushes, where household penetration is still low, how far can you push the model, how quickly can you drive household penetration, if you really go after it with heavy media spend, those would be the instances where we would be interested in investing more. Right. Okay. Maybe we can end on market share. Obviously, the organizations had a lot of success focusing on driving category growth and market share has sort of been a byproduct of that, a lot of hard work that goes into it, but a lot of success in the last few years. The last couple of quarters, weâve seen the market share gain dissipate certainly in the U.S., globally also. So, just how do you think through that? Is it more, look, some of the supply chain advantages a year ago, Andre just pronounced this year, a little bit of trade down, not that big a factor, but certainly, a negative factor, tough comps or as you look at sort of the nitty gritty and go through all the product categories, are there bigger concerns on that front? Just your general sort of feeling around share and how the organization stands today relative to the deceleration weâve seen in the last couple of quarters on a year-over-year basis? I think what we said at the beginning of this more volatile cycle is this won't be a straight line. It won't be a straight line from an earnings perspective and it won't be a straight line from a share perspective. And I think that's what we are seeing there. We are seeing bumps that we would have expected with the level of supply chain volatility in the base, the level of supply chain volatility still today, the level of pricing and different sequence of price increases being taken by different players in the market, consumers being in different stages of the inflationary cycle. So, what we are seeing, I think, are the bumps, the cyclical changes that don't mean that the line trajectory in and of itself will change, and I don't think it does. And we have been talking about Fabric Care share, for example, right? And we said it will be down for a couple of months, even a couple of quarters, because of the base period, because of the supply chain issues and because of the pricing sequence, and we see that playing out. Now volume shares back up, value share will follow. Family Care, the U.S. is the same thing. We knew the share would be down from July through December because of the base period where we had record shares, because other players were out of supply. We knew that would play out, but it will be done by December, January, February. So, I think it's the non-linear trajectory that we were describing, nothing structural. Europe, we are going to keep a very close eye on sufficiency of investment to ensure that the consumer understands the benefit of our brands. I think that's where probably the highest level of attention is required at this point in time. But, again, it's nothing fundamentally broken. It's just an opportunity to double down and be really targeted in terms of investment.
EarningCall_1819	Good evening, everyone and thank you for joining todayâs Chewy Third Quarter Fiscal Year 2022 Earnings Call. My name is Don Tanami, the operator for todayâs call. [Operator Instructions] I would now like to pass the conference over to our host, Mr. Robert LaFleur, Vice President of Investor Relations. Sir, the floor is now yours. Thank you for joining us on the call today to discuss our third quarter 2022 results. Joining me today are Chewyâs CEO, Sumit Singh; and CFO, Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC earlier today, have been posted to the Investor Relations section of our website, investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewyâs future prospects, financial results, business strategies, investments, industry trends and our ability to successfully respond to business risks, including those related to inflation and its effect on the economy and our industry. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance. Also note that the forward looking statements on this call are based on information available to us as of todayâs date. We disclaim any obligation to update any forward-looking statements, except as required by law. For further information, please refer to the risk factors and other information in Chewyâs 10-Q and 8-K filed earlier today and in our other filings with the SEC, including our annual report on Form 10-K. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in todayâs SEC filings. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to the third quarter of 2022 and all comparisons are accordingly against the third quarter of 2021. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will also be available on our IR website shortly. Thanks, Bob and thank you all for joining us on the call today. Building on the momentum we reported in the second quarter, Chewyâs Q3 results showed accelerating double-digit top line growth, a sequential increase in active customers, sustained gross margin expansion and solid free cash flow generation. We experienced strong demand throughout the third quarter, especially across our non-discretionary categories, which provided a solid foundation for our growth. The resilience of the underlying demand in these categories, coupled with our ability to grow customer share of wallet, again enable Chewy to outperform broader industry trends and take incremental market share. Q3 net sales were $2.53 billion, a year-over-year increase of 14.5% and a sequential acceleration from the 12.8% growth in the second quarter. Our top line results were anchored by the predictable nature of our Autoship customer sales, which grew nearly 19% to 73.3% of net sales and by rising customer engagement as measured by net sales per active customer, or NSPAC, which grew nearly 14% to $477. Digging a little deeper into our Q3 net sales, non-discretionary categories like core food and healthcare collectively made up over 83% of our net sales and were the primary growth drivers, reflecting healthy unit demand and improved in-stock levels. Within discretionary categories, hard goods showed relative improvement in Q3 with sales declining 5% year-over-year, which is a 400 basis point improvement versus the second quarter year-over-year performance. We remain confident that hard good sales will return to their growth path as the economic environment improves. Taking a longer term view, over the last 3 years, our third quarter hard good sales are up 70%, gross profit has nearly doubled and gross margin has expanded by over 400 basis points. Shifting to overall company profitability, Q3 gross margin expanded 200 basis points year-over-year to 28.4%, which is a new quarterly high. Our gross margin performance this quarter reflects the favorable comps from Q3 last year, the continuation of strong pricing trends without any noticeable impact on demand and the incremental benefits we realized from our ongoing supply chain and logistics transformation. Q3 adjusted EBITDA was $70.4 million and adjusted EBITDA margin was 2.8%, an increase of $64 million and 250 basis points respectively. The primary drivers of adjusted EBITDA growth were higher gross margins and accelerated scaling of SG&A results that showcase our ability to get big fast and get fit fast as we simultaneously drive top line growth and expand margins. Moving on to customers, we ended Q3 with 20.5 million active customers. Gross customer additions accelerated 6% sequentially and are up 9% compared to Q3 2019. Consistent with recent quarters, customer retention rates remained stable as we continue to work through the initial attrition phases of our pandemic era cohorts. In the third quarter, as consumers shifted their focus away from summertime pursuits like travel towards the upcoming holiday season, we saw opportunities to increase our level of marketing investment compared to recent quarters. While ad supply remained tight, we found ROI-positive opportunities consistent with our philosophy to maximize LTV payback and we invested accordingly. Now, let me update you on some of our latest innovations as we continue to build out the Chewy Health ecosystem, expand into new and exciting high-margin verticals, and make meaningful strides in our supply chain transformation. Starting with Chewy Health, we recently announced the expansion of CarePlus, our exclusive suite of insurance and wellness offerings with plans provided by Lemonade. Combining the products from Lemonade and Trupanion under the CarePlus banner enables us to diversify our product offerings across the full spectrum of price points and coverage options in order to meet the needs of a wider range of pet parents. We are targeting a nationwide launch of our Lemonade offerings beginning in spring 2023. We remain bullish on the pet insurance space and our ability to drive customer acquisition and deepen customer engagement. Elsewhere in Chewy Health, we recently launched Wipeful [ph], our first private brand in the pet wellness category. Wipeful is a line of supplements featuring products from multivitamins to hip and joint supplements. The non-prescription pet health and wellness category has an estimated 2022 TAM of over $2.4 billion. And given the increased consumer focus on wellness and the ongoing trend towards pet humanization, we believe this launch gives us another opportunity to strengthen our connection with customers and to drive top and bottom line results. Moving to new lines of growth, we recently launched the beta version of our sponsored ads program, several months ahead of schedule. Sponsored ads are dedicated product placements on chewy.com that promote specific products from select vendors. With these ads, our suppliers can seamlessly advertise to our 20 plus million active customers. We believe sponsored ads will enable us to scale contextual advertisements, which in turn should deliver highly relevant products to customers and high margin revenue to our business. The full launch is on track for 2023. And last but not least, we continue to make excellent progress transforming our supply chain and logistics operations and developing world class capabilities across our organization. More importantly, these efforts produced meaningful operational and financial benefits throughout the company in Q3. First, our automated FC network is handling an increasingly larger portion of our outbound shipping volume at progressively lower variable cost per order. In Q3, we shipped nearly 30% of our volume through our automated FC network, up from 10% in Q3 last year. Second, our inventory rebalancing efforts through enhanced software and planning capabilities have improved in-stock levels across our network, which has lowered costs by reducing average shipping distances by 25% compared to last year and announced customer experience by reducing click-to-delivery times and improving order accuracy. These efforts have been complemented by our middle-mile initiative, which also cuts average shipping distance and reduces costs. Finally, our two new import routing facilities are on pace to handle 90% of our import volume by the end of 2022, which further enhances our ability to optimize inventory distribution across our FC network and reduce inbound freight costs. Collectively, these supply chain and logistics efforts have allowed us to mitigate freight costs, begin leveraging our SG&A expense for quarter ahead of schedule, and improve customer experience on multiple fronts. Let me conclude with the following. The operating environment remains dynamic and evolving. What hasnât changed is how much pet parents value the enduring companionship of their pets and it is this emotional bond that sustains the pet category through all phases of the economic cycle. Chewyâs compelling value proposition backed by low prices, personalized service and delivery convenience across a broad selection of products continues to resonate with our customers. This enables us to build the long-term trust that in our view allows us to outgrow our competitors and take market share. Concurrently and unequivocally, our teamâs relentless focus on execution and operational excellence allows us to take this growing market share and transform it into incrementally higher profitability and in growing free cash flow. Before I turn the call over to Mario, I would like to share an important development with you. After nearly 8 years at Chewy, Mario has decided to retire from the company. Now itâs too soon to plan his retirement party or order the proverbial gold watch, although those things will be appropriate sometime next year. As of today, we have no specific date in mind for Marioâs departure and our intent right now is simply to inform you of our transition plans. We have begun a search for top-tier internal or external candidates for this important and strategic position. In the meantime, itâs business as usual and we are grateful to have Marioâs services for as long as necessary to find and ramp a worthy successor. Please understand that this is not a matter about which we will provide regular updates and we donât plan to comment about this until we have a successor in place. Thank you, Sumit. Appreciate the kind words and I am looking forward to a little R&R when the time comes. But until then, it is business as usual. Now, letâs talk about our third quarter results. Net sales increased 14.5% or $320 million to $2.53 billion. Growth was led by our non-discretionary consumables and healthcare categories, which collectively represented over 83% of our Q3 net sales. Driving our third quarter net sales growth was an 18.8% increase in Autoship customer sales, which reached a new high of 73.3% of net sales, a 13.8% increase in NSPAC, also a new high for the company and an active customer base of just over 20.5 million, increasing approximately 30,000 versus the second quarter and 100,000 versus last year. Moving to profitability, our third quarter gross margin expanded 200 basis points year-over-year to 28.4%. The -- approximately 100 basis points of the year-over-year improvement is a result of favorable comps against Q3 last year when global supply chain disruptions and product cost inflation adversely affected our gross margin. The balance came from continuation of the strong pricing trends that emerged last quarter and greater efficiency in outbound shipping costs, which resulted from bigger basket sizes and the favorable progress we have made in our supply chain and logistics initiatives. Continuing on to OpEx, SG&A, which includes all fulfillment and customer service costs, credit card processing fees, corporate overhead and share-based compensation, totaled $543.5 million in the third quarter or 21.5% of net sales compared to 21.1% in the third quarter of 2021. Excluding share-based compensation, SG&A totaled $497.4 million or 19.6% of net sales. This is an improvement of 60 basis points compared to the third quarter of 2021 and was flat on a sequential basis. As we shared previously, we expected to begin leveraging SG&A expenses, excluding share-based comp as we exited 2022 and we are pleased to be a quarter ahead of schedule in delivering on this expectation. I will now take a moment to elaborate on how our efforts to leverage these costs are paying off. First, greater efficiency and variable fulfillment cost provided 120 basis points of leverage in the quarter, led by ongoing improvements in fulfillment center productivity from our expanded network of automated FCEs. As Sumit shared in his remarks, nearly 30% of our Q3 volume shipped from automated FCs compared to 10% last year. This helped drive down variable fulfillment costs per order, which provided about half of the Q3 year-over-year cost leverage in this area with the remainder coming from an increase in average order size. We also gained an additional 20 basis points of SG&A leverage as the incremental volume shipped through our automated FCs absorbed more of the incremental fixed carry cost of those facilities. In addition to these gains, corporate overhead scaled by 40 basis points year-over-year as a result of our disciplined management of G&A spend and tight cost controls. At the same time that we are scaling our base costs, we continue to invest in the future. This includes the upfront investments we began making in the second half of 2021 and the personnel and technology needed to support the growth and profitability initiatives that we have detailed for you on this and prior calls. This contributed approximately 90 basis points of deleveraging in Q3, which is a 20 basis point sequential improvement from the deleveraging that we saw in the second quarter. As a reminder, while the growth-driving investments we make show up in our SG&A expenses today, the benefits will be realized over time through incremental top line growth and gross margin expansion. Third quarter advertising and marketing expense was $177.1 million or 7% of net sales, a 20 basis point increase over the third quarter of 2021 and a 110 basis point sequential increase compared to the second quarter of 2022. As we have said before, our marketing investments are ROI driven and may fluctuate from quarter-to-quarter depending on market conditions. In Q3, we saw the opportunity to make incremental investments across a full spectrum of marketing channels and we lean into those opportunities to maximize long-term gains in terms of active customers and top line growth. Overall, our marketing spend remained within the 5% to 7% of net sales range that we articulated on our last call. Wrapping up the income statement, third quarter net income was $2.3 million, a year-over-year increase of $34.6 million. Net margin expanded 160 basis points to 0.1%. Third quarter adjusted EBITDA increased to $70.4 million and our adjusted EBITDA margin expanded 250 basis points to 2.8%, which we believe clearly demonstrates the operating leverage that we are unlocking as we realized the benefits of higher gross margin and accelerated scaling of SG&A expenses. Moving on to free cash flow. Third quarter free cash flow was $69.8 million, reflecting $117.4 million in cash flow from operating activities and $47.6 million of capital expenditures. Capital investments were primarily comprised of investments in our automated FC and Reno and ongoing technology projects. We finished the quarter with $675 million in cash and cash equivalents and marketable securities, which is $68 million higher than our cash and cash equivalents balance at the end of last quarter. This quarter, you will notice that our balance sheet includes $297 million of marketable securities. Starting in Q3, we took advantage of rising short-term interest rates to redeploy excess cash from overnight deposits into highly liquid commercial paper and short-term treasury bills. At the end of Q3, we remain debt-free and between cash on hand, marketable securities and our availability on our ABL our liquidity currently stands at over $1.1 billion. That concludes my third quarter recap. So, now let me cover our fourth quarter and full year 2022 guidance. As 2022 winds down, the resilience of consumer spending in the pet category continues and Chewyâs value proposition remain as compelling as ever. Our current outlook for the balance of 2022 assumes no material change from current trends in the macro environment. We are increasing our full year 2022 guidance to incorporate our Q3 results and a tighter range of expectations for Q4. We are also raising our full year adjusted EBITDA guidance to reflect our gross margin and leverage in SG&A as reported through the third quarter. We expect fourth quarter net sales to be between $2.63 billion and $2.65 billion representing year-over-year growth of approximately 10% to 11%. We are raising our full year 2022 net sales outlook to a range of $10.02 billion to $10.04 billion representing year-over-year growth of approximately 13% and over $11 billion in absolute dollar growth compared to 2021. We are also raising our full year 2022 adjusted EBITDA margin outlook to a range of 2.3% to 2.4%, up from our prior range of 1.75% to 2%. As you update your models, here are a few housekeeping items to keep in mind. We now expect full year 2022 gross margin to expand by approximately 90 to 100 basis points from our full year 2021 gross margin of 26.7%. While we expect Q4 gross margin to improve year-over-year, it is likely to come in somewhat below Q3 due to seasonal factors like higher promotional activity and fewer opportunities to achieve freight and shipping efficiencies amid higher holiday volumes and peak season surcharges. In terms of CapEx, year-to-date CapEx is running at 2.3% of net sales. As we articulated on prior calls, the higher CapEx this year reflects a pull forward of payments on our next round of FC projects given longer project lead times. We now expect full year 2022 CapEx will come in slightly below our previous expectation of 2.5% of net sales as some anticipated spending shifts into 2023. We now expect to generate approximately $50 million to $100 million of positive free cash flow in 2022, given our revised profitability and CapEx outlook. Q3 results demonstrate Chewyâs ability to expand margins in growth profitability in the current macro environment. This is a direct result of our sustained track record of making targeted investments in areas that enhance customer experience, grow our top line, expand margins and improve free cash flow. We believe our unwavering customer centricity, combined with our sharp operational execution will enable us to continue extending our industry-leading position in pet. Thank you, sir. [Operator Instructions] Our first question comes from the line of Doug Anmuth with JPMorgan. Sir, the floor is yours. Thank you. Thank you for taking the questions. I have two. Just I guess, first on the 4Q revenue. Can you just talk about the deceleration versus 3Q and if there is anything in particular driving that or anything that youâre seeing in terms of trends quarter-to-date or during the holidays? And then second, the accelerated scaling of SG&A expenses. Where do you think youâre seeing the biggest gains across warehouses and automation and just overall logistics? Thank you. Hey, Doug, itâs Mario. Iâll start off with the Q4 guidance. So as youâve heard us say before, our guidance doesnât anticipate to take into consideration all the data that we have as of right now, when we look at the fourth quarter, weâre considering the fact that hard goods seem to make a bigger piece of the â of sales usually in the fourth quarter. Seasonally, Q4 tends to show a little more heavily towards hard goods given the holidays. And while we saw some demand firming up in the â between Q2 and Q3 generally speaking, demand for that category remains relatively soft compared to non-discretionary demand in things like consumables and healthcare. And itâs those headwinds produced by that softer discretionary demand thatâs likely to keep net sales growth rates below what we saw, for example, in Q3. Also recall that last year, Q4, we had a bit of a boost from the Omicron search in December and January. So thatâs an impact of higher comps last year regarding Omicron. Now that all said, look, the midpoint of the fourth quarter guidance is still it suggests over $250 million increase year-over-year and the quarter is off to a good start. And if you look at the full year, you see that our guidance now for full year 2022 is about 13% growth over $1.1 billion growth in dollar terms year-over-year and more than double the revenue over the last 3 years. Hey, Doug, this is Sumit. Iâll take the second part of the question. You said whatâs contributing to accelerated SG&A. You also said logistics. Iâll take both logistics initiatives are rolling up through gross margin, but Iâll explain as I kind of go through. On the SG&A scaling, so things that are in play here. One, the benefits that weâre getting from automation, which we rolled out a couple of years ago are really starting to come through now. So if you heard me talk about kind of a physics analogy in the past where I said there is a lot of potential energy conserved in the system, which once we start unlocking turns into kinetic energy and thatâs kind of what youâre seeing flow through. So basically, the two fulfillment tenders that we launched last year are fully ramped. We pushed nearly third of our volume or just a little under 30% of our volume through that network. We know the third one is still ramping and we realized half of our 120 basis point leverage to the accelerated ramp of the fulfillment centers. The ramp is also helped by the fact that our inventory positioning is improving both as a result of our work and as a result of improved in-stock levels. And so when you do that, you actually create density in the fulfillment centers that allows you to be more productive and the labor situation has been fairly stable. So when you put all of that together, it allows us to leverage our network in a manner that we essentially planned it or built it to begin with. So thatâs the fulfillment center portion. Underneath of that, weâre also getting operating leverage as a result of higher basket sizes. And as incremental volume flows through, thatâs the 20 basis points that Mario talked about today. And then third, of course, the G&A component that is built in, strong OpEx management strong controls on kind of spending, headcount, travel, relocation, anything basically that you need to run the company in a disciplined manner. The team is all over that. So that as contributing to SG&A. On the freight and logistics initiatives, there are basically three that weâve talked about. One, our work with inventory and positioning allows us to better position inventory. Weâve gotten inventory in lower zones that allows us to ship lower distances that allows us to essentially be more efficient with our shipping cost. Number two we are also improving package density that allows us to improve cartonization per order that allows us to extract that benefit. Number three, the middle mile initiative is contributing. Again, it helps us consolidate orders and deeper inject into carrier networks. And then for the work with our routing centers allows us to move inventory more effectively, that hits the inbound freight side, which also rolls up to gross margin. So as a result of these four, youâre seeing us leverage kind of the cost on the freight side, and the previous comments were relative to the SG&A side. Thank you for your question, sir. Our next line of questions comes from the line of Mark Mahaney with Evercore. Sir, the floor is now yours. Okay, thank you. Let me try two questions. First, the sponsored ad revenue opportunity, have you sized the TAM before? And just talk about the which kind of advertisers you would expect to bring on to the platform? And then in terms of the net active customers, this growth you had this quarter after two quarters of decline. And I know there is a factor here, which is kind of moving beyond the COVID cohort a little bit. Should the interpretation be that youâve now kind of at the end of that tunnel and that youâre back to kind of more normalized churn levels across the customer base and the gross adds kind of stay high that we should now expect a consistently ongoing growth in net active customers? Thank you. Hey, Mark, Iâll take the first one. Mario will take the second one. So on sponsored ad, since itâs just launched and still in beta, we havenât fully kind of shared the financial benefits. The way we would think about it is we compare ourselves to other companies that run single category or sponsored ads in single category. So I think that would become a reference. And then we would also consider the power of the Autoship program that allows us to build repeat purchase and loyalty into brands that allows us kind of an ROI, which is just different and more powerful than weâve seen in the industry. So you put those two together, the type of products that kind of lends itself to consumables, healthcare, all products where you can build loyalty, whether itâs search demand, whether itâs direct index on the website. And weâve seen basically great response from partners from that standpoint right now. So weâre prioritizing those too. Hey, Mark, on your second question about active customer growth, in the third quarter, you saw that we did increase the active customer account by about 30,000 and up about 100,000 year-over-year. That was in line with our expectations. The increase really is a result of a small uptick in the number of gross customer adds in the quarter and a small reduction in the number of churn customers. As to your point, we continue to lapse the very large COVID era cohorts that we acquired in â20 and â21. You know that, obviously, we donât guide to active customers just as we donât guide to NASPAC. But that said, our expectations for active customer growth going into the fourth quarter, remain generally consistent with what we said on prior calls. And thatâs all reflected in the guidance we provided for sales and the like. Okay. Thank you so much. Thank you, Mario. And Mario, congratulations on 8 years of great success in execution. So wishing you all the best. Thank you for your question, sir. Our next line of questions comes from the line of Anna Andreeva with Needham & Company. Maâam, the floor is yours. Great. Thank you so much. Good afternoon, guys and congrats great results. Two quick questions from us. On higher pricing, I know you have more of a portfolio approach towards managing that. Just any initial thoughts on how we should think about your price versus unit relationship into â23. And as you start lapping the price increases implemented this year? And then secondly, on advertising, itâs fluctuated in the last couple of quarters. Can you talk about whatâs implied for advertising for the fourth quarter? And should we think the 5% to 7% range is still the right level for the business as we look out? Thank you. Hi, Anna. This is Sumit. Iâll start, and if Mario has to add anything youâll jump in here. So first of all, pricing and unit growth contributed about equally to sales in Q3. We grew pricing, but we also grew units meaningfully as we move through Q3. And in terms of lapping next year, so one, obviously, this year, weâve seen increasingly elevated pricing as we moved from Q1 through Q3. And so the first half of year, there is still positive favorable comps to be lapped. So thatâs one. Number two, we are expecting incremental costs, as weâve shared in the previous calls, weâre expecting incremental cost and therefore, more inflation to be passed through into the industry as we enter 2023. So we believe thatâs how the pricing environment would look like as we get out of Q4 into the first half of 2023. And then, of course, in a similar manner where weâre growing units which is actually structurally different than how industry growth occurred in Q3. In Q3, industry growth occurred primarily on the back of price. But at Chewy grew units and price. We expect to do that in Q3 in â23 as well. Yes. Anna, to your second part of the question on marketing spend, we were in the Q4 marketing as a percent of net sales to be similar to Q3 and for the year to be in that 6% to 7% range, given where we are year-to-date. Thank you for your questions. Our next line of questions comes from the line of Brian Fitzgerald with Wells Fargo. Your line is now open. Thanks, guys. 30% of volume handled by the automated FCs. Any update or how should we frame up the cost savings that you realized from that? And then as you ramp up to automation and efficiency and then you drive these logistics improvements across the network it drives a better user experience, right? And so have you seen anything in terms of positive impact on engagement, order frequency NASPAC as a direct result of what youâre doing to the network? Hey, Brian, this is Sumit. So the improvement in how do we think about potential there. So I think you were asking a cost question. Weâve seen favorability to somewhere between 18% and 20%. So the volume fulfilled out of the 2G network was roughly 18% to 20% cheaper than the volume that we fulfilled from our first one legacy 1G network. And two, weâre still ramping volume into the third fulfillment center. So there is incremental volume leverage that we expect to gain, and weâre still continuing to scale our costs. So there is incremental productivity improvement that we would expect from our network. So all positive story there. In terms of the impact that weâve seen we have. I mean, weâve seen an acceleration both in â itâs reflected in the gross adds number. Itâs also reflected in the reactivation number as weâve improved both our inventory positioning and as weâve improved CX. This is not an exact science. So getting down to specific numbers is a little bit hard, but you can clearly see it in the way that our network plays out and our ownership rates, both kind of net and gross work out there, so, yes. And Brian, if I can add one more thing meter, if you look at where we are today, we have â you saw the numbers we recounted we reported in terms of the benefit in SG&A from these three FCs. And as a reminder, Reno just opened more or less at the end of second quarter. So itâs still ramping. So there is three FCs, one of which is ramping out of 13. And over the next year or a year, 18 months, weâre going to see a couple of more FCs open up that are also automated. So these are layers of profitability, as we said before, as we get more and more of our volume through these automated facilities over time. Brian, if you add these up, like Reno has several basis points of improvements to give when it ramps. The next two, we size to that 30 to 50 basis points also said there is 20 to 30 basis points of utilization capacity, which is operating leverage, certainly get released. So when you add that kind of improvement, along with the fact that we continue to push more volume and expect lower cost weâre satisfied with the journey so far. there is more to come. Thank you for your questions, sir. Our next line of questions comes from the line of Corey Grady with Jefferies. Your line is now open. Hi, thanks for taking my questions. I wanted to follow-up on the pricing youâre talking about in 2023. Can you say more about what youâre hearing from brands and commodity costs and additional pricing and what youâre expecting in terms of the magnitude of pricing next year? And then on hard goods, so as we come off the COVID adoption cycle and sort of think about a potential recession in 2023, how are you thinking about a recovery in that segment? And what are the leading indicators you would look at to gauge recovery and hard good demand? Thanks. Sure, sure, sure. So pricing conversations, itâs early to define or to put a range on the magnitude. So perhaps we could discuss that on the next earnings call when we have a little more clarity when we meet in March. We are expecting pricing to start rolling through in the Q1 time frame. So this will actually become more clear as we kind of wrap up the year and get into next year. So far, weâre not hearing of multiple rounds of increase. But then again, as we get more information, we will definitely pass that on. If you look at 2022, weâve had four rounds of cost increases over the last 15 months. starting from Q3 of 2021 through Q3 of 2022. We donât expect multiple rounds of cost increases coming, but there is certainly incremental cost that needs to pass through the system first half of next year. Your second question on hard goods, the inputs that are driving the hard goods lag essentially are a couple here. One is itâs tied directly to the consumerâs mindset to inflation pressures and consumer mindset to pullback spending from discretionary categories. Number two is refresh cycles on hard goods are typically longer. So for example, if you recall the last 2 years, every bed in America pretty much got letâs say, a bad refresh, all â every new puppy got to create, et cetera. And so these refresh cycles are generally 12 to 15 months long, and they donât get as refreshed as quickly refreshed as toys would, for example. So there is a little bit of that, we have to lapse as we play the kind of the timescale here. And the third one is pet household formation. When you look at these options on Lanquishman, they're basically flat to very slightly down from a year-over-year perspective. So as petrol household formation returns to normalcy, which again is tied back to the inflationary environment, as these inputs correct themselves, we expect hard goods growth to return to normal. Thank you for your question, sir. Our next line of questions comes from the line of Lee Horowitz with Deutsche Bank. Your line is now open. Great. Thanks for the question. Maybe another one on NASPAC, for the quarter, can you help us unpack a bit how much of the NASPAC work you saw in the quarter was from share of wallet gains versus just general inflationary path and the pricing environment? And then I know we will have this conversation next quarter again. But just at a high level, when you think about the path forward for NASPAC growth next year, we will have some pricing pass-through, but youâre obviously comping itâs a big inflationary year and donât necessarily have, say, a big â22 cohort thatâs going to be in that, call it, rapid paces NASPAC next year. So how are you thinking about the inputs for NASPAC growth next year? Thanks so much. This is Mario. Iâll take that one. I can go on for a while on this answer. But look, let me kind of give â purpose there was a couple of things, as we mentioned in the prepared remarks, our NASPAC did reach another all-time high in the third quarter at $477. If you take that number back to Q1 2020, thatâs a 34% increase over the last couple of years, so significant increase in grain of share of wallet there. The other thing is from a spending perspective, if youâre just comparing to customers that have been with us for a long time versus more recent customers. The customers we added during the last couple of years they are displaying similar spending patterns to customers we acquired back to the pandemic. And what that simply means is that they spend more the longer they stay with us. Weâve seen that for several years. In fact, weâve seen it back to the first cohort as we projected out to today. And I mean the first cover back in 2011 to today. Also consider that our current NASPAC is, as I said, about $477. And if you look at our oldest cohorts 11, 12, 13, they are spending about $1,000 a year with us. Add that to the fact that 60% of customers today have been with us for three years or less. So, think about what that means, there is this long curve that takes you from first year about $150, $200 to about $1,000. And on average, today, our cohort is -- our cohorts are fairly young on a weighted basis, and the average NASPAC is $477. So, there is a tremendous amount of upside potential to how much more share of wallet we can gain over time from those customers. Of course, we help drive NASPAC growth by adding new product categories like healthcare. We expand our catalog. Now we have over 100,000 products in our catalog. And we also make it easier to â for customers to discover product and drive more cross-category shopping, so all of these things that we are doing to continue to gain that share of wallet. But again, if you look back at over the years, cohort-after-cohort, they have these nice long curves as they stay, they spend more with us, the longer they stay with us. Sumit, anything you want to add there? Yes. I think Mario hit it. If you look at the business unit level, we have several growth factors that are still growing to deliver scale and contribute to positive NASPAC development. I mean if you look at healthcare, thatâs a rapidly developing $40 billion TAM and less than 15%, 20% of our customers are active customers. And when you look at private label, there is an opportunity to ramp that up. We just launched Fresh & Prepared category, which is a high NASPAC driver in sales. Our premium and specialty businesses have plenty of runway in front of them. On top of this, our B2C and B2B services, such as telehealth or connect with event compounding, Practice Hub, shelters, pet insurance. They all remain in nascent stages and early stages. And then on top of that, new initiatives such as sponsored ads, etcetera, are all â these are all early kind of vectors that we believe can really compound the value proposition that we deliver and capture kind of the full life cycle output, offer customers engagement with our platform. So, we are super bullish about this. Thank you for your questions sir. Our next line of questions comes from the line of Steve Forbes with Guggenheim. Your line is now open. [Indiscernible] on for Steve Forbes. Just a quick question on automated FCs, I see you mentioned 30% of the volume is shipped from automated. Any color you can give us on what that might look like at maturity? And any color you can give on additional investments either in Reno or additional facilities into 2023? Thank you. So, in terms of additional investments, we have talked about launching two new fulfillment centers, which will launch in the next 12 months to 15 months. So, one will definitely hit â23, one might hit towards the end of â23, perhaps early â24. But in the next 12 months to 15 months, we have shared with you two more fulfillment center launches, and both of them are automated. In terms of volume entitlement, of course, by the nature of the fact that we would have at that point, 15 fulfillment centers and 5 of the 15 would be automated linearly, we would say 30% of the volume, but we are already there. So, what you can tell is that we are densifying the region as much as possible to be able to shift or place these fulfillment centers closer to customers and then pack them up with as much volume as possible. If you recall in one of the previous scripts, we have said we expect fixed output â throughput per square foot to improve 25% is the efficiency that these buildings are giving us at overall 30% improvement in kind of full CPU or full cost per unit measure. And so our goal will be to push as much volume as possible. The constraint there is optimally locating inventory, and of course, corresponding to normal demand distribution that exists in the country. So, more to come as we continue to scale this. Thank you for your question sir. Our next line of questions comes from the line of Eric Sheridan with Goldman Sachs. Your line is now open. Thanks so much for taking the questions. And maybe a two-parter, if I can, compared to what you have seen historically, is there any way to frame or quantify what you are embedding in the forward guidance for promotional activity or competitive intensity in the next quarter over the holiday period versus what you have seen historically? And is there any sense that you might see a different bent to competition in the industry given some of the inflation dynamics and consumer wallet dynamics out there broadly? Thanks so much for the color. Eric, compared to Q3, the promotional environment is weighted in Q4, this is normal seasonal pattern we see every year heading into the holidays. But within the context of Q4 itself, we believe the promotional environment remains rational and more or less in line with what we have seen in previous holiday periods. And looking forward, we donât expect the levels of promotions will intensify beyond the current levels that we are seeing. On your second question, we arenât â do we expect competitors to add differently given inflation. The fact that the industry, primarily on the consumables and healthcare side is mapped, I think it allows a [Technical Difficulty] discipline in a market. And secondly, supply chains havenât yet fully recovered. So, in stock positions are certainly improving, but they are not back to normal to be able to expect hyperactivity. And then third, when you look at hard goods sales that are generally the elastic category, currently, there isnât much elasticity to be driven given the consumersâ mindset plus the inventory there, it doesnât â like when you look at the contribution from a contribution point of view, it makes up about 15% of our overall sales. So, we are a little more insured there from a spend point of view. Thank you for your question sir. Our next line of questions comes from the line of Dylan Carden with William Blair. Your line is now open. Thanks a lot. I guess you guys could decide today to provide any detail on the other revenue line item. I know there is a couple of moving parts there, particularly if you are seeing trade down or any benefit more broadly in the last several quarters in the private label space? And any update on the partnerships with vets or Practice Hub sort of how pharmaceuticals are trending? Thanks. Hi Dylan, this is Mario. I will take the first part of that. So, as you know, we donât desegregate that other line item, other revenue item. But in there, we include not only our pharmacy, but also our private â all of our proprietary brand sales specialty, meaning anything that is non-cat type of product, meaning other peptides. As you would expect, that you saw in the hard goods, I will give you context rather than specific numbers. But as you saw in hard goods, though that was an improvement quarter-over-quarter in the terms of decline, a lot of our sales in the private brand space are going to be hard goods. So, just like we sell with third-party or national brands hard goods declined year-over-year. You would have expected something similar on the private brands and other thing. Our healthcare offerings, our pharmacy especially continues to perform really well and to grow faster than the rest of the business. So, I will say that. And then we have not seen trade downs. I think that was part of your question. Your second part of the question was on Practice Hub updates or wet initiatives. Look, we are pleased with the update. Practice Hub scale is up 30% quarter-over-quarter from the last time we met you. So, we continue to deepen our presence, our engagement and our penetration with the vets and in a positively oriented manner. Connect with a vet continues to scale well. We are pleased with insurance. We are very early in insurance. So, these are generally arcs that are certainly beyond the 1-year mark. These are verticals that we think of in terms of 3-year increments, just as we did pharmacy when we launched it back in middle of 2018, â19 timeframe. So â but overall, we are pleased with the way that we are building out the healthcare ecosystem, and we are bullish about our place in this. Thank you for your question sir. Our next line of questions comes from the line of Justin Kleber with Baird. Your line is now open. Hey, good evening. Thanks guys. Just a follow-up to the question on promotions. If we look at gross margin, you are going to end this year about four points above â19. Can you help us understand how much margin has benefited over these past 3 years from this more benign promotional backdrop? Just so we can assess what a normalization in the environment could mean if it does happen for gross margins in â23 and beyond? Yes. No, I think thatâs exactly right. I think itâs de minimis and I would say where you see the gross margin improvement over time is everything we have talked about. It is getting into or expanding our higher-margin categories, healthcare, hard goods. It is the embedded business getting bigger, gaining the scale. It is gain sharing the benefits across our entire vendor supply and inbound and outbound, it is all those drivers there, but not promotional environment doesnât really affect it not materially here. Okay. I guess and why the big step down implied in 4Q on gross margin, itâs â there is always a promotional holiday, right? So, I guess it sounds like there is not a year-over-year change in promotions that you are anticipating this holiday. So, if itâs not been a big benefit, I guess I am trying to understand why the step down in margin here in 4Q relative to the 28.4 in 3Q? Sequentially, I mean margins of course, Q4 is a seasonal period. So, you would expect increased promotional activity. And we are seeing that. We have seen increased promotional activity as we move sequentially out of Q3 into Q4. On an annual basis, we will be stronger this quarter relative to last quarter, relative to the same quarter last year. Yes. So, between that and the peak surcharges that are happening during the holidays, and thatâs expected, we wouldnât have seen that in the third quarter. We would see it more in the fourth quarter. So, there are different drivers there, exactly. Now, I think maybe the other part of your question you didnât ask, and I will answer it anyways was, if you look at what we are looking at for the full year, we came into this year expecting to be basically we said broadly in line. We expect it to be more or less flat year-over-year on a full year basis. And now we are guiding to a 90 basis point to 100 basis point improvement in end gross margin. So, we are seeing certainly a lift there as we go through the year. Got it. And just an unrelated question, you mentioned price â another round of, I guess cost increases and therefore, price increases that need to be pushed in the system. If we eventually enter a period of deflation as input costs decline, how do you guys think about the ability to sustain all this pricing thatâs been taken here over the past few years, particularly in the consumables category? Thank you. Yes, we think pricing will sustain because most of the pricing is getting translated or applied in the industry through MAP pricing and MAP prices are generally sticky. So, you see less variability and therefore more stability at the same time. So, we expect these to be sticky. Thank you for your question sir. Our next line of questions comes from the line of Chris Bottiglieri from BNP Paribas. Your line is now open. Hey guys. Thanks for taking the question. You made a small bolt-on acquisition of PetaByte Technologies in November. Can you talk more about what capabilities this gives you and how it fits into your broader ambitions in the healthcare space? Yes. Sure. So, PetaByte is a relatively small acquisition of a cloud-based provider of technology solutions for the vet sector that we completed in November. We are excited to welcome the PetaByte team into the Chewy family. And we see opportunities â significant opportunities associated with adding PetaByteâs technology to our broader portfolio of healthcare service offerings. And today, there is not much more to comment because we are â itâs early stages and work has just begun, but we look forward to sharing more with you in the quarters to come. Got it. Okay. Thanks. And then I guess the next question is, can you just talk more about the â I guess, the basket size is what you are seeing there? Are you seeing your basket size has grown. It sounds like discretionary is under pressure. So, itâs like you are adding more discretionary. Whatâs driving the bigger basket sizes, are people trading into bigger package sizes in order to save more money per unit is inflation, or is this just â are you finding more ways to attach like healthcare products and stuff like that, and thatâs whatâs driving? Itâs a combination of pricing strength and our complementary growth on the healthcare side. We have come up with several different complementary products to add to the simple consumables and supplies purchase. So, as attach rates for highly discretionary categories such as toys, perhaps is near-term impacted, right. The attach for pharma drugs, other products such as insurance, telehealth, these are all additive to the basket size. Autoships have higher basket sizes than non-order ship orders and our ownership percent has continued to increase. So, thatâs the contributor in improving basket sizes as well. But this is all in place. Thank you for your question sir. Our next line of questions comes from the line of Seth Basham. Your line is now open sir. Thanks a lot and good afternoon. My question is on customer acquisition costs. You know that gross customer adds increased 6% sequentially, while your advertising and marketing expense increased 23% sequentially. So, your tax was up sharply, were your LTV expectations on customizations changed that much from the last quarter to this quarter to maintain ROI expectations on new customers? Hey Seth, this is Mario. I will start off and maybe Sumit can cover something. The customer, you said that our gross adds were up 6% quarter-over-quarter. So, expand on that one, I am trying to make sure that I answer your question correctly. Yes, the gross adds, that is both new customers and customer reactivations. So, it is a combination of both customers that are lapsed and coming back and also gross adds. I wouldnât try to tie the two directly together. We have gotten this question somewhat similar before on the active customer count increase and comparing that to investments in marketing. But I would say itâs â you have to sort of disconnect the two. They are not â they shouldnât be tightly connected that way. This is Sumit. We are continuing to see NASPAC growth, LTV growth. So, when you look at Q3, there were multiple areas that the spend actually went in â on top of the increased CPC or increased ad cost that we see in Q3, which you typically do coming out of a lull in Q2 as you gain as everybody tries to gain kind of mind share of the consumer in a current environment where the consumer pool remains shallow. So, CPCs have continued to increase. But beyond that, we saw opportunities to invest in three different areas where we did. First is customer development, focused on increasing engagement and expanding NASPAC. So, that was part of our investment. Number two, reactivating previously churned customers. And in Q3, we saw a double-digit year-over-year increase in customer reactivation. And then three, there is always some experimentation and testing that we are doing with new channels that are designed to drive broader reach and awareness of the Chewy brand and positioning that right in front of the holiday season as we gain more traction with customers is just a prudent thing to do. So, all-in-all, we are â we â in the way that we spent the money, we kept it within the 5% to 7% range that we have talked about before, and we were satisfied with the outcome here. Got it. Okay. So, your TAC was up sequentially, but in line with expectations to maintain ROI and the customers you acquired in this quarter relative to last? Thank you for your question sir. I would now like to pass the call back to Mr. Sumit Singh for any closing remarks. And with that, we will conclude todayâs Chewy third quarter fiscal year 2022 earnings call. Thank you for your participation. You may now disconnect your line.
EarningCall_1820	Good day, ladies and gentlemen, and welcome to the POSaBIT Systems Corporation Third Quarter 2022 Earnings Call. All participants have been placed on a listen only mode and the floor will be open for questions and comments after the presentation. I would like to begin the call by reading the Safe Harbor statement. This statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call with the exception of historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report and subsequent filed reports, as well as in other reports that the company files from time-to-time with SEDAR. Any forward-looking statements included in this call are made only at the date of this call. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events, or circumstances. The company may also be citing adjusted EBITDA in today's discussion. Adjusted EBITDA is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The company defines adjusted EBITDA as net income or loss generated for the period as reported before interest, taxes, depreciation and amortization, it's further adjusted to remove changes in fair value and expected credit losses, foreign exchange gains and/or losses and impairments. The company believes this is useful metric to evaluate its core operating performance. Thank you, James, and welcome, everyone. As a reminder, all numbers that I'll be talking about today are in U.S. dollars. For the third quarter, we delivered strong revenue growth, both year over year and sequentially. We had our first $10 million plus revenue quarter, finishing at $10.3 million. Revenue was up 62% over the third quarter of 2021 and 26% over this year's Q2 results. Importantly, we remain on track to achieve our full year guidance for 2022 and are continuing to build upon our success for long term growth into 2023 and beyond. I know that I say this on every call, but it's important to stress that POSaBIT has doubled or nearly doubled our revenue each year since 2017 and are on track to continue this trend in 2022. We set a record for monthly payments revenue in each month in Q3 and this trend has continued into Q4. For the third quarter, we once again significantly exceeded the cannabis industry growth rates, which still remain in the single digits or negative growth for many, as well as outperformed all our competitors. Further, we continue to expand our partnerships, evolve and improve our platform and license our geographic footprint to reinforce the long term prospects for our business. This is in stark contrast to others in the industry. Now let's discuss what we're seeing in the cannabis market. As I mentioned already, many of our competitors are struggling. Major restructuring, employee layoffs and top management changes are driving what was once an extremely high industry valuations in both the private and public sector to what are now far lower valuations today. The overall environment is increasingly favorable for companies like POSaBIT who have a track record of demonstrating great results over five years, have capital in the bank and are moving toward full EBITDA profitability. It is times like these that separate the companies that have real results like ours from those whose value was manufactured by overly broad promises, but fail when it comes to results. As a result of this, it will be a time of continued execution and growth for POSaBIT as we capture more and more of the market during this distressed period for many in the industry. This quarter, we continue to see the number of merchants using POSaBIT growth and they are increasingly embracing the idea that a robust integrated payments and point of sale solution are crucial to the survival of their business. Across the industry, the average sales ticket continues to decline slightly quarter over quarter. And with new retailers emerging, competition is increasing, merchant demand open technologies like POSaBIT that can support their business, provide them the software tools they need, while also offering an open platform that allows merchants the choice of any third party solution they desire. The positive platform provides complete freedom to the merchant. Earlier this month, voters in Maryland and Missouri approved legalization measures during the election cycle, bringing the total to 21 states and the District of Columbia that now allow recreational use cannabis. The market opportunity is clearly expanding and POSaBIT is well positioned to enter these new markets. Now let's shift our focus to new business that was created in Q3. As you all may recall in September, we signed the largest partner deal in the history of our company, a four year $20 million guaranteed software license agreement with a large cannabis technology provider from royalty payments to POSaBIT. This created a significant new stream of guaranteed reoccurring revenue over at least the next four years and quite possibly beyond that. Even more importantly, our investors will be pleased to know that because it's a licensed agreement for software that is already developed, the revenue essentially falls to the bottom line, creating $5 million of non-dilutive capital each year for the next four years. All in all, the economics of this agreement are highly attractive for the company. It is important to note that this deal was only possible because POSaBIT is an open platform, meaning, all cannabis technology companies in the industry are welcomed to integrate with POSaBIT for both our point of sale and our payments platform. This open platform approach is a key strategic differentiator in the commercial market and just as important, a key driver of value for our shareholders. In terms of merchant agreements, we now service more than 500 merchants, which is an increase of nearly 70% since the start of the year, with new locations being added regularly, including several large MSOs or multistate operators. Our 202 goal of entering eight new states will soon be achieved. We began the year with operations in 15 states, we are now live in 21 states and are under contract with merchants with three more which are scheduled to go live before years end. As we head into 2023, we look forward to adding many more states to our existing list with a focus primarily on the eastern seaboard. Earlier this month, we launched and showcased POSaBIT 2.0, the newly designed version of our POSaBIT point of sale client at MJBiz, one of the industry's largest conferences. The feedback was overwhelmingly positive. It is our most intuitive experience yet with a thoughtfully redesigned user interface, enhanced front end features, new and user centric improvements to its recommendations and preferences platform and enhanced reporting and insights on the back end. Overall, it elevates the day to day experiences of budtenders, managers and owners, whether they are small retailer or growing MSO. POSaBIT 2.0 is now live with a handful of beta customers and we plan to roll it out to our entire customer base over the next month. This morning, we announced our new integration of our platform with Onfleet, the largest cannabis delivery company in the market today. Onfleet is the trusted last mile delivery solution for thousands of companies across dozens of industries, including cannabis. Importantly, the integration is two way, meaning all delivery statuses are reflected in both systems to provide a real time ability to track consumer deliveries. Through this relationship, POSaBIT now fully supports consumer delivery capabilities for all states that allow for this. More information about this newly formed partnership can be found in today's press release. I will briefly touch on safe banking since I assume most of you are tracking this legislation. All indications are pointing to the passage of some form of safe banking in 2023. Given the split Congress, some believes this may occur in the next month during the [lame duck] (ph) session. We do not believe that is the case. However, we are very excited and supportive of the majority of the components in the most recent version of safe banking. POSaBIT will be in a great position to continue to support our current merchants with best in class payments technologies, as well as take advantage of a significant increase in the percentage of transactional sales. We continue to track safe banking closely and have already set up the ability to provide credit card processing if and when it becomes available to the industry. Before I hand it off to Matt to go over our Q3 financials in detail, I would like to briefly share some information about our overall capitalization. At POSaBIT, we have raised just over $11 million of external capital over the last seven years since the company was founded in 2015. We have used that limited capital to build a business that is now approaching $40 million in annualized revenue, which is a testament to our team's ability to execute and generate results. Our business continues to run lean with just under sixty employees, and we do not foresee a need to increase staffing significantly to support the next step up in our growth. We ended the third quarter with $8.2 million in cash and minimal debt. We remain focused on growing the top line and achieving adjusted EBITDA profitability. Equally important, we are also focusing on maintaining a strong balance sheet to support our goals as the largest payment infrastructure provider in the cannabis industry. With that, I'll now turn the call over to Matt Fowler, our CFO for a more detailed review of our financial results for the quarter ending September 30, 2022. Thank you, Ryan. Transactional sales for payment services totaled $142.6 million, up 32% compared with $108 million in the third quarter of 2022. Annualized, we are now at $568 million in transactional sales. Transactional sales is a non IFRS measure and one of key drivers for our business. Total revenue was $10.3 million up 62% compared to $6.4 million in the third quarter of 2021. Gross profit was $2.9 million or 28% of revenue, more than doubling on a dollar basis compared with $1.4 million or 22.5% of revenue in the third quarter of 2021. Sequentially, gross profit on a dollar basis was up 48% compared to Q2 2022. Operating expenses were $2.9 million compared to $312,000 in the prior year's quarter. The primary driver of the increase in operating expense was administrative expense of $2.5 million. Administrative expenses were primarily made up of our people costs, which were $1.9 million for the quarter. To a lesser extent operating expenses increased due to higher professional fees of $618,000 for the quarter. The increase in professional fees was mainly driven by legal work tied to our license agreement and large merchant and partner contract negotiations. We also had $518,000 in non-cash expense from share based compensation compared to $277,000 in the prior year quarter. Net loss was $1.2 million, inclusive of the negative impact of $1 million non-cash change in the fair value of derivative liabilities. This compares with a net loss of $6.9 million inclusive of the negative impact of the $7.9 million non-cash change in the fair value of derivative liabilities for the third quarter of 2021. The mark to market embedded derivative liabilities is tied to our convertible debt and is a non-cash accounting entry required by IFRS. It could cause significant differences in net income or loss quarter to quarter. Fluctuation to this line item of our income statement may be more extreme during periods of increased volatility in the price of the company's stock. Adjusted EBITDA loss was $290,000 or negative 2.8% of revenue, compared to some adjusted EBITDA loss of $439,000 or negative $6.9 of revenue in the third quarter of 2021. Cash on hand at the end of the third quarter was $8.2 million, this compared to $4.4 million at the end of 2021. September thirty cash balance includes $4.4 million received in August as part of our $20 million technology licensing agreement with $4 million net proceeds through from the private placement. During the quarter, cash was used primarily for working capital needs into purchase equipment, which is either sold or rented to our merchants. Our debt balance means low at $248,000 of long term debt comprised of an SBA loan and convertible notes. As discussed in our Q2 earnings call, we completed the private placement with existing institutional shareholders that netted us approximately $4 million of proceeds. The offering consisted of $5,861,941 units of the company at a premium to market price pursuant to the offering. $4,500,000 units were issued to existing investors of the company who concurred with the closing of the offering exercise $600,063 previously issued common share purchase warrants. Participation by existing shareholders demonstrate their competence in us in our business. We do not have anything new to report about uplisting the company's stock to NASDAQ or another market for trading securities. Other than to reiterate, the positioning of the company so that investors can easily invest remains important to management and the Board. We are also monitoring other legislative developments, including safe banking. It's still too early to note that the latest iteration will gain momentum to pass through the house incentive in the next 12 months, but we remain hopeful. That's it from me, Ryan. I'll turn the call back to you for closing remarks. Thanks, Matt. Let me start with guidance. Today we are reaffirming our guidance for revenue and transactional sales, but are increasing our guidance on gross profit to be $10 million to $10.5 million. For the full year 2022, we expect revenue to remain at $37 million to $40 million and transactional sales for card services of $600 million to $700 million. I want to end with a few comments specific to the industry and why we are so bullish about the future of POSaBIT. In a time when many of our competitors are announcing layoffs and reductions in their guidance, POSaBIT third quarter results were very strong, growing 26% quarter over quarter versus an industry average of 1% or negative results. Our position within the industry remains very positive with many opportunities on the horizon. In times of distress like we have today, strong companies with proven results rise to the top. We remain one of the few or even the only company in the cannabis tech space that is both doubling revenue year over year and announcing forecasted EBITDA profitability in 2023. We have a track record of completing what we set up to accomplish and 2022 is no different. We expect to give full 2023 guidance soon and cannot comment on that yet, as we are still finalizing some important details around the forecast. However, we do expect to have another year of strong growth and look forward to sharing the numbers with you very soon. Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And the first question is coming from Andrew Bond with Jefferies. Andrew, please proceed. Hi, good evening. This is Andrew Bond on the line for Owen Bennett. Thank you for taking our questions. So first oneâ¦ So first one from our side, could you zoom in on your guide a little bit, specifically what has changed within your internal model versus 2Q that gives you confidence in your raised fiscal 2022 gross profit guide? Yes, I mean, it comes down to -- basically as we grow our processing volumes. I've kind of said this all along. Everything -- it's scalable business. So as we process more, we can actually take more of that to the bottom line, because we get that discount in scale processing. We also see a little bit greater gross margin on our payment processing today that we do with our pandemic solution. So the other big thing I think that drove for this particular quarter is the $20 million licensing deal, which we signed. So we were able to pull in the first part of that and recognize it in Q3. So that definitely helps. Got it. Helpful detail. And then you noted you have a pipeline of 200 additional retail locations and you also noted you're on track with your target to enter eight new states by year end with three new states currently under contract, expected to go live before year end. So a bit of a two part question if I could, Ryan. So first one, are there -- are the three new states under contract included in the 200 store pipeline? And if so, how many stores do these under contract states represent? Well, good question. Yes, in our pipeline, when we state that as far as the opportunities that we're working, it does include merchants in those three new states that will go live between now and the end of the year. As you know, most of large MSO deals cover a lot of different states. And so, as you roll them out, you roll them out in kind of a staggered approach. And so, the good news is for us, we've been rolling out several MSOs and they have locations in these three remaining states. So we know that it's already accounted for as far as the deal is done. It's just a matter of getting out and implementing it. Got it. Helpful. And then the second part of that is, among these 200 stores, are they predominantly larger operators with multiple stores, smaller single state operators with one or handful of stores. Just wondering how or whether the pipeline has evolved over the course of the year in terms of size of client in the pipeline? Yes, it definitely has. I think when you and I talked first quarter, we saw kind of a third, a third, a third, meaning, a third amount of pops, a third kind of two to five locations and a third MSOs. As we start to exit the year, we're seeing primarily all in the multi locations, two to five locations as well as MSOs. So less mom and pop stores and definitely focus more on the larger MSOs and multi-location stores. Doing well. Thanks. So taking a step back, you reiterated revenue and raised gross profit, which -- I mean, to me it feels like a pretty remarkable accomplishment just considering the state of the cannabis market versus, I guess, a year ago when you first gave your guidance, Ryan. So can you just talk about sort of how much the market is deviated sort of over the last year? And I guess to what you attribute your growth in the face of -- I got to imagine this year didn't quite go the way you planned it would from an industry standpoint, right? Yes, exactly. I mean, I think it comes down to a couple of things. I mean, we've demonstrated over our past years that we are physically responsible. We don't get ahead of our skis, so to speak. We hired and we grew because we knew we needed to expand, but we did it in a thought approach. So we brought on new people as we were expanding into new states. So unlike others in this industry that we've seen where unfortunately they have gone out with such large valuations to raise capital and almost puts them in a tougher position because they have to try to generate results at a very faster pace and they have to then bring in more people to do so. We fortunately have this great payments business, which helps self-fund our growth. So we -- yes, we would have had the industry not kind of slowed down like it had. I'm sure we'll be talking and increasing the top end guidance by a significant amount. The fact that we can remain on the numbers that we started the year off with given the significant downturn in the economy and the industry, I think is a testament to our team and our ability to keep bringing on new stores, but even equally important is same store growth. Because as you -- and I've talked about in the past, when we start business with a new merchant, we usually see somewhere like 25% to 30% of the customers using our payments business. Over time, they realize that they can use a debit card and they stop bringing in cash and that tends to grow into the 40%, 45% side of it. So what we saw and what we got the benefit is -- benefit of is same store growth over the year and adding a bunch of new merchants as you saw. I mean, we added 70% more merchants this year than where we ended the year last year. So I think it's just -- it comes down to execution, being smart about how we grow, taking on new stores, but also educating our current base to make sure that we have significant same store growth over time. Yes. No, I think that all makes sense. And again, it's really just phenomenal execution to be able to still deliver in spite of just how much the market has changed, right? It's -- I won't ask you to comment on where we could have been numbers wise, had the market kind of [indiscernible] I guess a good lead is the next one I want to ask you, which is just based on what you're seeing, where do you think we're at as far as the cycle of kind of rationalization and when do you think things kind of get back to stability and you start seeing not so much of deviation between, I guess, dollar sales trends and unit sales trends in the cannabis industry? Yes. So I think what we saw was, last year compared to this year in Q3 a significant drop in the average ticket. If you compare the drop from Q2 to Q3, it's slowed down. So in some ways you can look at it as the actual average ticket sale is flowing down. It's still quite a bit lower than where we were a year ago. But in some ways, we can look at that as somewhat positive news that hopefully this industry is starting to level out a little bit. The other thing I would comment on is, because there is so many companies that started in this space like we've commented before and have raised capital on unfortunately valuations they can't live into right now and have P&Ls that aren't generating the kind of cash that they need to survive. They're living on whatever cash they raise, right? Because they'll have a very difficult time to raise anymore. So these are the opportunities, like I said, a few minutes ago, these are the opportunities where companies like us can take advantage of the situation. And there is definitely roll up strategies in play. As we look at how do we continue to grow aggressively? Obviously, we have a great sales team, they continue to add a ton, but we want to be aggressive and look and see if now is the time that we either do more strategic partnerships, potentially some acquisition capabilities, but this is the time for companies like us that are strong to kind of take advantage of that. Yes. That makes total sense and appreciate the color on the market. Just on that point too, can you just -- any color kind of through the quarter just kind of trends that you saw? On Q3, I guess, I mean, the main thing that I said. I mean, we continue to grow our [fixed] (ph) revenue every single month of the quarter, which was great. Last year Q4 was an anomaly because of -- since that was the beginning of the crash, so to speak. The good news is, this year we've had -- we just came through green Wednesday and whatever they call the day after Thanksgiving. But those were record sales days for us. And so, we're optimistic that what we're seeing is at least the merchants that we're working with are having a stronger fourth quarter. So hopefully that's going to obviously carry through to us and our ability to process more for them, which is not only going to help them in their store sales, but obviously it's going to help us with our revenue targets. Yes. No, that all makes sense. It does kind of feel like once you start to lap this kind of softening and again diversions between unit sales and dollar sales that you guys are going to be [indiscernible], all really helpful color. Last thing for me is, you mentioned something in the comments, which was you said, you'll be in a position to give guidance soon. I don't think you'll report fourth quarter earnings until next year, right? So what does -- that not very soon. What does it mean? Yes. I mean, I guess, what I wanted to say, I anticipated somebody would ask this question. We're obviously very thoughtful about guidance. And we treat it extremely serious, because as you've seen, we want to hit our guidance and we think that's extremely important for us whenever we talk to our investors. So we weren't quite ready where we felt like the forecast needed to be and we need to be comfortable to give the guidance. When I say soon, it's not going to be next April, it's going to be either later this year or early, early next year that we plan on coming out. And will this -- we'll do that with a press release and we may even do a call just to kind of walk investors through it. But yes, we're excited. We definitely see on the horizon nothing that's really getting in the way from us to continue to execute like we have been. So we're on a path hopefully of something very similar to what everyone has seen over the last five years. Thank you very much and congrats on a great result. Truly unbelievable how much this company has been able to grow and do, especially having raised such little capital over time. So great job. I have a question. So all the peers have bad business models, they're losing money, they're not capitalized well, are you having an easier time delivering your value proposition and onboarding customers, because the competition is in poor shape. Could you help us understand that on a more granular level? Yes. I think a great question. And when we talk to our merchants, it's become very clear and we saw this down at MJBiz just a couple of weeks ago in Vegas that merchants and MSOs want to partner with companies that are stable. And that's a really important thing because when you -- especially when you make an investment into a point of sale, you want to make sure that that company is going to be around, that it's going to grow, that it's going to innovate. And because of the state of so many of the point of sale companies in this cannabis space, we're starting to really feel that impact and companies coming to us that have said, hey, we've heard a lot about POSaBIT or this merchant or this MSO has said great things about POSaBIT, tell us more. So we've definitely seen a change in the last, I would call it, three to four months on just more people wanting to bet on us, because they hear the consecutive results, they understand that we're extremely stable, we have cash and we continue to grow. So I think that's a big part of it. They look at track records and they want to make sure the companies are around. So, yeah, it has become easier. The other big thing for us is that and we knew this kind of all along that the unit economics when you're trying to work with a TAM that's only 95,000 dispensaries, it's extremely hard to build a valuable SaaS based business unless you get significant market share. So when you start as a point of sale, and there's 10 other point of sales going for that same TAM or more, it's really hard to build a sustainable business. And so at day one, we didn't do the POS, we did payments. We used that payments revenue because it was obviously much better margins, much higher ticket, we could grow our company faster and we could self-fund with that payments revenue all along knowing we were going to do a POS, but we were going to do a POS when we have the capital to make the investment, to make a great POS that made sense. So I think that's what's playing out now and you have a lot of these SaaS based companies that just frankly have too small of a market to survive and are falling off on the side and then companies like us that have a very stable business that is grounded in payments revenue are being viewed as a much stronger opportunity and a stronger play for those merchants to partner with. Very helpful. Very helpful. Thank you. As a follow-up to that, if somebody has -- if you'd reached out to a dispensary and made your pitch and they've said, no thanks. What is typically the reason that they say no? Honestly, it's usually the ATM. So unfortunately, because this business -- this industry started out as cash only, the only alternative was for these owners to put ATMs in their store. And so, owners in some ways grew accustomed to enjoying those ATM fees that are associated with those ATMs in the cannabis store and a lot of them also recycle the cash. So the cash comes in from consumers and they can reload their ATMs themselves and then make fees off of that. So that's still the number one reason and you just have to kind of sit down and have a thoughtful owner that understands that, while cash initially that was ATM fees feel and seemed nice as a nice source of revenue, the reality is, cash actually costs more to manage than digital currency like a debit card because of all of the mistakes that are made obviously in counting the cash, the cost of dealing with it reconciliation obviously best and frankly just an unsafe work environment for customers and the merchant themselves. So you have to have somebody that's willing to kind of sit down and really understand it. Unfortunately, there are people out there that still just -- they want that ATM revenue. And so, usually when we don't get a deal it's usually because they're just so hooked on that ATM that they can't get away from it. So it's frustrating. We have case studies that really show how same store sales go up and average ticket goes up, but you can't -- I don't know what is it saying. You lead a horse to water, we can't force them to drink. So I guess that's kind of what we're doing here. Hey, thanks for the follow-up. I just wanted to go back Ryan to your comments on safe banking. As you pointed out in your prepared remarks, we've definitely heard some thoughts around safe successfully passing in lame duck from industry participants and politicians. And from our conversations, this view seems to be shared by a lot of folks on Wall Street in the buy side. So wondering if you can talk out your views a little more and give some color around why you're skeptical of Safe Passing in the Lame duck? I mean, I think it all comes down to just history. I mean, history -- we should learn from history here, because safe has tried and stopped six times. And so, I just think call me, I guess, Iâm not optimistic about the ability for this thing to make it through this time and why this time is different. I guess you could argue that obviously the split Congress is -- is this going to be the issue that they're really going to push through given everything else that's going on in our economy. Does this create some sort of win across the aisle for both the Democrats and the Republicans? I think it's yet to be seen. So I just -- my main reasoning and what our team looks at it is just there's a bit of skepticism. We've been down this road before. We've heard that it's going to pass and yet here we stand. So again, we don't shy away from it. I think it's great for the industry, it's great for POSaBIT. But at the same time, we're just trying to be a little bit realistic about the ability to get it passed. And even when it is passed, how it's going to get implemented, obviously, the decriminalization side of this is really going to be the interesting point of how that's treated, because I think a lot of people don't want to be see safe pass unless it has some of that in there. And so, I think it's going to come down to that issue probably on how much people value the decriminalization side of the whole bill versus just the banking side. I mean, ironically, say banking is -- a lot of safe banking isn't about banking. And the other thing that people sometimes forget is, there's over 700 banks that bank cannabis today. So finding a bank to bank your dispensary actually isn't a problem. It does have issues around lending and we understand that. But it's just, I guess, ironic that they call it safe banking when frankly, there's plenty of banking, it's really more about decriminalization. Good afternoon, and thanks for taking the questions. Congratulations on operations side. Just to kind of follow-up on the safe banking side, if that does go through as a narrow bill here, just want to get sense for the opportunity as you see for your business and the competitive landscape with safe passing, a lot of big banks or big financial institutions probably won't get involved until federal negotiations. And then a follow-up on that on potential uplisting with tops or what are you hearing from NASDAQ or Stock Exchange as far as uplisting and kind of what's needed from that side of things? That'd be great. Okay. Yes, I'll take the safe banking one and maybe Matt can answer the NASDAQ one, because I got him kind of one point for that stuff. I think the biggest thing and I've kind of been saying this all along is, it comes down to really two things. Safe banking happens immediately if -- and you said a really good point, if the card brands allow it, because remember, Visa and MasterCard have to allow it still to run on their rails. So people assume that safe banking passes and immediately Visa and MasterCard allow it. You got to remember that, if it's still illegal at the federal level, people need to â Visa and Master will evaluate, is it worth potential brand reputation to open -- to allow their rails to process or not. So let's just assume that that does happen. Right away, our volume is going to triple. So I said to you on the phone earlier, I said to the investors listening in, 30% of the sales on average when you first go into -- go through our system, it's still 70% cash. Now if you go to a coffee shopper or a restaurant, probably 95% of their transactions go through cards. So immediately, we're going to have a tripling of just revenue on our existing base. So obviously that's a great thing. The competition point, ironically the merchants in the space today are actually transacting at a lower rate than they will post safe banking. And I know it sounds weird to say that, but today we can offset some of the costs with a non-cash fee that the consumer pays. Going forward, there won't be that, right? People don't expect to pay anything to use a credit card, but the rates will definitely go up. So a merchant today who's maybe paying 3.5%, their rates immediately are going to go to probably 5.5% to 6%. So there's going to be a shift in the revenue. So our revenue will remain the same as far as every ticket, how much we make. But the overall volume will triple. So that's why I said, we embrace it. We think it's going to take some time once it does pass. And then I think there's a couple of big variables of does Visa and MasterCard move forward or not. And like I mentioned on the call, the good news is, we've already built the entire back end to support credit. So if this past and this would never happen, but if credit was available tomorrow, we literally have the ability in our back end to switch and be ready to process credit tomorrow morning at eight in the morning. And so it's -- we built our infrastructure to be ready to support it. And it's just a matter of does it happen and does Visa and MasterCard allow it to happen and how does the competition, how fast do they come in? But there's a lot of ifs that are kind of in play. So in general, like I said, we feel great about where we are today and our ability to react and actually take advantage of safe banking once it does pass. But I'll pass it to Matt, go ahead and talk about NASDAQ. Sure. Yes, I think we have counsel that really specialize in working with the NASDAQ on this specific issue. They keep a close pulse on this as well as in communication with the NYSE, because both are really options for us and making sure that if there is going to be a change or any legislation in the past, it includes language that would be needed to allow us to list. We're not there yet and we'd need too much legislation to get passed. But we continue to monitor it really closely and prepare ourselves for when that does come around. Okay. We have no further questions in queue. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
EarningCall_1821	Greetings, and welcome to the Hibbett Incorporated Third Quarter 2023 Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Gavin Bell, Vice President of Investor Relation. Thank you. You may begin. Thank you, and good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on hibbett.com via the Investor Relations link found at the bottom of the homepage or at investors.hibbett.com and under the News & Events section. These materials may help you follow along with our discussion this morning. Before we begin, I would like to remind everyone that some of management's comments during this conference call are forward-looking statements. These statements, which reflect the company's current views with respect to future events and financial performance, are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to uncertainties and risks. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this morning and are noted on Slide 2 of the earnings presentation and the company's annual report on Form 10-Q, and other filings with the Securities and Exchange Commission. We refer you to those sources for more information. Also to the extent non-GAAP financial measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our Web site. Lastly, I would like to point out that management's remarks during the conference call are based on information and understandings believed accurate as of today's date, November 29, 2022. Because of the time sensitive nature of this information, it is the policy of Hibbett Inc to limit the archived replay of this conference call webcast to a period of 30 days. The participants on this call are Mike Longo, President and Chief Executive Officer; Jared Briskin, Executive Vice President, Merchandising; Bob Volke, Senior Vice President and Chief Financial Officer; Bill Quinn, Senior Vice President of Marketing and Digital; and Ben Knighten, Senior Vice President of Operations. Good morning. And welcome to the Hibbett City Gear Q3 earnings call. For those of you following along on the slides, I'm on Slide 3 entitled overview. We're pleased with our strong top line performance for the third quarter boosted by a busy back to school selling season, which landed more in the current quarter this year versus the second quarter last year as consumers waited closer to the start of school to make purchases. That helped deliver a nearly 10% year-over-year increase in comparable sales in Q3 and an increase in diluted earnings per share in excess of 15%. We had confidence in our improving inventory position going into the third quarter and our sell through is strong as we continue to experience robust sales for our popular footwear brands. However, we did experience some challenges related to our apparel sales, which impacted our gross margins. We also saw margins continue to be challenged by the impact of high fuel and freight costs, increased utility costs and wage inflation. In Q3, these cost headwinds affected the operating margin somewhat more than in an expected higher volume quarter like Q4. Overall, our team did an outstanding job executing this quarter despite the ongoing macroeconomic pressures. We continued to leverage the strength of our business model and provided outstanding service in both our stores and through our expanding omnichannel platform. Moving on to Slide 4, I'd like to reiterate our success in rebasing our sales and profits at higher levels versus pre-pandemic levels. On a three year stack, that is compared to FY â20, our total Q3 sales grew 57% and our diluted earnings per share increased approximately 15 fold on a GAAP basis and 6 fold on a non-GAAP basis. These results derived from significant improvements to our underlying business model, which will continue to support our long term growth. As we enter the last quarter of the year and the important holiday selling season, we remain confident we will meet our objectives for fiscal year â23. Moving on to the topic of inventory. We ended the quarter at just over $400 million, which we believe will support our expected holiday demand and meet the needs of our consumers. We're fortunate to have strong vendor partnerships, which support our ability to have sufficient inventory levels of the right product mix to drive sales. In addition to the amount of inventory, we're very positive about the quality of that inventory as we approach the holidays. We continue to offer a compelling range of trend relevant brands and products that appeal to our fashion conscious consumers. While the current inflationary environment is certainly challenging for families faced with higher prices for food, shelter and gas, we continue to see strong demand. As we enter the fourth quarter, we remain committed to executing our strategy and optimizing our performance. Our best-in-class omnichannel business model, our superior service in the stores and our compelling merchandise assortment creates differentiation in the marketplace, provides us with a competitive advantage in the eyes of the consumer and our vendor partners, and puts us in a position to deliver strong sales and profitability in the coming years. As a result, we are reaffirming our full year fiscal guidance. Bob will cover this in further detail in a few moments. Before turning the call over to Jared, I'd like to thank our approximately 11,000 team members across the organization. They're the face of our company. They continue to represent our brand across our network of over 1,100 stores, our omnichannel platform, our logistics facilities and our store support center. And then finally, before I conclude the recent 2023 omnichannel leadership report from retail cloud platform provider NewStore, audited the omnichannel capabilities of 300 luxury, premium and lifestyle retail brands in North America. According to the research and feedback provided from a team of mystery shoppers, Hibbett was cited as one of the top five omnichannel retailers. We're extremely honored to be included in this exclusive group and even more grateful for the hard work of all of our team members whose commitment to excellence is being recognized in our industry. Thank you, Mike. Good morning. If you turn to Slide 6, merchandising. For the third quarter, our sales performance was inline with our expectations across our merchandise categories. We continue to believe that due to the impacts of COVID and stimulus during the last two fiscal years, the comparative fiscal '20 calendar 2019 is the most meaningful comparison. When compared to the third quarter of fiscal 2020, comp sales were up 51.7%. From a year-over-year category standpoint when compared to fiscal '22 calendar 2021, all categories performed as expected. Footwear and accessories were the standout categories during the quarter. Footwear had a comp sales increase in the high 20s and accessories were up high single digits. Apparel and Team Sports were both negative in the quarter, up again significant increases in the prior year. When compared to fiscal '20 calendar 2019, we saw positive comp results across all merchandise categories. Footwear drove the largest increase, up in the low 70s, Apparel was up in the high 30s and Team Sports was up mid single digits. Specific to Footwear and Apparel, men's, women's and kids all showed significant growth when compared to fiscal '20 calendar 2019. Women's growth was more than double, kids grew in the mid-60s and men's grew in the low 50s. As Mike referenced earlier, we are confident at our inventory position. The increased inventory levels are largely attributed to better in-stock position of key footwear franchises. As a reference to my sales commentary, we also believe the most meaningful comparison regarding inventory is comparing to fiscal '20 calendar 2019. When compared to fiscal '20 calendar 2019, inventory levels were up 40% at the end of the quarter and balance with our 57% sales gain. This increase is largely due to price inflation as well as positive impacts to our mix of inventory in footwear. When compared to fiscal '20 calendar 2019, unit inventory levels were plus 2%. Our results in the third quarter combined with our strong quarter end inventory position continue to give us confidence that our toe-to-head merchandising strategy is working and elevating how we serve consumers. I'll now hand it over to Bob to cover our financial results. Thanks Jared, and good morning. Please refer to Slide 7, entitled Q3 FY '23 Results. As a reminder, our results are reported on a consolidated basis that includes both the Hibbett and City Gear brands. Total net sales for the third quarter of fiscal 2023 increased 13.5% to $433.2 million from $381.7 million in the third quarter of fiscal '22. Overall comp sales increased 9.9% versus the prior year third quarter. In comparison to the third quarter of fiscal 2020, the most relevant period prior to the pandemic comp sales increased by 51.7%. Brick-and-mortar comp sales were up 7.9% versus the same period in fiscal 2022 and have increased by a robust 42.5% versus the third quarter of fiscal '20. Our online business continues to grow as e-commerce sales increased 22% compared to the third quarter of fiscal 2022 and have increased by 124.7% on a three year stack. E-commerce sales accounted for 15% of net sales during the current quarter compared to 14% in the third quarter of fiscal '22 and 10.5% in the third quarter of fiscal '20. Gross margin was 34.3% of net sales for the third quarter of fiscal 2023 compared with 36.3% in the third quarter of last year. The approximate 200 basis point decline was primarily due to a lower product margin of approximately 245 basis points, partially offset by approximately 45 basis points of expense leverage in our logistics operations. Product margin decreased as a result of increased promotional activity primarily on apparel and a higher mix of e-commerce sales, which carry a lower margin than brick and mortar sales. Expense leverage in our logistics operations was due to higher sales in the current quarter and the timing of expenses related to repairs and maintenance and supplies. Freight costs a percent of sales compared to the prior year increased by approximately 10 basis points, but this was offset by approximately 10 basis points of store occupancy leverage. Store operating, selling and administrative expenses were 23.9% of net sales for the third quarter of fiscal â23 compared with 25.2% of net sales for the third quarter of last year. This approximate 130 basis point decrease is primarily the result of leverage from the higher current year revenue. Although wage inflation continues to be a headwind other spend categories, such as medical expense, professional fees, repairs and maintenance and supplies were favorable. Depreciation and amortization in the second quarter of fiscal â23 increased approximately $2.1 million in comparison to the same period last year, reflecting increased capital investment on organic growth opportunities and infrastructure projects. We generated $34.2 million of operating income or 7.9% of net sales in the third quarter compared to $33.4 million or 8.8% of net sales in the prior yearsâ third quartered. Diluted earnings per share were $1.94 for this year's third quarter compared to $1.68 per share in the third quarter of fiscal 2022, an increase of 15.5%. We did not have any non-GAAP items in either period. Next I will discuss the fiscal 2023 year to date results. I'm now referencing Slide 8, entitled year to date FY â23 results. Total net sales for the first nine months of fiscal â23 were $1.25 billion compared to $1.31 billion in the first nine months of fiscal â22, a decrease of 4.4%. Overall comp sales decreased 7.4% versus the same period in the prior year. In comparison to the first nine months of fiscal 2020, comp sales have increased by 41.3%. Brick and mortar comp sales decreased 10.2% versus the first nine months of fiscal 2022 but have increased by 31% versus the first nine months of fiscal â20. E-commerce sales increased 11.2% compared to the same period of fiscal 2022 and have increased by 135.5% on a three year stack. E-commerce sales accounted for 14.9% of net sales during the current fiscal year compared to 12.8% for the first nine months of fiscal 2022 and 9.1% in the first nine months of fiscal â20. Year to date gross margin was 35.3% of net sales in fiscal 2023 compared with 39.1% in the same period of last year. The approximate 380 basis point decline was primarily due to the following factors; a decline in product margin of approximately 225 basis points due to promotional activity, primarily in apparel and a higher mix of e-commerce sales, which carry a lower margin than brick and mortar sales; increased cost of freight transportation of approximately 90 basis points, this is driven by higher fuel costs and an increase in our e-commerce mix; deleverage of store occupancy costs of approximately 90 basis points, mainly due to the year over year decline in total sales, coupled with higher rent and utility costs. These unfavorable impacts to gross margin were partially offset by expense leverage of approximately 25 basis points in our logistics operations. SG&A expenses were 23.2% of net sales for the first nine months of fiscal â23 compared with 21.5% of net sales for the same period of last year. This approximate 170 basis point increase is primarily the result of deleverage from the lower current year revenue, expense categories such as wages, data processing, advertising and general supplies necessary to support a larger store base and increased e-commerce activity contributed to the increase in SG&A. Depreciation and amortization in the first nine months of fiscal â23 increased approximately $7 million in comparison to the same period last year, reflecting our ongoing commitments to invest in organic growth opportunities and infrastructure improvement projects. We have generated $117.7 million in operating income or 9.4% of net sales in the first nine months of the fiscal year compared to $205.1 million or 15.7% of net sales in the prior yearâs first nine months. Year-to-date diluted earnings per share were $6.71 for fiscal â23 compared to $9.74 per share in the same period of fiscal â22. We did not have any non-GAAP items in either fiscal year. Turning to the balance sheet. We ended the quarter with $25.1 million in cash and cash equivalents. Net inventory at the end of the third quarter of fiscal â23 was $404.8 million, an 83% increase from the beginning of the fiscal year and a 56.4% increase from the same period last year. Inventory levels are generally higher at the end of the third quarter as we build toward the holiday selling season. Much of this dollar increase has been driven by cost increases as unit volumes have grown at a much slower pace. We have short term debt of $51.7 million outstanding on our $125 million line of credit at quarter end, mainly as a result of our inventory build and capital expenditure investments. Capital expenditures during the second quarter were $17 million, bringing the year-to-date total to $47.5 million. Capital spend consists primarily of store development, technology and infrastructure projects. During third quarter, our store count increased by net of nine units, comprised of 11 new locations and two closures. On a year-to-date basis, we increased store count by net of 30 with 33 new locations, one rebrand, and four closures. Our total store count stands at 1,126 as at the end of the third quarter. During the third quarter, we've repurchased 160,637 shares under our authorized share repurchase program for a total cost of approximately $9 million. On a year-to-date basis, we have repurchased approximately 797,000 shares at a total cost of $38.5 million. We paid a recurring quarterly dividend during the quarter in the amount of $0.25 per eligible common share for a total outflow of 3.2 million. For the first five months of fiscal â23, dividend payments have amounted to $9.7 million. Before we give guidance, I'll turn the call over to Bill to discuss some latest consumer insights. Thank you, Bob. As Mike stated, while the current inflationary environment is certainly challenging for families faced with higher prices for food and gas, we continue to see and anticipate strong demand. Through recent customer research, we know that customers plan to spend more this year during the holidays. In particular, they plan to spend more on apparel and an even greater increase in footwear purchases. For Q3, our customer research indicated that customers would spend more. We certainly saw that with over a 20% increase in sales through our loyalty program versus last year. This helped drive our comparable sales increase of nearly 10% year-over-year. Our growth to last year as well as to FY 2020 has been driven consistently by a couple major factors. First, the number of shoppers in our customer base has grown substantially. In fact, the number of active customers in our loyalty program achieved record levels in Q3 due to our ongoing acquisition and retention efforts. The second factor is that our average ticket continues to increase substantially due to gains in average unit retail. We see both increased customers and higher AUR as structural in nature, keeping our business rebase line well above FY '20. Turning to our e-commerce business. In Q3, sales increased 22% versus last year and 125% versus FY '20. These results were driven by three main factors; first, our inventory position is greatly improved; second, traffic increased due to our expanded customer base; and third, we improved our customer experience. Elevating our omnichannel experience is multifaceted and includes ongoing efforts to improve our delivery experiences, enhance our customer service and improve the design and features of our Web site and apps. We anticipate our digital sales in Q4 will continue to accelerate due to the three factors I mentioned as well as growth in average unit retail. The increase in AUR is important as it will drive improve our online economics since higher retails reduce fulfillment costs as a percent of sales. Slide 10 summarizes our fiscal 2023 guidance. Although there continue to be some potentially significant business and economic challenges that may impact the fourth quarter, we wanted to reiterate the guidance we provided at our last quarterly update. Total net sales for the full year expected to increase in the low single digit range in dollars compared to our fiscal 2022 results. This implies comparable sales are expected to be in the range of flat to positive low single digits for the full year. Full year brick-and-mortar comparable sales are expected to be in the flat to positive low single digit range, while full year e-commerce revenue growth is anticipated to be in the positive high single digit range. Net new store growth is expected to be in the range of 30 to 40 stores. As a result of product margin headwinds, higher freight and transportation costs, store occupancy deleverage and a higher mix of e-commerce sales, gross margin as a percent of net sales is anticipated to decline by approximately 290 to 310 basis points compared to fiscal 2022 results. This expected full year gross margin range of 35.1% to 35.3% remains above pre-pandemic levels. SG&A as a percent of net sales is expected to increase by 10 to 20 basis points in comparison to fiscal 2022 due to wage inflation, costs associated with growth in e-commerce, a larger store count and annualization of back office infrastructure investments we made in fiscal 2022. The expected full year SG&A expense range of 22.7% to 22.8% as a percent of net sales is below pre-pandemic levels. Operating income is expected to be in the low double digit range as a percent of sales, also remaining above the pre-pandemic levels. Diluted earnings per share are anticipated to be in the range of $9.75 to $10.50 using an estimated full year tax rate of approximately '24.5% and an estimated weighted average diluted share count of $13.3 million. We continue to project capital expenditures in the range of $60 million to $70 million with a focus on new store growth, remodels and additional technology and infrastructure investments. That concludes our prepared remarks. Operator, please open the line for questions. Just first, could you maybe just talk through what gives you confidence to reiterate the guidance? I think it implies an acceleration in same store sales versus the 3Q and a lot less sort of year over year gross margin compression versus the 200 bps you saw in 3Q. Is that based on trends you were sort of seeing to date or is it based on did you work through a lot of the sort of elevated apparel inventory that required clearance, sort of what gives you confidence to sort of reaccelerate here into the fourth quarter? We do have confidence in Q4. And I think that we've got a couple of different ways of looking at it. We'll start with the customer and then we'll go to inventory. So Bill, if you'll lead us all? So first part of that is we've asked our customers and they do anticipate spending more during this holiday season. The biggest category that's going to get that gain is footwear. On top of that, as I stated, we're in a record position as far as our member base. We've got a ton of active members also record position as far as our ability to communicate with customers in terms of email, text, push, social media, et cetera. So we're in great condition, great shape there. On top of that, we're seeing good sell throughs in particular high yield product. I'll turn it over to Jared to talk about inventory. So just a couple things. First and foremost, as a reminder, last year in Q4 was heavily pressured by a lack of inventory, in particular a lack of footwear inventory. It was essentially flat to the third quarter, which was a little bit surprising. As a reminder, we've talked about it, our inventory is extremely well positioned right now, very fresh, very new and highly concentrated in key footwear franchises. So we're very confident as we head into the fourth quarter around the composition of inventory, in particular as it relates to footwear. Historically, the fourth quarter improves in the low to mid teens from a revenue standpoint when compared to the third quarter. So that gives us some confidence. We didn't see that last year due to the inventory problems. But when you go back and look at historicals, that's typically the Q4 versus Q3 split. And then lastly, if you look at the second quarter and third quarter compare back to fiscal â20, that's pretty consistent in the 50s from a growth perspective, which gives us, again, a lot of confidence as we go into fourth quarter based off that trend. And then just as a follow-up, the sort of implied 4Q gross margin guide implies less year over year compression. Is that based on, have you worked through a lot of the apparel, is it still expected to be as promotional? And then any color you can give on how November is shaping up would be helpful? I mean, again, we're really confident where our inventory is getting incredible support from all of our vendor partners, and we want to make sure that our inventory is seasonally relevant on our floors. If you think about the last couple of years, particularly in apparel due to all the supply chain disruption, there really hasn't been a seasonally relevant apparel story on our floors or anyone else's floor for that matter. So we still have some things to work through primarily from spring and summer and that was some of the impact that we saw during the third quarter. But again, nothing that we are terribly concerned about. I will -- as a reminder, some quarters that were aided by stimulus, as an example, had some gross margins that were at unsustainable levels and last year, the third quarter really was the last one of those. So that's one reason why we don't see as much of deleverage coming as we go forward into the fourth quarter. Just one last follow up point. I think also, you're talking about a pretty strong Q4, gets a little bit more leverage and things like the store occupancy bucket. So obviously, would feel like we would see a little bit of improvement on a quarter-over-quarter basis there as well. Mike, in the press release, there were a few comments I was hoping to get some more color on. First, just the opportunities you mentioned around expanding digital capabilities. Is that around fulfillment or maybe what specifically were you alluding to? And then the second comment on identifying opportunities to extend your market reach. Just wondering if that was in reference to continued organic store growth or maybe something else on the M&A front? I'll take those in reverse order. The M&A part of the equation has probably slowed down considerably. I think everyone saw what happened over the past few years and most of the players have been taken off the board. So probably not, but never say never. With regards to expanding our market, we continue to be -- see opportunities to open new doors and believe that we disclosed that we opened the Vegas market most recently, that was our new market this year. And the balance of those stores, the rest of the stores that we opened we're filling opportunities. I personally visited a ton of stores in the past two weeks to include the Vegas market, great stores, great locations, great crews and the product is spot on and the omnichannel capabilities really shine through in those stores. So very excited about that. The filling stores that I also saw, we're operating at a very high level, so we're excited about that. Then as you would imagine, there are all sorts of other opportunities to extend our market reach in terms of inside the categories we already owned, continuing to exploit opportunities there, as well as adding two categories that we aren't currently participating in, in a big way. Those things always cycle up and down and you'll see the change in mix at the macro level between men's and women's and kids at the micro level between denim and twill, and all those things that apparel and footwear retailers obsess over, that's we get paid to do. That detail that we go through, well we don't often talk about it, is part of the opportunity that's there, and what frankly we get paid to do is exploit those opportunities. Then with regards to digital, we have the best mousetrap and we're very proud of what we have there, and that best-in-class omnichannel experience we know is a bit of a race though. And so we don't breast on our borrows and so we meet weekly on the list of opportunities that we have, the things that we can do and the list is longer than we can get done in any given year. So the opportunity is there. Bill, if you want to expand upon that, please. So I think you mentioned fulfillment, we're absolutely working on that. You can break that into a couple pieces. The first one is how long it takes for you to prepare an order, which we're working on. And then also how long does it take to actually deliver that order, which we've got numerous initiatives around. So yes, fulfillment is a big focus for us. The other thing is just the customer experience. And obviously, we have a very good offering of omnichannel capabilities and we spend a lot of time on the design as well as testing of our Web site, apps. But currently, we have installed all of the customer pain points that are out there. So we are not going to stop, as Mike mentioned, there are customer pain points that are out there that we are going to invest in solving and those are pain points that are common, both online and in store. Just a follow-up, unrelated on the comment on wage inflation. Curious if that pressure is accelerating and can you give us a sense of how much wages are up on a year-over-year basis or maybe where your average hourly wage rate stands today versus pre-pandemic levels? Bob mentioned earlier, our SG&A and the wage pressures we have experienced. The one thing I would say though, that's been going over a while. We have actually seen a little bit of mitigation there, that growth has slowed, which is obviously good. Our job is to mitigate that cost, both in the stores, the SSC and our distribution centers. Some of our investments in technology and automation are starting to come online, and that's really helping us to control those. We are also focused on managing our overtimes as well as continue to look our labor model and making sure that we have got it dialed in exactly right. But hopefully that answers your question. We are actually seeing a little bit of a slow in that growth. Still there, but slow. First off, just on apparel. I was hoping you could elaborate on the competitive pricing pressure that you are seeing there. Maybe just getting to some of the specifics and then how you see that kind of carrying through into the fourth quarter? So yes, we have obviously seen, the apparel promotions ramp up. I mean, we expected them to ramp up but we believe theyâve ramped up even more than expected. Our big challenge in the third quarter was less with regard to competition and was more with regard to our desire to get to a seasonally appropriate work. So we were fairly aggressive around spring and summer product that delivered late and maybe we didn't get through as much as we would like. Typically in the back end of the quarter, you get an offset of seasonal product and unfortunately this year with some weather challenges back into the quarter, we didn't see that come to fruition. The other part of that is with our improvements in footwear inventory and our consumers very focused on footwear that likely led to some pressure in some of the apparel businesses as well. So we are less reactive to the competitive environment. We are more reactive to our business and how we want our floors to look as we get into future seasons. And then on footwear, I'm curious with the discontinuation of Yeezy, a couple of things. First off, just kind of remind us how important that business was to you? And as that's gone away, are you seeing demand transferring to other brands or is it just -- or is that demand just going away? And in particular, are you seeing demand maybe transfer to the Retro Jordan business? And I'm curious, if that is happening, does that benefit you just kind of given better allocations there and kind of your relative position in that business versus some of your competition? So first and foremost, very small business for us. We were in the process of seeing some planned tightening growth as we were to go forward, but unfortunately that didn't forward. So not a business that we're terribly concerned about comping. But we do think it's an advantage for us based off the other product lines that we carry. With that inventory not being in the market for the fourth quarter or the foreseeable future and our ability to get additional inventory and the highly coveted footwear styles, we do feel like that's an advantage for us in the fourth quarter and as we go forward. I had a couple of questions I wanted to see if you could expand on the consumer trends you are seeing. How stable is the demand? Are you seeing any trade downs on any change in behavior, meaning are you finding consumers waiting more for promotions to make the purchase? We certainly are cognizant of the fact that the consumer is feeling pressure from inflation. We believe that our positioning in the industry and in retail in general skews more towards the hard to get the luxury items as we continue to call it affordable luxury items, which then causes the consumer to make different choices. We believe that one of the things that you're putting your finger on is the middle class shopper moving up and down in the price range based upon pressures they're seeing. We have a bit of a different point of view and our consumer approaches that a little bit differently. Bill? So we haven't seen customers trade down nor waiting. The behavior is for some customers, not all customers, number one, are impacted by inflation. Other customers that are they're going to cut back in things like eating out as well as buying for themselves. So that is the behavior of trend. But again, our customers overall plan to spend more during the holidays. And then on the not waiting, customers are actually spending a little bit earlier in certain cases, and that's being driven by concerns around availability as well as some of the promotions. I'd also chime in just purely from a liquidation perspective, we continue to see our best liquidations in the more premium price points and best level product across footwear and apparel. So again, our positioning in those products, we feel does give us some advantage, but we are seeing significant continued acceleration in our sell foods in those best level products that typically carry a higher price. And then my second question was around the benefit you're seeing from Nike pulling back from some of your retail competitors. How is that materializing given the level of promotions out there, particularly in apparel? We're definitely seeing the improvement where the distribution buzz cut back for sure. It's certainly more outsized in the footwear area right now than it is in the apparel area. But we're seeing it across the board and again, feel like it's something we can continue to take advantage of for the foreseeable future. And then the last question I had, it's more for Bob on the, again, on the fourth quarter outlook, it implies really significant operating margin expansion, based on my math north of 500 basis points solidly double digits. So on the SG&A side, is it mostly just leverage on the higher sales or any other cost rolling off or lapping that would allow you to get that amount of operating market expansion? Clearly, some higher sales give you that leverage point, and that's going to be the biggest individual factor. But again, as we've continued to kind of evolve our business over the last couple years, we're taking some pretty critical looks at some of our spending categories. I think, Ben touched on it earlier, we are doing a lot of things within the stores to manage labor. We've got a lot of under technology that's starting to really pay dividends, things we've invested over the last couple years. And I do believe that overall, we're working hard to kind of maintain that cost structure so that not only do we get leveraged during times of stronger sales, but we can manage those expenses more effectively even in additional quarters going forward. Thank you. There are no further questions at this time. I would now like to hand the call back over to Mike Longo for any closing comments. Well, thank you very much for your time today. We appreciate the opportunity to speak to our business and to congratulate our teammates on another successful quarter, and we appreciate it. So with that, we'll conclude. 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_1822	Good afternoon, ladies and gentlemen, and welcome to Cansortium's Third Quarter 2022 Conference Call. Joining us today are the companyâs CEO, Robert Beasley; and the companyâs Interim CFO, Liora Boudin. At this time, all participants are in a listen-only mode. After the companyâs prepared remarks, the management team will conduct a question-and-answer session, and conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded and will be available for replay in the Investors section of the companyâs website at www.getfluent.com. Please note that certain subjects discussed on this call, including answers the company may provide to questions may include content that is forward-looking in nature and therefore subject to risks and uncertainties, and other factors, which could cause actual future results or performance to differ materially from any implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the companyâs regulatory filings, which can be found on SEDAR.com. The company does not undertake to update or revise any forward-looking statements, except to the extent required by applicable securities laws in Canada. In addition, during this call, the company will refer to supplemental non-IFRS accounting measures, including adjusted EBITDA which do not have any standardized meaning prescribed by IFRS. As a final reminder on todayâs call, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. Thank you, [Therese] (ph), and good afternoon, everyone. We continue to generate strong growth in profitability in Q3, highlighted by yet another consecutive quarter of year-over-year revenue and adjusted EBITDA growth. We continue to reap the benefits of our investment in Florida and Pennsylvania with now the added benefit of Michigan no longer weighing down our bottom line as we exited this state earlier this year. In Florida, while we had 12 stores closed temporarily due to Hurricane Ian at the end of the quarter, we nevertheless continue to see an impressive ramp in sales with the total revenue in Florida up 39% year-over-year, driven by improved store productivity, as well as the addition of two new stores. As I've mentioned in the past, our increased store productivity is almost entirely a reflection of the improvements we made in our cultivation in Florida, compared to the year ago quarter. Yields are up dramatically and we are consistently producing higher quality and higher THC products that resonate with our customers and patients. This is why we continue to pull market share from our competitors. That said, we did experience some setbacks with our Sweetwater cultivation facility as a result of the Hurricane. Our Tampa and our Polk City facilities were largely unaffected. In Sweetwater, we experienced damage to our HVC and fertigation system that resulted in a loss of material from the mother and pre-flowering rooms. We had the early harvest five rooms, which put the facility out of its continuous production cycle. We have been remediating and repairing that facility since and have seen steady improvements, but do not expect to return that facility to its previous continuous production levels until early February 2023. All things considered, the fact that facility was even standing when I arrived there two days later was a pure miracle, we were very fortunate to have -- saw which most of the harvest and the greenhouse crop was entirely unimpacted by the hurricane. The facility has continued operations continuously, although we'll remain in a lower throughput from now until the end of the year. Looking ahead in Florida, we now expect to open one additional store in Q4 and that will be in Pensacola, Florida and Nine Mile Road and an additional three locations to open in first half of 2023. Should have those remaining three open and that will be Crestview, Florida, another Pensacola store and the Jacksonville store by March of 2023. We previously expected to have all of these locations opened by December â22 or January 2023, but construction delays, some permitting delays, and of course, the Hurricane pushed our timing back just a bit. We also expect to locate and construct a large greenhouse facility to be completed by the end of 2023. We are currently under contract with two potential sites and have bids for construction ongoing at this time. Going over to Pennsylvania, our most recent store opening in Annville has been ramping nicely with consistent growth from each month. In fact, in October, we had record month sales for that store and we expect to continue driving organic growth across all three Pennsylvania locations in 2023 as we further improve our sales and marketing efforts. We're excited and prepared for the possibility of Pennsylvania going to adult use. In Texas, as I mentioned in our last quarterly update, we now have a go forward plan approved by DPS to build out our footprint and country's most -- second most populous state. In 2023, we opened to open our first delivery center. All packaging, all product formulations and other necessary components have been approved by DPS at this time. We have began staffing for the delivery center and we hope to have that location under construction soon. Before I hand the call over to our new Interim CFO, Liora, I want to acknowledge the entire Cansortium team for their hard work and dedication, particularly as we persevered through the disruptions from the Hurricane. We have many heroes step up within our ranks. I'm grateful that all of our employees remain safe. I would like to thank each and every one of them for working so tirelessly to get -- hope that our business closer to normal and operations returned as quickly as possible. Finally, I wish the best to our former CFO, Patricia Fonseca, as she moves on to the next stage of her career, and Liora, many thanks for stepping into fill her role as we search for a permanent replacement. We look forward to continuing our expansion in the final weeks of â22 and into â23 and are excited to share further updates in the spring when we report Q4 and full-year results. With that, I'll pass the call over to Liora to walk through the details of our financials and then we'll open the call up for Q&A. Liora? Thank you, Robert, and good afternoon, everyone. Please note that all figures are in U.S. dollars and all various commentary was on a year-over-year basis unless otherwise specified. I'll jump right into results. Third quarter revenues increased by 42% to $22.1 million, compared to $15.6 million. The increase was largely driven by growth of Florida and Pennsylvania as we have more stores opening each market, compared to prior year. Florida revenues increased 39% to $18.2 million, compared to $13.1 million over a year ago -- period ago. Our adjusted gross profit in Q3 increased 71% to $16.7 million or 75.5% of revenues, compared to $9.8 million or $62.7 of revenue in a year ago period. The increase was primary driven -- I'm sorry, primary driven by improved productivity and cultivation yields for the quarter, compared to prior year. Third quarter operation expenses remained flat at $8.5 million, compared to same period in 2021. However, as a percentage of revenues operating expenses decreased significantly with -- to 38.2, compared to 54.6 in 2021 as we continue to focus on operational efficiencies. Third quarter net loss totaled $5.6 million or loss of zero $0.02 per share, compared to net income of $7.4 million or $0.03 per share in the same quarter of 2021. Adjusted EBITDA increased by 140% in the third quarter of 2022 to a record of $11.7 million or $53.1 million of revenue, compared to $4.9 million or 31.3% of revenues in Q3 2021 with an increase due to improved productivity across our cultivation, more stores and better operational efficiencies. Turning to the balance sheet, at September 30, 2022, we had $9.1 million of cash and total debt of $69.4 million. Regarding our outlook for 2022, we are revisiting our previously issued revenue guidance given some of the impact of our Florida business from Hurricane Ian. Our now expected revenues for the year to range between $85 million to $90 million, which compares to our previously issued guidelines of $90 million to $95 million. This reflects an approximately 37% increase from 2021 at the midpoint of our guidance. In addition, we now expect adjusted EBITDA to exceed our previous issued guidelines between $25 million and $28 million, reflecting an approximate increase of 35% from 2021. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jon DeCourcey with BTIG. Please go ahead. Hey guys, congratulations on the quarter, some continued solid execution here, which is a good thing. So -- to just jump into a couple of questions on Florida, wanted to just touch base on the drag in Q3 from the Hurricane. I know there -- I think it was in the release it said that you would have had growth in the quarter on the top line? If you could care to elaborate on that at all, that would be great? And then additionally, what did that kind of look like from a cost standpoint, any sort of increased costs related to reopening things and to kind of shoring up things? Sure thing. Thanks Jon for the question. It's good to hear from you. So you had two things you had drag in cost, so I'll talk about drag first. The facility at Sweetwater is our high quality flower production facility, as you know, itâs got eleven rooms. And the fertigation room is kind of an outparcel room adjacent attached to the facility, which included our charcoal filtering system, our smart fog system and basically the filtering system that filters the well water going into fertigation. That room was completely removed from the premises and is yet to be found with all the equipment. And unfortunately, when it departed the roof impacted the roof of the main structure, it flipped over the main structure and impaled in three different locations. Other than that, the main structure held on pretty well. We got those roof leaks fixed and almost immediately had a little struggle with generator power. Our main impact from the Hurricane on that facility was the failure of our rented ring power generator set to function properly causing what would have been two days of power outages to go into four. Those rooms sitting dark for four days was a problem. We did some temporary lighting. Ultimately, the flower that was in the more mature stage, which was two rooms we harvested, went ahead and harvested it early, sent all that to extraction and then try to survive the remaining three rooms once we got power back on. Those three rooms could not be saved and those were early harvested. The result of that is the way we set up our facilities is what we call continuous harvest. And so once they're running in all cylinders, if you would, they're harvesting every week essentially. Sweetwater is a little different, because itâs a little bit more harvest to order, kind of, scenario, but there's still a window of harvest. Well now that facility is off cycle, if you would. We did lose a good bit of the mom stocks, we had to restock that out of existing crops. The benefit of having two or three different facilities we were able to move product and mom stock from facility. So the main drag is essentially being off production cycle. As I said, we will remain off cycle in kind of a wobble, if you would until mid-February and then we'll be back on cycle. So planning those five rooms with some auto flowers, we're kind of growing some outdoor extraction quality material, but indoor, but it gives us a cycle, because steady feed is the important part of it. Outback in the greenhouse, it was a sheer miracle. The roof was rated for 56 minute mile an hour, itâs a polyroof. The high wall set on that facility for almost an 1.5 hour at a 114 miles an hour in the roof held not actually sure how that occurred. The crop inside was completely unimpaired and we went ahead with a normal harvest cycle there. So lucky is the best word I can tell you for how it impacted that facility. The cost -- the main cost was the fertigation skid, the smart fog system that was inside of that fertigation room that cost us about $250,000 luckily, there was a used one on the ground in North Carolina and we had it coming the day after the Hurricane. We're about $0.5 million into repairs right now. There's a little bit of repairs in the electrical system. We had some shortages, we had a good bit of power fluctuation in the lines through the storm, which is pretty typical of a hurricane. So it shorted out some electrical components, some ATS, which is we're still trying to track those down, they've become a little bit of ghost in goblins at some point. So we're looking at it between 500 and 650 of total repair cost. Most of those repairs are done. Still working on the HV system, AC system, one of the chillers was flooded and working off of two out of three chillers right now, but the third chiller was kind of a backup. So we're up and running, I think we're seeing the end of the repairs, as far as cost. I'd go over to Tampa and Polk City. Polk City is a small greenhouse, it was completely unscathed and Tampa had a little bit of water in the parking lot, but those facilities, although they went on to generator power for about 12-hours, those facilities were completely unimpaired and unimpacted by the Hurricane. So our biggest loss was the five rooms that put us out of production cycle. And of course, the mom stock was a pretty good loss for us. But luckily, we had a Belton's spender system. We have duplicate moms at the various facilities just for this type of event. Okay. That's great. And that's really helpful color. And it seems like by looking at the OMMU data that there hasn't been any sort of fall off in Q4 in terms of Florida demand. But kind of power things either for you guys or kind of on a -- I know for you guys, the guidance wasn't changed much. But there's kind of from a general demand in the state, are you thinking that things are tracking to kind of where you expected as it seemed when the Hurricane hit that there might have been a longer term drag for Q4, as well, but it doesn't seem to be the case? Right. So and again, go back to our Q3 expectations. And I was asked this at the end of Q2, which is -- our Q2 was so great, why am I not adjusting guidance? It's because we anticipated Q3 to be flat. We were hoping for it to be flat or slightly up. I think we would have been slightly up, but for a Hurricane no one could predict that. But you got to remember we're in Florida and our patients all leave town in the summer, because it's hot. And so we traditionally see decreased sales in August in July. So we knew that was coming and we were hoping to hold on to flat. We would have, but for the Hurricane. Now coming into Q4, sales have taken off we have had pre-thanksgiving, we had two or three days in a row, which was our second and third best of fluent days ever, so we've had a top five day, three days of the week coming into Q4. It did start a little slow, but now it's ramping, kind, of as we expected and we anticipate it to go strong. The holiday period from here into the end of the year is very strong period for sales for us. Okay, great. And then how's the pricing environment in Florida? I hear a lot about discounting and not quite as bad as maybe last, I think it was Q3 when some folks flooded the market with some excess inventory, but still I'm hearing that there's a lot of discounting? How are you seeing the competitive landscape in the state? So yes, you're right. Q3 of last year was a tough time for us, because we had that liquidation event. We have not seen anything like that going into this year. Pricing was very competitive coming into Q3 and stay competitive, but actually eased a little. We keep seeing these -- what I call media splash events where Cookies or Jungle Boys, they'll roll out a big sale, they roll out a big roll out, but then they go out of material and they go away again. So they're -- while they're good for media events, they're just not presenting enough stable, steady competition to our shelf to really impact pricing. So pricing has relatively stayed stable throughout the end of Q3, a little bit of competition coming in. And right now pricing is kind of back to Q1 levels. And so we're not seeing any major price competition at this time. I expect we will see some by the end of Q2 next year and that has to do with some of the competitor stores construction schedule. Luckily, we're all constructing at the same time with the same challenges and so they're just as behind as we are sometimes. But I do not see any price compression being an event between now and the end of the year. Okay. And then one last question for me and then I'll jump back in the queue. But if you guys look at Pennsylvania, you've talked in the past [melt wanting] (ph) vertical-integration there and seeing that as a potential investment? Given the really discounted pricing environment there and cheap wholesale product? Is that still a focus or especially in the near-term? And then kind of how are you thinking about next steps to grow in that state? So I'm sticking to the plan I told you before, which is to kind of try to get some grow relationships in place. There's still quite a few of the mom and pops out there that need a relationship, they don't have access to a shelf. And the competition hurt the wholesale market last year more than it hurt the retail market. In fact, I'm getting on a plane to Pittsburgh tomorrow morning to go look at and talk to a grower. I really like Pennsylvania as a market, itâs a good solid consumer market, a good solid blue collar market for us. We're not in the best regions. We have the three -- the region in the three stores in the South Central region. What we're really trying to do is get a better margin on the shelf, because there's a little bit of compression there, because we're now buying from our competitors, who have competing stores and that's always a precarious position. So trying to get our own products on the shelf to kind of pick up our margins and then just hold tight to see what this regulatory environment is going to do as they move into adult use. I think the democratic term there has really supported going to adult use. We believe that has to necessitate the opening up of more store opportunities. But even a grow relationship for us is a little bit constrictive if we do not get more shelf space. We can only push so much out through three stores. So we're going to hang in there. Pennsylvania, we're retooling a lot of our sales strategies, we're understanding the market much better. And if we could get our own product on the shelf, that would be great. Otherwise, the plan is to keep hanging in there and see how we can grow with the state market. Good afternoon and thanks for taking my question. Congrats on the quarter and the EBITDA margins in particular, your adder near the tops in the space. I'm just wondering how sustainable you think these margins are outside of the repair costs associated with the end? What kind of headwinds do you foresee over the next few quarters? And I guess related to that, how meaningfully drag like startup costs in Texas would be? Okay. Hey, good to talk to you Russell. Thanks for the question. So EBITDA margins, yes, it was a bit of a surprise to me and watching our EBITDA margins, EBITDA develop as it is. As you know, we elected to adjust guidance, because we're going to be a little under owned revenue, but we're going to be over or right on EBITDA. And so that just means that the efficiencies we put in place are continuing to be seen in the EBITDA line. We are reaching, I think, our maximum efficiencies in some areas, there were several target areas. And as you know, this company has come up a very steep slope of improvement since 2022. And the low hanging fruit is gone now, and so we're working on the fine tuning. We really focused this last quarter on overtime, overtime and temp help and overtime. We're still suffering from labor shortages in some of our areas. And so that was a big add-on savings this year. I'm sorry, this quarter. As far as Texas goes, it's not going to be much. We're going to put -- we've already got the facility. We're already stacking distillate. We went right to THC, right when the legislative changed, effort changed. We've been stacking distillate now. We've got good manufacturing and lab equipment out there even though it's a small cultivation footprint. The real challenge with Texas is figuring out how to navigate the legislation hurdles that were put on is we have DPS as a partner out there. They really want to do something. And so we've worked with them to remove or navigate around some of the many obstacles. And now what we've come out with is the opportunity to have a delivery center, which is not a store, because the store is not allowed. Product cannot maintain on those shelves for longer than for 24-hours. And so the truck has to take them back every day. We've identified a market in Katy, Texas, which is about an hour from Schulenburg, which is for our facility is. Weâve got a couple of good sites there. From the consumer's point of view, it's going to look like a store. We've got some really neat edibles coming in. We've got all our formulations approved, that all our packaging approved. And we're picking all this up, supporting it from Florida. So a lot of the work is being done in Florida to support Texas. And because of that, it's just kind of an add-on to the existing labor and product pool that we already have going, so not a lot of cost there. The big cost will be, I'm about to add a staff member, I need a sales director for that market and that'll be a pretty expensive add. And then, of course getting this -- the TI for the physical facility to get open, a couple of hundred dollars there, so I think $0.05 million will be the Texas entry at this point from here. And of course, we've already put in a decent amount up to this point. Not a big amount, I've asked the board whether we would consider a capital call or not on that. We do -- we are cash flow positive. We do have cash now at this point. So it's a concerning amount from an entry point, but considering we're opening up a new state, it's just not that large of an amount to worry about. Great. Thanks for the color. If I could probably add one more with respect to Florida, you've got your next several sites already mapped out and under development, but just more generally given I think almost 500 dispensaries in Florida at this point. How are you finding or approaching site selection at this point? Is it becoming any more difficult to identify white space for new locations given competitive efforts to expand their retail footprint as well? Yes, so the three that are going to be completed by March have been in queue now for some time. In fact, they are behind schedule. Quite frankly, I wanted them open in November and December and now weâre looking at one coming out by the end of the year, one in January and then two by March. Those have been in queue for a while. I'm now locating three more. And of course, the trick that I always preach is balanced. And so -- and our existing cultivation square footage, if I follow the throughput full forward, I still have three more stores that I could feed without worrying about inventory at all. Maybe it could go to five more, but that's why you heard me say I'm now starting on the expansion of the cultivation side, because once one silo of this business is starting to max out, you have to go to the other silos to feed it when you're vertical. So we've got three slots open, I've just started relocating those, we've developed the store locator model over the last year or so. And it's an average model. It's not perfect, but it does help us. And so to specifically answer your question, my next three, I'm going to go for two open spots, I have a hidden where the [indiscernible] policy. So we've got two more open spots to locate and there are space there, there are B market spaces, but as we've learned with our Hanover store in Pennsylvania and some of our Florida stores being the only game in town is not a bad place to be even a B market. So Florida is a big state, there's still a couple of real opportunities in B markets. They are no longer clean or easy. Some of them are empty parcels. We're going to have to do a build. And so we've got those two narrowed down to five possibilities. And then I'm going to come back into one of the two A markets. We've got two A markets in Florida that I've identified in our own store sales, one is Orlando and one is Jacksonville. Those markets have good competition in them. But really to be honest with you, Orlando could use more stores, at least on our side and more coverage. So we're going to go 2B markets and 1A market for our next three stores. And then I'm going to sit tight and get cultivation increased again and then add then I can be set to add another 10 stores. Hey, Robert. Congrats on a great quarter here, especially getting some of the quite literal headwinds that you guys faced. Most of my questions have addressed, I was just wondering on the Hurricane, if you can kind of quantify like the lost sales or EBITDA impact from having the 12 dispensaries closed? So we had -- I can try, we had 12 dispensaries kind of linked closure. And if you remember that storm, it almost traverse the entire state, but for the last minute when it jettied out into the Atlantic, it turned, went in and then went up the center of the state, we thought it was going to roll all the way to Georgia, but luckily it exited. So almost everything in its path was closed or in advance of its path was closed for some period of time. As far as revenue impact, we were talking in the 200s, 200,000 to 300,000 was a revenue impact from that what I call the blink of those closings, because most of those closings were early closures in anticipation of the storm. And as you know, the most important thing in these storms is your people. And what happens is that well in advance the schools close. And when schools close, then the concern for their children outweighs the concerns to work in our stores and it outweighs it for us too. So we're pretty aggressive about our closure times. So we closed those. Then we had the two stores that were actually impacted and those two stores were closed for about a week or so. And here's the phenomenal thing, they obviously registered zeros during those stores, during those closure times. But right before the storm, we had tremendous spike in those sales in those stores. In every impact zone, we had a tremendous spike. And then soon as we got them open, we had a tremendous spike, it just goes to prove that clean water or drinking water, toilet paper in cannabis are the three things that you need in front of a storm, because the sales were tremendous. And so what happens is if you level those out over a week or two period, it really wasn't that big of a sales impact, because we had such tremendous build up before. And then the St. Pete's store was open on generator power with a line around the block. People just really wanted to get in there even though they didn't have power. So because we had the pre and post storm spikes, our total loss was under $0.05 million of revenue at that time. And so we just didn't have that much of a store sales impact, our real impact was in production and we saw that production impact kind of decrease our inventory available to be competitive in the weeks following the storm. And of course, as you know, we had a storm right behind it. And so we determined that our first storm event was not an anomaly, because sales right behind it on that West on the East Coast they spiked right around the Melbourne area again before the impact of that storm. Interesting, itâs been achieved with the kind of consumer staple impact. Really appreciate all the color and again congrats on a great quarter. Hi, Robert. Congrats on a great quarter and thanks for taking the question. Maybe to follow-up on the Hurricane impact. In terms of being off cycle in the production now, what might that impact be going forward? Would we see that on revenue, margin maybe both line items? And do you have access now, I guess, to the wholesale market due to lost crop? Thank you, Daniel. Yes, so the DOH was very generous. They immediately contacted us and said from the storm track you appear to be the most impacted company. They did not know nor did I know I was not able to physically get to the Sweetwater facility until day two after the storm, because the roads and bridges were out. And so it took a long time to get in there. And of course, we expected it be completely flattened and it wasn't. And so the DOH said to us, do a rough calculation of what your losses could be and you can go ahead and buy. And then we had this extraordinary scenario where we had multiple competitors reach out and say, hey, if you need to buy from us, we will sell to you. And that's unusual in Florida, we're not a wholesale market, so we're not wholesale oriented. And so the idea of selling to your competitors is just not something that is available here. And so for them to reach out, it was just a tremendous -- generous move on their part. However, because we early took down those rooms and because two of the rooms were already in an advanced stage and because the greenhouse survived, we actually did not see an immediate impact. So while we were cleared by DOH to do some buys, we kind of held back and didn't do those wholesale buys. Florida allows a crop loss purchase, which means if you have an approved loss of your crop by the DOH, you can replace that crop through wholesale purchase. It's the only exception in the rule. And so we went ahead and manufactured and produced and got that crop into production just to see before we panicked if you would and started buying. And what we've seen is that we're continuing to be strong in inventory and we have not made a crop loss. We now have gone through the process of getting our crop loss certified, itâs not yet certified. Again, DOH said we could as an interim go ahead and purchase, but we didn't need to do it. I anticipate we will see the results of this in January. So if I look at the charts that are coming out of production, we're going to still continue to be on an upward inventory build through December and then we're going to start to peak and we'll need to start doing some supplementals probably in January and I'm anticipating one or two supplemental buys. Although quite frankly, I thought it was going to be December and then now I've pushed it January and sometimes that's what happens in production is plants come in a little stronger than you thought. You have a little bit less demand. And so we will feel it internally, but here's the beautiful thing. We're no longer living hand to mouth here, because of our increased production capacity and our increased inventory. We still suffer all the same casualties, not hurricanes, but all the same casualties that every company does. But were inventory rich at this point to the point where we can afford a one or two day impact something in manufacturing or even a Hurricane with some limited impact without the customer seeing on the shelf, because we now have a robust inventory and that was one of my goals. My goal was to get to the point where everything that happened on the inside was not directly felt by the customer on the shelf. And so this Hurricane tested that. And as a result, we took an impact from a Hurricane and we might not even see the effects until January when we need one or two small supplemental buys. So that's how it's laying out right now, itâs a very fluid scenario. If you would have asked me this question day after the Hurricane, 10 days, 30 days after the hurricane, I might have given you a different answer. But right now, I'm looking at making it through the end of the quarter of the year without any need for supplementation. That's great to hear and hats off to the team for making that happen. And then as a quick follow-up, you talked about some plans, a larger greenhouse in Florida and I guess you addressed Texas. But is there a sense of CapEx for those build outs in the next year? Yes. So we've been blessed with investor groups that support us through various types of scenarios. We have avoided the sale leaseback scenarios that some of our competitors have gotten into. It's just -- it's not the right answer for us, so we look for other alternatives. We are cash flow positive that helps us now build our stores without the need for any type of capital raise or any kind of loan funds. And so this next project we're looking, we've got three investment groups that are interested in being involved. We've actually talked to our lenders about being involved. And so I feel like a greenhouse project which is -- it's a $10 million to $15 million project all in. So that's a very digestible CapEx amount for investment partner or even a loan. And so I think we can get that done pretty easily. We're not talking about one of these $30 million, $40 million, $60 million, $90 million, you guys pick it $1 million indoor projects that you hear about. The type of feed I need, because if you remember, we have the BHO came online and so we have now switched over to BHO, we're soon to ramp in full production on that and we have live raws and that's come online. Those two product lines they really need high quality, but not indoor high quality flower, they need B, B+ flower to get a high yielding, high quality flower, so that we can make those derivative concentrate products. And that's really our focal point right now, because it's these are product lines that we don't yet offer and the ones we offer, we sell out pretty quickly. So I need my in feed, my biomass feed to match my output expectations, which isn't high quality flower. We have enough high quality flower. We have two facilities dedicated to that. So because of that, I don't need to build a big indoor facility at $30 million, $60 million, $90 million, a good environmentally controlled greenhouse at $10 million will get me there, plus I could put a lot more square footage. I'm looking at probably 70,000, 75,000 square foot of cultivation space, which will then of course push us to that next level. Hey, guys. Thanks for taking my questions. I appreciate it and congrats on the incredibly impressive results really phenomenal, especially when taking into consideration. What's taking place across the industry and given the Hurricane et cetera? I'm sorry if I'm not following this correctly, but I was hoping maybe you could reiterate or help me understand your commentary surrounding Q4 EBITDA as it relates to the guide. And I appreciate the revised guidance, especially on that line -- EBITDA line, but can you maybe give some additional color or let me know what I'm missing in terms of where you'd expect to end up? Revenue seems to be coming in flat or slightly above sequentially. And I was maybe thinking we would see similar profitability to Q3, but that comment around 30% to 35% EBITDA growth from fiscal year â21 would maybe imply that Q4 is down. So am I off there? How should we be thinking about that? Well, I don't expect Q4 to be down. I expect it to be right on guidance. If you look at where we've been on adjusted EBITDA, we have of course the biological inventory which continues to grow and that factors into the adjustment as you bring on the new facility. Our efficiencies realized throughout Q3 helped us have a much higher EBITDA than we anticipated. So we anticipate that trend to continue, but slow a little. And so we're going to -- we're already sitting at, I think they suggested we're 28, so we're already sitting in the mid-range now. I don't expect it to change much from that. I think we'll probably increase at that point a little higher, but we don't expect a major downshift at this time. Okay. That's helpful. Thanks. And then in line with some of the efficiency improvements and increased cultivation, you did talk about some of the puts and takes on gross margins, which are appreciated. Is that mostly related to the cultivation improvements? Is that is exiting Michigan a factor there? Is there a way we can kind of peg maybe a normalized number at this stage or moving forward? I think exiting Michigan was an anomaly. Michigan was a drag for us. We had a series of events in Michigan prior to my arrival. We gave it one more good try. The Michigan market is too volatile to be competitive in the situation we were sitting in. So an exit was the right answer. Having everyone's side relief in the markets when we finally pulled the plug on that, and so if you take that out a little bit, I think what you're going to see is Q4 will be normalized. And again, a lot of the low hanging fruit on efficiencies now, we've realized that. And so I think we're starting to settle in now. There are a few more things we can do, but we're kind of getting to the top of the improvement pyramid as to those efficiencies. So I think what you're going to see out of Q4 is really going to be the normalized scenario for us. Okay, perfect. And then, yes, so I think, I have sort of at a high level have heard a lot of things on this call that I didn't expect to hear in a good way. And that's great, as it relates to you mentioning that the low hanging fruit is sort of -- has been addressed and is sort of behind you and then talking about the potential greenhouse build, which is really interesting. We spoke about this previously, but I'm wondering if you can just kind of talk about maybe at a high level your desire to keep growing the dispensary count and whether you feel like you're kind of stuck at this stage cycling between working on the cultivation growth and improvements and then trying to build the footprint? And I'm aware of the strategic plan in terms of cultivation improvements and then flipping footprint growth and vice versa. But given where the industry is right now and your guys competitive position in the State of Florida, and the fact that most operators seem to be actually pulling back on things like expansion CapEx, M&A, et cetera. It seems like a really attractive time to sort of pivot toward more store growth, so you can really sort of press the gas on market share gains. I mean you guys are finally generating significant cash. So I'd just love to hear maybe what sort of gives you the confidence to maybe make these increased investments right now or any thoughts there would be really helpful. So we've come a long way, and in coming from where we were to get to where we are, we learned a lot of about efficiencies and we learned a lot about balance. This company and many companies back in the day were way out of balance. Because we are in Florida and Florida is our primary revenue producer, we are a strictly vertical. And as I said before, in the most strict sense you cannot -- if you don't grow it, you can't sell it. So because of that, you have to stay in a balanced scenario where you have adequate inventory compression in your stores to drive your sales. And if you get too many stores, you can't feed them. That's where Fluent was the day I arrived. We had more stores than we can feed. We were 12 to 14 hours from truck to the customer bag. That sounds like a great thing, but it was a terrible thing, because the company was in constant volatility as far as inventory and demand. So staying in balance is very important to me. Right now, we have -- we will continue to increase cultivation output based on the realization of an annual realization of what's already in place. Let me tell you that specifically. When we finish Q4, we will only have two crops coming out of Polk City. Polk City is 24,000 square foot greenhouse. And so because we brought Polk City online mid-year, it will only have two harvests in all of â22. So â23 Polk City is going to realize it's full harvest ratio, 5.5 harvest. Same thing with what we call new tablets, about 8,000 square foot of high quality flower. It only -- its first harvest was only in October, and so only in this last part of the year, did you see any benefit or contribution from that. So those two facilities coming into full production rate and full and giving a good annualized contribution are going to cause growth in â23 anyway. So now I need to make sure I have the stores online to fully realize that potential. And that's why I've picked in addition to the four, the next three are already ready for citing. If I fight those three now, we get those cited in the next few days, we're looking at August, September of opening those stores, if everything goes right. Once those stores are open, maybe up to five, then we're in perfect balance. We will realize the benefit, the annualized benefit of those two new facilities at the same time we're putting the new stores on. At the same time, the other four stores are coming up to speak, because remember, I've got those four to feet as well. At that moment, we are in perfect balance. The company is solid, it's cash flow positive, it's in perfect balance, which is really my goal from day one, is to get to this moment. Well, now we've got to grow and start low and go slow is kind of the industry model and I believe that's the right answer for us as well. We already did the over expansion in the over horizontal expansion game. And that was no fun in pulling back from that was a tremendous effort. So let's just grow in sequence and grow in balance. To grow in balance at that point, you don't need more stores. You've got to feed more stores. So you've got to go back to the other end of the stream. Our prior investments on the middle segment, which is manufacturing, extraction and packaging and labeling all of that, is still capable of handling more cultivation and think of it as three distinct silos. And so we have the manufacturing segment, which is still has plenty of capacity. I can add about another 70,000 square foot of cultivation into that facility and the manufacturing facility will handle it. My stores are now balanced, I'll go back to cultivation, get the cultivation up and running, move that cultivation through the stream, and then I can open up more stores. That cultivation ad that I mentioned to you allows me to go to 42 stores. Just by math, if you guys want to know it, that 42 stores with the additional cultivation that puts us as we're number six in the state right now, that puts us at number three in the state. So that's the plan, itâs not even a secret plan anymore, because I just told it to you. All right. Well, yes, you hit on the key things I was looking for and I really appreciate all the tremendous color. Thank you for taking my questions and keep up the great work. As there are no further questions on the phone lines. This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
EarningCall_1823	Good morning, ladies and gentlemen and thank you for standing by for Baozunâs Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managementâs prepared remarks, there will be a question-and-answer session. As a reminder, todayâs conference call is being recorded. I will now turn the meeting over to your host for todayâs call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations of Baozun. Please proceed, Wendy. Thank you, operator. Hello, everyone and thank you for joining us today. Our third quarter 2022 earnings release was distributed earlier and is available on our IR website at ir.baozun.com as well as on Globe Newswire services. They have also posted a PowerPoint presentation that accompanies our comments to the same IR website, where they are available for download. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Arthur Yu, Chief Financial Officer; Ms. Tracy Li, our Vice President of Strategic Business Development; and Ms. [indiscernible], President of Baozun Brand Management. Mr. Qiu will review the business operations and company highlights, followed by Mr. Yu, who will discuss financials and key operating metrics. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon managementâs current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the companyâs control, which may cause the companyâs actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the companyâs filings with the U.S. SEC and the announcement on the website of Hong Kong Stock Exchange. The company does not take any obligation to update any forward-looking statements, except as required under applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB and the comparisons are on year-over-year basis. Thank you, Wendy. Hello, everyone and thank you all for your time. Despite the ongoing challenging environment, we are encouraged with the resilience of business. As shown on Slide #2, in addition, we delivered double-digit growth in several categories, including luxury, fashion apparel, and FMCG. Moreover, our digital marketing and IT solutions revenue increased by 22%. While product sales continue to decline as planned as we keep optimizing distribution model, service revenue grows 4% year-over-year. Business development during the quarter was on track with a net addition of 7 brand partners for store operations. For existing client base, itâs worth noting that our business development also speaks to higher engagement in company channel and more value-added services. Our integrated omni-channel operations help brands to timely identify evolving e-commerce trends, thus enhancing resource allocation efficiency. During the quarter, over 42% of our brand engaged with us on an omni-channel approach. We continuously develop new features and tools to augment bundled value-added service. This quarter, we launched a short video cleaning tool, which automatically converts long video or live streaming record to short videos. We also co-developed with a marketplace and AI-based outbound calling system to make proactive communications to targeted brand customers. This helps us with better purchase frequency and conversion. We expanded the regional service centers to more cities recently and added new scope to them, supported by our customer service management systems or S-ANY as a backbone. We improved not only service quality, but also efficiency. The new module named S-ANY, which means event anywhere, has been developed and reported on to S-ANY for centrally managed content creation tool during the quarter. Despite the short-term headwinds from macro environment, we are glad to see that brand partners still take China as one of the most critical markets with a lot of potential. We continue to see a trend of digital transformation such as the rapid convergence between online and offline or OmO continues. Along with the digital transformation trend and the emphasis on our China-for-China strategy, brands are investing in IT solutions for the long-term. As such, our technology-related revenue sees notable growth with a sound pipeline for additional growth. In light of the strong demand, we officially launched BOCDOP, a Baozun omni-channel digital operation platform, a package solution with powerful customization capabilities. BOCDOP is centered on multiple channel order fulfillments and delivers powerful omni-channel D2C, data intelligence and decision support functionalities to our brand partners. Following many years of nonstop investment in technology, we started expanding upstream in recent years and target to evolve into a technology-driven omni-channel commerce player. Early this November, we announced our acquisition of Gap Greater China, one of the largest American specialty apparel brands. Along with the acquisition, we launched Baozun Brand Management, a new line of business that we see as a strategic addition that naturally flows from our core e-commerce service and technology offering. The acquisition is a good fit to develop BBM since we have worked with the brand for many years. We love it and believe in it. It has only been a few weeks since our announcement and we are still in the process of finalizing the acquisition. It is encouraging that since the news was there, many other brands have come to us to discuss about China-for-China strategy and about our technology-driven approach. It has become obvious that our brand management offering clearly can add more to our value proposition and it differentiates us from traditional service providers. While it will take time and hard work to fully actualize our vision, we believe a closed loop demand to supply value chain as well as integrated offline and online commerce will make brands unique and much more successful than before. Okay. Thank you, Vincent and hello everyone. Please turn to Slide 4. During the quarter, our total GMV increased by 16% to RMB18.6 billion, mainly due to outstanding performance of one leading electronics brand. Excluding this brand, the adjusted GMV would have been flat on a year-over-year basis. Total revenues declined by 8% to RMB1.7 billion, of which product sales declined by 29%, while service revenue increased by 4% compared with the same period of last year. Now, letâs turn to Slide #5 for a breakdown of revenue. Despite a decline in total revenue, several categories, including apparel and FMCG achieved double-digit growth. The value-added services has shown more resilience in this quarter, where digital marketing and IT solutions increased by 22% and warehousing and fulfillment service revenue declined by only 7%. Overall, the contribution from value-added service increased to 23% of total revenue in this quarter. Please turn to Slide #6. In this quarter, our cost of products decreased by 30% to RMB415 million, mainly due to continued efforts in optimizing product sales business. As a result despite a reduction of 29% in product sales revenue, the gross margin for product sales improved by 175 bps to 16.6%. Moreover, our overall gross margin improved by 800 bps to 76.2% driven by a combination of a higher service revenue mix and improving gross profit margin. Now turning to Slide #7, our non-GAAP income from operations was RMB17 million during the quarter, representing a non-GAAP operating profit margin of 1%. Non-GAAP net income was breakeven this quarter, mainly impacted by unfavorable exchange rate movements. Once again, we have prepared waterfall diagrams depicting our analysis of how our top line and bottom line evolved year-over-year. As a reminder, this analysis is unaudited and should solely be used as supporting members to aid discussion. First, on Slide #8, this diagram shows our net revenue walk from quarter three 2021 to quarter three 2022. In red, you can see the biggest item impacting our revenue this quarter was product sales, as we continued our efforts to optimize low-quality distribution revenue. Revenue from DM and IT services, which we view as value-added services, grew by 22% this quarter. Revenue from warehouse and logistics declined by 7%, mainly due to our decision to de-invest a subsidiary in the business, which I will address more later. Excluding such investment, revenue from warehouse and logistics should have been a slight increase year-over-year. On a positive note, this initiative led to better profitability. Now please turn to Slide #9 for the indicative walk of non-GAAP operating profits. As mentioned earlier, the combination of higher COVID-related cost and general operating deleverage due to lower revenue resulting in less profit for online store operation businesses, generally across all categories. However, as shown, non-GAAP operating profit from digital marketing and IT improved by RMB30 million year-over-year. In addition, the optimization of low-quality distribution business contributed RMB3 million and profits from warehouse and logistics business improved slightly by RMB1 million. We also generated a positive savings of RMB3 million from back office cost optimization. In cost optimization, we continue to gain higher efficiencies by centralizing our operating capabilities, rationalizing incentives and consolidating office footprint. More significantly, this quarter, we selected more cities such as Jinan, Chengdu and Enshi to expand the scope and scale of our regional service center. Now approximately 60% of our customer service staff are located in regional service centers. By placing customer service staff in regional centers, increased service flexibility and agility to better cope against COVID-induced top line. Moreover, we expanded beyond customer service and added more operating functions at regional service centers and live stream studios. We also further deepened our cooperation with Cainiao to leverage already established infrastructure and network. As you may recall, in the second quarter, we began to manage Cainiaoâs warehouses in the apparel category, got business referrals in luxury and premium sectors and also launched the mall solution for some of our key sportswear brands. Motivated by the synergies and after further careful evaluation, we decided to reduce our shareholding of Baobida, a last-mile delivery agency to minimize duplication with Cainiao. As you may recall last year, priority to our strategic alliance with Cainiao, we invested into Baobida to expand our logistics capabilities. However, now with Cainiao alliance, we decided to wait on our investment to a minority holding in Baobida. Now turning to Slide #10 about our cash flow, as of September 30, 2022, our cash and cash equivalents totaled RMB2.9 billion. In light of macro uncertainty, we continue to improve working capital efficiency. During the quarter, we launched new initiatives to further advance our back-end process to improve inventory management, billing and collection activities. Historically, in order to prepare for the Double 11 festival, the first quarter typically require peak operating cash flow. This third quarter benefiting from the progress in our inventory procurement planning, we were able to narrow the operating cash outflow to only RMB113 million compared with RMB740 million a year ago. During the quarter, we repurchased approximately 700,000 ADS for approximately $6.1 million. To-date, with our share buyback effort, we repurchased a cumulative total of $68 million in the last 9 months. Lastly, the voluntary conversion into a primary listing status on the main board of the stock exchange of Hong Kong Limited became effective on the November 1. Baozun is now a due primary leasing company on both Hong Kong Stock Exchange and the NASDAQ Global Select market. This marks a significant milestone in our capital market journey. Overall, our effectiveness in maintaining operations and supporting our partnersâ success during this period of macro uncertainty underscores the durability and strength of our business model. Throughout this year, we prioritized the cost transformation and working capital efficiency and our efforts are bearing fruits in terms of higher gross margin, lower operating expense and better cash flows. The establishment of Baozun Brand Management, along with the acquisition of Gap Greater China will provide us with good opportunity for future growth. This is my financial review section and that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thank you. [Operator Instructions] Our first question comes from the line of Alicia Yap from Citi. Please go ahead. Your line is open. Hi, thank you. Good evening management. Thanks for taking my questions. I have two questions. First, if management can share with us any preliminary color that you are seeing in terms of the consumption sentiment and across all the channels post a single stage. So in relation to that, how should we think about the overall GMV and revenue growth for the fourth quarter and if management also have any preliminary view on the 2023 outlook? Second question is your digital marketing and IT solution is actually doing pretty well. If you can elaborate a little bit what type of the brandâs customer and the operation metrics like the take rate that you can share with us related to this service? And will this revenue line continue to deliver decent growth in the coming quarters? So how should we think about that? Thank you. Okay. Thank you, Alicia. So maybe, Tracy can comment on the Double 11 performance and the consumption segment. And I can answer about the view of Q4 and next year. If thatâs okay? Tracy? No problem. Thanks for the question. I think right now, the China consumer is still very largely impact from the COVID-19 and also you can see in recent 2 months, actually from the logistics point of view, there is still a lot of lockdown and the impact on that. But on the Double 11 number, we can see the overhead number is still under pressure, which means there is no big increase. But the [indiscernible] is a very important window we see the trends on different categories. So on that part, actually, I can summarize some of the observation from our core from our BI system and also from the public system. We see from the consumption trend, the upward consumption, home improvement, self-scale and the sports lifestyle are the four heated schemes. Take the sport lifestyle scheme for example, the sales of the category outdoor, sports equipment, huger and also the sports footwear were listed by range from 28% to 9% year-on-year increase representative. And also, you can see the fitness mountain climbing, skinny, urban sports, camping, and the running and basketball contributes most of the category. And also, we can see the luxury and also previous screwy bags and luggage has been several â I mean a few of the categories are still reached steady growth in the past four quarters. So I think among these four areas, we still can see the opportunity for next year. But also, there are also down trends category like the fashion accessories and also menâs and womenâs footwear. And this has been reflected over two or three quarters decline in most of the daily sales and the big promotion. So for all of those part, we still need a steady growth way to sickout. And besides the category shift, I think we also see the platform pay more attention on the user retention and the acceleration of private domain [indiscernible] new business incrementals like Alisports [indiscernible] and doing newly added store member enrollment benefits, the membership compound and membership gifts. And all of this have gave our potential to collaborate brands and platform together on the digital marketing and also interactive technology related. So I think on that part, we can back to other parts to talk about our next yearâs plan, yes. Okay. Thank you, Tracy. In regarding to the Q4 outlook, our current view is from the GMV perspective. We see some good momentum in electronics and FMCG. But we also see some strong headwinds in terms of the apparel and sportswear. So overall, we believe our Q4 GMV will be in line with the market, which is likely to be flat year-over-year. In terms of the revenue, at this moment, we still see the optimization of the low-quality product sales will continue unless the market sentiment pick up. So from a revenue perspective, we think there will be a low decline year-over-year. The main contributor factor is the product sales, which we continue to optimize. In terms of the next year, I think itâs a little bit too early to comment because there are still some very big factor, which is in the overall micro kind of condition and also the COVID policy. But our view for next year from a current perspective is conservative. And we want to plan on a conservative basis for the next year as well, i.e., to focus on the quality inside of focus on the growth. But on the â on your second question, Alicia, regarding the digital marketing and IT solutions, i.e., overview on the value-added service. I think thatâs one of the areas we see there is a quite strong momentum from our client base. So basically, at this moment, our brand partners start to focus on the medium and long-term investments of the business in China. So therefore, we have seen a strong kind of the pipeline from the value-added service like the IT solutions like the digital marketing and the market-related kind of proposals from our offerings. So we think that will continue. And given the investments into the technology in the last few years, I think Baozun is well positioned to take on those opportunities at the current market situation. Okay? Thank you. We will take our next question. Our next question comes from the line of Charlie Chen from China Renaissance. Please go ahead. You line is open. Thanks, management for taking my questions. I got two questions here. The first one is regarding the GMV combination. So I can see in this quarter, the GMV contribution from non-Tmall channel seems to be a little bit lower than last year, 4Q 2021. So can you explain whatâs the rationale and background behind this? And whatâs the long-term goal of this GMV growth between Tmall and non-Tmall channel? Thatâs the first question. And the second question is regarding the GAAP acquisition as well as the whole restructuring. So can you give us more color about the progress after you acquired announced the acquisition of GAAP. And also, I can see Baozun seems to be transforming from a pure marketing agency to a more comprehensive service company. So how do you expect the length of this transition period? When do you see the synergies or integration should be completed and we can see some results or impact going forward? Thank you. Actually, how about Charlie, do you have to talk about the brand management for the second question? Maybe Sandrine, can you take this one when we tie together this is ready. Yes, sure. Hello, Charlie. This is Sandrine. Thank you for your question. So itâs about 3 weeks, we have signed with [Technical Difficulty], we have not [Technical Difficulty] the acquisition [Technical Difficulty] happen and generally, if everything goes smoothly on the approval procedure. So we are very mobilized in the corporation, which now focuses on really taking a deep dive with a different GAAP function to enable a deeper understanding of the operation today and [indiscernible]. And then based on this we will be able to pretty much more detail. But still I understand you want to have it bit of color. So for the time being, what we are learning from the feedback confirming what we were seeing in the â what weâre seeing here in the [indiscernible]. That the one hand, there will be some quick wins in terms of a bit of a restructuring and cost cutting, mainly can the fact that we are now managing from [indiscernible] Chinese company. And then going forward, as we mentioned earlier, we see some real [indiscernible] around product that can be [Technical Difficulty] relevant way. And as you may remember, we have full freedom on the supply chain. The supply chain is ours, so we can really improve the speed market reactivity to trends and also bring some elements that are more locally relevant to in the product design and development. Thatâs one aspect. The other aspect is ready to work and actually, the first one, weâre also trending to date, to work on the gross margin and reduce the discount level, which are in our view, too high today. And we believe that by differentiating products by channels, which is not really done today, we can really improve the [indiscernible]. The third aspect, which would be [indiscernible] is for us to revamp the current portfolio of stores. So itâs not a about opening many more stores [indiscernible] going to be really to make the current stores both in terms of [indiscernible] and in terms of operations much better than what we have today. So this is pretty as much cover I can give to the based. With all this, financially, we think that it can translate into a very significant reduction of the loss in â23. We consider that loss can be reduced by [Technical Difficulty] it be in â22. Then we will see a further reduction of loss in â24 in order to reach breakeven point in â25 and profit in â26. So that is for GAAP. And I would leave it to Wendy to allocate the other questions to add some other people. Okay. Thanks Sandrine. Charlie, let me maybe answer your question on the Tmall. So the trends you have seen is actually impacted by a major electronics brands outperforming in quarter three. So if we excluding the increase of this one single brand, our Tmall percentage has actually dropped a non-Tmall has increased by a single digit. So thatâs the true reflection of whatâs going on in the non-Tmall channel. And in addition, our omni-channel strategy is actually not ways of purpose to push the people from the Tmall to a non-Tmal channel. Itâs actually to encourage people to go for the omni-channel, which has increased the stickiness and to a more value-added service from Baozun to the client. So by this quarter, we have 42% of our total brand partners through spoken to operate of omni-channel holder. So this is our current situation. Thank you. Thank you. We will take our next question. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead. Your line is open. Thanks, management for taking my question. I have two questions. My first question is, could management share some color about change of domestic versus international brands? And my second question is, could management share some updates about the cooperation with Cainiao and [indiscernible] about expansion into Southeast Asia market? Thanks. Sure. No problem. Hello, thanks for the question. I think in terms of the â to win in the consumer side, I think they are facing the same pressure no matters following our local brands, how to solve the short-term problem and how to invest in longer program to win [indiscernible]. But for the online segments, we can see actually most of the players are still emphasizing the importancy of the online part because of the relatively for store performance in recent quarters. So right now, actually, we are working with our brand partners to come out with a 3-year plan to talk about how to connect with their consumers directly and then how to allocate their budgets smartly, I mean, cross-channel and also to reach the direct communication with the consumer. And also from the â for the local brands part, we are â we are very likely to share. We have some break during the past few months to seek the collaboration opportunity in professional way areas like IT service, content marketing, an interactive marketing technology and the consumer customer service. I think in the longer run, the professional in specific areas still will be the win in the service market. Thank you. Okay. Thank you, Tracy. In regarding to the Cainiao, we have continued our good progress in terms of catching the synergy. So as we mentioned in the past, we see the synergy coming from three areas. So, the first one is joint BD. So, where is the Cainiao and Alibaba ecosystem, we would be able to â I mean we are seeing some additional BD opportunity coming in from the ecosystem, so which is helping both Baozun logistics and also Baozun as whole to conduct new business. The second one, we see is actually to utilizing the scale and even structure of Cainiao. So, basically, in terms of the warehousing and in terms of the last-mile delivery Cainiao style has provided a very good kind of support for us to get more resource. And finally, we see as the technology enhancement basically previously, is actually Baozun makes the investment into the technology on the logistics part. And now we can utilize the Cainiao network on the technology enhancement like RFID technology, which is giving us more efficiency when we operate in the warehouse. So, overall, we think we are in the good trend with our alliance with Cainiao. In terms of the Southeast Asia expansion, we are continuing to focus on building our own capability in that region. And also our approach is trying to replicate some best practices and take the learnings we have from operating the e-commerce in China. But also our approach in the Southeast Asia is to work closely with the brand to grow the e-commerce offering in that region. So, while we have made more progress, we will come to report back to the market. Thank you. We will take our next question. Our next question comes from the line of Wang Zhihao from CICC. Please go ahead. Your line is open. Hi. Good evening management. Thank you for taking my question. We noticed that the number of brand partners for store operations increased. As the macro environment is weak, could you please share something about customer acquisition strategy used in this quarter? And could you please share some details from the new brand partners such as the industry, scale and the main channels we help them to operate? Thank you. Okay. Thank you. Tracy, would you like to take on? And then I can maybe add on more color after you. Sure. Thanks for the question. For the last quarter, actually, most of our new wins focusing on our new revenue source, which is the IT client and also digital marketing clients. And you can see actually, they are combined with our emerging category like our CUC category and also the luxury category. So, which indicates actually our strategy on the one-stop solution, which means we come â actually, we start from the operation, but we extended our service to other part strategy works. And you can see actually in this market, we can see some of our clients actually invest a lot in the long-term strategy, including the interactive marketing and also data and also infrastructure setup. Yes. Arthur, do you have any other entry question â answer for this? No, I think another thing I would like to add is in terms of the value-added service, we are utilizing the omni-channel and also utilizing the foundation we have built over the time, we think that will be also the new business coming in the next few quarters. Thatâs it. [Operator Instructions] The next question comes from the line of [indiscernible] from Guangfa Securities. Please go ahead. Your line is open. Hello management team. So, I have two questions. The first one is about the luxury revenue has reached past growth during the past quarter. So, could you please elaborate over on the future strategies for expanding the luxury category? Also do you have a certain benchmark percentage of luxury categories contributed to the revenue? My second question is, do you have the investment strategy for the 2023? Thank you. Okay. Let me answer your second question first. And then Tracy can cover the luxury question. Yes. In terms of the investment strategy, as you have seen, we recently made the announcement of acquiring Greater Chinaâs business. So, in the short-term, our focus will be building the Gap China business and building the Baozun brand management type a new business unit. So, we will focus our efforts on integration and also transition to make sure it is a success. And in terms of the investment, our focus will, in the short-term be, the brand-related investments will be our focus. So I mentioned in the last few quarters, Baozun has made investments either the minority investments or the controlling investment into six brands. And we have made some good progress in terms of those brands, which in Double 11, the GMV from those fixed rents, adding together has grown over 200% year-over-year, which shows the enhancement of Baozun adding value to those brands. And also forecast the Double 11 performance has also been good. The GMV has grown 22% year-over-year for the Gap doing Double 11, which outperforms the market. All of this shows was Baozun enhancement, we will be able to add more value to those brands growth kind of story. At the same time, when we are looking at the investment, we are also proactively optimizing our investment portfolio. As mentioned earlier, the Baobida, which is the last mile delivery investments we made, we actually practically introduced another strategic investor to take the controlling stake and make auto become a minority stake. This is because this investment is a little bit duplicate to our strategic alliance to await Cainiao. So, with that in mind we actually optimized our investment portfolio to turn our self from a majority to turn our self from a majority shareholder into a minority shareholder. Looking at the medium to longer term, I think our investment priorities are focused on the international expansion and also building technology capability on top of the brand management. And with the current market condition, we actually keep an open eye on the good value assets as we did for the Gap China acquisition, okay. So, thatâs on the investment strategy. So, Tracy, maybe you had something on the luxury business. Yes. Tracy, can you hear me? On mute. Yes, come back to the luxury story. I think we need to look to the industry from different angles. In short-term, actually, definitely, the market is facing pressures on the slowing down growth, take this Double 11, for example, many brands have ramped up in variety and intensively of any base to enhance the sales such as deeper discount, interest-free installments and also GMV â GWP based. But on the other hand, we see many of our brand partners are investing for the longer â middle to longer strategy. Some of them take these 2 years as opportunities to adjust their pricing strategy. They are more focusing on the product innovation itself and also the brands group, the emphasis on the consumer-centric and increase their budgets on content marketing and the data infrastructure. We see a lot of innovations initiate happening in this Double 11. The leap to [indiscernible] and also, you see a lot of limited addition SKUs and online fashion shoes has moving to the live stream topics to continue to drive the sales and also to attract new members. So, I think that is the true size of the factor base currently in the industry. And for Baozun, we still treat luxury as our strategic part of our overall business. Because of the luxury market is still growing, they still have lower penetration, and we see a lot of duties in new pipelines right now. And we in the longer run, I think itâs not just rely on one or two cases. We rooted in, I think over 10 years practice in fashion and then we develop our luxury industry solutions in more forward-looking strategy, which is more omni-channel with leading IT solutions and more consumer driven with a strong in-house sales team and more reliable and value-added service related to logistics solutions. And with all of this, we have the strong belief to grow with the market in the next 1 year or 2 years. Thank you. Thank you. We will take our next question. Our next question comes from the line of Charlie Chen from China Renaissance. Please go ahead. Your line is open. Thanks management for taking my questions again. So, I have one question regarding the launch of BOC, DOP. So, I heard Vincent mentioned that. So, can you share more color about this topic? And how do you think about the cost and the top line contribution for 2023? Thank you. Thank you for the question. This is Vincent. I will talk about the concept of this is in BOC, DOP, what we call is BOCDOP. In Chinese, we gave you a Chinese name called the [indiscernible] its product line or solution. And then Arthur, maybe you can talk more about the revenue of local expectations. Yes. Actually, in the past several years, Baozunâs core system, we call this a middle-end system, including all the order fulfillment, other management and processing system and also other fulfillment system. We call this middle end. This middle end or DOP, Digital Operating Platform plays a very important role to support an omni-channel retail and D2C-based business. Because all these traditional ERPs, they donât have these kind of offerings. I mean China, because of the omni-channel and the online/offline integration is much faster and advanced than the other countries in the market. So, there is a strong demand in the local market for this kind of system. With this system, all the brands can operate their retail and D2C business. They can open stores on Tmall and JD and WeChat everywhere in the same time. And they can process all the orders from different channels and make sure they can deliver all these orders to their customers. So, that is the system. So, previously, itâs just about the highly customized system for each of the clients Baozun did as the other players. Recently, we put a lot of investment in the packaging and the product types of this solution. But right now, I think the productization level is much higher than before. So, we package this as a solution. Itâs more ready to market. So, we are trying to market the solution to Baozun client base and also other new clients and also some medium and small size of the clients trying to help us with them with omni-channel solution strategy. So, that is the concept of the products. We are seeing very good progress and we are trying to make it better in future, the near future. And Arthur about the revenue, whatâs your view on that? Yes. Yes. Sure. So, Charlie, thanks for the question. From a financial point of view, I think we may continue the investments into technology, which is to build the competitive advantage of Baozun over our competitors. And from the introduction of the BOCDOP, which is actually helping us to commercialize those technology in a more advanced way. So, looking forward, we will be able to see the investment side, we continue to make a similar amount of investments into technology year-over-year. So, the cost would not increase. However, we foresee the revenue from the technology will increase year-over-year because our better structured, productization and also commercialization of our IT offerings. So, in return that will help us to drive our profit margin from the type offering into the market. One more thing. Thank you, Arthur. One more thing is not only support all the clients with omni-channel order processing and fulfilling capabilities, but also with all the data collected from different channels, we can also deliver a much better business intelligence capability and decision support capability to all the clients. Yes. Thank you. Yes. And also in addition to that, I think investments into technology not only benefits the traditional e-commerce business, it will also benefit the Baozun business management business as well. So, with the Gap China, we will be able to use our technology to drive the transformation of the brand we acquired as well. So, that will help to create more value. Thank you, operator. And in closing, on behalf of the Baozunâs management team, we would like to thank you for your participation in todayâs call. If you require any further information, feel free to reach out to the IR team. Thank you for joining us today. This concludes the call.
EarningCall_1824	Greetings. Welcome to the Safe-T Group Limited Third Quarter 2022 Earnings 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. At this time, I will turn the conference over to Shachar Daniel, Co-Founder and CEO. Mr. Daniel, you may now begin. Thank you and welcome everyone to Safe-T Groupâs 2022 third quarter earnings results conference call. As is customary, weâve Shai Avnit, our Chief Financial Officer. I would like to provide a brief review of our business operations, summarize our accomplishments, and then turn the call over to Shai who will briefly discuss the financial results of the third quarter and nine months period before we open the call to questions. We are excited to present seven consecutive quarters of revenue growth. Safe-T today is a different company that it was a year or two years ago and right where we planned it to be. I would like to explain how we successfully accelerated our growth quarter-by-quarter. On a corporate level, all the actions and activities taken in the recent quarters led to revenues of $13.6 million for first nine months of 2022 already exceeding full-year 2021 revenues and presenting an increase of 109%, compared to the nine month period of 2021. Our greatest achievement this quarter was the ability to balance between continued growth and operating profit loss. While maintaining our growth, we managed to significantly reduce our overall expenses and decrease our bottom line loss. Our efforts to reduce operating expenses resulted in a 25% reduction in net loss and a 29% decrease in adjusted EBITDA loss. I would like to address one more important subject and that is our recent funding initiatives. In May 2022, we secured a $2 million non-dilutive credit line from a leading Israeli bank. In August 2022, we announced a strategic financing of up to $4 million. The $4 million in financing is including a commitment for the [$14 million] [ph] with the additional $2 million to be made available subject to achievement of certain milestones. A successful customer acquisition program, allowed the waiver by the investor of the milestone condition for the second part of the funding and we secured the second funding of $2 million, which in total will be made up relative to the company through a series of cash installments until July 2023. We are extremely proud to execute these fundings that support the company growth without impacting our shareholders at the current market valuation, resulting in the addition of over $4 million on top of September 30, 2022 capital resources. On a business level, I would like to provide a short summary of our enterprise privacy business, NetNut. NetNut operates in the fast growing market of IP Proxy in which with each year the demand for solution in this field increases. Although several companies operate in this sector, the ability to provide and support enormous number of customers and [its risk] [ph] is not trivial. NetNut wholesale network has been established and developed five years ago, and during recent years, we have invested a wide range of resources, including building an experienced motivated marketing team to grow and strengthen its network. I am proud to say that today our network and infrastructure are one of the most experienced and reliable in the market, serving hundreds of customers. In recent months, we redesigned our scalable infrastructure in order to meet growing demand and continue to scale as we expand with our partners and customers. We recently announced that our network doubled its usage volume within one month with more than 36 billion requests [processed] [ph] the latest spike in usage. Our ability to handle over 100% increase in traffic loads within a short period of time and [indiscernible] business without affecting performance is gaining customer confidence in our solution. In the past month, we recognized traction for new vertical and exciting markets such as cybersecurity companies, increased demand from our car and the new e-commerce customer and with this increased inquiries for advertising for detection, mitigation, and prevention solutions. Advertising fraud is an existing and growing industry issue, one that costs a waste of billions of dollars annually for both enterprises and consumers. According to business of apps, the total cost of advertising fraud in 2022 reached to $81 billion predicted to increase to $100 billion by 2023. We expect demand for this segment to keep growing and to represent bigger share in deposits from our privacy enterprise units. During the first quarter, from the beginning of the year 2022, our consumer privacy and cybersecurity business evolved significantly as well. We're excited to launch our solution in additional platforms, making them accessible to Android users, as well as for iOS and Apple devices users. By launching across the top mobile platforms, we expanded our offering to additional [thousands] [ph] of potential users. Last month, we announced one of the biggest milestones to date of our consumer privacy business that reached 5 million in downloads in a very short time. Moreover, our Apple iOS privacy application is ranking among the Top 10 privacy applications in the category of productivity in the U.S. App Store. Similar to our enterprise privacy business, our expert professional team and our marketing and technology capabilities contribute greatly to our growth. In addition, the expansion of our user base for the consumer also depends on our ability to successfully acquire customers. Customers is our business, main assets and investments in user acquisition translating into future high margin recurring revenues. Our model estimates revenue for each acquired customer for the duration of their lifetime value, which is LTV period. Under this plan, a significant portion of our certain marketing expenses reflected in our P&L is simply our investment in acquiring users, which we believe that according to our model will translate into more predictable future revenue streams. For example, during the third quarter, we invested $1.2 million in customer acquisition, which has already returned in a very, very short time 20% of the investment. We believe that this investment will generate millions in future and in revenues. Before going further, I would like to turn the call over to Shai to discuss the financials for the quarter in more detail. Shai, go ahead. Thank you, Shachar. I will begin with a summary of our third quarter 2022 financial results, which are compared to our third quarter 2021 results unless otherwise stated. All figures in this summary were rounded up for simplicity. Revenue for the third quarter of 2022 totaled $4.8 million, a 42% increase compared to revenues of $3.4 million for the third quarter of 2021. The growth is attributed to an organic increase in enterprise privacy business and consumer business revenues. Gross profit for the third quarter of 2022 was $2.6 million, compared to a gross profit for the [corresponding period] [ph] in 2021 of $1.8 billion only. The increase in gross profit was primarily driven by the increased revenues. Operating expenses in the third quarter of 2022 totaled $5.1 million, compared to $6.2 million in the equivalent quarter of 2021. As of September 30, 2022, the company's cash and cash equivalents balance [segregated] [ph] to $3.8 million, compared to $4 million on June 30, 2022. These company's cash balance for September 30, 2022 does not account up for up to additional $4.3 million in future funds under its recently secured credit facility and investment financing. As of September 30, 2022, shareholders' equity totaled $15.7 million or approximately $4.8 per outstanding American Depository Share, compared to shareholders' equity of $17.3 million or approximately $5.7 per ADS as of June 30, 2022. Net loss for the third quarter of 2022 totaled $2.4 million or $0.07 basic loss per ordinary share, compared to a net loss of $3.7 million or $0.12 basic loss per ordinary share as of September 30, 2021. Adjusted EBITDA loss decreased sharply to $1.7 million, compared to an adjusted EBITDA loss of $3.1 million for the equivalent quarter in 2021. Lastly, I wanted to touch base upon our share count as it stands today. On an outstanding basis, we have around 32.6 million ordinary shares, which equal to approximately 3.26 million ADSs. On a fully diluted basis, we currently have around 49.4 million shares or 4.94 million ADSs outstanding. Thank you, Shai. In summary, during the third quarter this year, we continued to realize our mission, including the delivery of significant revenue growth, reducing our loss, and expanding our solutions reach. On a personal note, we are not indifferent to the share price and the capital markets as many other companies, Safe-T too suffered from the challenging market conditions. Over the past year, our financial results show that we are building a high growth company with high growth margins. Our board and team are committed to building a [solid robust] [ph] company as a top priority and over time we believe that the value of our business will become greater because of the decisions being made now and will translate into shareholder value. Alongside our commitment to improving our business operations, we are also committed to expanding awareness of [Safe-T] [ph] through more frequent contact and participation at investment conferences. Looking ahead, we have a well-defined roadmap for execution, technology innovation, and expansion plans for the near term. The cybersecurity and privacy market are going into a global multi-billion dollar opportunity in response to the incredible surge in privacy and cyber-attack issues for both organizations and individuals. We are optimistic regarding the future of the company and are building our business plans to support our continuing efforts to improve financial results. Thank you. [Operator Instructions] Thank you. And our first question is from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your questions. Hi, great. Thanks for taking my questions. First, can you break down the third quarter revenue consumer versus enterprises? And now that your acquisitions have anniversaried, what are reasonable growth targets for each of these businesses? Okay. So, the breakdown is around $2.6 million for the consumers privacy and cybersecurity business and around [2.2] [ph] for the privacy enterprise business. What's the other question, Brian? I'm curious, you know the growth rates are currently impacted still by the acquisition of CyberKick year-over-year in the third quarter, right? You had a full quarter, but you didn't have a full quarter last year. So, I'm curiousâ¦ Yes. Okay. No, you're right. Sorry. I apologize. You're right. Yes, so, in the press release, you talk about challenging market conditions. So, given the economics uncertainty, I'm curious, has there been an impact on your enterprise business, whether it's slower spend by enterprises, any change in sales cycles? What has been the impact to your business? Okay. So, I wanted to explain what I meant in my [quote] [ph] in the PR. From a business commercial perspective, I would be totally honest, no impact. Meaning, it goes very well. You see the growth, you see the numbers. When I say challenging market conditions I meant to the capital markets. No, not something that I can point as significant, you know here and there, but it's always the routine. Always we will have market conditions, but I cannot point of something significant that impact our business. I think that we met our â all our targets even more. I'm talking from market conditions, it's capital markets. Yes. Okay. So again, back to consumer enterprise as you think about going forward, which business might grow faster going forward? Is the consumer side given the capital that you have for that? And what are reasonable growth targets for those two businesses? Okay. So, basically as you see in the last quarter, as you can see around 50/50, sometimes it's 60/40, but this is more or less the split and this is the target of the company. We do not have any specific preference for one of them. And just to elaborate, so the â as we mentioned in the PR, the enterprise business is basically in a breakeven. It can be profitable very soon. And at this point of time, we don't have plans to invest more resources, but we have plans to grow organically and to stay profitable or around the breakeven, it's going very well. The demand is unbelievable and we think that we can do it without any further investments. In the consumer business, as I mentioned, few times in the past and also in the â now in this call, and we can divide our expenses for two parts. One is the operation expenses, which is very, very efficient, but the most significant investment is the consumer acquisition. As you saw in the last two quarters, two very, very, let's say blended organizations like a commercial bank or like a strategic investors shows a huge belief in our [indiscernible] model, and they invested in the consumer acquisition. Meaning, for us it's not a loss. It's an investment. We have many ways to fund it externally without diluting our investors. And it's not only us, it's part of this business if you go to other B2C companies. The giants and the small â if the model is working, if the team is performing. So, we have many organizations that love this model because it gives you a great IRR over the time, and fast returns and itâs very stable. So, basically, these are the plans for the coming future for both [business events] [ph]. And just to [order it] [ph] differently, so, do you think consumer can grow 25% plus and enterprise maybe grows a little bit slower since you're not investing as much in it? How do you think about their revenue growth rates going forward? You know what, Brian, I cannot point on the number and divide it to percentage. I didn't say that I think â I didn't say because I don't think so. The enterprise business is growing organically without any further investments. Meaning, we are using the profits in order to scale the team, to scale the infrastructure, to add more marketing activities. I think that we â in the next quarter, we will see around 50/50 between both of them needs to grow. It depends, you know sometimes it's the season, sometimes it's the situation around the privacy, sometimes it's [shining] [ph], sometimes the consumer is shining, but I cannot point on a specific business unit that is going to grow more than the other. Okay. So, basically Brian, I think as I told you in the last call regarding the internal formulas and conversion rates that we have, we are keeping it quite confidential, not due to the capital markets, but due to the competition. I think that if you look around, you will see that any company in the [B2C] [ph] exposing their conversion rates, etcetera, but I can tell you one thing that our conversion rates, the churn rates, the lifetime value, and the CPA, which is the cost per acquisition according to statistics are in the top. As I mentioned now, we are in the first 10 places in the app store and productivity because of this statistic and this performance of our deal. By the way, this is our sweet spot, right. The ability of our team to have a great marketing and sales performance and the independent statistics. Great. And then I guess I have one follow-up to that without giving me Safe-Tâs information, what are industry standard conversion rates? You say you're at the top, what would be a standard number? You said that if you look at the â you said the industry standards for the conversion rates, if you look at them, you're well â I think, what I think you were intimating is that you're well above that. What are you comparing that to? What are the averages in the industry for conversion rates? Okay. So, it's a good question, but I don't â to be honest, I don't have in front of me. And the conversion rate is something that each company choose to present sometimes what it's good for. What I mean, you know download and the conversion is between the download to paying a customer. Now, over the time, over the last two years, no, you have also churn rate. So, you need to aggregate the number for all the paying customers versus the downloads. And then it's the win number, but if it's very interesting for you, I'm willing to jump on a different call with you and to discuss about the market specifics and the market standard. Thank you. [Operator Instructions] The next question is from the line of Jason Kolbert with Dawson James. Please proceed with your question. Mr. Kolbert, please proceed. Your line is open for questions. Thank you. Just can you go through what the final share count is after the reverse split? I didn't catch that. One second. Opening it. [Multiple Speakers] Just a minute. Okay. The share count ADS perspective right now is about 3.26 million ADSs outstanding. Okay. Thank you. And you talked a little bit about reducing expenses in the quarter, but according to the filings, I see that selling and marketing was actually up cost of goods as a percent really didn't change. R&D didn't change. So, I just see it was focused on G&A. So, that correct? All of the expenses broken up by R&D, sales and marketing, G&A and also cost of goods, what direction do we expect that to run? Okay. So basically, our current expenses, we think we can optimize the revenues and we build an infrastructure, as I mentioned also in the call, we invested a lot in the last quarters to build the infrastructure from product and technology perspective, [indiscernible] resources perspective, and we think that our costs should remain more or less the same, while we think that we can scale up with revenues based on more or less the same cost. So, this is the account trend that we have for the next quarters. And I know you're hesitant to give a revenue guidance, but we have been anticipating that this kind of a year of building a base with, kind of, as you move out on the traditional hockey stick plan. So, is it going to take more time to realize those significant revenues? I mean, I had you out to 50 million in 2025? And so, I'm trying to understand what you're thinking strategically in terms of when you're going to be able to leverage those revenues across the infrastructure? Well, [Technical Difficulty] cost of goods across, you know you said you had essentially a fixed cost of goods and then as revenues grow, you're going to build. So, I'm trying to understand how your revenues are going to build over the next couple of years? Okay. So, if you look at the [indiscernible] targets, our targets since last year, which basically were better than this target is to have a 50% [growth] year-over-year. If you will calculate, you will see that if we meet this plan, we will be in 2025 in around $50 million in revenues. So, I think that our current revenues are significantly growing. The company in 2018 was a $1.4 million in revenues. Now, in 2022 it is almost, you see the numbers and you can calculate regarding the whole year. And if it goes like this, I said â like this, I think that it's totally significant growth, significant revenue, leveraging everything just trying to understand what specifically you want to understand. No, that's fine. I just wanted to hear you say that you're still on track for that growth rate. And talk a little bit about cash on the balance sheet and kind of what the â you said that it's been a difficult capital financing market. Tell me a little bit about, you know how you're planning to manage the current cash? And how long do you think it will last? Okay. So, we have â weâre at â the company now is in a very good position because we have kind of [new plants] [ph]. One of them can take us further ahead with the current cash. And we have, as Shai mentioned, we have [indiscernible] in the PR, you can see that we are on top of the current cash for September 30. We have additional $4 million committed from the bank and from the strategic investors. We're paying installments in the next few quarters. So, basically, we have the current cash to support the growth and to support the current customers and technology of the company. As I mentioned to Brian, our consumer acquisition plan is very attractive for many investors to come and be partners. The rev-share model that we did with the last strategic investor. So, from consumer acquisition perspective, due to the fact that our model is working very well and is very attractive from IR perspective, we think that we can fund it even forever on this rev-share model and keep the company to be, look at the difference between the cash in the last â in the end of the second quarter to the end of the third quarter and [indiscernible] that we can keep like this for many quarters. And again, in the phase of the market positions and in many other terms, but we have some plans and we will adjust the plan according to the market conditions and the growth rate that we will define for the company. So, I hear you saying is that you can take the current cash balance and with adjudicating expenses, you can manage on this cash balance until their market conditions allow you to bring more cash into the company.
EarningCall_1825	Good morning. My name is Denis and I will be your conference Operator today. At this time, I would like to welcome everyone to the Nordson Corporation fourth quarter and fiscal year 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speakersâ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star, one again. I would now like to turn the conference over to Lara Mahoney, Vice President of Investor Relations and Corporate Communications. Please go ahead. Thank you, good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. Iâm here with Sundaram Nagarajan, our President and CEO, and Joseph Kelley, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, December 15, 2022 to report Nordsonâs fiscal year 2022 fourth quarter and full year results. You can find both our press release as well as our webcast slide presentation that we will refer to during todayâs call on our website at www.nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until December 29, 2022. During this conference call, references to non-GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metrics has been provided in the press release issued yesterday. Before we begin, please refer to Slide 2 of our presentation where we note that certain statements regarding our future performance that are made during this call may be forward-looking based upon Nordsonâs current expectations. These statements may involve a number of risks, uncertainties and other factors as discussed in the companyâs filings with the Securities and Exchange Commission that could cause actual results to differ. Moving to todayâs agenda on Slide 3, Naga will discuss fourth quarter and full year highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the three business segments. Joe also will talk about the year-end balance sheet and cash flow. Naga will conclude with a high level commentary about our enterprise performance, including an update on the Ascend strategy as well as our fiscal 2023 first quarter and full year guidance. We will then be happy to take your questions. As I reflect on the past few years and in particular 2022, the Nordson team managed through supply chain constraints, inflation at a 40-year high, increasing currency pressures, labor challenges, and COVID-19 shutdowns, and yet we have achieved a second consecutive year of record results in fiscal 2022. I want to thank our incredible employees who have remained focused on our customers and successfully leveraged our NBS Next growth framework to prioritize their time, efforts and resources on the best growth opportunities during the year. We finished 2022 with a strong fourth quarter performance and carry momentum into 2023 related to the holistic deployment of NBS Next and our Ascend strategy. This is critical as we enter 2023. The environment will likely be as full of macro changes and challenges as the last two years. Iâll speak more to this in a few moments, but I will now turn the call over to Joe to provide more detailed perspectives on our financial results for this quarter and fiscal 2022. On Slide No. 5, youâll see fourth quarter 2022 sales were $684 million, an increase of 14% compared to fourth quarter sales of $599 million. The increase was primarily related to 18% organic growth plus the NDC acquisition, offset by unfavorable currency impacts of 8%. The 18% organic sales increase was driven by solid 14% volume growth and approximately 4% in pricing as we passed through cost inflation. The growth was in all geographies and most product lines with particularly strong demand in polymer processing, electronics and medical, and headwinds resulted from the U.S. dollar strengthening against the euro, the British pound, the Japanese yen, and the Chinese yuan during the fourth quarter. Early here in fiscal 2023, some of this increased pressure has subsided, moving back closer to the third quarter levels when the year-over-year currency impact on sales was unfavorable 5%. Gross profits increased 10% over the prior year to $363 million or 53% of sales compared to $331 million or 55% of sales in the prior year fourth quarter. The double-digit growth in profit dollars was driven by the strong sales growth while the year-over-year margin decrease of 200 basis points was influenced by several factors. Most significant was the passing through of cost inflation which, while relatively neutral from a gross profit dollar perspective, diluted the margins approximately 140 basis points. Additionally, the significant strengthening of the U.S. dollar pressures the margins of our businesses that have U.S. dollar-denominated manufacturing costs and sell denominated in euros or other foreign currencies. These two factors contributed to the 200 basis point decline in margin percent while delivering a significant 17% constant currency growth in gross profit dollars. Operating profit was $178 million in the quarter or 26% of sales, as 17% increase from the prior year. Strong double-digit organic sales growth at attractive incremental margins more than offset the 10% unfavorable year-over-year currency impact on operating profit. Consolidated Nordson organic incremental operating profit margin inclusive of the currency changes was 43% in the quarter. Looking at non-operating expenses, other net expenses decreased $12 million year-over-year, relatively evenly split between lower non-operating pension costs and increased foreign currency exchange gains. The lower non-operating pension costs are sustainable heading into 2023 while the currency exchange gains resulted from the significant currency fluctuations in the quarter and are not likely to repeat. Tax expense was $36 million for an effective tax rate of 20% in the quarter, slightly below the full year and forecasted rate of 21%. Net income in the quarter totaled $141 million or $2.44 per share, representing a 28% increase from the prior year earnings. This improvement is reflective of the 14% year-over-year increase in sales and, more importantly, consistent application of the NBS Next growth framework which leads to steady profitable growth with attractive incremental margins. Sales for fiscal year 2022 were a record $2.6 billion, an increase of 10% compared to the prior yearâs record sales result. This change in sales included an organic increase of 11%, a 3% increase primarily from the NDC acquisition. This growth was partially offset by unfavorable currency impacts of 4%. Also a company record, adjusted operating profit was $707 million or 27% of sales, which reflects a 15% increase over the prior year, or on a constant currency basis growth of 21%. Organic incremental operating profit margins on the year were 55%, which is above the targeted range of 40% to 45%. Adjusted diluted earnings per share were $9.43, a 22% increase from the prior year, and EBITDA for the full year increased to $807 million or 31% of sales. Industrial precision solution sales of $356 million increased 13% compared to the prior year fourth quarter. Organic growth in the quarter was 16% and the NDC acquisition added 7%. This growth was offset by an unfavorable currency impact of 10%. Robust demand in the polymer processing product line plus steady growth in industrial coating products and packaging product lines in the food and beverage industry, as well as the industrial end markets, drove this quarterâs results. All major geographies contributed to the quarterâs growth. Operating profit for the quarter was $110 million or 31% of sales, which is an increase of 8% compared to the prior year operating profit of $103 million. This growth was driven primarily by leveraging organic sales growth at incremental margins of 43% plus the benefit of the NDC acquisition. Medical and fluid solution sales of $181 million increased 11% compared to the prior yearâs fourth quarter. This change included an increase in organic sales volume of 15% and a 4% decrease related to unfavorable currency impacts. Growth was across all product lines with robust growth in the biopharma fluid component product line. All geographies contributed to this quarterâs growth with particular strength in the Americas. Fourth quarter operating profit was $52 million or 29% of sales, which is an increase of 2% compared to the prior year operating profit of $51 million. This growth was driven by sales volume leverage offset by manufacturing inefficiencies following the third quarter factory consolidation within the fluid dispense division. These challenges should be temporary in nature as the consolidated factory ramps to targeted production levels and efficiency. Turning to Slide 9, we will see advanced technology solution sales of $147 million increased 21% compared to the prior yearâs fourth quarter. This change included an increase in organic sales of 28% offset by a 7% decrease related to unfavorable currency impacts. This segment had double digit growth in both the test and inspection and electronics dispense product lines, serving predominantly the semiconductor and electronics end markets. All geographies contributed to this quarterâs growth. Fourth quarter operating profit increased $21 million or 131% from the prior year to $38 million or 26% of sales in the quarter. The growth was driven by sales volume leverage and realization of benefits from cost control measures taken in the prior year. Deployment of our NBS Next growth framework continues to be a key element in the success of this segment delivering profitable growth. Finally turning to the balance sheet and cash flow on Slide 10, through our disciplined approach to capital deployment, we ended the quarter with a strong balance sheet and abundant borrowing capacity. Cash totaled $163 million and net debt was $574 million, resulting in a 0.7 times leverage based on a trailing 12 months EBITDA. Free cash flow in the quarter was $161 million, which brings the full year 2022 free cash flow total to $462 million or a conversion rate on net income of 90%. This conversion rate was below the normal target of 100% because of strategic investments being made in inventory throughout the year to address supply chain constraints and support the backlog. Dividend payments were $37 million in the quarter, reflective of the 27% increase in the annual dividend that our board approved during the quarter. Also, with the ongoing market volatility, we again capitalized on the opportunistic repurchase of shares within the quarter, bringing the year-to-date total spent in share repurchases to over $260 million at an average repurchase price of $219 per share. For modeling purposes, in fiscal 2023 assume an estimated effective tax rate of 20% to 22% and capital expenditures of approximately $50 million to $55 million, with minimal cash pension contributions given the pension annuitization that took place earlier this year. In summary, fourth quarter 2022 was a very strong finish to a record fiscal 2022 performance. All three segments contributed both sales growth and operating profit growth in the quarter. Consolidated revenue growth of 14% despite an 8% currency headwind and delivering 43% incremental margins on the organic growth evidences our NBS Next growth framework delivering results. This makes for the second consecutive year of delivering record annual sales and earnings. Thank you Joe. Again, thank you to the Nordson team for another strong year. I want to re-emphasize Joeâs comments - we achieved record results with all segments contributing to both sales growth and operating profit growth for the quarter and year. Thatâs quite an accomplishment. Beyond the financial results, Iâm very pleased with our steady deployment of the NBS Next growth framework. NBS Next has evolved from an aspiration to a working model within the business. This data driven segmentation framework drives choices, focus and simplification. We now have two divisions that have achieved market leading business performance. They use the framework as a competitive advantage to deliver on time quality products to their top customers, winning the business and growing market share. Leaders from these divisions are now sharing their lessons learned internally by hosting facility tours and teaching at our Nordson accelerated training programs. Earlier this month, I visited several sites in Europe and Iâm excited by the progress I observed. The questions that were asked as well as the progress that was shared during the manufacturing facility tours clearly demonstrates the engagement and adoption of the framework as the way we do business. NBS Next is becoming a competitive advantage for Nordson moving into 2023 and beyond. This new capability combined with the core elements of the Nordson business model has positioned us to deliver results through more challenging economic demand environments. First among the core elements of Nordsonâs business model is the fundamental focus on our customers. Our intimate customer relationships allow us to add value by solving critical customer problems, whether that is enabling their new product ideas or helping them operate more efficiently. This customer partnership has been further strengthened over the past two years as we worked through numerous challenges to consistently deliver quality product. Second is the diversity of our business from both a geographic and end market perspective. For example, in fiscal 2022 we overcame the shutdown of our Shanghai, China IPS facility as a result of our strength in other regions. We also serve a wide variety of end markets including consumer non-durables, medical, electronics, industrial and more. Within these end markets, we are diversified; for example, a quarter of our medical platform is the fluid component solutions used in biopharmaceutical applications, while the remaining is our interventional solutions that includes catheters, cannulas and medical balloons. In addition, our electronics applications are split between dispense applications and more secular test and inspection processes. This diversification makes us largely recession resilient or able to withstand the ebbs and flows of individual end market applications or geographies which may be more cyclical or volatile in any given period. Finally, the third core element of our business model is the recurring revenue. Over 50% of our sales mix is aftermarket parts and consumables, which has been proven to sustain our business even in down periods. These core elements position our base business to perform well during periods of economic uncertainty. In addition, the execution of a disciplined M&A strategy continues to strengthen our position technology platforms. The NDC measurement and control division which we acquired in November of 2021 is integrating well and contributed nicely to the fiscal 2022 performance. Recently we closed the CyberOptics acquisition which expands our applications in the optical test and inspection end market. We are excited about the opportunities we see in that space. Turning now to the outlook on Slide 12, we enter fiscal 2023 with approximately $1 billion in backlog, inclusive of the acquired CyberOptics backlog. The book-to-bill in the fourth quarter of 2022 was slightly unfavorable and the year-over-year currency headwinds are significant, as evidenced in our fiscal fourth quarter results. Based on the combination of order entry, backlog, customer delivery timing requests and current foreign currency exchange rates, we anticipate delivering sales growth in the range of 1% to 7% above the record fiscal 2022. This includes an estimated 2% currency headwind. Full year earnings are forecasted in the range of $8.75 to $10.10 per share. This full-year guidance assumes an unfavorable currency impact of approximately 3% on the earnings, the increased interest rate environment, and contemplates some demand uncertainty related to the back half of 2023. As you will see on Slide 13, the first quarter 2023 sales are forecasted in the range of $605 million to $630 million and adjusted earnings in the range of $1.85 to $2 per diluted share. Included in the forecasted guidance are the unfavorable currency impacts of approximately 4% on sales and 7% on earnings. Again, I want to thank our employees, customers and shareholders for your continued support. We will now open the phone lines for questions. Thanks. A couple questions. First Naga and Joe, can you maybe talk about the order cadence you saw over the course of fiscal Q4 and what youâve seen thus far in the fiscal â23? Maybe talk about some of the pluses and minuses youâre seeing across the business and how that informs your view on what youâre calling a bit of an uncertain second half in the fiscal year, and then I have a follow-up. If you think about ATS, the backlog is pretty strong going into Q1 and first half. For the full year, we expect single digit organic growth for the year. Both T&I--you know, both our test and inspection and our dispense business are expected to grow in the year. If you look at our industrial business, or IPS, end markets remain solid. A couple of our system businesses are expected to deliver and are expected to grow double digits, while our consumer non-durables are expected to sustain their current record levels. If you think about MFS, our forecast is again this segment is also expected to grow in single digits. What you see is our interventional components, the medical fluid components, if you think about the interventional side, which is our balloons and catheters, this business is returning back to pre-COVID levels of high single digit growth. Our fluid components, which is approximately 20% of this business, had a great two years of double-digit growth, and what we understand, and we watch this end market with some caution as some of our customers have built up some excess inventory, but important to remember this is 20% of our MFS segment. Hopefully that gives you some color, and this is what is embedded in our guidance for the quarter and the year. Yes, Iâd just add, as we said, as it trended throughout the year, we saw strong performance in â21, â22 - most of the quarters, we were running with a favorable book to bill, and in Q4 some of that started to moderate. The book to bill was slightly unfavorable. Understood. Maybe if you can just comment a little bit more on M&A, and even CyberOptics - you know, what are you incorporating into the guide as it relates to EPS accretion from CyberOptics, and what are you seeing looking forward in terms of actionability within your current M&A pipeline? Thank you. As it relates to CyberOptics, we are very pleased, everything is on track. Just a reminder, itâs about a $100 million business, weâre integrating it into our test and inspection division. We paid about 18.5 times EBITDA and as we execute synergies over the next year or so, weâre going to take that to roughly 14.5 times EBITDA. Everything that weâve got in CyberOptics is what we expected and weâre very pleased with it, and thatâs--. As it relates specifically to our guidance, what it will be, when you look at our full year guidance, the assumption is that that is slightly accretive for the full year. Joe, let me take the question around our acquisition pipeline. Maybe just as a reminder, Matt, we have clear strategic and financial criteria when we look at acquisition ideas and when we consummate deals, and just as a reminder, the strategic criteria really are weâre looking for differentiated position technologies, we are looking for businesses that serve markets with high growth rates, certainly looking for businesses that have a customer-centric business model. On the financial side, we certainly look for businesses that have attractive growth rates and with Nordson-like gross margins, EBITDA margins around 20% with a clear path with expansion opportunities and an ROIC that is ahead of our cost of capital in five to seven years. Thatâs really sort of our--thatâs what informs what deals we pursue and what we consummate finally. Our focus still remains on scaling our medical and test and inspection platforms. We certainly will look at adjacent position technologies if they meet our strategic and financial criteria. Having provided you that background, our pipeline is pretty healthy. We are pursuing a number of different opportunities. Certainly weâll act on them thoughtfully based on our strategic and financial criteria - thatâs really important to remember. We are confident in our ability to deliver on $500 million of acquisitions, which is an important part of us reaching the $3 billion target we set for ourselves in 2021. Again, another reminder, we have acquired about $210 million worth of acquisitions towards that $500 million already, right - we did NDC, CyberOptics and Fluortek, and all of that gives us about $210 million. One other thing I would comment, through what we have done thus far, we have now been opened to many types of deals - for example, CyberOptics was a public company deal, NDC was a carve-out from a public company in Europe, so we feel good about our pipeline. We will remain strategically and financially diligent and disciplined. Maybe help me understand some of the comments you had about the seasonality through the year. Obviously the first answer to Mattâs question was very helpful as far as how youâre thinking about the various moving pieces and orders trends; but Naga, you highlighted that the guidance assumes uncertainty around what the second half looked like, so maybe you could talk a little bit about what the seasonal assumptions look like, how the front half compares and the back half compared to what normal seasonality looks like, and whatâs behind the uncertainty that youâve got embedded in the back half. Iâm not saying itâs not prudent, I just want to make sure I understand where you guys are coming from. Mike, if you think about our full year guide, basically the midpoint is 4% sales growth and flat earnings on the full year. The simple way to think about this is acquisitions are roughly 4%, so the organic growth is probably 2% to 3%, and this is offset by our assumption around unfavorable currency impacts. The organic growth is coming in at incremental margins of 40% to 45%. The CyberOptics acquisition, as I mentioned before, is slightly accretive, but whatâs embedded in the earnings guidance is thereâs a currency headwind of about 3%, so when you think about 1% in sales of currency headwind, it translates to roughly 1.3 to 1.5 headwind on the earnings line. Interest expense is driving an increase given the change in interest rates, plus this year we did benefit from some foreign currency hedge gains, so those are not forecasted to repeat, so thatâs about a $0.20 headwind or 2% headwind to earnings. Thatâs the full year, kind of what weâre thinking about. To your question on timing, we feel pretty good about our visibility into the first half of the year. Weâre entering with a billion-dollar backlog, so we see organic growth in the first half of the year of about 4% to 5% - this is following two consecutive years of double-digit organic growth. But when we look at the second half, our guidance assumes that the organic growth is actually relatively flat at the midpoint, and so--and thatâs just given our visibility. We have good visibility to the first half, I would tell you, given some of our backlog in systems orders, and limited visibility to the second half. When you think about the first half, itâs actually not evenly split between Q1 and Q2. Your have Chinese New Year last year fell in Q2; this year, it falls into Q1, plus as you know, our systems business has grown nicely and so with that backlog, when we look at the scheduled customer system delivery dates, Q2 will be much stronger than Q3. Thatâs kind of how weâre thinking about it. When you think about FX, the FX headwind is going to be heavier in Q1 and Q2 at about 4% to 5% unfavorable on sales, where that will moderate to be relatively neutral in the back half provided we stay at forecasted exchange rates. No, that was great. To paraphrase quickly, first quarter youâve got some headwinds, second quarter you feel really good about the delivery schedule you see based on the backlog, but maybe some expectations for orders to be somewhat soft, youâre just not sure what the environment look like, so the back half then, youâve got maybe below normal seasonality 2Q to 3Q and weâll just see how it plays out as we get closer to that date. Is that a fair, very quick interpretation? Thatâs a fair interpretation, yes. The FX is a heavier impact in the first half then the second half, just given the way exchange rates have moved. Thatâs a fair interpretation. Then the second and related piece is on the medical piece, you mentioned the inefficiencies. Could you maybe just help bucket out what kind of an impact that was in the quarter and then when you think the timing of that could get back towards what you think the more normal run rate for margins are in that segment? Yes Mike, so the reference there is to our MFS segment, which saw--you know, in the quarter had nice 15% growth and the operating profit grew, but it was negatively impacted, I would tell you, by approximately probably $5 million due to some manufacturing inefficiencies. This again was tied to the consolidation of the factories Q3, and so as we look into 2023, that factory as it ramps up to targeted efficiency levels and production levels, that will start to mitigate as we move throughout, I would tell you, the first half of â23. Hi, good morning. Naga and Joe, I want to go back to your comments around the moderating book to bill here. I know lead times have been extended on the order side. Are we seeing some normalization thatâs driving some of that as well, or are you seeing specific volatility in certain end markets or geographies? Just any thoughts there. Yes, if you think about our Q4 contribution and the full year contribution, it was fairly broad-based, all our business lines across all the three segments, and the same can be said for our geographies, so historic two years [indiscernible] organic growth going into [indiscernible]. As Joe said, we have good backlog, and we talked about by those different end markets, so in general we feel very strongly about first half, we have good visibility. I think second half, the best way I would tell you is our assumptions are it is a flat kind of organic growth, is really what we are assuming. Remember, this is flat on historic revenues in second half of 2022. Thatâs helpful. Then I know you talked about some timing of deliveries, you know, Q1 versus Q2, but was there any timing deliveries maybe that shifted into Q4 that could have been Q1? I know organic was maybe quite a bit stronger than we had anticipated. Just any thoughts there, thanks. Yes Allison, I would tell you Q4, particularly on the systems side, came in stronger than anticipated, and so there was a portion of that which you could contribute to timing, perhaps getting pulled into Q4 as opposed to Q1, so that does contribute a little bit to our guidance in Q1. Just on advanced tech, it sounds like great finish to the year, kind of in line-ish growth versus the rest. Iâm just wondering if you can parse out momentum in test and inspection versus electronics. Any softness around--you know, emerging softness around the consumer-related portions of your business or any of this China regulation noise, either on the core or on CyberOptics? Yes, I think the way to think about this, our test and inspection business continues to have strong momentum coming into the year, and as we can see it, we feel good about our test and inspection business. We do see some moderation or book to bill that is unfavorable in our dispense side of the business, which has a portion of it is consumer-related, not all of it, because there is still semiconductor. But overall, we feel good that both these product lines will grow in the year and ATS as a segment would have single digit growth in the year, so feel good about that. First half, really good visibility, second half is a flattish kind of assumption. In terms of China regulation, Jeff, is one of the questions you asked, we donât see any significant impact that we know of today, so we donât really see that. No, I think that covers it. Then just on the guide, maybe itâs around macro uncertainty but the range is pretty wide, and maybe outside of the sales range, what are some of the other moving pieces that will inform maybe the wider range, and then if you can just give us an interest expense number so we can kind of fine-tune how to think about the increase there, thatâd be great. Thanks. Yes Jeff, maybe Iâll take the interest expense first. I would think about that going from roughly $20 million to $40 million based on the interest rate movements and our average powering balances â22 to â23. As it relates to our guide in terms of the sales range, again I just would go back and share that we have pretty good visibility into Q1 and Q2, and so the first half, the organic growth for the first half is 4% to 5%. You can think about acquisitions as a 4% favorable, and then FX is 4% to 5% unfavorable in the first half. When we go to the back half, itâs really relatively flat - organic sales 4%, acquisition, and then FX starts to moderate and is maybe flat to negative 1%. Then as it relates to the range, I would tell you that--you know, appreciate roughly 50% systems and 50% parts and consumables, and we have pretty good visibility on the systems side. The parts and consumables again is a shorter book and ship time frame, and so weâre just looking at our order entry and monitoring that and being--you know, putting a range particularly on the back half, and so as you see our Q1 guidance is relatively tight and, to your point on the earnings, the interest expense will be a headwind to earnings in Q1 particularly. Yes, thanks. A similar line of questioning here. Basically, can you help us think through how much price youâre carrying into next year, and then how much visibility you have on that and how much youâre thinking about upside-downside on that, and sort of similar question on volume. Yes, so if you think about it, our price, we exited Q4 with roughly 4% realization in price, so as you can appreciate, that impact grew throughout 2022 as we realized inflation and then we took pricing actions to pass that inflation through. As a reminder, our stated strategy was to pass through the inflation, not the inflation plus 55% gross margins, and we were effective on that. It had a diluted impact on the percentage but we were effective. To your point, weâre carrying into Q1, so part of the first half growth, organic growth of 4% to 5%, you can probably think about that as roughly split - half would be pricing given the timing of price realization last year, and half of that would be volume. Then as you can appreciate, as you get then to the back half of next year, the pricing impact on a year-over-year basis will be less simply because we had realized more throughout the year as we experienced the inflation. All that said, we clearly remain in a dynamic environment and responsive. As the cost pressures and inflation change throughout the year, we will be responsive, and again weâre targeting and weâve been successful in maintaining incremental operating profit margins of 40% to 45% on the organic growth - we delivered that in Q3 at 43, we delivered that for the full year at 55%, which was actually ahead of our target, so thatâs how we think about it and, to your point, weâll continue to manage that. One thing to add to our pricing effectiveness, there are a couple of things to remember. The gross margins are over 50%, right, that is because we create value for our customers, and this value allows us to get paid for any cost increases that we have, so weâve been very prudent in managing the cost increases. But youâve got to remember, we create value and we get paid for it. The second thing I would tell you, from our customersâ point of view, our cost structure in their total cost stack is a fairly small number, so we are a low cost component creating incredible value and critical value, and that allows us to continue to be effective along price increases. But you know, we certainly want to protect our customer relationships and weâre being prudent, and thatâs what youâre going to see us do in this environment that we are experiencing. Just thinking through the guidance range, maybe just a little bit of a clarifying point, are you--when you think about the high end versus the low end, are there certain end markets that you are risking higher or lower? You made the comment earlier about the systems versus components, but can you just sort of clarify if there is specific markets that youâre particularly watching in driving that wide range or is it just the broad economic uncertainty? I think the way to think about our range is that, first as Joe indicated and reiterated, we are very comfortable because of the visibility we have and because of the system orders we have. There is a split between the first quarter and the second quarter given Chinese New Year timing as well as systems shipments. But second half, Connor, we are assuming flattish growth on some very historic record revenue levels that we were running in â22. We expect all of our segments to grow in the year, albeit single digits, so. The two end markets we are watching that weâve talked about is our biopharma fluid components, which is 20% of our MFS segment, itâs a small part of our MFS segment. That is where we have customer inventory is fairly high, from what we understand, so weâll watch that one. The other one that I indicated was our dispense business in the ATS segment, which has had some incredible growth here in the past two years. What you see--you know, coming into the quarter, there was some unfavorable book to bill trends there, so weâre watching that, so those would be the two we would be watching. Our industrial businesses seem to be remaining pretty solid, our system industrial businesses are actually growing very nicely. Our medical business is back to pre-COVID levels, which is our medical interventional business, I should say, so. Once again, if you would like to ask a question, simply press star then the number one on your telephone keypad. I have a question. Was interested to hear the call-out on the polymer product lines. I donât recall if that got a call-out in recent quarters, but curious if youâre seeing some emerging vibrancy in those markets or kind of a recap trend. Yes, I think that is a business--if you remember, a number of years, a few years ago, we had exited our [indiscernible] barrels business but we kept some parts of the business that we really liked which had some long term trends, and so--and certainly weâve had to address a number of cost structure issues in that business over the period of time. I have a great leadership team thatâs taken us through that and has positioned the business to go after the best growth opportunities there, and so all that work has resulted in a pretty nice growth rate. Again, this is a business that we liked. There were parts of the business we liked and there were parts we did not like, but I think weâre in a place where this is a good business and it is growing nicely for us. I wouldnât say this is our biggest strategic part of the company [indiscernible] medical growth and test and inspection growth, but it is a solid part of our portfolio. We really appreciate what the team has done in this part of the business to really reposition the business, and now it is growing. I would say a couple of things. There is certainly this whole trend around recycling, itâs a trend that is certainly benefiting this business. What we also see is in some parts of the business, there is some specialty film that is used in EV battery manufacturing that they have a pretty good customer base. Again, these are all small opportunities, Chris. I donât want to make it to be significant, but it really has pretty nice momentum in these two areas and the team is doing--and there is some bio plastic materials also that the team is working on, so. Again, singles and doubles is the way you want to think about [indiscernible]. I think the bigger takeaway should be the company is, you know, with some incredible leadership from our teams, reposition [indiscernible] better place and growing. Thank you. On ATS--or in MFS, rather, I wanted to look at the non-medical side. I think itâs basically EFD, something over a couple hundred million. Just want to remind what the customers and applications are there, the cyclicality and how thatâs positioned. Yes, that business is--you know, itâs actually one of our most diversified applications. Quite frankly, [indiscernible] fluid dispensing applications to electronics dispensing applications to life sciences. That business wins with applications, so itâs pretty diversified. [Indiscernible] GDP kind of growth is what it typically does, maybe a little bit more if the electronics cycle is going strong for them. Itâs a good business but a growing part of it is also life sciences. This does conclude the Q&A session of todayâs call. I will now turn the call back over to Naga for any closing comments. Thank you for your time and attention on todayâs call. Our core capabilities combined with the NBS Next growth framework positions us well for a dynamic environment. This was evidenced in 2022 and we expect it to position us well for fiscal 2023 as well. We remain focused on achieving our long term objective of delivering top tier revenue growth with leading margins and returns. This concludes the Nordson Corporation fourth quarter and fiscal year 2022 conference call. Thank you all for joining. You may now disconnect.
EarningCall_1826	All right. Good morning, everyone. Iâm Dara Mohsenian, Morgan Stanleyâs Household Products and Beverage analyst. Before we begin, just a quick disclosure. Please see the Morgan Stanley research website at www.morganstanley.com for important research disclosures and you can contact your Morgan Stanley representative if you have any questions. So with that, Iâm very pleased to welcome Constellation Brands and Garth Hankinson, Constellation CFO, to this fireside chat today. Constellationâs got a great track record of growth over the last decade driven by the beer business. And weâre going to start today with some comments from Garth, and then weâll go into Q&A from there. Thank you. Thanks, Dara. Obviously, weâre excited to be here today. Before we get started, we have some disclaimers here. I invite everyone to review our forward-looking statements and non-GAAP financial measures disclaimers, which can be found on pages two through four of the deck that we posted to our website yesterday. Reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed today are included in the slides or otherwise available on the companyâs website at ir.cbrands.com. And as a quick reminder, we just ended our fiscal third quarter, and we are in our quiet period. So today, I will not be sharing any results of operations or financial conditions for a Q3 fiscal year 2023. Now, as many of you are aware, we recently reached an important milestone for Constellation Brands. Last month, we transitioned to a single class of common stock and aligned the voting power and economic ownership of our shares. We want to thank our shareholders for their support of this important change and other governance enhancements combined with this transition. We believe our company is in an even stronger position to execute against our strategic initiatives and pursue our capital allocation priorities as a result of this transition. So today, Iâll be sharing in more detail how we intend to approach our capital allocation priorities moving forward. And why we are confident we will continue to build on the path of solid growth and value creation underpinned by those priorities. With that, letâs turn to slide five. About 3.5 years ago, our current leadership team began to come together following Bill Newlands appointment as CEO. From the outset, the team was committed to sustaining profitable growth and building shareholder value. And I am pleased to say that we have and continue to deliver against that commitment. Since the beginning of our 2019 fiscal year, we continue to extend our strong track record as a growth leader among large CPG companies. We accomplished this with disciplined investments to support the growth of our core industry-leading brands and by thoughtfully expanding on that solid foundation with innovative products and emerging brands aligned with consumer trends. We firmly believe this approach is key to driving total shareholder returns above those of our competitors. So we are proud to be ahead of our competitors on delivering value for our shareholders. But we are not complacent, and we remain strongly committed to sustaining high levels of performance. Moving to slide six. As I mentioned, we have a powerful collection of industry-leading brands that continue to deliver solid growth. Starting with our beer business. We are the number one supplier in high-end beer and have delivered 51 consecutive quarters of volume growth. As you see, Modelo is now the number two beer brand in the U.S. beer market and the number one beer in the high-end beer market. Modelo is now the number one or number two beer in 11 states, which is more than double the number of states three years ago. The brand has gained 3 share points since our fiscal 2019 and remained the number one share gainer in the entire U.S. beer category in our last sixth consecutive fiscal quarters. Another exciting opportunity for the Modelo family is our Chelada brand, which is now the number one RTD Chelada brand in the category. It has over 50% share of the segment and is driving 170% of the segment growth. So Chelada is no longer a niche business. It is a sizable platform, and we are excited as we expect to increase media investment by over 60%. And we continue to build on the opportunities within the Modelo family with a clear focus on maintaining the brand essence. So we are excited about the national launch of Modelo Oro next year, which has surpassed internal and external benchmarks in test markets. Moving to the Corona family. Corona Extra has regained its momentum, delivering 6% depletion growth in the second quarter. We believe this return to mid-single digit growth was not an accident, but a reflection of our disciplined efforts with this brand. Weâve continued to invest behind Corona, making it the Official Cerveza of Major League Baseball and launching the La Vida MÃ¡s Fina campaign, which has the highest scoring ads ever for the brand with three of the top five spots within the beer category this year, including the number one spot. We made these shifts in the brand thoughtfully and authentically. And consumers are responding as Corona Extra remains the number one most loved beer brand with both the general market and Hispanic consumers. As with Modelo, we are also developing new products within the Corona family to meet the consumer where theyâre headed. We will be launching Corona non-alcoholic next March to align with the growing interest consumers have shown in the non-alcoholic space with 60% more consumers having tried NA beer this year alone. Last but not certainly not least on the beer side, we are seeing a fantastic runway for Pacifico. The brand grew over 37% in the second quarter and was a top 10 share gainer in track channels, and the brandâs national awareness increased by 4 points in the last year. So we are increasing our investments in the brand through digital forward media for Gen Z audiences, which is a core demographic for this brand. That backdrop of strong core brands and thoughtful consumer-led innovation gives us confidence in our ability to continue to deliver against our medium-term net sales and operating margin targets. In fact, since fiscal 2019, despite the challenges faced by most businesses due to the pandemic, our beer business delivered net sales growth and average operating margin at the high end of our target ranges. Turning to slide seven. Our wine and spirits business has undergone a significant transformation over the last four years, shifting from a U.S. wholesaler focused, mainly on the mainstream segment, to becoming an omni-channel, global competitor primarily focused on the higher-end segment. This journey include building brands like Meiomi and the Prisoner Wine Company, which were only added to our portfolio a few years ago. These are now leading brands within the growing segments of the category. Itâs also included the sale of around 30 lower-priced brands to Gallo and the more recent divestiture of a smaller set of brands to the Wine Group. But the business has retained scale as we remain the number two supplier of wine in the U.S. market. As a result of these changes, approximately 60% of our portfolio mix on a net sales basis is above $15 per bottle, a dramatic shift of the roughly 25% in fiscal 2019. But more importantly, in our second quarter, our largest premium and fine wine brands as well as our craft spirits brands, all delivered solid depletion growth rates. Furthermore, we are also driving growth in our wine and spirits business by shifting our geography and channel mix in line with consumer preferences. So we are pleased that the net sales mix contribution of international and DTC channels has increased by 600 basis points since fiscal 2019. And that in our second quarter, our international and DTC channels each delivered double-digit net sales growth year-over-year. That said, we know there is more progress to be made toward the growth and margin targets that we aim to deliver in our wine and spirits business. After adjusting the business reported fiscal 2022 net sales of approximately $2.1 billion and operating income of $470 million for the $44 million of net sales and the $26 million of operating income that the recently divested brands contributed, we anticipate net sales to be flat to down 2% and operating income to grow by 3% to 5% in our fiscal 2023. But ultimately, we continue to target top line organic growth of roughly 2% to 4% and operating margins of 28% to 29% over the medium-term. Moving to slide eight. The solid performance of our beer and wine and spirits businesses has supported consistent strong cash flow generation over the last few years. However, since fiscal 2019, the uses of that cash evolved to better align with the shift of our capital allocation priorities to focus on maintaining our investment grade credit rating, delivering cash returns to shareholders, advancing the brewery capacity expansion and construction processes in our beer business to support its continued strong growth, and lastly, executed on disciplined small M&A to fill gaps in our portfolio. To that end, between fiscal 2020 and fiscal 2022, we used approximately 50% of our cash flow in debt repayment, approximately 26% in dividends and share purchases, approximately 21% in capital expenditures and about 3% in mergers and acquisitions. Turning to slide nine. Our approach to capital allocation moving forward remains aligned with the priorities we introduced in fiscal 2020 to achieve a disciplined, balanced and thoughtful approach to support growth and value creation. First, we remain committed to our investment grade rating and to growing the dividend in line with earnings as key elements of a disciplined financial foundation. Second, we will continue to balance supporting the growth of the business with organic investments and delivering additional returns to shareholders through share purchases. And third, we will deploy excess cash to smaller acquisitions that fill portfolio gaps with a thoughtful and prudent approach. So letâs step through each of those in more detail. Moving to slide 10, as I mentioned earlier, over the last few years, we have significantly reduced our debt obligations to support our investment grade rating. Combined with the strong earnings growth delivered by our beer business, our net leverage ratio has been below the 3.5 times we have been targeting. To further reinforce our commitment to an even more solid investment grade rating, we will now be targeting a ratio of approximately three times. As a reminder, as of Q2 fiscal 2023, we are already operating in that 3 times range. However, when factoring in the financing for the cash payment associated with our recent transition to a single class stock structure, our net leverage would be 3.5 times on a pro forma basis. So while we expect to retain our investment grade rating, even when factoring that -- factoring in that financing, weâre also confident in our ability to return and operate at a 3 times net leverage target. To that end, youâll see our maturity profile and at the $1 billion loan that accounted for the majority of that financing was structured to have no prepayment penalty, which gives us optionality on how we choose to manage our progress towards meeting our 3 times target, particularly in the absence of any other debt coming due in our next fiscal year. Turning to slide 11. Another important element of our commitment to a disciplined financial foundation is targeting an approximately 30% dividend payout ratio. In line with that target, we returned approximately $1.7 billion to our shareholders in dividends over the last three fiscal years, which is over 4 times the amount we spent on M&A. Importantly, our payout level has been consistent with the average for our competitor group. So while our dividend yield has been below our competitors, this has been a result of the relatively strong performance of our share price. Going forward, we intend to continue to target a payout ratio of approximately 30% and will continue to evaluate our relative performance to offer an attractive dividend. Moving to slide 12. Given the strong growth of our beer business, we intend to continue to deploy capital to organic investments to support this momentum. As of the end of the second quarter, our brewery capacity in Mexico was approximately 41 million hectoliters, supporting an effective annualized supply of approximately 430 million cases. This included approximately 9 million hectoliters of capacity added between fiscal 2020 and fiscal 2022, as well as an incremental 2 million hectoliters unlocked from our brewery optimization and productivity initiatives. As we look ahead, we continue to expect adding another 25 million to 30 million hectoliters of capacity between fiscal 2023 and fiscal 2026. This will be supported by the $5 billion to $5.5 billion of investment over that same period. We are deploying this capacity through a series of expansion waves, which is consistent with the modular approach we have consistently adopted to maintain capital expenditure discipline and flexibility. Importantly, all of these expansions continue to advance in line with our plans. And on that note, I am pleased to confirm that we have recently broken ground on our new site in Veracruz. Turning to slide 13. As a balance to our investments in organic growth, we have also returned cash to our shareholders through share repurchases. Over the last three fiscal years, our share repurchase ratio has significantly exceeded the average of our competitors. And over our last six quarters through Q2, we have completed approximately $2.8 billion worth of repurchases, which exceeds our combined fiscal 2022 and anticipated fiscal 2023 capital expenditures by approximately $400 million. Looking ahead, we remain committed to executing share repurchases to at least cover dilution, but we also have approximately $1.2 billion of our repurchase capacity still in place and will remain opportunistic, particularly as we achieve incremental cash flow flexibility. Moving to slide 14. Judiciously deploying excess cash to M&A remains our last priority with a particular focus on small gap filling opportunities. Our recent acquisitions of My Favorite Neighbor and Lingua Franca as well as the purchase of the rest of Austin Cocktails from our venture portfolio, enhanced our wine and spirits business with supplemental offerings. All of these brands are delivering growth. And the cost of these acquisitions was largely covered by the divestiture of our ownership stake in another brand from our venture portfolio. Again, we intend to remain disciplined in our pursuit of any M&A opportunities, and weâll continue to pursue transactions that we believe are consumer-led, deliver growth momentum, provide compelling returns, fill portfolio gaps and offer synergy benefits. Lastly, turning to slide 15. I thank all of you for joining us and offer you a couple of recap takeaways. First, over the last three years, we have unquestionably delivered against our capital allocation priorities with clear determination. We consistently operated below our target leverage ratio. Weâre on track to exceed our $5 billion goal in cash returns to our shareholders by the end of this fiscal year, significantly increased the brewing capacity of our beer business through expansion and optimization projects, and weâve conducted a handful of small M&A transactions to further enhance our wine and spirits business with supplemental higher-growth brands. And second, as we look ahead, we continue to believe that the right framework to sustain profitable growth and build shareholder value is to: one, remain committed to a disciplined financial foundation with a solid investment grade rating and dividend growth in line with earnings; two, to balance organic investments to support growth and additional returns through share repurchases; and three, to thoughtfully and rigorously assess any deployment of excess cash to small acquisitions. Thank you. That was great. So I wanted to start on capital allocation. I think you sort of answered a lot of my questions in the presentation. But maybe to put a finer point on a couple of points on share repurchases? Is it more sort of opportunistic from here around stock price and ROI? Is it more consistent based on cash flow leverage? How do you think about that? And then on the M&A front, you clearly sounded like smaller, higher-growth acquisitions was a focus. So Iâm assuming medium to large-sized deals, unlikely not as much of a focus at this point, but maybe you can just give us a little more detail there. Yes, Dara. So I would start by saying weâre in a pretty enviable position given the growth of our brands, the top line and given the attractive margin profile that we have. We generate a good amount of cash. And so weâre able to really execute against all of the initiatives that I just outlined. As it relates specifically to share repurchases, share repurchases will continue to be a meaningful part of our capital priorities moving forward. Certainly, I think that you framed it as an either/or and I think itâs probably more of an and as we identify and our cash flow flexibility becomes clear, weâll have the ability to pull that lever if we want to. But in the near-term, we also have the ability to be opportunistic as conditions present themselves. So itâll be some, and some on the share of purchase front. Clearly I think you articulated pretty well and from an M&A perspective, I think that the recent past is a good reflection of the type of transactions that weâre looking at, whether itâs the transactions that we did this last year that we highlighted a couple minutes ago. If I look back a little bit further, things like the Meiomiâs, The Prisonerâs, the High Westâs of the world, those are the type of things that I think that you can expect as we look at M&A, keeping in mind thatâs the last of our list of capital allocation priorities. Great. Thatâs helpful. And then shifting the beer business, you mentioned the great long-term track record over the last few years, and thatâs really continued year-to-date here. Weâve seen a little more volatility in the scanner data recently. Some of that is probably around Thanksgiving timing, but just given itâs created a little bit of concern, normally we donât get as much into the short-term dynamics, but just any thoughts around some of the recent short-term volatility weâve seen in scanner data and some of the underlying drivers behind that, and your enthusiasm looking forward around the beer business in terms of the growth potential there? Yes, Dara, so, I think itâs important to say that we remain on track to deliver our full year from both the depletion and from a shipment perspective. And if you look at the recent scanner data, we continue to take share in the total categories. We continue to take share in the high end. I think that what youâve seen a little bit over the last couple weeks, and this is something that we monitor very closely as we always do and certainly given the context of the macroeconomic environment which weâre operating in, as we look at that, we think that some of what youâre seeing in the most recent periods is largely driven by performance in California. Certainly California first, this time last year is a really tough overlap where weâre kind of growing in the mid-teens -- at the mid teens range. But additionally thereâs a very different weather situation last year in southern California than this year. Last year it was sort of 20 degrees warmer than this year. And certainly beer consumption is driven in part by weather. And so those are things that weâve had to overcome this year. That being said, even in California, which, and I point out California because that makes up about 23% of our overall business, but even in that market with some of what youâve seen, we continue to take share again both in the broader category and in the high end. So outperforming the competitive the competitive set. If we look more broadly across the rest of the country, weâre doing really well in some of our non-traditional markets, in areas like Portland and Seattle, weâre up over 30%. Weâre up -- weâre up similar amounts in similar rates in places like Asheville and Richmond. We continue to perform well in New Orleans and South Dakota, Salt Lake City. So, this gets back to the runway of growth for Modelo specifically and the rest of the portfolio around some of the non-traditional markets and the distribution opportunities we have. So, net-net, weâre -- as I say, weâre in good shape to deliver the full year. Okay, great. Thatâs helpful. And just given the consumer environment weâre in, can you talk a little bit about macro impacts on your business, what youâre seeing from a consumer standpoint? Obviously with 100% premium portfolio in theory there could be some more pressure from the consumer spending weakness weâre seeing in general. But obviously your business has held up very well year-to-date. So how do you think through some of those impacts? Should we expect to see a bit more channel shift to some of those larger format retailers that are in the scanner data I mentioned, and less momentum and on premise? How do you sort of think through macro impacts, either in terms of less consumer trade down, channel mix shifts or whatever they may be in terms of the impact on your beer business? And maybe you can touch on the wine business also. Sure. So, there was a lot there. So, Iâll try to get to it all if I missed anything, just bring me back to it. But in terms of the macro returns, obviously this is something we pay a lot of attention to just giving the macroeconomic backdrop. Youâve heard us talk about before, one of the key metrics that we look at is, is by rate and by rate is the number of trips that the consumer makes to a retail outlet times the amount that they spend per trip. For the most recent month that we have data, weâre continuing to see very good performance. The consumerâs been very resilient specifically the high end beer consumers, well, as the Hispanic consumer continues to be holding up very, very nicely. That being said, again, this is something that, that we watch closely. I mean, I think the good news for the category and the good news for us is, as you think about some of the category dynamics more broadly is that, beverage alcohol only makes up about 1.5% of a consumerâs overall basket of goods. So itâs not necessarily a big driver for their expenditures. So itâs not necessarily a place that theyâre looking to cut for most consumers, somewhere in the neighborhood of 70%, they see beverage alcohol as a staple, not as a discretionary item. So itâs on the list of things that theyâre looking to purchase when they go to a store, not necessarily, an impulse buy. Based on the work that weâve done looking at past recessions, we also know that you pointed out that we have a higher end more premium portfolio, whether thatâs in beer or wine and spirits, that premiumization trend thatâs been going on for a long period of time, you donât really see that abate. You might see a little bit of a slowdown in terms of the growth rate, but youâre not necessarily seeing broad trade down. And then once you the economic environment sort of normalizes, you get back to the right back on the same kind of growth trajectory. So, I think that those are all net positives for us. Certainly as I say, this is something that we monitor regularly to the extent that we see any weakness. Obviously we have leverage to pull, whether those are things on a packaging or format perspective or from a pricing perspective, there are things that we can do to try to mitigate the impact if we see any areas of concern. Again, so far, we havenât seen those, the consumer remains resilient. On the channel shift -- when we look at IRI data, IRI data makes up about 50% of the overall category. So itâs a good indicator, but itâs not perfectly reflective of whatâs going on out there. And again, in IRI we continue to perform very, very, very well. In the on-premise, the on-premise is a channel that continues to bounce back from COVID, that our business pre-COVID on-premise account for about 15%, 16% of our overall net sales. We ended this past fiscal year at about 11%, and at the end of Q2, we were back up to 12%. So, weâre still seeing some nice growth there, but as you rightfully point out given the macroeconomic backdrop, that is a channel that we pay particularly close attention to because that is where consumers sometimes will make changes to their spending habits, right? So that doesnât mean that thereâs necessarily a change in consumption, it just is a change in where and how consumers consume. And then, we have additional non-track channels which again, have been growing nicely, but they face some the similar macroeconomic conditions that that the on-premise has. So, again we think that the consumers pretty resilient and weâre confident in our ability to meet the year. Okay, great. And thinking about your two largest brands on the beer side Modelo and Corona, can you talk a little bit about the growth opportunities for those brands going forward? And as you think about long-term growth, what the key drivers are there obviously theyâve had tremendous strength in recent years. How sustainable are some of those underlying drivers? And maybe specifically, and Iâll remind you if you forget this one but Modelo, Oro, just talk a little bit about your enthusiasm for that innovation coming up next fiscal year. Sure. So, and our growth drivers remain unchanged. I mean, if you look at Modelo, letâs start with Modelo, I mean, Modelo going to continue to be the biggest driver of growth for us over the medium term. We continue to have a lot of opportunity for distribution growth, whether thatâs basic distribution, which is just getting on the shelf for effective distribution, which is getting the allocation that you deserve given how quickly your product turns or our product turns, and given the profit profile of it, we think that, retailers need to treat shelf spaces their most precious asset and give it to the brands that, that have the profile that deserves that, that shelf space. And certainly weâve been successful with our shopper first shelf initiatives to increase our product placement over the last several years. So distribution continues to be a big opportunity for us. Again, weâre pretty well distributed across the coasts. But certainly thereâs a lot of opportunity for us in the interior of the country. And as I indicated, as we do move across the country into some of those, non-traditional or, what havenât been traditional to this point, markets for us, weâre seeing really good, great rates of growth. And on a brand like Modelo, which is now, the second largest brand in the category and the largest high end brand, it still doesnât have the same distribution as Corona, let alone Bud Light. So a lot of opportunity there for distribution. Continuing on with Modelo, certainly we have demographic tailwinds for us. The Hispanic consumer, demographics is expected to grow to kind of a 3%, 3.5% compound annual growth rate. So thatâll double over the next 20 years or so. So thatâs another opportunity for us or another tailwind for us. You mentioned Oro, certainly weâve been a little bit more active with Corona as it relates to innovation and brand extensions. We havenât been really up to this point with Modelo other than with Modelo Chelada, which as you heard my prepared remarks, this is a brand thatâs turned into be a bit of a sneaky, big brand with really good growth dynamics and a brand that weâre going to further invest in next year. And then weâll get to Oro right now, because you mentioned it, but Oro weâre really excited about, Oro, we test in three markets this past spring and summer. It exceeded our internal and external targets. And as a result, weâre excited to launch that in March. Itâs personally Iâm really excited about, itâs a great liquid and it really does capture an underlying consumer trend around wellness and better for you. So, weâll build that in the right way. Weâll make sure weâre building that in a sustainable way. But we think that thereâs, thatâs a big opportunity for us. And moving on to Corona, I mean, similar set of drivers, right? There are still opportunities for that brand with distribution. Itâs returned to growth nicely. Again, not as fully distributed, doesnât have the same number of points of distribution, as something like, Bud Light. So we think that thereâs still opportunity there. We had some issues the past couple years with some spot outages as it related to availability of things like glass that led to some, out of stocks with Premier. But Premier now is back fully in stock, and weâre doing a little bit of a transition there from glass to aluminum cans because thatâs what the consumer is looking for that type of product. So, we think that that can be a driver of growth. And we have some other initiatives within the Corona brand family that weâre equally excited about. So all in all, same set of drivers that, that weâve had. And again, thatâs why we have a lot of confidence and conviction in our near term growth algorithm. Okay. Great. Maybe we can end on beer margins. Obviously this year with the cost pressures in the industry, youâre not at that 39% to 40% long-term goal. As you think about returning to that over time, can you give us a little bit of sense of timing and specifically the back half of this year, youâre obviously at a lower margin rate than the first half based on your implied guidance. And some of that is, the cost curves. I think you have some depreciation coming up early next fiscal year. So, Iâm sort of assuming next year, first half is lower than the second half. Is that fair based on the way the cost curves work, et cetera? But also just a sense for that 39% to 40% how insight that is long-term coming off this aberrational year, this year to some extent with the cost pressure is being so severe. Yes, I mean, look, we continue to think that the right way to think about our beer margins is in that 39% to 40% over the medium term. As weâve said previously, in any one given year, weâre going to have more headwinds or tailwinds. Obviously, last year we had more tailwinds, so we were over 40% this year weâve had more headwinds. So, weâre going to be below 39% a bit. As we look forward to next year and I guess, I have to give you one caveat there is just given the sort of bizarre fiscal year end that we have, weâre in the process right now of going through our annual planning process, and so weâll have better line of sight around what margins look like in several months. And clearly, weâll provide guidance, when all that comes into focus probably, in line with our full year results. But that being said, next year as weâre looking forward to next year, we are going to have some similar headwinds. Certainly the inflationary environment is still with us. Obviously some things have abated, some of the commodities have abated off of their peak things like aluminum, but theyâre certainly not back to where they were, 24-months ago for sure. And so thatâs something that weâll still have to figure out exactly what the inflationary impact is next year. I think, as weâve talked about before our contracts for input costs are done on a calendar year basis, and theyâre done on a staggered basis. So weâre in the middle of negotiating some of those contracts right now. So again, weâll have more input, weâll have more clarity on that here in a few months. Certainly weâre going to continue to have some, as you noted that weâre going to have some depreciation drags. The ABA facility at Nava will come on fully online either at the end of this fiscal year, at the beginning of our next fiscal year. So thatâll be a bit of a headwind, as well as a full year of depreciation for some of the expansion weâve done at Obregon. So weâll have that drag. And then again, as we layer on incremental capacity, youâve got the fixed overhead absorption drag over the near term as you grow into that. So those are some of the drags. Obviously some of the things we do to offset that is weâll continue to take pricing. Weâve been very disciplined around our 1% to 2% pricing algorithm, and the flexibility of that gives us, last year we took more than 2% this year as we announced in our Q2 earnings, weâre going to take 2% to 3%. So above that, again next year weâll be in that 1% to 2%. I think we have to just see how the most recent pricing holds and what the impacts that has honestly, since they have any before we know how aggressive weâll be in that 1% to 2% range to cover some of those inflationary pressures. Weâre going to continue to work in our cost savings initiatives, as we always do in our footprint. And the team is really good about identifying ways to save dollars and take costs out. And I think that thatâs reflective of the 2 million hectoliters of a capacity that we added just through optimizing the footprint. Weâll continue to identify those type of initiatives. So again, Iâm being a little bit long winded to say that, itâs a little bit too early for us to tell you exactly what next yearâs going to look like, other than we know that weâve got some headwinds that weâre going to face. But, we have a number of initiatives underway that weâll do our best to cover those. One you did and weâre out of time, but you did ask the question, I guess around the timing of I would say that I think that your assessment is pretty accurate around the fact that weâll have some more pressure the first half of next year just given the way things like hedges get layered in and when those roll off. And so the first half of our current fiscal year is when we had the benefit of our most favorable hedges. And as we layered more in, obviously weâve protected the P&L but not at the same sort of favorability. So there likely will be an inverse of the impact next year than, than what you saw this year.
EarningCall_1827	Greetings, and welcome to Constellation Brands' Third Quarter Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Thank you, Rob. Good morning, all, and Happy New Year. Welcome to Constellation Brands third quarter fiscal 2023 conference call. I'm here this morning with our CEO, Bill Newlands; and our CFO, Garth Hankinson. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Before turning the call over to Bill, in line with prior quarters or like last, let me limit everyone to one question per person, which will help us to end our call on time. I hope you all had a great holiday season and that our products were able to play a role in some of your special moments with your family and friends. Since our last call in October, Constellation Brands reached a notable milestone in its history as a public company. As most of you know, in November, our shareholders approved the elimination of our Class B common stock. With that came the transition of our company to a single class of publicly listed stock, our Class A common stock, which provides our shareholders with equal one share, one vote rights. I want to thank everyone who supported this important enhancement to our company's corporate governance profile and capital structure. We believe that our leadership team now has an even stronger foundation to continue to build shareholder value through the strategic initiatives we adopted and have steadily advanced over the past nearly four years since I assumed the role of CEO. Since fiscal 2020, we agreed to focus on and put in place plans to: number one, continue to build powerful brands that people love; number two, develop consumer-led innovations aligned with emerging trends and consistently shape our portfolio for growth; number three, deploy capital in line with disciplined and balanced priorities; and number four, operate in a way that is good for business and good for the world. I'm pleased to say that we continue to build on a strong track record we have established against all of these strategic initiatives. Starting with number one, building our powerful portfolio of brands. Our beer business, despite a more recent series of headwinds, which we'll address in a few minutes, delivered its sixth consecutive quarter of leading share gains across the entire U.S. beer category in IRI channels that was primarily driven by our two largest brands, Modelo Especial and Corona Extra. In the third quarter, Modelo Especial maintained its position as the top share gainer and is the number one high-end beer brand, and Corona Extra was the third largest share gainer and the number three high-end beer brand. In fact, our beer business delivered 3.5 points of share gains and 54% in dollar sales growth when comparing the 52-week period that ended with our latest fiscal third quarter against the 52-week period that ended with our fiscal 2019. And comparing the same periods, the business contributed the highest dollar sales growth in the category, amounting to over $2.5 billion. In our Wine & Spirits business, our largest higher-end brands Meiomi, Kim Crawford, The Prisoner and High West, all delivered dollar sales growth and share gains in the third quarter. And comparing the 52-week period that ended our latest fiscal third quarter, against the 52-week period that ended our fiscal 2019, these brands achieved 72% dollar sales growth. Moving on to number two, consumer-led innovation and shaping our portfolio for growth. Many of you may be surprised to know that in our beer portfolio, our SKUs introduced over the past three years have driven 20% of the growth delivered by the business since the start of fiscal 2020. An important part of this growth has come from our Modelo, Chelada brands, which have evolved from a niche business to a sizable platform. In fiscal 2023 year-to-date, it has delivered 13.6 million cases of depletions, which already exceeds the brand's total deflations for all of last fiscal year. And in the third quarter, Modelo Chelada Limon y Sal moved up nine spots to become the sixth largest share gaining brand in IRI tracked channels. Beyond the Chelada brands, we continue to build on the opportunities within the Modelo family with a clear focus on maintaining brand investments. We are excited about the national launch of Modelo Oro in March which has surpassed internal and external benchmarks in test markets. In our Wine & Spirits business, innovation has also yielded strong results, increasing its contribution to net sales from 1% in fiscal 2020 to approximately 8% in fiscal '23 year-to-date. This expansion has been primarily driven by extending our largest higher-end brand, once again, Meiomi Kim, The Prisoner and High West. Notably, extensions in The Prisoner brand family, Blindfold, SALDO and Unshackled have contributed significant growth, especially Unshackled, which has grown to be half the size of The Prisoner brand in just four years. In addition, since the beginning of fiscal 2020, we have added five brands through acquisitions, like Bronco Wines, My Favorite Neighbor, Empathy Wines, Halpern and Kings and Austin Cocktails, all of which are in the higher-end segments of the wines and spirits categories that are contributing to growth. And we divested 36 brands, the vast majority of which were in the mainstream segment, which has mainly been in decline due to consumer-led premiumization trends. Given this free shaping of our portfolio, including the recent additional divestiture 62% of net sales in fiscal '23 year-to-date were from our higher-end brands. This is a dramatic shift from the 34% higher-end brands represented at the end of fiscal '19. Now turning to number three, capital allocation. In fiscal 2020, we introduced a thoughtfully structured approach designed to consistently deploy capital with discipline and balance. We made maintaining our investment-grade credit rating, our top capital allocation priority and reduced our net leverage ratio, excluding Canopy equity and earnings, from 4.5x at the end of fiscal '19 to 3x by the end of the second quarter of this fiscal year. This was partly driven by a $3.2 billion reduction in our debt levels and partly by strong earnings growth in our beer business. And then in the third quarter, these efforts gave us the flexibility to both accommodate the $1.5 billion financing for the elimination of our Class B shares and to maintain our investment-grade rating. As our net leverage ratio remained in line with our prior 3.5x target. However, we recently updated that set target to 3x, given our ability to previously achieve that target and the continued strong cash flow generation capabilities of our businesses. Our second priority became delivering cash returns to our shareholders, and we set a goal to return $5 billion in dividends and buybacks between fiscal 2020 and '23. We virtually completed that goal ahead of schedule in the third quarter and we're now on track to exceed the $5 billion target with the fourth quarter dividend payment announced today. As to our third priority, we sought to advance growing capacity expansions to support the strong growth in our beer business. Since the start of fiscal 2020, we added approximately 9 million hectoliters of capacity through growth investments and another 2 million hectoliters through brewery optimization and productivity initiatives. We are also on track to further diversify our production footprint with the development of our new brewery in Veracruz, where we have recently broken ground. And last in our capital allocation priorities was M&A, and since the start of fiscal '20, we have judiciously deployed excess cash through acquisitions with a strict focus on small gap filling higher-end brands. And the key strategic acquisitions we have executed over the last nearly four years are delivering top line growth. All in, we believe we have unquestionably upheld our capital allocation priorities and have even exceeded some of the associated targets we set out to achieve. Moving on to strategic initiative number four, operate in a way that is good for business and good for the world by advancing ESG goals. Our ambitions are to protect the environment and natural resources by serving as a model for water stewardship in our industry while reducing greenhouse gas emissions, to champion the professional development and advancement of women within our company, industry and communities, to enhance the economic development and prosperity in disadvantaged communities and to promote responsible beverage alcohol consumption. While we still have much work to do, I am proud to say we are making good progress towards our goals. To that end, in the third quarter, we released our 2022 ESG Impact Report, which included several enhancements on the information shared on these important topics and our work towards our targets, including, for the first time, references aligned to the Sustainability Accounting Standards Board framework and taking into consideration recommendations from the task force on climate-related financial disclosures. So as with our capital allocation priorities, we have been consistently working to deliver against our strategic initiatives. Net, we have done we have said what we do, and we have done what we said. And despite current inflationary pressures and the risk of recessionary headwinds we remain confident in our ability to continue to advance and create value through these initiatives. And on that note, let's move on to a more fulsome discussion of our performance in the third quarter. Depletion growth for our beer business decelerated to 5.7%, which, as I mentioned earlier, was largely due to a recent series of headwinds that developed towards the latter part of the quarter. First, as we shared on our last call, we decided to introduce all pricing changes above our usual algorithm due to cost pressures across the chain, and historically, the impact of these types of notable pricing actions take a few months to settle in. Second, distribution growth is returning to more normalized levels after lapping a softer summer period last year when we were managing supply constraints. That said, distribution growth remains at exceptionally healthy levels as well as aligned with our full year expectations. And third, some of these headwinds were particularly accentuated in a few key regions for our brands, such as California, where we lapped double-digit depletion growth rates and better weather in November of last year as well as more favorable economic conditions. All of that said, our beer business continues to perform strongly relative to the wider market and to resonate with consumers who continue to shift to higher-end brands. In IRI channels, we gained 1.5 points across the entire category and 2.3 points in the higher-end segment in the third quarter, which is higher, let me repeat that, which is higher than the share gains in the same quarter last fiscal year. And when looking at depletions fiscal '23 year-to-date, our beer business achieved growth of 7.8%, which continues to be in line with our annual expectations. Importantly, based on the prior activity we have seen in retail, as they adjust to the continued inflationary environment, we expect trends to return to more historical rates over the next few months. Now shifting to the performance of our beer brands. Modelo Especial delivered depletion growth of 4.4% in the third quarter lapping a tough 13.2% depletion growth comparison in the corresponding period of the last fiscal year. That said, the brand has achieved depletion growth of 9.9% over fiscal '23 year-to-date. In the recent quarter, it continued to strengthen its position in the five states where it is already the number one beer brand in dollar sales, delivering another approximately 0.2 points in share gains. Importantly, in the other 39 states tracked by IRI data, Modelo Especial delivered more than 4x the share gains at over 0.8 points. More broadly, Modelo Especial's depletion growth in its secondary markets outpaced the growth in its top five states by over 10 points. As such, we continue to see significant incremental opportunities to maintain the momentum of Modelo Especial, particularly through distribution gains in the states where it is under represented. Corona Extra delivered depletion growth of 1.3% in the third quarter and 4% in fiscal '23 year-to-date. As noted earlier, the brand has maintained its momentum as the number three share gainer in track channels. We continue to invest in the growth of Corona Extra through a thoughtful and authentic evolution of the brand's market such as the augmented reality addition to our O'Tannenpalm campaign, which is one of the more enduring holiday themed commercials running for over 30 years now. And we continue to see growth potential for Corona Extra with younger legal drinking age and multicultural consumers. Pacifico's depletion growth accelerated in the third quarter to 40.7%. And over fiscal '23, year-to-date, its depletion growth was 32.9%. The brand remains a top 10 share gainer in tracked channels in the third quarter, mainly supported by its growing footprint in states like California, Nevada, Utah, Colorado and Arizona. We continue to see fantastic growth runway for Pacifico as one of our new wave brands with significant distribution potential relative to Modelo and even more so relative to Corona Extra. Particularly as the brand also continues to build momentum by shifting East in the U.S., building on the 26% depletion growth delivered in our Eastern business unit in the third quarter. Lastly, our Modelo Chelada brands achieved depletion growth of 44% in the third quarter and 48% over fiscal '23 year-to-date. Our Modelo Chelada brand remained the number one set in the Chelada space, and the brands gained nearly half a share point across all U.S. beer and track channels. For perspective, that is as much as Corona Extra's gain. In fact, these gains were largely driven by innovations launched this fiscal year, including Naranja Picosa flavor, the Limon y Sal 12 ounce 12 pack, which is a top 10 new packaged SKU and our new variety pack, which is among the top 15 new brands. We continue to expect significant growth from the Modelo Chelada brands as we invest in marketing to the general market consumer to broaden the demographic appeal for this product. All in, the strong demand for our brands in the third quarter supported a net sales increase of approximately 8% for our beer business. And despite the impact of inflationary headwinds on operating income, we were able to maintain operating margin at 37.5%. This gives us the confidence to once again raise guidance for our beer business this fiscal year lifting the low end of our growth outlook. We now expect to achieve 9% to 10% net sales growth and 4% to 5% operating income growth for fiscal '23. Moving on to Wine & Spirits. Our Wine & Spirits business continues to advance its vision to be the high-end market leader. As noted earlier, our largest higher-end brands delivered strong performance relative to their categories in the third quarter. In our Aspira portfolio, which includes our fine wine and craft spirits brands, over the third quarter in track channels, The Prisoner brands grew dollar sales by 4.3%, while the fine wine segment contracted by 5.7%. And High West grew dollar sales by 22%, while high-end spirits segment grew by only 3.4% In our premium and mainstream Wine & Spirits portfolio, which we refer to as Ignite, both Meiomi and Kim Crawford gained share in the U.S. wine category. Depletions for our Wine & Spirits business declined by 5.5% in the third quarter, mainly driven by continued headwinds based across our mainstream brands. However, our Aspira portfolio delivered strong performance with 8.5% depletion growth in the quarter. And in fiscal '23 year-to-date, our Aspira portfolio has now achieved an overall 6.3% increase in depletions supported by strong double-digit depletion growth for The Prisoner and High West. Among Ignite brands, Meiomi and Kim Crawford have also delivered solid depletion growth in fiscal '23 year-to-date, supporting an overall 2.3% increase in depletions for our premium line portfolio. Our Wine & Spirits business also continued to expand its global omnichannel footprint, advancing its growth in direct-to-consumer, 3-tier e-commerce channels as well as international markets. Wine & Spirits DTC net sales grew 23% in the third quarter, and we continue to perform particularly well in 3-tier e-commerce which delivered dollar sales growth 9 points above the competition. These results were underpinned by our strategic DTC investments in both hospitality through facility upgrades and talent development and our own e-commerce website platforms as well as our continued leadership in 3 Tier e-commerce through marketing innovations like launching video ads on Instacart. And a strategic focus on major omnichannel national accounts, third-party marketplaces and digitally native retailers like Amazon, where we were the number one overall supplier and number one growth supplier in higher-end wine in the third quarter. International markets accounted for 9% of the total net sales in the Wine & Spirits business in the third quarter as our strategically focused approach continued to target select metropolitan markets, including London, Tokyo, Seoul, Sydney, Mexico City, Zurich and Toronto with some of our most renowned premium and fine wine brands like The Prisoner, the Schrader as well as more recently acquired brands like Lingua Franca and My Favorite Neighbor. And with our craft spirits portfolio, which includes brands like Casa Noble and the CAMPO high-end tequilas, that delivered international shipments 5x greater than the third quarter of the prior year. We are also pleased that our efforts to establish a leading global higher-end Wine & Spirits portfolio are gaining recognition with several of our brands receiving remarkable accolades including Schrader Cellars winning its 37th 100-point score and its Double Diamond brand being recognized by The Wine Spectator as its number one wine of 2022. Our To Kalon Vineyard was being recognized again as the top vineyard in North America for the fourth consecutive year among top vineyards in the world. And I'm pleased to report that our To Kalon Vineyard has now also is certified as organic, expanding the appeal of its wines to a broader set of consumers and adding to its differentiation. And in our spirits portfolio, our recently launched Nelson Brothers Bourbon Reserve was ranked among Whiskey Advocate's top 10 most exciting whiskeys of 2022. So all in, our Wine & Spirits business continues to make meaningful progress on its transformation. And while net sales and operating margins, net of recent divestiture, were slightly lower relative to the third quarter of last fiscal year due to volume shifts from shipment timing only being partially offset by mix and pricing benefits we did see a significant sequential uplift in operating margins of 55 basis points relative to the second quarter of this fiscal year. This gives us confidence to reaffirm our fiscal '23 guidance for our Wine & Spirits business of stable to 2% lower net sales and 3% to 5% operating income growth, which we are providing against the fiscal '22 baseline adjusted for the recent divestiture. Looking further ahead, we are also confident that over the medium term, both our beer business and our Wine & Spirits business remain well placed to deliver strong growth and best-in-class operating margins. That said, given continued inflationary pressures and the potential impact of recessionary environment, we remain mindful of balancing the momentum of our brands against near-term cost challenges. To that end, based on our current expectations of the pressures that the consumer will continue to face in the near term, we are giving even more careful consideration to our pricing actions for fiscal '24. In particular, we currently expect pricing actions for our beer business to be more muted in fiscal '24 as our pricing actions in the current fiscal year were ultimately above our medium-term algorithm. While input costs remain at historically elevated prices we strongly believe that additional consideration in our approach to pricing in fiscal '24 is warranted to sustain healthy growth for our brands. In addition, while some input costs are below the peaks from earlier this fiscal year, we now anticipate inflation to remain above historical trends in the high-end single-digit range for fiscal '24. As always, we will continue with our disciplined approach to manage these evolving conditions through cost-saving initiatives. But these persistent inflationary headwinds will be compounding on the double-digit cost uplift we have faced in fiscal '23. As such, we now expect operating margins for our beer business in fiscal '24 to be more in line with our anticipated margin structure for this fiscal year, and therefore, below our stated 39% to 40% medium-term range. We are still refining our outlook for '24 and will provide more detailed guidance at our next earnings call, but we wanted to share some context today now that our annual planning process is underway. With all that said, let me be clear. Our beer business continues to have best-in-class operating margins and our Wine & Spirits business continues to make progress toward achieving that same differentiation. We are also confident that over the medium term, our beer business remains well positioned to deliver leading operating margins, supported by the sustained momentum of our core Modelo Especial and Corona Extra brands, the significant opportunity being captured by our Pacifico, Modelo Chelada brands. The incremental upside from our broader existing portfolio and the continued development of our innovation lineup particularly from exciting imminent additions like Modelo Oro and we continue to expect our Wine & Spirits business to make progress on its operating margins supported by continuing to pursue the exciting runway for growth of our higher-end brands and ensuring these brands represent an even greater portion of our mix over time, enhancing the performance of our mainstream portfolio through a greater focus on brands and initiatives with higher returns, including through relevant and innovative products and growing our omni-channel and international leadership particularly as an incremental opportunity for higher-end growth. Now before I conclude, I wish to quickly touch on Canopy. We remain supporter of Canopy sellers to create an exchangeable share structure designed to support the consolidation of all its U.S. cannabis assets into a single avenue. And to that end, our intention continues to be to transition our existing common share ownership interest in Canopy Growth into new exchangeable shares once its shareholders approve this transaction. We believe that the conversion of our ownership interest will maintain our ability to realize the potential upside of our investment in Canopy. At the same time this transaction and the surrender of our warrants are expected to eliminate the impact to our equity and earnings, mitigate risk to our organization and further reinforce our intent to not deploy additional investment in Canopy in line with our capital allocation priorities. In closing, I'd like to reiterate three main takeaways today. First, nearly four years ago we committed to a series of strategic initiatives aimed at delivering profitable growth and shareholder value. And I'm pleased to say that we are delivering against those initiatives and in many cases even exceeding the goals we set out to achieve. Second, our third quarter results demonstrate that we continue to execute against these strategic initiatives and that our company remains in a strong position to deliver best-in-class results. Despite the headwinds in the quarter due to macroeconomic pressures and tough comps versus prior year, the strong performance of our beer business has put it on track to deliver better-than-expected results in fiscal '23. And the transformation of our Wine & Spirits business is also yielding results. And third, we remain confident we will continue to build on our track record of solid growth and value creation through our strategic initiatives. As Bill mentioned, we delivered another set of solid results in the third quarter and continue to make progress against our operating plans and strategic initiatives. Our beer business achieved high single-digit net sales growth and continue to deliver best-in-class operating margins. Our Wine & Spirits business made additional progress against its strategy with an even more premiumized portfolio further aligned with consumer trends following our recently completed divestiture. Additionally, we generated strong cash flow results and with yesterday's declared dividend to be paid in February, we are on track to exceed our stated $5 billion goal of returning cash to shareholders in the form of dividends and share repurchases between fiscal '20 and fiscal '23. I will now review our Q3 performance and full year outlook in more detail, where I will generally focus on comparable basis financial results. Starting with our beer business. Net sales increased 8%, primarily driven by higher average price increases and solid demand across our portfolio. Q3 shipment volumes were up 3% reflecting a difficult volume lap given the focus of replenishing product inventories in the same period last year. From a depletions perspective, we achieved growth in the quarter of approximately 6%, driven by the demand of our Modelo family of products, including the Modelo Especial and Modelo Chelada brand as well as double-digit growth from Pacifico. As Bill noted, depletions decelerated sequentially from Q2 to Q3. This was primarily due to: number one, incremental fall pricing that, as expected, will put us above our targeted annual average increase. Notably the impact of our fall increases has been heightened by additional pricing actions across the value chain. That said, we expect the impact of incremental pricing will settle over the coming months as we have seen in prior similar circumstances. Number two, relatively lower distribution growth in Q3 versus Q2, where we lapped a softer prior year period when we were managing supply constraints. And while we are seeing distribution growth return to normalized levels, it remains aligned with our full year expectations. Importantly, it is worth noting that Q3 distribution growth remained well above the levels we achieved in Q4 last year and Q1 of this year. And number three, as Bill also referenced in the third quarter, particularly in the month of November, we lapped multiple tailwinds from last year such as double-digit depletion growth rates in key regions like California, which benefited from periods of warmer weather and a stronger macroeconomic environment. All of that said, we expect depletion trends to continue to normalize as we move into fiscal 2024, and we remain confident in our fiscal year expectations. Selling days in the quarter were flat year-over-year, but please note that in Q4, there will be one less selling day. Operating income for the beer business decreased 2% and operating margins declined by 380 basis points to 38%. As expected, operating income and operating margins were negatively affected by ongoing inflationary pressures across raw materials and packaging, particularly as more favorable hedges rolled off. Increased logistics expenses related to higher fuel and freight costs, incremental operating costs and increased depreciation as a result of our brewery capacity expansions, and increased marketing spend, particularly from our media investments in sports sponsorships with NFL, NCAA Football, Major League Baseball, the NBA and the NHL. Marketing as a percent of net sales increased 160 basis points to 9.6% in Q3. For fiscal '23, we continue to expect that marketing as a percent of net sales will be in the 9% to 10%. More broadly, given the strong top line growth of our beer business year-to-date, we now anticipate it will grow net sales between 9% to 10% and operating income between 4% to 5% for the full fiscal year. This still implies an operating margin of approximately 38% for fiscal 2023. As expected benefits from our 2% to 3% average pricing increase for the full year and our cost-saving efforts will be more than offset by the same headwinds that have affected our margins year-to-date. I'd like to take a moment to reiterate some of the points Bill made earlier regarding fiscal '24. As mentioned, we are anticipating our beer business margins to be more in line with our anticipated margin for this fiscal year, and therefore, below our stated medium-term target range of 39% to 40%. This is driven by the fact that input costs remain at historically elevated levels due to ongoing inflationary pressures. As we have shared in some of our prior calls, we hedged about 10% of our beer business costs to help reduce volatility in the P&L. However, our commodity hedging program is managed on a multiyear rolling basis. So we currently do not anticipate our blended hedge rates to capture the favorability of recent declines in certain commodity prices until the second half of next fiscal year. In addition while prices have declined from their peaks earlier this year for commodities like aluminum and natural gas, which are part of our can and glass cost, they still remain above pre-pandemic levels. Beyond our hedging program, most of our beer business input costs have a greater exposure to inflationary pressures, including raw materials, such as wood pallets, steel crowns and cartons. The majority of these input costs are subject to contractual agreements that tend to reflect negotiated prices that are based on existing inflationary conditions. So as we move forward with our annual planning and supplier cost determination process, we will develop a clearer view of these contractual prices and on the resulting margin expectations. Against that backdrop, with these processes now underway, we have greater visibility into the high single-digit cost segments that will continue to build off the double digit unfavorable cost outlook that our beer business faced in fiscal '23. In addition, we continue to see ongoing macroeconomic pressures on the consumer, which are leading us to plan to take more subdued pricing actions across our beer portfolio in fiscal '24. That said, we expect a number of tailwinds that will partially offset some of these headwinds, including the continued momentum of our core brands, capitalizing on opportunities with emerging brands such as Pacifico and Modelo Chelada's, winning with new and future innovation such as Modelo or Modelo Oro and through our consistent and disciplined cost savings actions, nevertheless, as Bill mentioned, we will continue to refine our outlook for next year, and we will provide detailed guidance during our Q4 earnings call. That said, it is important to reiterate that our expected fiscal '23 and fiscal '24 operating margins remained best in class. And in fact, when considering our fiscal '20 through our currently anticipated fiscal '24 margins, we expect the average operating margin for that 5-year period to remain within our medium-term algorithm of 39% to 40%. Now shifting to Wine & Spirits. As a reminder, during our recently concluded third quarter, we divested a series of brands from our Wine portfolio. As such, third quarter of fiscal '22, included approximately $17 million of net sales and $11 million of gross profit less marketing, that are no longer part of the Wine & Spirits segment results. When presenting today's results, I will be discussing our top line results on an organic basis, excluding the contribution from those divested brands in the preceding periods. Starting with organic net sales. The Wine & Spirits business decreased 1%, primarily driven by a 13% decrease in shipments, partially offset by a favorable product mix, which both related to consumer-led premiumization and mix improvements of our portfolio. From a depletions perspective, while the Wine & Spirits business saw a decline of approximately 6% on an organic basis in Q3 as Bill noted earlier, our higher-end brand delivered strong performance with our Aspira portfolio, which includes our fine wine and craft spirits brands, delivering depletion growth of 9%, driven by growth in our Prisoner Wine and High West brands. Meanwhile, our Ignite portfolio, which includes our mainstream and premium Wine & Spirits brands primarily faced headwinds from our mainstream brands, which was down 8%. That said, in tracked channels, our largest higher-end brands continue to outperform their corresponding segments, and our peak premium brands portfolio actually gained share in the category with particularly strong performance from Meiomi and Kim Crawford in both volume and dollar sales growth. Moving on to Wine & Spirits operating income and operating margins. Wine & Spirits operating income declined by 7%, partly as a result of the divestiture and operating margin decreased 60 basis points to 24.8%. The decrease in operating margins was driven by higher transportation costs, including ocean freight shipping, unfavorable costs from higher drivers largely due to inflation and increased general and administrative expenses due to higher compensation and benefits primarily related to higher headcount from our continued strategic focus on expanding into direct-to-consumer channels and higher-end brands in our Aspira portfolio. For full year fiscal '23, we remain confident in our previously stated outlook for our Wine & Spirits business. We expect fiscal '23 organic net sales decline of 0% to 2% and operating income to increase 3% to 5% implying a full year operating margin of about 24%. Looking ahead to fiscal '24, we expect our Wine & Spirits business to continue to make progress on its operating margin. We believe our Wine & Spirits business is positioned to further improve its operating margins through growth of our higher-end brands, bolster performance from our mainstream portfolio through high-return brand initiatives such as innovation, and expansion of our omnichannel and international footprint. As I mentioned earlier, we are currently working through our annual planning process and we'll provide a more detailed fiscal '24 outlook during our Q4 earnings call. Now let's proceed with the rest of the P&L. Corporate expenses came in at approximately $75 million, up 70% versus Q3 last year. This increase in corporate expense was primarily impacted by costs associated with increased compensation and benefits, primarily related to a third quarter fiscal '22 reversal of stock-based compensation and third-party services related to our ongoing investments in our digital business acceleration initiative. We now expect our total corporate spend to be between $290 million and $300 million for the full year, mainly driven by the incremental costs in Q3. Interest expense for the quarter was up 12%. Also, as we noted in our release, following the completion of the reclassification of our Class B common stock, we now expect interest expense for fiscal '23 to be between $390 million and $400 million. This includes the interest expense associated with the funding of the $1.5 billion cash consideration which is expected to be $80 million to $90 million on an annual basis based on current market rates. Our Q3 comparable basis effective tax rate, excluding Canopy equity and earnings, came in at 18.8% versus 14% in Q3 last year. The effective tax rate increased mostly due to the change in stock-based compensation benefits. As a result of these updates to our outlook, the increased interest expense due to the reclassification bonds, adjustments relating to our most recent divestiture in our Wine & Spirits business and increased corporate expenses that were only partially offset by the increased expectations for our beer business. We now expect comparable EPS guidance to be in the $11 to $11.20 range, which represents a $0.20 decrease to the bottom end and a $0.40 decrease at the top end of our prior guidance range. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx. We generated free cash flow of $1.6 billion for the nine months of fiscal '23 reflecting strong operating cash flow partially offset by a 14% increase in CapEx investments as we continue to support the growth of our beer business through our brewery capacity expansion plans. And on that note, to echo Bill, we are excited by the progress we have made with our new sites in Veracruz in which we recently broke ground. Our fiscal '23 free cash flow is now expected to be in the range of $1.5 billion to $1.6 billion and CapEx is now expected to be between $1.1 billion and $1.2 billion. Operating cash flow for fiscal '23 remains unchanged and is expected to be between $2.6 billion and $2.8 billion. Related to our uses of these cash flows, as we recently noted in December, our capital allocation priorities moving forward following the reclassification remain fundamentally aligned with the priorities we introduced in fiscal '20. To achieve a disciplined and balanced and thoughtful approach to support growth and value creation. Our recently updated capital allocation priorities are as follows: first, we remain committed to our investment-grade rating and to targeting dividend growth in line with earnings as key elements of a disciplined financial foundation. We ended the third quarter with a net leverage ratio of approximately 3.5x when factoring in the financing for the cash payment associated with our recent transition to a single-class stock structure and excluding Canopy equity earnings. That said, we have set a target net leverage ratio on that same basis of approximately 3x, which we are confident we can return to. Another important element of our commitment to a disciplined financial foundation is targeting an approximately 30% dividend and payout ratio. Second, we will continue to balance investments to support the growth of our business and deliver additional returns to shareholders through share repurchases. As we look ahead, we continue to expect adding another 25 million hectoliters to 30 million hectoliters of brewing capacity between fiscal 2023 and fiscal 2026. This will be supported by $5 billion to $5.5 billion of investment over that same period. We are developing this capacity through a series of expansion waves which is consistent with the modular approach we have adopted to maintain capital expenditure discipline and flexibility. We remain committed to executing share repurchases targeted to at least cover dilution. While we also have approximately $1.2 billion of our repurchase capacity still under our current board authorization and plan to remain opportunistic, particularly since we achieved incremental cash flow flexibility. And third, we may deploy excess cash to smaller acquisitions. Again, we intend to remain disciplined in our pursuit of any M&A opportunities and we'll continue to pursue transactions that we believe fulfill one or more of the following characteristics: are consumer led, they deliver growth momentum, providing compelling returns, fill portfolio gaps, and offer synergistic benefits. Lastly, on Canopy. As it announced in October, Canopy plans to consolidate all of its U.S. cannabis assets into a single entity, Canopy USA. This U.S. holding company and new exchangeable share structure is designed to enable Canopy USA to trigger full ownership of Canopy's U.S. cannabis investments and capitalize on the U.S. cannabis market opportunities. Assuming the completion of this transaction and approval by Canopy shareholders of a charter amendment we intend to transition our existing common share ownership interest in Canopy into new exchangeable shares, which is intended to protect Constellation shareholder value while retaining an interest in Canopy through nonvoting and nonparticipating shares. This share ownership transition and the surrender of our Canopy warrants is aligned with our focus on core beer and Wine & Spirits businesses and capital allocation priorities. As a reminder, until this transaction is completed and we convert our holdings into exchangeable shares, Canopy will still be reported within our P&L consistent with past quarters. In closing, we continue to demonstrate strong execution in growing our core business and investments to enhance our portfolio of industry-leading brands. As we approach the end of the fiscal year, we remain committed to delivering against our stated goals to drive sustainable and profitable growth and build shareholder value. Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question. Thanks. Good morning. When you walk through the drivers of the change in trend for depletions that you saw towards the end of the quarter, one sort of mention was a comparison on macroeconomic trend versus the prior year and then also your comments on taking sort of more muted pricing as you look into '24. So I'd love if you could just spend a little bit more time talking about what you're seeing from your various kind of core consumer groups, it feels like I know you pointed out some share gain continues. But when we look at some of your brands relative to other high-end brands, core beer brands, not Seltzer, it does look like there's underperformance, it's specific to your brands. So just any further diagnostic you may have done would be really helpful to hear about? And then also, I wasn't entirely clear on why the slower CapEx spend, I know you just went through it across at the very end of your comments, but I was hoping you could just reframe that because I admittedly missed why is it $200 million lower this year? Sure. So relative, Lauren, to the depletion trend scenario, we're still seeing in our -- all of our assessment and research suggests that we continue to have very strong support for our brands among our core Hispanic base as well as growing trends amongst the non-Hispanic community. I think a great example of that shows itself in that we actually had an increase in our share gain quarter-on-quarter from last year which reflects very well. Certainly, some of what we saw at the latter part of this quarter was driven by a couple of things. One is many businesses, including ours, took additional pricing over what we had planned. And that caused an overall softness in the market, particularly in the state of California. It wasn't limited to us. And frankly, that's not an unusual reaction. We've seen that many times before. Frankly, what we were very pleased about as we then look into December and to see if this thing is beginning to go back to some normalcy, we see that it has been, we saw a 7.5% swing to the upside in dollars versus where it was in November and that compares to a category swing of 4.5%. So again, we saw a significant improvement in the market that was primarily the cause of a bit of deceleration in our depletion performance as we got into December, and we continue to gain share in that overall mix of swing. So we're not -- we -- this is not an unusual event. It happens virtually every time you see significant pricing action taken and the fact that we continue to gain share at the clip that we are gives us great confidence going forward and the strength of the brands overall. Garth, anything you want to say. Yes, Lauren, just on the CapEx, it's important to note that we continue to progress with our expansion as planned. As we stated in the remarks, we've added 11 million hectoliters of capacity over the last several years, $9 million in growth, sort of $2 million through productivity initiatives. We are on track with our expansions at both Nava and Obregon. And as we mentioned, we've recently broken ground in Veracruz. So the reduction in CapEx for this year is not necessarily abnormal as we move through the year. It really has more to reflect the timing of when payments will be made and less to do with progress. Yes, good morning, everyone. Bill, I was hoping maybe you could talk about what's actually happening with some of the pricing as it goes through the supply chain? Certainly, we've picked up some commentary within the trade that pricing was taken on top of what you actually took in the market. And I'm just curious what the state of that is, if it's starting to get unwound? And have you seen any implication of that in some of the more recent weeks? Yes. You bet, Nik. You're absolutely right. One of the things that we saw that occurred after our pricing increase is that other players within the chain took more price on top of what our pricing increase was. And frankly, this often happens as well. The Board tends to happen, and we've already started to see it in certain some markets is that, that moderates over time as well because an attempt is made to see what the consumer is ready to accept. And if we find a spot that's a bit more than they are ready to accept you see some moderation in that increase. You've already started to see that with some critical change in the state of California, which probably relates to my answer to Lauren a moment ago, which is why you saw the trends in December change quite a bit. So you're correct there was a lot more and it piled on, if you will, once it was out of us and into further down the chain, more was taken and as we often see that goes higher early and then moderates over time. I just want to stick with depletions here. I know you gave those explanations in your prepared remarks, but I have two follow-ups. So the first is that the reported depletion still meaningfully lag the trends in the Nielsen track channels, which I would have assumed would reflect a number of the factors that you called out, so could you help us understand this gap? And then the second question is, I know you've mentioned that you have confidence that your depletions would return to those normal levels. But we are still seeing weakness in the December Nielsen trends. So could you provide some color as to what gives you that confidence? And what are your quarter-to-date depletions at the moment? Sure. So let's start with the question of track channels. One of the things that we have historically found is that you're in the roughly -- there's roughly 3-point delta, we use IRI, I realize you just said Nielsen, we use IRI. There's roughly a 3-point delta historically between the growth that you see in the tracked channels and the depletion rates. Interestingly, that got massively bigger when you're in the middle of the pandemic because the percentage of business that went through the off-premise trade increased substantially. That has now come back to somewhat of a more normalized level as you get to a little bit better positioned in the on-premise, not quite back to where it was, but it's directionally. So that is some of what you are seeing is you're back to a more traditional split between those individual things. Relative to -- and I quoted to the California, some other states are seeing a bit different. Texas on the other was also a market that was somewhat softer post price increase, and that one has not rebounded just yet. But that, again, is not unusual either. It's a little bit of a different channel mix than what you see in the state of California where you often see a more faster response to whatever impact pricing increases take. So this, in our judgment is all part of a normal process of when pricing actions are taken. It takes a few months for it to all work its way through the system. Relative to the depletes, we don't have the final numbers in. As you would expect, we're only in day five of the New Year and obviously, it included the New Year, which makes the reporting a little bit behind. What I would say is that we're comfortable with where we think the summer is going to land. Otherwise, we wouldn't have raised our guidance. Hi, guys. Not to belabor the pricing conversation, but when you mentioned 2024 pricing to be more muted, could you maybe just talk a little bit more about what that means? And then Garth, when we think about the share price, not just the movement today but perhaps more recently and perhaps even the fact that it's been -- the share has been flat for a period of time. Does that change how you're thinking about share recalls? Sure, I'll go for it. So relative to 2024 pricing, as we stated in the last quarterly call, we were going to go above what our expectations had been. And that reflects, obviously, in the October increase that has taken us above our traditional 1% to 2% guidelines. What we're suggesting relative to 2024 is that it's going to be much more in line with what our historical trend has been, which is 1% to 2%. We would not expect it to go beyond the top end of the range as we did in this particular year and late in this fiscal year. Yes, Kaumil on the share repurchase, I just want to make sure it's clear that we haven't necessarily deprioritized share repurchase activity. As we mentioned, we have $1.2 billion worth of capacity under our current board authorization. In the near term, we think that it's more important to focus on getting our leverage ratio back down close to 3%. That being said, we do have the flexibility to be able to take advantage of weakness in the marketplace, as we said in our prepared remarks and be opportunistic. So it's absolutely something that we have the flexibility and optionality to execute against. All right, thank you. Hi, everyone. Just maybe first, a quick clarification on your pricing. I'm wondering if you're still expecting to be in your 2% to 3% pricing guidance range for the full year since I guess that would imply only around 1% pricing in Q4? And then, I guess, a question on your guidance, just in terms of your beer guidance, you raised your full year sales and op income growth, but it does imply shipments will be down maybe as much as high single digits in Q4. So I'm aware you're lapping the distributor inventory build from last year, but just trying to reconcile this with some of the key initiatives you have out such as the rollout of Modelo Oro that's shipping now. So maybe if you could touch on that? And then just finally, I wanted to clarify if you expect your full year shipments and depletions to be broadly in line with each other? Thanks. Sure. We do expect to be slightly above our 2% to 3% that we quoted in the last quarter, when all is said and done for the year. We also -- you should also recognize that mix is going to be higher and in large part because of the significant increase in the Chelada business, which is mix accretive in the overall portfolio. Garth, do you want to touch on the other piece? Yes. Just in Q4, right? I mean as a reminder Bonnie, as we said throughout the year, you need to focus on sort of full year performance as that we're going to -- it was going to be sort of uneven or choppy results throughout the year, given the fact that we had the difficult overlaps as we were in the first half of last year dealing with some production-related issues in the second half of the year, we were building back inventories. So Q4 will certainly be muted this year versus what it was last year as last year was sort of artificially high due to that, those rebuilding efforts. Hi guys, good morning. So I know we spent a lot of time on depletions already, but just a couple more specific follow-ups to drive a finer point on it. A, just as we think about the deceleration we've seen in nontrack channels, the untracked channels the last couple of quarters here. I wanted to get a little more detail on your perspective on what's occurring there. Is it more just look, there's less momentum from an on-premise recovery post-COVID as you cycle the more normalized post-COVID comps, might there be more of a macro slowdown on the untracked off-premise channels as theoretically volume shift to track channels in areas like Bodegas, et cetera, just sort of break down that nontracked channel mix a bit in terms of talking about on-premise versus the untracked off-premise. So sort of extended a bit beyond the answer to Nadine's question? And then Modelo does look like it's disproportionately slowed. Just to check on that, it seems like your mindset is more that it's related to some of the weakness in California, some of the pricing impact, less sort of more temporary factors. Is any of that sort of related to more longer-term factors? Maybe it's at a much larger base and you're having -- you're not going to see as much growth? How do you sort of think about the Modelo brand and its performance recently? And then last, sorry for the multipart question, but price/mix was obviously very strong in the quarter. Some of that is higher year-over-year pricing. But presumably, some of that is mix also. So are you seeing a big shift to smaller packages, might that also be part of the reason for some of the depletion weakness. So I just wanted to get a little more clarity on those points as it related to depletions? Thanks. Sure. Let's try to tackle those one at a time. Relative to Modelo, well, importantly, we are still seeing share gains in our five biggest markets. I think that's really important. But we're seeing several times those gains in the other markets with track channels, which we see as we've said many times before, a tremendous upside opportunity, this brand is still under shared, if you will, in terms of its household penetration compared to Corona Extra as an example. So there's just a lot of runway for growth for Modelo, and we remain very, very comfortable and confident in that brand's ability to continue to accelerate. Relative to the nontracked channels, we have continued to see on-premise get closer to where it had been, but it's still not quite to where it was before the pandemic, one. Two, it always takes a bit more time in some of the smaller Bodega style nontrack channels for pricing actions to work their way through. We've seen that happen before. And obviously, when you include and talk about the state of California, which is our single biggest share market, I'll remind you that Modelo Especial is bigger than Coors Light, Miller Light, Bud Light combined. When you see some of that happen it has a disproportionate impact in the short term until the pricing scenario plays itself through. So we don't believe this is any long-term trend issues. And our confidence in that is bolstered by the fact that as I stated earlier to one of the earlier questions, that we saw a very strong rebound in the State of California during December. Relative to price mix, a piece of that -- by the way, I should also mention, the number one share gainer in the State of California in the last four weeks happen to be Pacifico. I think that also speaks to the strength of our portfolio. Our portfolio is not a one-trick pony. We have a very strong place in the Corona brand, and the Modelo brand as well as Pacifico, all of which I think is very positive. Relative to the price mix question, right? We are seeing mix benefits. Some of that, as I stated just a moment ago is related to Chelada, given how big and important Chelada has gotten to be, that is mix accretive to our overall business. And therefore, the 40-plus percent growth profile that you see from that particular subsegment of Modelo does add significantly to the mix benefit that you observed. Great, thanks. Good morning, everyone. So my question relates to trade down in the category over the next 12 months, given the sort of obvious element in the room with the macro factors. And I wanted to tie that in your level of confidence on -- in your beer segment. So we are seeing trade down like we see it in the Nielsen data for economy beers, which, of course, have been donating share for a long period of time. So Bill, how concerning is that when we look at trade down behavior and we've seen it in past recessions as well. I just want to see how that's sort of informing the view. And I think relatedly, just given some of the concern that's out there in the market today, I think folks would be very keen on hearing your level of confidence, I guess, in your intermediate term, high single-digit growth outlook for the beer business. The color you guys gave on margins was certainly helpful. And it looks like you're taking a conservative tack there. Is it reasonable to take a sort of similarly conservative tack in your outlook for top line growth in the beer segment looking out to next year as well? So thank you for all that. Sure. I'll go backwards there on that. Hopefully, I won't miss anything. We maintain our continuing expectation of our medium-term guidance that we've said before, we don't think there's any radical change to where that has been. And as you know, we've often beaten that in the past. Relative to trade down, we'd obviously watch this carefully. We are very fortunate in the alcohol beverage business that we tend to be recession-resistant, doesn't mean that there's no impact that we are -- it is certainly resistant. The interesting thing that's occurred at this particular time is we've seen variable trade down at our price points. It doesn't mean -- you're correct, there has been trade down, but it has tended to be from price points below us going even lower rather than trade down from our brands which I think speaks very strongly to this year's strength of those brands. We have seen some trading around within our brands. I know -- as I said a moment ago, the Pacifico scenario in the state of California is spectacular. And I think is reflective of the growth potential for that business but it also reflected some trading around within our portfolio that occurred. So we are less concerned. We also keep our eye on it. We are less concerned about trade down from our price points. And remember, we are continuing to market these brands in the same way that we have historically. Our share of voice at the consumer level has never been higher. And I think that's important as well. We continue to invest behind our brands to support those in the eye and the mind of the consumer. And I think that's going to be critically important during a time when there could be some trade down lower in the category. Hi, good morning. Thanks for taking the questions. First, I'll follow up quickly and then another question. The follow-up is on pricing again. I'm just curious, obviously recognizing that you're making some of the commentary about '24 being a bit more muted, while you're seeing some volatility in the depletion trends. So can you just talk about how you'll be approaching that or what you'll be watching as you move through the year potential flexibility there, things maybe holding a little bit better? And then the other question is just on product innovation, which you mentioned all the growth that's been driven by product innovation in the last several years. How does the innovation pipeline look now versus the last several years? Are you -- where are you seeing kind of the biggest opportunities or where is the focus? And is that more or less relevant in this consumer environment? Thanks. Yes, you bet. So relative to pricing, Andrew, we believe we're going to be more -- we took more price now in October which will inherently have some rollover benefit within the P&L. But relative to new pricing taken in next fiscal year, we expect them to be back in that 1% to 2% range that we have consistently delivered. We think that's important, especially in an environment where the consumer is overly sensitive to pricing actions. We're in an inflationary environment across all areas in the consumer space. And our view is we need to be careful in balancing our growth profile with our pricing profile. And we're going to continue that thought and approach going forward because we think it's in the best long-term interest of our brands. Innovation is going to continue to be an important part of what we do. As you know, we're very excited about the launch here in March of Modelo Oro. Certainly, the Chelada business continues to be one of our great growth drivers. And many of those things, as I noted in my prepared remarks, are products that are relatively new. As you probably know, this fiscal year, we added a 12 pack, we added 12 ounce. We're putting a variety pack in. That's been very successful also. So we're reaching more consumers and more consumer occasions than what we have done. And therefore, we continue to expect innovation to be an ongoing part of our success, same through the wine business. You saw that with things like Unshackled with things like our Red Blend in Meiomi. You saw that with Illuminate, with Kim Crawford. We're -- and innovation has been a strength of our companies and that we can put outstanding liquids in the bottle or can as the case may be and continue to do so, and we think that's going to be an important part together with our core organic growth of our growth profile going forward. Hi, everyone. So I'm just trying to get a little bit more comfort with the outlook on beer operating margins for next year. If I just take this concept of muted pricing and high single-digit inflation, I'm coming up with a little bit of operating margin compression, right, and maybe modest operating income growth in beer next year. And so I'm just wondering if that logic is sound or whether there are other things going on here like incremental savings programs for less spending elsewhere, which gets you to, I think, what you're implying is operating margins are flat, and if not, I just wonder if there's a more important revision of estimates that's required here, so thanks for any clarification on that? And any help you can provide on the bridge math. Yes, Chris, thanks for the question. Look I think it's important to note that we will continue to deliver best-in-class operating margins, both this year and next year. As we said during the call, we're in the process right now of going through our annual planning review. And so we'll have a lot more detail to share on this with our Q4 earnings release and outlook for FY 2024. That being said, we did want to use today to acknowledge that next year's margin profile is going to be more in line with this year's margin profile for all the reasons that we discussed. Certainly, inflation continues to be enduring, and it's lasted longer than anyone had expected. And as we noted, many of our costs are contractual in nature, and those contracts when they get renegotiated, they get renegotiated at sort of the then inflation rate, not necessarily what the outlook for the year is. And we're going through that process again right now. So we'll have more clarity around where we land on those as we go through the next several weeks and months. We've talked about hedges in commodities, and commodities coming off their highs, but certainly, they certainly haven't reverted yet to where they were pre-pandemic, so they will continue to be a bit of a headwind for us next year. Depreciation will also be a bit of a headwind next year for us as we lay around the incremental CapEx that I referenced to Lauren's question, we will -- we do expect to go live with our ABA capacity expansion at Nava as well as that incremental capacity at Obregon. What's the impact to that depreciation on, again, we'll know better about that in the next few months because that's all dependent upon when assets are put into service. And then as you know, pricing will be a bit more muted. Again, we're still going to be within our 1% to 2% algorithm. We just won't be above 2%, like we have been not just this fiscal year but last fiscal year as well. And so those will be some of the headwinds. And again, we always have tailwinds for as well. The continued momentum of the brands, right? We'll continue to -- the brands will continue to grow and drive efficiencies, and we always have a robust set of cost savings initiatives that we will avail ourselves up. And again, we'll have more detail around what -- how each of those impact margins for FY '24 as we release our FY '23 annual results, but we wanted to acknowledge that on this call. Thanks, operator. Good morning, everyone. Just one quick one for me. Garth, I guess while we're talking about '24 there's a $26 million, I guess, gross contribution after marketing hit from the Wine & Spirits divestitures that affected fiscal '23. So does any of that spill into fiscal '24? Or are there still I guess drags from divestitures that we should be thinking about as we're just polishing up our '24 model today? There won't be any more necessarily more drags per se from that, as the cost will come out. I won't say that the impact that you'll have is that there will just be a comparability issued for the first sort of three quarters of the year, but no further drag as we move into the year. Hi, thank you very much. I was hoping we could pivot to the wine segment, given the conversations around down trading in beer Bill, I was hoping to get some perspective on what you guys think you're seeing in wine, the Nielsen data would suggest that there is down trading there? And if you could just remind us, given all of the divestitures that you guys have done, what percentage of your wine revenues are coming from $20 and above? Sure, you bet Vivien. We have seen some more trading down in the wine business in the fact that private label has been tending to outpace branded sales by roughly 2.1 points in the last 12 weeks. So that has had some impact. What's interesting is you get a bit of a, I would say, a buying model scenario, meaning you're seeing some trade down at sort of mid- to lower price points. And then you're doing fine if you get into higher price points and a little bit in the middle has been a little shaky is some of what we're seeing. So -- which is a little different than what you have seen historically in these particular environments. As I said in my prepared remarks, there's been a pretty radical change in the amount of our business in the premium sector. I would -- I didn't categorize it as $20. But we're well over 60% of our total business now occurring in the premium and fine wine sector, which was 34% just a few years ago. So we're seeing a pretty radical move within our business as we thought what if we reshape the portfolio because over the long term that's where the consumer is going. And we believe that's not only where there's better profitability but there's better growth as well. So we believe the work that we've done is bearing fruit, and I think it plays itself out in terms of the growth profile of some of our higher end and critical brands. We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Bill Newlands for closing remarks. Despite the ongoing inflationary headwinds affecting the concern in our business over the last three quarters, we're on track to deliver another strong year of growth and remain well placed to further build on the solid track record we have established against advancing our long-term strategic initiatives for nearly four years now. Our Beer business continues to lead in share gains, growth and margins and we're confident in our ability to capture the significant opportunities we still see for our core and our next wave brands. Our Wine & Spirits premiumization strategy continues to gain momentum as well advancing our higher-end brands, DTC channels and international footprint, all yielding noticeable results. Lastly, the performance of our businesses, coupled with our disciplined and balanced capital allocation priorities has allowed us to maintain our investment-grade rating, surpass our cash returns goal, grow our beer production capacity and execute small growth accretive M&A. With all that said, let me reiterate, looking ahead, we remain committed and believe we now have an even stronger foundation to deliver sustainable growth and value creation for our shareholders. Thanks for everyone for joining the call, and I wish you a happy, safe and healthy New Year.
EarningCall_1828	Good day everyone and welcome to American Outdoor Brands Inc. Second Quarter Fiscal 2023 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations for some information about today's call. Thank you, and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, indicate, suggest, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies and vision; our strategic evolution; our market share and market demand for our products; market and inventory conditions related to our products and in our industry in general; and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings. You can find those documents as well as a replay of this call on our website at aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note about our comments on today's call. First, we reference certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, shareholder cooperation agreement costs, technology implementation, acquisition costs, other costs and income tax adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures whether or not they are discussed on today's call can be found in our filings as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Joining us on today's call is Brian Murphy, President and CEO; and Andy Fulmer, CFO. And with that, I will turn the call over to Brian. Thanks Liz and thanks everyone for joining us. Our second quarter performance demonstrates our ability to successfully navigate ongoing challenges in the macroenvironment while executing on our long-term strategy. While itâs too early to see what our economy will deliver as we move into the new calendar year, I believe our recent results reflect our ability to remain focused, identified those elements we can control, executing accordingly and best positioning our company for success over the long term. In the second quarter, we achieved net sales growth of 14% above our pre-pandemic levels of fiscal 2020 and we introduced several new innovative products, while strengthening our balance sheet and marking a number of achievements that support our strategic priorities and reflect our dedication to leveraging our culture of innovation to deliver solutions for consumers in the moments that matter. Our E-commerce platform is an important part of our brand growth strategy and it represents an investment we made prior to the pandemic and our spin-off just over two years ago. While our E-commerce sale declined compared to the year ago quarter, driven by our online retailers, our E-commerce channel grew over 171% compared to pre-pandemic level. Within our E-commerce channel is our direct-to-consumer business which is largely comprised of our outdoor lifestyle brand. Direct-to-consumer sales remain strong in the quarter, delivering year-over-year growth of over 119%. Consider our direct-to-consumer sales to be one gauge of how well our brands are resonating with consumers, since those sales are not typically impacted by issues that have hindered retailers, such as inventory levels or limited open to buy dollars. Direct-to-consumer category also includes MEAT! Your Maker, meat processing equipment, and Grilla outdoor cooking products. Together these two brands generated nearly 10% of our total net sales and helped our outdoor lifestyle category generate over 55% of our total net sales in the second quarter. We remain excited about growth opportunities in our outdoor lifestyle category, which consists of products related to hunting, fishing, camping, outdoor cooking and rugged outdoor activities and which delivered growth of more than 22% over the pre-pandemic second quarter of fiscal 2020. We believe continued growth in this category as a percentage of our total net sales will help mitigate fluctuations in our shooting sports category, which has been more susceptible to short term cyclicality. Turning to our traditional sales channel, which consists of customers that operate out of physical brick and mortar stores, sales declined in the quarter, largely the result of a continuation of the factors we laid out last quarter. Namely, retailers placed fewer orders in response to lower consumer foot traffic, while they work to lower their inventories across all of their offerings, limiting their open to buy dollars. This activity had its biggest impact on our shooting sports category, which includes personal protection products, such as laser sights, and sales of shooting accessories to firearm OEMs, dealers and distributors. By way of an update, initial national media reports on Black Friday shopping appears to be generally favorable for both online and brick and mortar retailers. With Bloomberg reporting year-over-year increases in the 2% to 3% range for both categories. The good news since increased foot traffic should help lower retailer inventories and improve their available open to buy. Innovation is a key element in our long-term strategy and new products launched within the past two years generated 30% of our second quarter net sales. We continue to leverage our Dock & Unlock process to deliver a steady flow of organically developed exciting new products in the second quarter. Let me tell you about a few of those. Adding to our bestselling line of meat grinders, we launched a line of MEAT! Your Maker Dual Grind Grinders, which retails between $450 and $700 based on different size options. These dual grind grinders help simplify and save time processing, bypassing meat through a separate course and fine plate simultaneously. We introduced our MEAT! Your Maker Kitchen Knife set, which is made with high quality German steel blades, premium G-10 handles and includes a unique storage solution. We designed these knives specifically for our meat customers, and we market them through our DTC channel. We also launched a MEAT! Your Maker Butcher Knife set with proprietary non slip grips, as well as a premium leather knife carrier for safe and convenient transportation and storage of cutlery. And I just want to add here that we're very impressed with the continued brand loyalty that we've developed under the meat brand as consumers continue to flock to our websites and provide us with great reviews and feedback. Lastly, we launched two BOG tripods lines, the Sherpa and the Infinite. These innovative tripods which can be used for everything from hunting to photography, incorporate proprietary features, deliver enhanced versatility and functionality and provide a compact and lightweight platform for hunters, for whom BOG has become synonymous with premium hunting accessories. During the quarter, we attended the National Association of Sporting Goods Wholesalers Expo, where the Caldwell Claymore was recognized as the best new accessory. The Claymore Clay Target Thrower is our first meaningful entry into the shotguns sports market. Some of you have joined us at SHOT Show in January when he first unveiled this innovative foot operated clay thrower to the public. The show gave us a great opportunity to demonstrate the innovation of the claymore which provides all the benefits of an electric clay thrower without requiring a battery. The buzz of the show was incredible and people were lined up to give it a try. We are now shipping the claymore to customers. We are excited about the opportunity addressed by each of these new offerings. As a company that thrives on innovation, intellectual property is one of our most valued assets. And you'll find it within several of the products I just outlined in a great many more across our portfolio. Investing capital in organic growth remains the top priority in our strategic plan. And our Dock & Unlock process continues to fuel the innovation pipeline that will support our long-term growth. This power of innovation is apparent with our MEAT! Your Maker brand, which was developed internally launched in late fiscal 2020 and delivered trailing 12-month revenue of $8.7 million at the end of Q2. Stay tuned for updates on several exciting new products we have planned for MEAT, Bubba, Grilla and many of our other brands in the new year. Our strategy also includes a focus on utilizing our leverageable business model as we grow. On our last call, we announced that we would consolidate our Crimson Trace operations in Wilsonville, Oregon, as well as our Grilla operations in Holland, Michigan, and Dallas, Texas, into our Missouri facility. I'm happy to report that we recently completed both of those consolidations right on schedule. Andy will provide more detail but savings from these consolidations will help us move closer to our long-term profitability objectives. Current environment of high inflation and rising interest rates makes it difficult to predict future consumer spending patterns as we head into the new year. Nevertheless, we are encouraged by the fact that consumer participation in the outdoors is at its highest level in years. We are also encouraged by recent reports in our industry, which indicate that once someone begins to participate in the outdoors, they're likely to continue as a nimble, innovative, an emerging growth company with a portfolio of strong brands that resonate with our core consumers. We are excited about the growth opportunities these trends present for our brands in the long term. As such, our focus will remain on executing our long-term strategic plan while we carefully managed the elements within our control. While we do so we will continue to invest in our infrastructure and our robust new product pipeline, seeking out opportunities to lower costs where we can and ensuring we remain well positioned to achieve our long-term plan, which is to reach $400 million and beyond in net sales and EBITDAS margins in the mid to high teens. Thanks, Brian. Net sales for Q2 were $54.4 million, a decrease of 23.1% compared to the prior year, and an increase of 14% over the pre pandemic second quarter of fiscal 2020. E-commerce channels accounted for roughly 42% of our sales in the quarter at $22.7 million, representing a decrease of 17.5% from Q2 of last year, but a significant increase of over 171% over the pre pandemic second quarter of fiscal â20. The recent year-over-year decrease was driven by reduced orders from our online retailers offset by a 119% increase in our direct-to-consumer business. Net sales in our traditional channels, which consists of brick-and-mortar retailers decreased 26.6% in the second quarter, compared to last year, which we believe is due to lower foot traffic at most retailers locations during the period, combined with their continued efforts to reduce their overall inventories. Gross margins came in strong for the quarter, increasing 100 basis points over the prior year to 47.7%. During Q2, we benefited from lower inventory reserves, and reduced tariff and freight costs as we delivered on our commitment to reduce inventory levels going forward. GAAP operating expenses for the quarter were $26.1 million, $1.6 million lower than Q2 of last year. Within OpEx, our variable selling and distribution costs decreased in dollars due to the overall reduction in net sales. But they increased as a percentage of net sales year-over-year due to higher outbound freight costs. On our last call, we discussed efforts to contain costs where appropriate as we navigate through the current economic landscape. Marketing dollars spent declined from last year due to reductions in advertising and lower compensation costs and our G&A spend remained flat to last year. It's important to note however, that the majority of the advertising savings were related to the timing of digital advertising, which will now move to our third quarter. Non-GAAP operating expenses in Q2 were $21.3 million, compared to $22.7 million in Q2 last year. Non-GAAP operating expenses, exclude intangible amortization, stock compensation, and certain non-recurring expenses as they occur. As Brian indicated, we remain focused on leveraging our business model. Our performance in Q2 demonstrated that focus when we announced the consolidations of our operations in Oregon, Texas and Michigan, into our main facility in Columbia, Missouri. During Q2, our operations team did an outstanding job efficiently tackling these consolidation projects. As of mid-November, our assembly, warehousing and distribution functions for all of our brands are now being conducted entirely from our Columbia facility. As we discussed on our last call, these consolidations will help us simplify operations, maximize warehouse efficiency, and leverage the cost of our Missouri facility. We expect the net cost savings from the consolidations will be roughly $1.5 million on an annualized basis. And we'll begin to see savings in our fourth fiscal quarter this year. GAAP EPS for Q2 was $0.03 as compared with earnings of $0.32 last year. And non-GAAP EPS for Q2 was $0.29 compared to $0.58 last year. Our Q2 figures are based on our fully diluted share count of approximately 13.6 million shares. For the full year, we expect our fully diluted share count to be roughly 13.7 million shares. Adjusted EBITDAS for the quarter was $6.4 million, compared to $11.7 million last year. Turning to the balance sheet and cash flow, I'm pleased to share that we continue to strengthen our balance sheet during Q2, ending with net debt leverage of virtually zero, while returning capital to our shareholders through our share repurchase program. We ended the quarter with $16.4 million of cash down just $1.1 million sequentially from the first quarter. We're very pleased with this result given the cash outflow for our ERP implementation as planned, and roughly $750,000 spent for share repurchases. Positive operating cash flow for the second quarter was $1.1 million compared to operating cash outflow of $22.1 million last year. Recall that last year's outflow was driven by large bills and accounts receivable and inventory. Accounts receivable in Q2 this year increased sequentially over Q1 by $8.6 million due to the increase in net sales. We offset this increase with a $9.2 million decrease in inventory, all while maintaining strong gross margins. You'll recall last quarter we discussed that we had commenced targeted inventory reduction initiatives. I'm very pleased to report that our team has done a great job executing on those initiatives. And we're actually a bit ahead of schedule. We will continue to focus on inventory reduction going forward driving further cash conversion. Turning to capital expenditures, we are lowering our CapEx spending plans for full fiscal â23 by roughly $500,000 to a range of between $7 million and $7.5 million. Breaking that amount down, we now expect to spend between $4.6 million and $5.1 million on product tooling and maintenance CapEx and we still expect our ERP project to come in at $2.4 million. Now a brief update on our ERP implementation. As I've shared before, we are utilizing a multi phased go live approach with our new ERP system, Microsoft D365. I'm pleased to report that we successfully went live with Phase 1 on October 1 with a small portion of our business as planned. So kudos to the entire AOB team. Our tiered go live decision was a good one. In the Phase 1 process, we identified the need for some system enhancements that we've now designed into the final phase, which is Phase 2. While these changes will extend the timeline just a bit by about 60 days, they will improve our operational efficiency on day one and the new system. And despite the new February go live date, we don't expect to add any cost to the project. So great result and again, great job to the entire team. For fiscal 2023, our expectations for one time ERP costs haven't changed. We still anticipate spending a total of $1.7 million in onetime OpEx for implementation cost as well as $500,000 in duplicative costs to operate both our current and new ERP systems in parallel through February, both amounts will be treated as non-recurring implementation costs when calculating non-GAAP operating expense and adjusted EBITDAS. We ended Q2 with $20 million outstanding on our $75 million line of credit, keeping our net debt leverage ratio near zero. Last week, we paid down an additional $10 million, leaving us with just $10 million outstanding on the line of credit as of today. We focus on maintaining a very strong balance sheet so that we remain well positioned to address our three capital allocation priorities, which in order of priority are first to invest in organic growth. Second, to seek complimentary acquisitions, and third to return capital to shareholders. Our Dock & Unlock formula serves as the foundation for long term cash flow generation. That cash in turn funds further organic growth as well as the ability to capture attractive M&A opportunities when they arise. Ultimately, access cash generated by this process can be returned to shareholders when that is the best use of capital at any given point in time. We demonstrated our willingness to do that when our board authorized a $10 million share repurchase program in September. And during Q2, we repurchase roughly 84,000 shares at an average price of $8.97 per share. Now, turning to our outlook, in our view, retailers and distributors remain cautious regarding their inventory levels, and consumer spending patterns going forward are still undetermined. That said, we believe our brands are performing consistently with long term positive consumer outdoor trends. As a result, we continue to believe our net sales for fiscal 2023 could exceed pre pandemic fiscal 2020 levels by as much as 25%. To refresh you on our revenue flow by quarter, we expect typical seasonality to occur in fiscal 2023 with Q1 as our lowest net sales quarter, Q2 and Q3 as the highest net sales quarter, and Q4 coming in higher than Q1. We've noted in previous calls our returned to a more normalized promotional environment, consistent with the environment prior to the pandemic. As a result, we plan to participate in seasonal promotional programs, mostly in our shooting sports category, as well as other promotional events with our retail partners in the second half of fiscal 2023. As such, we expect gross margins in the second half of fiscal 2023 to be consistent with margins in the second half of fiscal 2022. With regard to OpEx, we expect Q3 OpEx spending to be higher than Q2 due to additional selling and marketing costs relating to annual industry trade shows, such as Shot Show and ATA in January, as well as the advertising spend, I discussed earlier. Lastly, we expect Q4 OpEx spend will be slightly higher than Q1, mainly due to the higher sales volume. Going forward, we plan to continue identifying areas for cost containment, where it makes sense in the short term, while being mindful of long-term investments needed to grow the business and execute on our strategic objectives. Thank you. Good afternoon. Hello, one question that become [inaudible]. I guess can you give us a sense kind of sense where you think your product inventory is at retail kind of versus last year? And as you think about demand remaining solid as you see from your own DTC and kind of, we assume continues in the retail channel and others? When does that inventory kind of need to be restocked? I guess and then only thing about it, what did you assume in your kind of guidance framework for this year with sales up as much as 25% in fiscal â20? Are you assuming some kind of restocking into the back part of the year or are you assuming itâs kind of staying at the same kind of status quo non restocking that have you seen in the past couple quarters? Yes. Hey, Eric, this is Brian. So in terms of POS that we're looking at, or I've looked at through the quarter, certainly our product at retail is below where it was last year, at this time. And in particular, the shooting sports side was down in the double digits versus prior year and outdoor lifestyle was down close to double digits. So we see that as a positive trend for us. And as we look out in terms of, yes, the question about restocking, I think certainly over the next over the coming quarters, we would expect to see that begin to come back because retailers will need product to sell through to consumers. So yes, we see that coming back. Obviously, TBD, to be seen what happened with Black Friday, Cyber Monday and the rest of the holidays for our customers but overall the trends look very positive. So just to make sure, the expectation that it should start to come back. Is that what you're assuming in that 25% outlook number or is that not included in that? Got it, and then just last question, obviously great results on the DTC trends, anything in there that you can point to that kind of indicates the health of the consumer one way or another frequency of guests purchases basket size ASP, if anything kind of goes one way or another in terms of that, beyond just overall growth number. Yes. This is Brian again. So certainly the majority of our DTC today comes from Grilla. And MEAT, and Grilla being acquired MEAT, obviously, an organic brand, but we were really impressed with the average rank for both of those brands. Both of them had significant increases over the prior year. And really some strong results. So we see ring size going up for those two, and also the baskets, we're seeing a lot of repeat customers. I don't know if we mentioned on this call previously, but Grilla in before the acquisition sales generally, were about 50% repeat customers. And we're seeing some strong repeat customers on MEAT. And I mentioned in my preamble about just the brand loyalty around MEAT. And take a look at some of the reviews of the new products, folks had purchased a grinder or slicer or something different and have come back to buy more meat products. And so overall we're really excited about that. And I think it shows consumers are definitely still spending money, and they're spending at the higher ranks. Hey guys, itâs Mike David on for Matt. Maybe just start off putting a finer tune to what exactly is driving gross margins stronger in the quarter? And how repeatable that is going forward? Yes, Mike, this is Andy. Great question. So during the quarter, we saw overall, we've had this decrease in inventory, kind of led by lower purchases over the last six months. As you can imagine, the lower amount of kind of unfavorable freight costs, unfavorable tariffs kind of lead us to not having those costs as much during the quarter. Going forward like I said, in the prepared remarks. Second half of the year, we're kind of expecting right in line with second half of last year, we're back into kind of that normal promotional level that we saw a pre pandemic, which we had last year as well, with similar programs that we're expecting in the second half of the year. Okay, so then is the more higher cost inventory that was burdened with elevated inbound shipping costs? Are we fully sold through that? Or so can we normalize that kind of going forward? Or do we still have some to filter through the P&L? Yes, not yet. Great question, but not yet. So freight costs are definitely way down. We're seeing them anywhere between probably four and five times lower now than they were even six months ago. But because those freight costs are capitalized into inventory, it'll take a little while for them to kind of flush through COGS. So I would probably say another couple quarters. Got it. Oaky, thatâs helpful. And we kind of touched on the traditional channel and restocking a bit earlier, but maybe also putting a finer tune to it. We've been comping in the negative 20% to 40% range for the traditional channel for the past like year or so. And retailers are going to start, they are going to have to start taking a more aggressive stance to restocking. Can we expect the traditional channel to approach more of a high single digit negative comp in the back half of the year? Or are we more of leaning on the DTC, E-commerce businesses to get us somewhere around that implied revenue mark for the full year? Yes, we haven't really, we can't dig in that detail. However, Q2 we saw a similar environment that we had in Q1, where we're kind of, we're competing against inventory levels of other products at our retailers. So they're focused on reducing inventories overall, which are limiting those open devices. So as Brian talked about before TBD on when that shakes loose. Yes. Mike, this is Brian. I would also add, let's not forget that we're, we introduced a lot of new products each year. And we've got a focused stream of new products are coming out, we mention of a few that we have on the call today, the claymore, which is going to be, in my opinion, a huge product for us. We've got some additional things coming out under Grilla and Bubba here in the next little bit. So that's all incremental. We don't see that as necessarily restocking, right? That's just incremental, new products play. And so that's a part of it as well. So we're very bullish on that. Got, it makes a lot of sense. Last one for me. I know we didn't own Grilla in the prior year period. But pro forma, we're sales positive in the quarter. They were, yes, if you take a look in our MD&A, you'll see that our DTC only which is Grilla plus MEAT was roughly $5 million. And then we just -- we filed our investor deck showing that meat on a TTM basis is $8.7 million. So you can kind of, if you do the math from other presentations, you can kind of see where that's going. Hey, good afternoon, guys. Thanks for taking my question. Thanks, the balance sheet $111 million in inventory on the balance sheet, it's down from where it was on $1 basis in Q1. How should we think about the inventory balance in the back half of the year understanding that there's some flow of product that's going to go into your traditional channels of retail where they might be backed up still. But as we model the cash flow statement, this is a big part of how the overall cash position is going to shake out at the end of the year. So I'm just curious, is there anything that gives you confidence that this amount of inventory, the stays on hand is going to come down and create a cash inflow into the back half of the year? Yes, John, this is Andy. Itâs a great question. So weâve talked, starting last quarter that weâve had these targeted inventory reduction initiatives that will drive cash conversion, we were actually saying closer to the second half of the year, weâre actually ahead of schedule on that. So we thought that the $9 million reduction in the quarter, weâre very pleased with that. But the work is not done. And weâre going to continue to drive those in â that inventory balance down to convert cash in the second half of the year, weâve talked in the past about the $100 million plus is probably too high of an inventory balance. And on the low end, I think we ended fiscal â21 at $74 million. But we also had $15 million of backlog. So weâve said that that number was too low. So itâll take some time to bring the inventory levels down. But we have those initiatives in place. And weâre executing against those. Got it. And maybe talk to innovation in the product pipeline, by brand that you're most excited about that can get the top line run rate improving as we head into the back half of year fiscal year and into the calendar year, next calendar year. Yes. Certainly, hey, this is Brian. So like we mentioned, under the Caldwell brand, which is in our shooting sports category. And we're focused in some of the larger I would say stable, more stable categories within shooting sports. So getting into shotguns sports, the claymore is, again, my opinion and also the folks that are getting their hands on it is a revolutionary product. I think that's going to be a big Halo product for us going forward. So more to come on that we just started shipping that product. Within Frankford Arsenal, that's our reloading brand. So now we're getting into progressive presses if you know much about reloading, and so we're just about to launch our x 10, which we showed at SHOT show last year, we began shipping some pilot units to consumers to get their feedback and also begin to build that groundswell. As you look at the way we're marketing some of our products now, just given the, I would say battening down the hatches somewhat, we're getting more creative in terms of how we get our products out, how we're launching those products, build working more with communities, quite honestly a lesson learned from Grilla. Grilla has done a fantastic job in that regard, and so we're doing something very similar. With MEAT! Your Maker, we do have some other products planned that you'll see here shortly, some nice high ASP products, Grilla, we've had a few products in development, beginning really just before the acquisition. And I say that because we were looking for a brand to apply some of these innovations and some of this IP, and it worked out perfectly with Grilla. So you'll see some of those innovations here in the next few quarters, probably the next quarter. And then going into the second. And then Bubba, right, we've got Bubba ICAST coming up next summer. So we're working on some of those new products, we've got the smart fish scale, which is if you've heard me talk about it, like Strava for fishing, totally revolutionize the way that fishing tournaments happen and how they're done. And so more news to come on that. But that will begin shipping here in the spring. So quite a few new, I'd say very disruptive products and some very large markets, largely the markets that we're really excited about. Got it, then maybe my final question is just on gross margin, there was a nice inflection in terms of just the year-over-year change in gross margin of 100 basis points. Maybe talk to how we should think about gross margin, not just in the back half of this year, but long term. What are the levers to kind of take you back to that 46%, 47% gross margin you've been had in the past? Yes, no worries. I would say in the long term, certainly the freight costs coming down will help. Like I talked about before, and you probably have heard elsewhere, the container costs were up four or five times what they a couple of years ago. Now those are back down to normal. Outbound freight, unfortunately, is not yet. There are still some really high fuel costs out there that are keeping those costs higher, which that's OpEx. But on the gross margin side, certainly freight in the long term, I would say probably starting in fiscal â24, we should see that start to cycle through. And that should be -- that will help us get to those levels that you talked about, John. I'll jump into, this is Brian, really quick. Certainly new products are a major way that we look to expand margins. So that's obviously a big initiative, this last quarter, it was about 30% of our total net sales. And then also direct to consumer, being very careful, of course not to step on our retailers toes, we are very careful about not competing with them. But with are more direct to consumer only brands and in looking at other businesses to either acquire or to form organically presents a good opportunity for us to continue to take margin on the gross margin side. Hi, guys, realizing that you guys are pretty diverse outdoor company. Can you talk about what you are seeing in consumer trends kind of today clientele and such jab come from Black Friday and moving into hunting season. We'd love to hear your thoughts kind of on the split between maybe hunt shoot products versus kind of fish and camp and everything else. Sure, Mark. Yes, this is Brian, I would say just real quick on Black Friday and Cyber Monday. Speaking for the direct-to-consumer side of the business, we saw some really impressive numbers. Really impressive increases year-over-year, for both Grilla and MEAT, so the teams did a great job there, which again, just speaks to one of the earlier things we spoke to consumers, at least a portion of consumers are still willing to spend higher ring volumes, higher bundling, things like that. So that's encouraging to see. And then as it relates to the breakdown hunt, shoot versus fishing. I would say that across the board. I don't recall seeing anything that jumped out at me in terms of fishing being higher than something else. We did see some good trends with BOG. BOG is our hunting brand and so we sell a lot of tripods under that brand, death-grip is our marquee IP protected product there. And so we did see some nice trends on that side related to hunting but nothing else Mark that caught my attention. Okay, as we look in particular at kind of the shooting sports products, any additional insight, we're seeing some mixed data today that looks pretty positive. For the most work for November, assuming that we've got more kind of centerfire rifles that are part of that rather than hand guns. Anything that to call out where you've seen kind of direct tie, perhaps to any increase or better firearm sales that are tied to kind of your accessory sales? I would say in total on the shooting sports side, we, like I said earlier, we have seen inventory in the channel drop versus where it was last year, and that in the double digits in the quarter. And then as it relates to sales, I would say flat to down slightly. I'd say consistent with what we're next has been shaken out here as a as of late. Andy, do you â Yes, no, totally agree. And as you know, I mean, there's still a decent amount of channel inventory out there, our POS data is based on roughly 50% of, we see roughly 50% of our sales, what we don't see is some of the distributors, dealers. But assuming that there's still a decent amount of shooting sports inventory out there. Okay, and then next, just kind of big pitchers, we think about direct to consumer the good job, you guys have done there, can you just talk about learnings and opportunities on continue to mix, continuing to expand that kind of throughout the product portfolio? And then also, I'm curious as you continue to build up MEAT and Grilla, are there opportunities to change from kind of a fully direct to consumer market to perhaps putting this into brick and mortar eventually? Tough questions, Mark. So learnings first, yes, I mean, it's been really interesting, MEAT! Your Maker has exceeded our expectations, we launched that organically. And we have learned a ton, we've been pushing the bounds with the product quality and really tried to offer value to the consumer. And they fully embraced that, it's working. And then here comes Grilla, we acquired Grilla. And like I said, we have some products that were in development that you'll see very shortly that are going to be, we're going to use Grilla to introduce those. But Grilla had a very unique approach to marketing their products, very unique approach to building consumer loyalty. And so we're taking notes there and beginning to implement that for other brands, like MEAT! Your Maker. So in the way that we introduce our products, making getting consumers involved in that process creates ownership. And ultimately, I think that's helped to really create this groundswell for our direct-to-consumer brands. So that is definitely a learning that we've taken. And then we've also been very careful with not forcing anything with the consumer. We don't want to begin to bundle things that just don't make sense and feels forced. So we have been very careful, we do a lot of testing, AV testing, whether it's advertising or bundling opportunities. And then we obviously take that information and make better decisions. So that's been helpful as well, as in regards to your second question in other words, would we take Grilla, and MEAT! Your Maker, for example, into brick-and-mortar retail, it's not out of question I think ultimately, we want to do what's best for the brand, we also want to honor the consumer. And if there's a retail partner that is in alignment with those two things, and we can offer value, then I think it's something worth exploring. But we also have quite a bit of demand that's built up through our direct-to-consumer channel, and so we don't want to neglect that as well. So is it possible? Certainly, is it something that we've talked about? Definitely. But we definitely want to be careful about that transition to make sure we're doing what's right for the brand. Perfect and last one for me, I don't think it's too bad of a question here. Just cash balances in good shape as well as availability, you move down into the kind of that third priority on capital deployment on returning cash this quarter. Any changes that you're seeing in the M&A market today? Are you seeing more opportunities? Are you seeing valuations turn any more reasonable? Any updates that you have would be great? Yes, Mark, this is Brian again. So, Andy, feel free to jump in. I would say as it relates to deal volume in terms of bankers bringing deals to market has slowed pretty significantly. And I think there's several reasons for that, obviously, interest rates are going up. Banks are a little bit more hesitant to provide leverage on questionable EBITDA for some of the companies that are looking to sell and then you'll have seller expectations that might be where they were a year ago. And so there needs to be some reconciliation there. So fewer deals coming to market right now. But with that said, we do have our own pipeline that we're constantly working on and speaking with founders in particular, or even private equity on businesses. So we still see quite a quite a few deals. Just the last few weeks alone we've had several converts stations with folks. And we continue to explore what those look like. I would say I wouldn't be surprised that there are few more distressed situations coming to market, which also presents some opportunity. And we have some experience in that respect, looking at companies that are a little bit more distressed. So it is something we're keeping your eyes on. But there were some companies, more entrepreneurial companies, founder led businesses that in an effort to grow quickly, maybe put on too much debt on the business. And maybe in a distressed situation, so we're keeping a close eye on that, and looking to see if there are opportunities to partner but we're being very cautious. This concludes our question-and-answer session. I would like to turn the conference back over to Brian Murphy for any closing remarks. Thank you, operator. Before we close, I want to let everyone know we'll be participating in the ROTH Conference in Deer Valley next week. In January, we'll be attending SHOT Show in Las Vegas, and will also be participating in the Lake Street Outdoor Conference. We hope to connect with some of you at these upcoming events. As we head into the holidays, I want to give a special thanks to our employees whose loyalty, hard work, dedication continues to move American Outdoor Brands forward on the path towards an exciting long-term future. To those employees and to everyone else who joined us today, we wish you a happy and healthy holiday season. And we look forward to speaking with you again next quarter.
EarningCall_1829	Good day, and welcome to the Five Below Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After todayâs presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Christiane Pelz, VP of Investor Relations and Treasury. Please go ahead. -- Please go ahead, Christiane. Thank you, Cole. Good afternoon, everyone and thanks for joining us today for Five Below's third quarter 2022 financial results conference call. On today's call, are Joel Anderson, President and Chief Executive Officer and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our SEC filings, The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. Thank you, Christiane, and thanks everyone for joining us for our third quarter 2022 earnings call. We delivered a third quarter that substantially beat our guidance against a difficult macroenvironment, especially given the comparison to last year's extremely strong sales. We are playing offense, staying nimble and controlling what we can, all the while keeping our customer promise of delivering value at the center of our decision making. We are also executing on our long-term growth initiative that underpin our triple double plan, of which store growth is key and we are pleased that the conversions to our new Five Beyond store format are being met with a very positive customer response. All of this helped drive total sales growth of 6% to $645 million, a comparable sales decrease of 2.7% and earnings per share of $0.29, which were all ahead of our guidance for the third quarter. The sales beat was driven by both ticket and transactions results, improving throughout the quarter. We opened 40 new stores across the country in the third quarter, finishing the quarter with 102 stores opened year-to-date. Three of these new stores ranked in the top 25 fall grand openings of all time and two of them were in our new states of North Dakota and South Dakota. We were also very excited to open our third Manhattan location in Times Square. In addition, we have already converted approximately 250 stores this year to the new Five Beyond prototype. We are very pleased with the pace and execution of this rollout as well as the customer response, which is driving higher sales and traffic to these stores. This past year, we continue to focus on our strategic initiatives of product experience and supply chain, which were key to our performance and were important enablers of our past long term targets. Next year, we will outline our strategic pillars that will enable our Triple-Double goals. On product, the trends we mentioned last quarter continued, with our version of consumables or needs-based products resonating with customers. The candy world once again outperformed, featuring novelty candy like Slime Liquors, Snacks from great brands like Hershey and Rochelle, as well as our salty business featuring the One Chip Challenge and Talkies. In games and toys, our Swiss model products remain popular. We connected with our customers with Squish Sunday events and recently launched our exclusive Five Below Only collection of squish models. Newer trends like Anime, Funko and Hello Kitty grew and we sourced more licensed product, including items such as Disney's, Lilo & Stitch and Marvel Action figures, all at extreme value. In addition, Halloween was more normalized as tricker treating and other Halloween rituals recovered from the pandemic impacted 2020 and 2021 years. We were pleased with our performance and our seasonal offerings were well received. Five Beyond, as I mentioned earlier, continues to be a growth driver for us, with more stores offering the full assortment in the back of the store. We have added about 200 items to the converted Five Beyond stores. Finally, I'd like to add that we took advantage of close-out opportunities and one-time special buys in the marketplace and now have additional extreme values across products of many categories. Our goal, especially this holiday inflation induced season, is to drive even more value for our customers and we will continue to selectively pursue opportunistic buys that will drive traffic and attract new customers to Five Below. As it relates to our strategic initiative of experience, we are focused on connecting with our customers and delivering an even better shopping experience for them. We already spoke about the successful rollout of the latest prototype featuring the Five Beyond store within a store in the back of the store, which includes the re-imagined tech and room worlds. We continued to see customers who purchased Five Beyond products, spend about twice as much as those who did not, which bodes well for continued increases in store productivity. With approximately 20% of our chain in the new Five Beyond format that we unveiled earlier this year, we are on track and marching toward our goal for over 80% of the chain to be in this format by 2025. With respect to marketing for the third quarter, we invested heavily in digital, specifically in paid search and social media. We increased our marketing spend year-over-year, focusing more on the second half of the quarter, leading into the key holiday selling season. We tested various strategies and believe our efforts were effective in driving sales. Our marketing and digital design teams did a great job communicating our value message to customers, whether digitally or in store. In addition, with increasing knowledge about our customers, gained through tokenization, we are leveraging data to target both new and existing customers more effectively. For e-commerce, we enhanced our offering by rolling out buy online, pick up in store, chain wide in September. The initial results are promising and we look forward to our customers discovering the convenience that bopis orders during this busy holiday season. With respect to supply chain, we are proactively managing our operations and navigating dynamic conditions. We continue to look for ways to control our destiny. As an example, we strategically accelerated inventory receipts to ensure a great in-stock position for the holiday season. We remain nimble in this ever changing environment and I am extremely pleased with the positive results the team has delivered. Regarding our distribution infrastructure, we completed our five no network with the summer opening of the Indianapolis ship center. We now have the capability to reach approximately 90% of our stores within two days and the network is expected to provide efficiencies and keep our stores well stocked. Peter Town, New Jersey, our first large ship center has been fully built out with the ability now to service approximately 500 stores. The other for ship centers will be expanded over the coming years to support our continued growth. Now, on to the all-important holiday season. We are pleased with the start of Q4, including Black Friday weekend. Our stores are stocked and ready with an amazing assortment of value products that promises to delight our customers, from branded games and toys to pet beds and from holiday decor and license keys to bluetooth speakers, we have something for everyone to complete their shopping lists. In addition to our Five Below stocking stuffers and gifts, we are also excited for Five Beyond to provide new and extreme value products in different categories, which further reinforces our position as a must-stop holiday gifting destination. For example, this holiday season, we are featuring a folding light-up scooter with LED wheels for only $20. We are also really excited to have sourced Kylie and Kendall crossover bags for only $5, exclusive to Five Below. And to highlight these amazing values, earlier this month, we kicked off our save the holidays marketing campaign, utilizing social media, paid search, TV and key partners like Kelly Clarkson, to attract new and existing audiences. In our stores, we've hired thousands of associates to keep our shelves filled and help customers with their holiday shopping needs. We also plan to further elevate our customers' journey with approximately 70% of our stores offering assisted checkout, which improves throughput and the customer experience during the busy holiday shopping season. We can't wait to see everyone in our stores and online at fivebelow.com. So in summary, we made great progress on several initiatives in the third quarter and are in a great position for the fourth quarter. We believe with the steps taken, including accelerating inventory receipts, expanding our value assortment, increasing marketing, adding BOPIS and growing the number of self-checkouts in stores, we are well positioned for our customers as they adjust to an inflation holiday season and look even more for value. Last quarter, we said that Five Below becomes a needs-based retailer during the holiday season, and we are beginning to see that play out with improved transactions. We offer the extreme value our customers need to help alleviate macro pressures while providing a fun shopping experience to let go and have fun. Our customers know they can count on Five Below for amazing, affordable gifts and stocking stuffers to celebrate the season and we won't disappoint. Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our third quarter results and then provide guidance for the fourth quarter and the full year. As Joel said, we were pleased to exceed the third quarter guidance we provided. Our sales for the third quarter of 2022 increased 6.2% to $645 million from $607.6 million reported in the third quarter of 2021. On a 3-year compound annual growth rate basis, sales growth for the third quarter was approximately 20%. Comparable sales decreased by 2.7% with a comp ticket decrease of 1.8% and a comp transaction decrease of 0.9%. Our average ticket remains strong, increasing over 20% in the third quarter as compared to the corresponding pre-pandemic period in 2019, which is in line with the results we have seen since we reopened stores in mid-2020. We were pleased that our comps on a 1-year basis and a three-year geometric stack basis increased post-August with improvements in both transaction and ticket. We opened 40 new stores across 20 states in the third quarter compared to 52 new stores opened in the third quarter last year. We ended the quarter with 1,292 stores, an increase of 119 stores or approximately 10% versus 1,173 stores at the end of the third quarter last year. Gross profit for the third quarter of 2022 increased 2.7% to $207.8 million versus $202.4 million in the third quarter of 2021. Gross margin decreased by approximately 110 basis points to 32.2%, driven primarily by occupancy deleverage on the negative comp. As a percentage of sales, SG&A for the third quarter of 2022 increased approximately 270 basis points to 29%. SG&A expenses as a percent of sales were higher than last year driven primarily by fixed cost deleverage, higher store expenses and increased marketing expense, all offset in part by cost management strategies initiated this year and lower incentive compensation. As a result, operating income decreased 50.7% to $20.9 million versus $42.4 million in the third quarter last year, with operating margin deleveraging year-over-year by approximately 375 basis points. These results were better than our expectations due primarily to the sales beat. Our effective tax rate for the third quarter of 2022 was 24.6% compared to 24% in the third quarter of 2021. Net income for the third quarter of 2022 was $16.1 million versus net income of $24.2 million last year. Earnings per diluted share for the third quarter were $0.29 compared to last year's earnings per diluted share of $0.43. We ended the third quarter with $117 million in cash, cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit. Inventory at the end of the third quarter was $702 million as compared to $521 million at the end of the third quarter last year. In line with our expectations, average inventory on a per store basis increased approximately 22% versus the third quarter last year. Approximately half of this increase came from unit growth as we accelerated inventory receipts to ensure better in-stock positions for the holiday period. We continue to expect the growth in average year-over-year inventory per store to moderate significantly by the end of the fourth quarter. Now on to guidance of fourth quarter and fiscal year. We are pleased with the start to the fourth quarter, including Black Friday weekend results. We expect fourth quarter sales to be in a range of $1.085 billion to $1.110 billion based on opening approximately 48 new stores in the quarter, with comparable sales in the range of negative 1% to positive 1% versus last year's fourth quarter comparable sales increase of $0.034. As Joel said, we feel great about our holiday assortment and expect to benefit from a better in-stock position in Q4, more targeted and effective marketing and an expanded Five Beyond assortment in more stores. At the midpoint of our guidance, we expect year-over-year operating margin improvement in the fourth quarter of approximately 150 basis points, driven by leverage in both gross margin and SG&A expenses. Lower incentive compensation and additional cost management strategies are expected to more than offset deleverage on fixed costs and higher than originally planned marketing spend. Our effective tax rate for the fourth quarter is planned at approximately 25%, which excludes the impact of share-based accounting for any share repurchases. Net income is expected to be in the range of $164 million to $173 million with diluted EPS expected to be in the range of $2.93 to $3.09. For the full year, we expect sales in the range of $3.38 billion to $3.63 billion or an increase of 6.7% to 7.6% versus fiscal year 2021. We expect comparable sales in the range of negative 3% to negative 2%, and EPS in the range of $4.55 to $4.71, which is an 8.1% to 4.8% reduction versus last year. These full year projections assume opening 150 new stores and completing approximately 250 conversions to the new Five Beyond store format. For fiscal 2022, we are planning to spend approximately $235 million in gross capital expenditures, excluding the impact of tenant allowances. This reflects the opening of our new ship center in Indianapolis, opening new stores and executing conversions and investing in systems and infrastructure. In conclusion, we had a better-than-expected third quarter and are off to a good start for the fourth quarter. It remains a dynamic economic environment. However, Five Below is a resilient retailer. Our teams continue to move quickly to adjust to changing customer preferences, and I want to thank them for their ongoing commitment and dedication. The combination of our long runway for growth, industry-leading new store economic model and strong balance sheet, combined with disciplined cost management sets us apart and positions us to weather economic uncertainty, all while continuing to deliver on our strategic priorities to capitalize on the significant growth opportunity that lies ahead. Great. So congrats on a great quarter. Joel, so a couple of things. What do you review the inflection in business that you've seen since August. Could you elaborate on November? And is it fair to say that you're embedding a level of potential conservatism in the 4Q guide? And then just anything you see today that prevents you from returning to the components of the Triple-Double plan as we look to next year. Yes. Thanks, Matt. Obviously, based on our guide where the quarter end, the quarter improved throughout September and October, I think it's largely a combination of the factors I outlined in my prepared remarks, which specifically were a combination of what we've done around the Triple-Double has really helped the improvement in transactions. And we've always said as we get closer to holiday, we become a needs-based retailer, and we clearly seeing some of that begin to happen. And then finally, we increased marketing. And so those are all things on our side of it. And then it's not lost on us that the consumer CPI has gone down throughout the quarter, and that probably certainly helped customers as well. And that's kind of how we see Q3 playing out. As far as elaborating on fourth quarter, conservatism is a tough word to confirm or deny in the sense that as you always know, Matt, Q4 is a different quarter than the rest of the quarters. And we clearly have 2/3 of the quarter still in front of us. So I think we said in our remarks, we're really off to a very solid start to the quarter. It's in line with our forecast. And we see no reason for that to stop. But we also have to recognize that it's a pretty dynamic environment and the customer hasn't dealt with inflation like this before. But look, all the stuff we put in place seems to be resonating, and we expect that to work throughout December. Thanks, Matt. Happy holidays. Joel, can you talk about the product pipeline heading into '23. I know you won't give '23 guidance, and that's not the point. But anything that's different? And then is there any products that are not already set for the holiday that come into your assortment in the next I'm assuming not, but anything around that and then to '23? Yes. Look, as far as the assortment for Q4, I would -- you'll see a few new stuff still floating in for Five Beyond. I think that's a very dynamic line that we expect stuff to go in and out. So you'll continue to see some newness and wow in there. But in terms of the product line, I mean, some of the stuff I called out on my prepared remarks, like the Kylie and Kendall crossover bags. I mean that's just a great example of the merchants being out there, being trend right getting exclusive to us. And that item is off to a great start, and that will carry into next year. And then I think the big -- we want to forecast into '23, I think the big change we've seen licenses haven't been relevant for the last 3 years, largely because movies haven't happened and licenses tend to come out of movies. So the emergence of licenses here in the fourth quarter is a good sign that will probably continue into '23 as well. But that's kind of a quick overview on product and as we think about going into '23. Your thoughts, right, where we are in Five beyond now, right, in terms of price points, I think you've got more $25 items than you've ever had. But price points worlds, and I know you've always -- Michael has always challenged the merchants, right? We need dollar items as much as we need $5, that discipline on Five beyond, right? Is that we need $10 items as much as we need $20. What's your thought on that today? Yes. Good question, John. And what I would say to you on that and honestly, for everyone on the call, we're still Five Below. And more than ever this year, we really focused on that. $1, $2 price points and really try to screen value in the stores. And at the same time, strategically, we are very excited about Five Below and what that allows us to do to not only be your stocking stuff or headquarters during holiday, but also be the main gift, and we've landed on a great platform, obviously called Five Below. But what you're going to see us continue to emphasize and build upon is the bifurcation of the two. And it is not our intent in non-Five Beyond stores to grow that assortment. You will not see that assortment grow in the non-Five Beyond stores. we may still carry a 8-foot section in the front. But whether you're talking about Five Below or Five beyond, the consistent message that the merchants will deliver is value. I think that's more important than the actual price. And you're right, John, we have more $25 items than we did last year. For now, I think that's the high end of where we'll go. And we've got too many opportunities to have to go any higher than that right now, but you'll see that continue to expand in the Five Beyond stores. And Michael and the team will do what they do. We'll start as we said at the Investor Day, we're moving away from items on the shelf to a store within a store and you'll start to see worlds emerge, you'll start to see categories emerge. And I'm talking about Five Beyond for the second here, John. But hopefully, that gives you some sense of the difference between Five Below and Five Beyond, and yet at the same time, it's about delivering value. Thanks, John. I have a question on store growth. I think it's again going to be a bit lower than kind of previously anticipated. So I guess the questions are, are there still headwinds to the opening cadence we should be thoughtful about, especially as we look towards the '23 unit growth opportunity? Yes. It's a good question, John. I mean clearly, coming into '22 here, the headwinds persisted over -- coming out of the pandemic. Even the ratio of stores first half to second half is skewed much later to the second half year in '22. And of course, that rolls over a little bit into '23. But Look, we're still on track for the long-term Triple-Double goals. I think we said 1,000 stores over 4 years. If you take the slow start in '22 here, hey, does that you end up missing that by 5% or something. It's still directionally 1,000 stores, and that's only because of the start here to '22. We are gaining momentum going into '23 and expect that to continue to grow. But I think the majority of the headwinds are behind us. And I hate to say it, Scott, I think for the first time in 3 years, we're going to see some retail displacement coming out of the holidays. That will be a good thing for us as we pick up more sites as we expand our growth. But that hopefully gives you some outlook on it. Thanks, Scott. Congrats on this quarter. So my question mentioned -- you mentioned in your prepared comments, the opportunistic purchases. So the question I have is maybe just elaborate further on that. Is this something -- you've always -- you've done this in the past. This is a bigger effort now just given some of dislocations. And the product that you're buying opportunistically, is it more of what the same in Five Below? Or do you have products that could be unique this year? Yes. I think that why it was important to get that included, Brian, in my prepared remarks is that, honestly, for the last couple of years, there hasn't been a lot of closeout opportunities, onetime opportunistic buys. And I think it's important to note, though, it's still relatively low single digits of our overall purchases. But you walk in our stores, you'll see a big selection of Funko. Our 12-inch marble action figures, Uno, things like that are a combination of really great brands and licenses and then incredible value that we brought to the stores. So I think it's look, it's something that's been in our DNA for quite some time, but I needed to remind everybody that's kind of back in our playbook, and it hasn't been there for the last couple of years. Curious if you can share what you're seeing in terms of the Five Beyond prototype comp performance versus the rest of the chain? And any detail that you might be able to give in terms of the traffic or to get in those stores versus the non-Five Beyond stores? Paul, it's a great question. It kind of alludes a little bit to what Matt asked about improvements through the Q3 quarter. And at the same time, I'm not trying to dodge your answer. And while we are seeing improvements in both, it's really early for us to kind of give you a definitive statements on that because the overwhelming majority of those happened in Q3, which is -- again, it was an input into why sales improved throughout the quarter. And I think we really kind of need to watch how Q4 goes. But what I'll tell you and remind everybody at our Investor Day, we expected the first full year post remodel to run in plus mid-single digits. And we haven't seen any signs that it's -- they're not going to perform at kind of that level. But at the same time, we want to kind of more real data. We got a large subset of stores now, 250, and we'll really watch those through the quarter. But I would stick with the mid-single digits, which is what we laid out at Investor Day. So there's been a lot of talk about heavy promotions this holiday period, especially in categories like toys, -- can you just maybe talk about what your Q4 mix is in that category and how you think you're set up to compete? And then just a follow up on one thing you talked about earlier on the closeout business. Just maybe a little color on what you're seeing there in terms of the opportunity. Could you maybe size it and the impact that could have in Q4 as well? Yes. Ed, the toy category for us, holiday is in kind of the high teens range. And I think it's -- look, I know the industry is talking a lot about heavy promotions, over buys. We -- that really hasn't impacted us. We also don't tend to play in the traditional toy line-up that everybody is talking about. Squish model is in the -- in our toy world. And that's very different than the plastic toys that I think a lot of people are referencing. And I don't expect us to deviate too much from the high teens in terms of the Q4 performance in toys. I don't know, Ken, anything to add on that? No, I think you hit it. It's always an important part of the holiday season. And as Joel mentioned, those are our expectations. That's what we've seen historically from a penetration standpoint. And that's what we're expecting to see for this holiday also. So Joel, you mentioned a few times, and I know you said on past calls that the business becomes more needs-based as we get into the holiday season. So I'm just curious as you're starting to plan the business for next year, if you think we could see a similar cadence, just this sort of environment continues. I'm curious to get your thoughts there. Yes. I just wonder, as we get out of the holiday season, we entered the spring and summer, assuming that the consumer just broadly still under pressure if you're kind of planning the business this run rate won't continue if we'll see some softening before that it picks up again as we get into the holidays. Yes look, I wouldn't expect us to see softening. I think it's -- it's a very different time period than where the start of the year was. The consumer has clearly said value is important, and they figured out that we're a piece of the value equation. I think what we saw in Q2 where we saw a big slowdown as did most retailers, and that was during the transitory time of massive inflation. Certainly, the war started, and we saw the consumer freeze. They've adjusted their pocketbooks. They've adjusted new lifestyle, and we're part of that equation going forward. Will the first couple of quarters, be more focused on our needs-based categories like consumables and candy, absolutely. But as long as we continue to deliver value, I don't see it going backwards. Plus, look, you're going to get the continued benefit of more conversions as we go into 2023, which is going to more than offset any potential slowdown you're foreshadowing there. hopefully, that gets at what you're asking, Jason? Congrats on the strong results. I wanted to ask one to see if, first, just clarifying on the cadence trends. If I'm not mistaken, I think the cadence -- the compares get easier as we get into the back half of December and into January. So first just confirm that. And then the second question would be just you've invested a lot in technology within the stores self-checkout. We've had a lot of retailers that have talked about an increase in shrink rates in 2022. I wanted to get a sense for what you're seeing and particularly as the last couple of quarters here and as we get into the holiday season. Yes. Thanks, Jeremy. Yes, I think you're thinking about the cadence piece of it, right? If you recall, Q4 last year, January, was up against the stimulus payment from '20 January of 2021, which was the end of our fiscal '20. And so that was our hardest compare last year. I do think January is now a more normalized baseline from prior years. And it's also our smallest month of the year. But clearly, I think -- and this is all in our guide, too. We expect November was the toughest. There was a big pull forward last year of buying with the whole concern over supply chain. But that -- we factored kind of all that in as we thought about our cadence for the quarter. And then as far as shrink rates, look, there's been a lot of talk in the industry about that, I think all that started to emerge in '20 and '21. And so I don't expect '22 to be significantly different than '21. And -- some of that's driven by our price points vis-a-vis some of the higher-end retailers, but it's also kind of already in our -- largely in our base from last year. This is Eric Cohen on for Chuck. Inventory growth definitely improved a lot this quarter. I was wondering if you could sort of unpack the drivers of improving growth and then also sort of how you're thinking about inventory as we get to year-end. Yes. Thanks, Eric. Yes, as I mentioned in the prepared remarks, we did see a significant improvement in that year-over-year average store inventory. It actually dropped in half -- you recall back in Q2 was I think the growth rate was in the high 40%, I think 47% down to 22%. The overwhelming majority of that was our strategy of accelerating inventory receipts to get prepared for this holiday season. We didn't want to get caught up in any type of supply chain disruption. And if you move forward, to the end of the year based on our expectations, we think that moderation is going to continue significantly as we get back to the end of the year. And we'll be -- we should be in a very good position at the end of the year. And probably we're seeing some of the freshest inventory levels that we've seen in years. So we feel really good about where inventory is for us right now. You mentioned that your assisted self-checkout penetration I guess it's in 70% of your stores. And I was just wondering what's sort of the long-term target? And are there any kind of limiting factors to get into 100%? Yes. Thanks, Anthony. Look, the long-term targets, it will probably never be exactly 100%. Some of it is a factor of converting old stores. So I would say our really low-volume stores or still our smaller format stores, we probably aren't going to have the room to put it in. And then our extremely high shrink stores, we tend not to put it in there. So -- but for all intents purposes, that number will continue to float up. It will never be 100%, but it's probably not going to be less than 85%. So somewhere in that range, 85% to 90%. Thanks, Anthony. And best wishes for the holidays here. My question was, Ken, I know it's early to talk about 2023, but I was wondering if in broad strokes you can give us a little bit more thinking around margins given some of the noise that we're seeing and given the inflection that you're guiding for here in gross margin? Yes. Brad, it's a question you're asking. It's probably on a lot of people's mind. I'll turn this over to Ken here in a second. But just look, this is normally where we wouldn't want to give any guidance on '23, and we tend to save all that for March or maybe a little bit of ICR listen, I know you're all trying to kind of figure out your models and you have to also realize we have to get through Q4. But maybe I can help you a little bit on the top line. Think about that. And Ken, maybe you can think about a scenario that would help them to think about the bottom line. But I think our largest input to top line growth is new stores, and we wouldn't expect to be below 200 next year. And so I think that's in the range as we're thinking about it. We'll certainly have full line of sight to the new store program as we get to March and our year-end call, but Ken help them think about a scenario of how to think about the bottom line. Yes, sure. And thanks, Brad, for the question. As Joel mentioned, obviously, we're going to get through the holiday season and we'll provide guidance as we normally do on our March call. And again, this is not guidance, but in a scenario format. So in a scenario, say, of a 3% comp for next year. Based on what we know today, Brad, we believe that operating margins should be up slightly, and that's versus our fiscal '22 guidance that we're providing. Now that does include some puts and takes that we've spoken about before. There are some headwinds that we would expect next year around areas like higher incentive compensation, the cost management strategies that we initiated this year, primarily in the back half of the year that we've spoken about that have done, helped us significantly from a profitability standpoint, we're going to be anniversarying those. And some of those we're carrying forward and some of those, we can't. So there will be a slight headwind there. And inflation. We're seeing increases in certain operating areas of the business, especially coming on here late in the year. But as you know, we always look and we do a pretty good job of mitigating a lot of those increases based on our Gale negotiations and other cost management strategies that we can put into place. So that's, again, just a scenario of what we would see next year if it was a, say, a 3% comp. I appreciate the commentary around Five Below and the lift you're getting in that respect, but average ticket this quarter was still down. It was up 20% looking back to 2019, but down on a year-over-year basis. Did that acceleration you saw through the Q3 period in terms of comp, did that have to do more with sort of this quick shift to value? And are you seeing those lower price points? Are they moving at a faster velocity than, call it, $5 and higher? David, you were asking that through the quarter. Did it -- ask me that question again? I'm trying to follow it. So the improvement you saw throughout Q3 and an acceleration, did that have to do more with some of your lower priced items just turning quicker and selling better? Or are you still being that lift from items that are $5 and higher? Well, I think it's if I had to categorize it, it's probably roughly one third, one third, one third, meaning one third of it is coming from Five Beyond, one third of it is coming from strategic price increases we made to combat inflation and then one third of it is coming from sales mix shift, right? So I think that's... Yes. David, if you're referring to kind of the typical average unit retail increases there. That's where that's coming from -- you that mix. But from an overall improvement in the business. It's really coming from across the board in terms of a product perspective. Ken, do you need a 3% comp to generate some margin expansion next year. Presumably, that's not the new norm for the leverage point given that you'll have some unique expenses rolled back into the base. So what is the new what is a long-term sustainable comp point comp amount that you'll need to lever expenses? And what happens if your sales are flat in 2023, how much margin compression would you see just given there's a lot of uncertainty in the macro environment into next year? Let me just take the beginning, Ken, I'll hand over to you. I just -- I want -- I jumped in there, and I'll let Ken answer it specifically, Michael, because I don't think the scenario -- I mean, Ken gave you a 3% scenario, but I don't think the scenario everyone on this call should be thinking about is a flat comp. I think clearly, as we get to March and if the world changes again, I'd unwind that comment. But I think with all the initiatives we've got focused on what we told you all at the Investor Day, we're pushing ahead with all those, and we outlined 3% to 5% the next 3 years. We're working our way into that for next year. And I think the 3% is still the right way to think about it. If you take our historical low single-digit, you add in the benefits of conversions, that's what starts to push us at 3% or higher. We're not ready to go any higher than that yet. But I would caution everyone from getting off of a flat comp. And Ken, I don't know if you want to... Yes. So Michael, if you take it a little further because you're asking, you're going a little further out in terms of the timing here. Just to remind everybody, 2022 was a pretty unique year. And because of a lot of things that happened this year, they're having an impact on next year, right? I spoke about some of the headwinds, which are really carryovers from this year, reduced incentive compensation. Some of those cost management strategies and some other things. So there's a lot going on there to unpack. But how I would answer you would go back to our Investor Day where Joel just spoke about our expectations from a top line perspective. And I think one of the things that we emphasized was our ability to lever on a kind of a higher basis, right, in terms of higher leverage given the investments that were behind us, specifically in areas like the distribution network and some other things, technology that we would have an increased ability to leverage as we move forward. At this point, obviously, I can't provide any specifics in -- we need a little bit more time for that. But I would think that, that's probably the key takeaway from a profit profile for us longer term and then operating leverage embedded in that. Yes, I don't see anything longer term, Ken, that has said our leverage tipping point needs to stay up at the 3%, 5% where we used to be. We just got to get through '23 first. Just wanted to follow up. Joe, you had mentioned about the new store side earlier. Can you give any sense for the remodel conversion front in Five Beyond next year? Can we think $300 plus? And just remind us what the CapEx is for those? Yes. I think a $300-plus number is certainly a number. At this point, we're still putting all that together, Michael. But I wouldn't certainly expect it to be less than $300 at any stretch. It will probably be a little bit north of that number. And what we will lay out for all of you we get -- certainly, the March call is not only how many, but some of the timing behind that. And then Ken for the investment or the build-out per store. Yes, Michael, that varies depending on the type of conversion that's taking place depending on the age of the store. If it's a more recent store, it can be pretty low actually -- down below $100,000. If it's a full versus an older vintage type store, it will cost pretty much the same as it would for building a new store. But the overwhelming majority of those are going to be less than $100,000, right? It's not -- that's about where we're thinking about it. Thanks, Michael. Congratz on a really good quarter. I was just wondering thinking about share of wallet. You did mention in your prepared remarks that you're working to leverage data for more effective messaging. You also invested in marketing more heavily in the back half of the quarter. So can you maybe talk about the customer response that you saw? Because it does seem like it could be a pretty meaningful opportunity looking ahead, especially to drive brand awareness. Yes. Thanks, Krisztina. And that's really why we invested in tokenization. And starting with November here is our first month where we have year-over-year statistics on -- at the customer level, we used to really only have it at the DMA level. But I would tell you -- so we'll have that data going forward, which will answer your question specifically. I think as I look backwards, I really have to use transactions as a proxy for traffic. And we saw transactions improve throughout the second half of the third quarter. And that is a really good sign that says our marketing is working, customers are looking for value and then what we'll be able to start to give all of you as we look at fourth quarter here and beyond is start to see what the mix of our customer is specifically who's coming in after we advertise. So I just need a little bit more time so we can get off of kind of the old way we've done it. But short of having a loyalty or a credit card, our tokenization work which started November last year, that which then therefore means this is the first year I've got year-over-year trends. We'll have that starting in '23 for you. Thanks, Krisztina. Go ahead, operator. Go ahead. I'm going to say this just concludes the question-and-answer session. I'd like to turn the conference back over to Joel Anderson for closing remarks. Yes. Thanks, operator. Sorry for jumping on top of you there. Hey, thanks, everyone, for joining us today. And just a reminder for everyone, as always, I think -- and we tried to communicate it today, our purpose here at Five Below is to deliver exceptional value and wow for our customers and value is even more important this holiday than ever. We are extremely confident that we have sourced a terrific selection for this fourth quarter of value products that will wow our customer. We are the go-to destination for stocking stuffers and gifts. And we also believe in value and giving back to our communities. And right now, we are currently with Toys for Tots. This is something we've done over 10 years now. And I encourage all of you to visit our stores and help make a donation and a difference for Toys for Tots. Look, in conclusion, I want to thank all of our teams here at Five Below for their continued hard work and making this a great company and brand. We look forward to speaking with all of you after the holidays. Have a great day, and Happy past Thanksgiving. Thank you.
EarningCall_1830	Good morning to all of you who have joined us on today's call. My name is Cheryl Grue, and I am the Director of Corporate Affairs for Athabasca Minerals, Inc. Today's call will be addressing the 2022 third quarter financials that were released last week as well as providing an update on AMI's current activities and our continued refocusing of the company as part of our commitment to corporate growth and shareholder value. David Churchill, our CFO, will begin by addressing the Q3 financial results, providing some more information on the numbers and focusing on some of the highlights of the last quarter. Following that, we will have Dana Archibald, our CEO, provide an update on corporate operations, specifically our U.S. sand operations, which have become the cornerstone to our growth. We will have a Q&A period after Dana and David have spoken. So please feel free to submit questions during the call or in the Q&A session. All questions can be submitted through the Q&A function on this platform. Before we start, I would also like to reference that this investor call contains certain statements or disclosures relating to Athabasca that are based on the expectations of its management as well as assumptions made by and information currently available to Athabasca, which may constitute forward-looking statements or information under applicable securities laws. Please reference the forward-looking statements posted on the corporation's website on November 23, 2022, under the news release titled Athabasca Minerals announces Q3 2022 financial results and upcoming Investor Call. Good morning, everyone, and thank you for joining the call. I'm David Churchill, and I'm the Chief Financial Officer for AMI. I will be speaking to you about AMI's third quarter results for the 3 and 9 months ended September 30, 2022. I'll be making reference to the information contained in the November 23, 2022 press release, the third quarter unaudited financial statements and the third quarter MD&A that are posted on SEDAR and on the AMI website. Please note that all figures mentioned today are in Canadian dollars. Revenue net of royalties for the 3 months ended September 30, 2022, was $11.5 million, an increase of $7.2 million or 166% compared to Q3 2021 revenue net of royalties, which was $4.3 million. This increase was due to frac sand sales from our 50% interest in the Hixton, Wisconsin industrial sand operations, which we acquired in March 2022 and increased sales in RockChain. When looking at the year-to-date revenue net of royalties for the 9 months ended September 30, 2022, we have earned $25.8 million versus $8.6 million for 2021. This is an increase of $17.2 million and is due mainly to increased aggregate sales in AMI aggregate and RockChain and the sand sales from our Hixton, Wisconsin sand mine through our 50% interest in AMI Silica LLC. Again, the purchase of the Wisconsin sand facility was closed in March 2022, during which time the corporation assumed operations. For the 3-month period ending September 30, 2022, AMI reported a gross loss of $0.8 million versus a gross profit of $0.4 million in the comparable 3-month period ending September 30, 2021. The main reason for the gross loss in the current period was noncash depreciation, depletion and amortization expense of over $1.1 million compared to $0.1 million in 2021 and $0.3 million of increased mobilization, transload and stockpiling expenses in AMI Silica LLC. The increased noncash expense is due to the Hixton, Wisconsin sand mine assets acquired in March 2022. As we mentioned in our earnings call on August 30 of this year, depreciation expenses will be higher in 2022 than in 2021 given the dollar value of the depreciable assets in our Silica LLC division. Excluding noncash depreciation, depletion and amortization expense, the corporation shows a gross profit of $0.3 million for the quarter ending September 30, 2022. For the 9-month period ending September 30, 2022, we reported a gross loss of over $18,000 versus a gross profit of $1 million in the comparable 9-month period in 2021. The 9 months ended September 30, 2022, includes a noncash depreciation, depletion and amortization expense of $2.2 million versus $0.3 million in the comparable 9-month period in 2021. Excluding the noncash depreciation, depletion and amortization expense, AMI shows a gross profit of $2.1 million for the 9 months ending September 30, 2022. This year-to-date gross profit fall slightly below our anticipated numbers due to several factors from our Hixton operation, including rail disruptions and increased operational costs due to the stockpiling of sand. Dana Archibald will speak to these factors later in this call. For the 3-month period ending September 30, 2022, general and administrative expenses were $1.2 million versus $0.5 million in the comparable 3-month period ending September 30, 2021. This increase was due mainly to increased head count in the RockChain division. In August 2022, we made decisions related to reducing G&A in the noncore businesses and -- noncore assets and businesses, which included the phasing out of TerraShift Engineering as part of the corporation's stage plan to create a sustainable and resilient business model. We will continue to evaluate additional cost-saving measures as AMI prioritizes becoming a leading frac sand provider in Western Canada and the United States. For the 3-month period ending September 30, 2022, the corporation reported a net loss of $2.2 million compared to a net loss of $0.4 million in the comparable 3-month period ending September 30, 2021. The net loss in Q3 2022 was due to increased mobilization and transload expenses of $0.3 million in AMI Silica LLC, the increased depreciation expense of $1 million resulting from the Wisconsin assets and increased general and administrative expenses of $0.6 million due to the increased personnel expenses. I would like to thank you again for attending our call this morning, and I will now pass it over to Dana Archibald to provide an update on our corporate operations over the last quarter. Thank you, David, and good morning to all of you joining us on today's call. Since taking over the permanent CEO position on August 29 of this year, we have seen a significant number of changes in our company, some incredibly exciting and some a little more challenging. Everything that we are focused on as an executive team is based on a clear message that we received from our shareholders at this year's AGM, emphasizing the need to reset and refocus the business. The focal point of our company has become AMI Silica, which is and will continue to be a key contributor of Athabasca's revenue generation and growth strategy into the future. Since our purchase of the Wisconsin facility back in March of this year, we have dried over 1 million tonnes of sand and mined and washed over 2 million tonnes. As we mentioned in the August earnings call, logistics continues to be one of our key challenges, and we have been actively pursuing opportunities that would allow us to expand our rail capacity. Through the leasing of additional railcars, expanding capacity at our Wisconsin transload facility and securing exclusive agreements with transloads in Western Canada, in turn, increasing our ability to move and sell product. As per our press release last Thursday, we have made progress on this initiative with the signing of a transload agreement with CRL transload services, this agreement will allow us greater accessibility to our current and potential customer base in the growing market of the Montney Basin. This is the first step in a multistep strategy to increase our services and capacity into the Canadian Western Basins. As announced on September 27, the press release, another highlight of Q3 for our sand division was our ability to secure USD 2.7 million in nondilutive financing for further expansion initiatives and growth. Funds from this financing will help support capacity expansion initiatives at our Wisconsin transload, which will allow us to increase the throughput of railcars and ultimately, sand sales. As David mentioned earlier in the call, there were several factors that contributed to a lower gross profit than initially anticipated. I'd like to touch on the seasonality of our production. So in Q3, we focused on increasing our wet sand stockpiles prior to the end of the mining and washing season that generally runs from April and this year ended in November 10. Because of this, we incurred higher-than-usual operating costs for the quarter. Another major factor and one that could not have been anticipated was that during September and October, we experienced unplanned rail disruptions on both the Union Pacific and the Canadian National Railway line. These disruptions had a major impact on both our sales volumes and our revenue for Q3 and early Q4. Moving to RockChain and aggregates. In December of this year, AMI RockChain announced the award of a contract with a major construction company valued at over $8 million to supply, test and deliver aggregate for a large Saskatchewan-based project. We continue to successfully execute on this project, and we will be providing services well into 2023. In October, RockChain also launched Version 3.0 of their platform designed to provide a more user-friendly supplier portal for quoting. Throughout the third quarter of 2022, our RockChain team has been over $70 million in aggregate projects. Many of these bids are for projects that will be executed in 2023. This is an increase of more than 56% over the same quarter in 2021, where we bid on approximately $45 million in orders. Our Vice President of AMI RockChain, Phillip Schuman, has done an outstanding job in focusing and growing our RockChain division as well as identifying and meeting new customers with a goal to turbocharge our growth. Looking briefly at our AMI aggregates division, we are seeing increasing opportunities in 2023 in the Wood Buffalo region for deliveries of aggregates to existing and new clients, also due to increased industrial activities, specifically near our Coffee Lake Public Pit, Pelican Pit and Kearl Pit. We're anticipating increase in demand for aggregates as we enter into 2023. Athabasca's long-term vision is to become the leading provider of premium sand for Western Canada and the Northwest United States supporting the growing oil and natural gas markets. By strategically growing our network of transloads and customers, we are well positioned for future development of our portfolio of silica sand assets, both in Canada and the U.S. I want to thank our shareholders for their continued commitment and support of AMI and reaffirmed our leadership team is dedicated to long-term growth and sustainability in the business. Thank you, Dana and David. I also did want to remind our listeners that this call has been recorded, and it will be posted on our website later today. You can check on it there afterwards, if you miss anything or want to refresh what you heard. At this point, I'm just going to see if there's any questions that pop up, feel free to send them forward. If you feel like to -- we're not able to ask a question during the call or you think of something after the call, please feel free to direct your questions directly to me by e-mail or telephone call, and I'd be happy to try and answer them as best we can. So we do have one question here. I think I'm going to probably post this one to Dana. What are you seeing for pricing in Western Canada for frac sand? Yes, that's a very good question. What we're seeing is -- actually, since we started in March there, we've seen continued quarter-over-quarter upward pressure on the pricing. And we sort of see that continuing on here. We've seen that trend continue on in Q4 and looking the same here in Q1 next year. So Dana, I'm going to pass another one on to you here. How much can you increase the Wisconsin transload capacity by? Another good question. So with regards to our Wisconsin transload, currently, we can move around the 80,000 to 90,000 tonnes a month with some of the work that we're looking at doing out there, that should increase it up to 120,000 to 130,000 a month. I believe this one's going to go to David. David, it sounds like there was some significant write-offs and onetime expenses largely but not exclusively related to Wisconsin acquisition. Is everything now in order? And can we assume that going forward, we'll have a clean P&L that accurately reflects the current business performance. I think on the significant write-offs, I'd say there were no write-offs in the third quarter relating to the Wisconsin acquisition. I think there were -- I direct you back to in the second quarter, and there's a lot more detail in the financial statements in the MD&A. There were some write-downs related to a take-or-pay on the Prosvita Sand Project that we weren't going to be able to finish off in time to meet the contract conditions. So there were some write-offs there. The onetime expenses that we talked about earlier in Wisconsin, I think to say everything now in order. I think on the one on the Wisconsin side of things, as Dana mentioned, we can't predict rail disruption. In the third and fourth quarter, there was some -- there was the threat of a strike. In the fourth quarter, there was a bridge fire. So those things are unplanned and unrelated to the business. So I think we -- on those ones, those are hard to predict. So I think those ones I can't say that with such certainty that they're not going to happen. So the idea would be to get ahead of those and make sure they're actually reported in the statements. I think in the write-offs, I don't expect -- the Wisconsin acquisition, the purchase price equation, we addressed that in the second quarter -- the first quarter when we acquired the asset. We're still subject to audit. So there may be some changes to the purchase price in there, but I would view those to be noncash as they relate to the gain. So I don't expect anything significant to come out of the Wisconsin acquisition. We have one more question here. I'm going to pose this one to Dana. What is the average revenue per tonne of silica selling at the mine site versus the range of revenue per tonne selling through the transload strategy? Not sure how much you can answer that, but give it a... Yes, maybe just answer this sort of generally here. With regards to the revenue per tonne, selling at the mine site versus the transload is that when we're selling it at the transload, we're picking up fees on freight as well as transloads. So it is higher going through the transloads versus selling that one. Yes, I'll just roll into that next question. With regards to rail freight inflation and fuel surcharges. So yes, we are seeing that. Traditional -- yes, so we've seen increases on freight pricing throughout 2022. And during Q1, there's always a surcharge due to the cold weather in Northern U.S. and into Canada. So we are seeing the freight going up as well as the fuel surcharge. The fuel surcharges have increased significantly in 2022. Now these are pass-through costs that we pass through to our customers, but we worked very closely with the railways to make sure that we're getting a fair deal when it comes to the freight and fuel surcharges. There is another one as well that I think I'll direct it to you, Dana. What percentage of sand sales are to the U.S. versus to Canada? Yes. So we're seeing a bit of a shift in this. At the beginning of the year, we were probably closer to 50-50 Canada and the U.S. We're seeing that change as we move forward here to more towards Canada. So now we've gone sort of 50-50 probably to like an 80-20 scenario, but I also see that maybe even out a little bit more as we move forward. Yes. So we're very early in the contract side of things there. A lot of our sales right now are spot sales. We do -- we are working on commitments with our key customers there. And so we are looking at contracting some volumes as we move forward. I think maybe if I could jump in on that, Dana, too. I think for the benefit of the listeners is that what we're looking at are volume commitments, committing volumes to people, not the pricing. Pricing typically runs 90 days out. Prices are set, I believe, $490. Is that right, Dana? Yes, I see the next question there just with regards to how do we count the shift from the U.S. to Canadian sales. So really, when we're selling into the U.S. and on the [indiscernible], we pay actually a fairly large differential. And so what we're looking at doing is moving a lot of those sand sales towards Canada because we do better on the margin and on the pricing. Dana, there's another one here that I think you could probably answer. How many railcars is AMI looking to add to its fleet? Yes, that's a great question. So currently, we are running 900 railcars on our CM fleet, and we are working with our customers to make sure that we understand the cycle time on our railcars because that really is what affects how many more railcars we bring into the fleet. But notionally, we're looking at adding probably up to another 100 here in the next 90 days and past that, probably another 100 in Q2. Yes, that's a great question. I think all of us are trying to figure that out. Notionally, what we're seeing here is, I think that in 2020 or 2022 here, we will be in that 6 million to 7 million tonne range is what we're hearing from the market, our customers, other suppliers in the industry. I think as we look towards next year, probably in the 7 million to 8 million. And beyond that, we've heard projections staying in that sort of 8 million tonne range all the way up to 11 million plus. So what we are seeing is a sustained growth in the demand here, at least over the next couple of years as LNG Canada comes online in 2025, and then some of these other LNG projects that are looking at to move online here as well. We're seeing this add demand increase significantly, especially up in that more on the Montney and Duvernay basins. And I think maybe to add to that, too, Dana, is that these -- where we see the demand for 2023, this is based, again, as Dana mentioned, on discussions with our customers, internal projections. This would be our own view of what we see demand for 2023 and forward. Thank you, gentlemen. And with that, we are going to wrap up our call for this morning. I want to thank everybody again for joining us. Just a reminder that it is -- has been recorded and will be posted on our website later today. If there's any other questions you think of, please feel free to reach out to me directly by e-mail or phone, and we will try and respond as quickly as possible. Thank you again for your time, and I wish everybody a wonderful day.
EarningCall_1831	Welcome to our next session. David, great to have you on. I want to start actually more bigger picture a little bit with you. You've been on a -- like we've met the first time, like day before the IPO, and you've been on a really great journey. Kind of maybe talk a little bit about like the evolution of Datadog as from when you kind of joined in terms of like how this became such a kind of nice easy company. Yeah. First of all, thank you for having us. We appreciate it. And also just want to mention that we are not in this presentation going to update our comments relative to what we said on our last earnings call. So just to create expectations -- manage expectations. Yeah. I'm going on my fifth year at Datadog, believe it or not. It's been an unbelievable journey. And when I reflect back on it, I joined in 2018 about a year before IPO. And I was -- the trends that attracted me to Datadog and are driving the company in migration of cloud workloads, DevOps practices, the integration of more within the DevOps environment, including security, have accelerated and persisted, and that creates a very strong backdrop for Datadog. But back then we were more of a single product company. We started with infrastructure, and we were in the build stage of APM and logs. And we had the beginnings of a platform. But that's been a very substantial evolution since I've been there in the last four years. The expansion of the product set has been very rapid, very focused, and has created a tremendous adoption that's provided more value to clients, more stickiness of product and the growth level. So, that's a change and that's a real evolution. Secondly, I would say, we started out in more of a cloud native land and expand and more US focused. And in the last four or five years we've built out our go-to-market substantially in terms of building out the commercial, the customer success and enterprise teams continue to evolve that. We're still midway in that. So just the maturation and the growth of our go-to-market, our marketing has been something that has been persistent. And then when you think about scale and growing out the company, whether it be in the G&A functions, the management team, bringing in new people, getting succession, that's been a very big focus of the team. And we've grown our number of employees from less than a thousand to going on 5,000 over that period of time. So that's been a very significant growth. So just scaling the company has been a real challenge. Yeah. I think, we've had strong relationships, but we have developed and diversified our relationships from starting with AWS towards having strong relationships with all the hyperscalers. So being broader there. We've expanded the number of our instances and our ability to deliver on different clouds. We have developed strong technology partnerships with all the cloud vendors. We've built out Gov [ph] cloud in order to address that market. And I think we've deepened our go-to-market in terms of being on everybody's marketplace. And being more focused on a mutual interest of go-to-market. So, I would say that we always have had focused on it and always have had the strong relationships, but they've become broader and deeper over the last four or five years. Yeah. And the question I get from investors a lot is like, well, gee, I'm looking at AWS group coming down, I look at Azure group going down, what's going-- what's Datadog is doing. But talk us maybe in that respect a little bit about the product expansion, because there's an -- there's a really nice offset here for you guys, like maybe you mentioned earlier, like infrastructure with where you started like, but talk a little bit about the scale and the growth that you see in the other parts of the product portfolio. Yeah. I think if you look back and reflect on it, we've always had a higher growth rate then the hyperscalers. And although, we are linked towards the migration of workloads to the cloud, and then to think about what the differences might be. The hyperscalers have a broader set of sort of use cases and end markets, and we tend to be focused on client facing real-time applications, which tend to also be more complex and mission-critical. So, one, we are probably exposed to some of the higher priority workloads. That's one thing at the core. And then over the course of developing the platform, we have expanded the functionality, which has created a significant growth driver for us as clients have used more and more part -- more and more pillars. And that's in our metrics. And then I think because of that growth of the platform, we have begun to -- we -- our competitive position has strengthened and our ability to get more and more of that functionality on the Datadog platform versus other alternatives has been enhanced as we've made that product investment. Yeah. Yeah. And then like, maybe just -- I mean, you did comment in the past about like how logs or APM has become like a certain revenue kind of run rate, et cetera. Like where are we on these for different product sets? Yeah. I think we said that a few quarters back or two or three quarters, we said that those new two pillars, logs in APM, which we didn't have five years ago, we're over $700 million of ARR. And if you think about where we are right now, we haven't updated it, but something around the hoop of, half of the company has been in those new product sets. So, when you think about how meaningful that has been, not having five years ago these products, yet having about half the -- around that revenue in the company, that just goes to show you the impact of that. And also the appeal of the platform and the fact that we said many times that our clients are not buying individual products, they're using a platform to accomplish business goals, which is real-time monitoring remediation, which is enhanced by having more functionality. Yeah. Yeah. I mean, like, in a way like -- do you remember like at the IPO, one you had to come up with like a TAM. But now with a much broader product set, like how do you think about -- like the TAM for the different segments like, and then bringing that together for a Datadog level? And it probably -- when you think about our platform, it's the percentage of the market we can address through our platform increasing. And then on top of that, we have discussed the fact that we are developing the security product, which is in early stages, both in terms of our development and in the adoption, but that could be a TAM multiplier and that wasn't included in the initial TAM. And then there's the shift left in addressing a little more of the developer use cases, which could also be a TAM expander, be that as it may, we think we're against a very large TAM in our core monitoring. And one that has many, many years to grow, et cetera. And so, that's sort of the main TAM and then the TAM -- our ability to address it and our expansion of that TAM has been methodological over time. Yeah. And do you think about like a mix of the business in the future in terms of like, oh, like infrastructure is now most -- the majority now it's like -- APM will be this log will be that, or is that actually a kind of a wrong question because it's one platform. So, the platform will kind of --? Yeah. I think we think about it, as I think you said more as one product to the platform, and this increases the platform wallet share by providing more functionality. That's really the way. And when you think about how we go-to-market and how we contract and how we expose all this functionality to clients for them to use within their contracts as they want to. That's really the way we think about it at the core. Yeah. Yeah. Yeah. And then, does that -- I mean, on dollar net retention kind of, you give me like a broad base number like, but do you see that, well, it must be impacting that number, I guess. Yeah. Definitely. Dollar, we -- I think we said that essentially in -- within one year, the -- or the growth, which is really dollar net retention is driven about three quarters or a little more maybe 80% by the expansion of products with the client had a year ago. And the rest of it from new products, but that probably underestimates because they're in the process of ramping. So, when you think about the fact that about half the company, right now, are non-infrastructure products. That gives you probably a better sense over multi-year of what the actual compounded impact of the expansion of the product has on the net retention rate. Yeah. Yeah. Yeah. The -- and the -- if you think about these -- going back to my original question around the cloud workloads and the -- like what the hyperscaler said versus like what you're doing. Like how do you think about that dependency for Datadog and for your revenue in terms of like, yes, there's something happening on a macro? But like on the other hand, I have a lot more products to sell. Like how does that come together? Yeah. I think that they are like correlated in direction because at the very core, the -- is cloud workloads. But then you have, as you mentioned the fact that our workloads are more mission-critical, client facing workloads, which we feel would cause stickiness and potential protection that might be a little more concentrated on the positive side, in addition to the expansion of the product. So, we don't think we're immune to optimization. We think we have a lot more flexibility with our customers. So, if they're optimizing in one area, they can use another area of the product set, they can also put more and more of the product set on our platform versus other point solutions, which has been happening for some time, which could result in them controlling their costs, but it may be not be as much expense of Datadog. And then I think, overall, we think this is very early, and this is long-term. There may be variations in this growth, but we think this is a very, very long-term trend towards migration of the cloud and towards increased complexity, which benefits a data. And then the -- I just lost my train of [indiscernible]. On that note -- no, let me change the -- if you think about the environment that we are in now at the moment, have you changed your go-to-market when it comes to -- in terms of the message to sales guys are giving out in terms of more value, more ROI focused, et cetera? Or is it -- is it still the same kind of message that you had before? We've been doing that over the number of years, both in terms of investing in enablement, sales engineering, et cetera, and product managers. So, we've been doing that. We've been selling both in terms of this is mission-critical. If you don't have this your client facing could go down. And we've been selling in value-added selling, meaning looking at the cost side of open source to do-it-yourself. We've been putting more resources over time in that, continue to do so. So it's more a continuation of the way we have been selling. I think as the product set has expanded, we know that we have to continue to invest in the training of our sales team, of our customer success, having more -- some more product specialization injected in there. It hasn't resulted in a change of the way we go-to-market, but just the focus of the resources in making that sales proposition. Okay. And my last question came back to me. Like how does the -- like I remember we had conversations back in 2020, and there you kind of -- back then, you talked about being impacted by the optimization at the hyperscaler level because you're part of the contract. Like how does 2020 compare to what you're seeing now? Yeah. So, now that was a -- the world looks like it may and or change. We have to change our priorities very quickly, maybe focus on remote work, don't know what's going to happen. So, we had a very high intensity of customers across the board all at once. And it was more focused, and we have higher percentage on the infrastructure side. Now, I think we're seeing -- and then we had a rebound. I think we're now seeing, it isn't one size fits all. We have a diversification where we have newer customers who are ramping quite rapidly. We have customers even in cloud native and complemented industries that are continuing, and then we have areas, I think we said on the last call, cloud native, where you've expanded rapidly and you're an affected industry focusing a little more on cost optimization. So, it's more of a portfolio, not everybody doing it all one. And also our product suite has been more diversified, meaning it hasn't been infrastructure. It's been a little more diversified. And in fact, we said on our calls that some of the areas that are more data focused like logs, or the part of APM where you're storing traces rather than logs are the areas where you can change the dial. So, it's been a little bit of a difference but for the most part, we've ended up in between what happened at COVID and the high point indicating that it hasn't been one size fits all, and it's been more sort of concentrated in portions of our customer base rather than across the board. And as part of that like -- the next question that follows up like remind us on -- is there a vertical focus for you guys as like some of your it's not competitors like some other guys take industries like, well, we had a lot of like coin base so now we're suffering. Like what's your set up? Yeah. We're pretty diversified and mirrors the digital economy where some of the larger segments might be enterprise software, financial services, I think we said that, for instance, I think consumer discretionary was in the low-teens. And I think we had said at the time of COVID, that travel and entertainment was around 10. So, we have a number of segments like that. We're very diversified. We don't have a lot of concentration. And so for crypto, et cetera, if we have customers there, it might be an effect, but that's not one of our large segments, et cetera. So, it's really the portfolio of all of this. But in general, we are, as you know from previous we're very diversified across industries, we don't have great customer concentration. And we also diversified across enterprise, mid-market and SMB. So, there is pretty good diversification here. And we tried to point out on the last couple of calls where we've seen the brunt of it and try to illuminate where we're seeing and I'm not saying it. Yeah. Yeah. Okay. Let's shift gear into -- you started the call saying we're not going to give you guidance for 2023. I just wanted to -- and I'm not asking a question. And I just wanted to kind of maybe have you talked a little bit about the input factors need to think about so that investors kind of understand the complexity -- not complexity in a bad way, but like this is not like 2025. Yeah. Yeah. I think that we have the net retention, which is really the organic growth. We've talked about use of more of the same products and new products, which has been in the middle for the last couple of quarters. And that will certainly carryover. If you remember in COVID, we were in the 70s and we had a quarter of two of compressed growth, and that took us down at that point to 50. And so the number of quarters you have where your growth is different than historically will carry over in this model, okay? So that's one thing. So, what I think we said we've been in the intermediate that the effect of having two quarters of that will carryover for four quarters or more that we've had strong pipeline for new logos and new business. And we haven't seen a disruption about that. That's another factor that is layered in. So, it's really the interplay of all of that and how that carries over, that governs the growth rate. And then it essentially is the rate of growth of hiring. I think we said we've been investing quite rapidly, but we haven't been able -- we have not been able to invest at the rate of growth of revenues that over the long-term, we try to maintain some stability in periods where you didn't have the office expenses and you weren't able to invest at the same level as revenues, you would have margin expansion. And then, we try to balance that across growth. So that's the other input as you go into next year. The interplay of those two things really produces the economic model. And then the -- as part of the like -- just to share some experience here from the last a day and a half, like pricing came up a long in terms of like, well, there's inflation, et cetera. Like maybe let's start with kind of what's your -- like how do we have to think about your pricing? And this kind of always talks about consumption pricing, like remind us maybe of how you price? Yeah. A couple of things to remember. Land and expand we -- essentially, most of our customers stay short relative to what they think they'll evolve to. So, the concept of having software that you bought that is not used, doesn't exist at Datadog, land and expand. That's one concept. The second concept is we have been a value increase or through investment, not a unit price increase so far. So, we have essentially gotten our clients to increase their wallet share with us by offering either their expansion of their workloads or the products they're buying. That has put us in a position where we haven't been a price increaser. We are open to looking at that at some point, but haven't really found the need to do that. So, I think we've been someone -- we've been a vendor who has not sold software that clients don't use has -- had the structure of increasing the discounts based on volume. So, it's been embedded in the price structure. And has when clients go into on demand, have worked with them proactively in fixing their commitment to ameliorate that through time. We think that served us well and will continue to serve us well in this environment. Yeah. Yeah. I remember like when we first met, you had like the -- you always had that like secret buffer for US the CFO of overages. Like where are you like customers are probably getting better in terms of understanding how to size your kind of commitment with you, I'm sure you were getting better to kind of help them. Like is that still a factor for you? Or on the overage side or is like? Yeah. Still a factor. It's very similar because they stay short and they've always had a conservative and we've not pushed them to over commit, given our go-to-market. It's been and continues to be the same motion, which is they float on a weighted average into on demand. They make the decision on whether they want to increase the commitment and lower the average price point or stay more flexible, we provide alternatives to them and help them too. So, it's pretty similar. Again, back to your original question, we either -- we pretty much priced based on number of hosts or sort of the infrastructure that they use on data they consume or use or test. And on our website is very, very transparent. It's right there. And we have discount structures and structures based on reserve, whether you want to reserve or stay flexible. And so that's the pricing. It's been -- and we don't see any reasons to change that. Yeah. Yeah. Okay. Perfect. And then the last couple of minutes, I want to talk about profitability. Like the one message that came out so far today and is very consistent with like CFOs talking about like, okay, it's a different time. The cost of capital is increasing. So, I need to think more about ROI and project ROI, like that means like I have faster fill year for some new initiatives and things like that. Where are you on that kind of profitability journey? And you were always -- like you were one of two companies in high growth, gross margins, like so unit cost economy must be really good anyway. Yeah. So, I think it's a very good point. So, I think that, number one, we have good unit cost economics from the way the platform is designed and that has always -- and I think if you look at our D&A and our gross margin, we've always been very prudent cost managers, always investing not beyond our means, but doing this in all the environments. We -- I think we are facing a very long-term opportunity, so we don't want to short change the company. But we essentially have always looked at sort of the top line weighted average over a long-term and try to invest against it, and we have these economies of scale. So, we're going to continue to do that. That may mean that there's a little higher bar, and we prioritize a little more. We don't want to not invest in the priority. Some of the investments we make have returns in the shorter term, and some of them are longer term and we can play that against the top line to prioritize. I think as Oil said, we always have and we understand that we're balancing growth against a long-term opportunity and profitability. And as you said, have always evidence that behavior, and we'll continue to do so. Yeah. Yeah. Okay. And then like that kind of translates into kind of cash flow, good cash flow generation, healthy cash flow. As a CFO now, how do you think about your cash, cash position usage of cash? We've only burned in the history of the company before we became cash flow positive, believe it or not, in the 20s of millions of dollars. So, we've always been this way. So, we're in a position where we have a good amount of cash. Our M&A strategy of basically aqua hires and always integrating the functionality in the platform has been very efficient as well. We're not saying we're never going to spend more money on acquisitions, but we've always sort of been able to be prudent there. And so, we're essentially have a lot of flexibility and a lot -- in our basic model, as you mentioned, that allows us to have degrees of freedom that as a CFO, I'm very thankful for that allow -- allows us to make good choices, I think, in a variety of environments and manage that risk, and we'll continue to do so. Yeah. And then last question and then to let you to [indiscernible]. We had the LinkedIn CEO on stage here yesterday, and he said like the one thing out of the LinkedIn graph that was really interesting is that the New York and San Francisco are seeing the most inflow of people at the moment. So, people are coming back. In that respect, like -- and then we also have the VC communit -- VCE-funded companies all kind of looking a bit funny. Like what do you see in terms of hiring employee retention, et cetera, at the moment playing out for you? We've been -- number one, we've been leading the people back to the office for quite some time. We've never been a company where I say we're going to be remote. We have -- we have always maintained our discipline in hiring people, having gone in the crazy. We think that it will be a more benign environment for us. It's a little too early to tell. But given what we're seeing in terms of the competitive companies, whether it be the large companies like Facebook or Google, where the pre-IPOs. We think that puts us in a good position to press our competitive advantage and get the right people. So, we're excited about that. But it's too early to tell how much of a degree, but we think that will be coming.
EarningCall_1832	Good morning, everyone. Welcome to Lilium's Q3 2022 Business Update Call. My name is Geoff Richardson, Chief Financial Officer of Lilium. Before we start, let me go through a couple of housekeeping items. This is a virtual conference call, and for the moment, all participants are in listen-only mode. Today, we'll give you an update on our progress since our last call in September. There will be time for questions after the presentation. We scheduled the call for 45 minutes, including Q&A time. Please note that this conference call is being recorded. A recording will be placed on Lilium's Investor Relations page soon after the event. As a reminder, after yesterday's market closing, we posted our shareholder letter on our website. We have also posted the press release on the contract signature with eVolare. We invite you to take a look at it. Before handing over to our Chief Executive Officer, Klaus Roewe, let me please give a reminder that our presentation will include forward-looking statements within the meaning of the United States Federal Securities laws that are subject to risks, uncertainties and other factors that could cause Lilium's actual results to differ materially from such statements. Please refer to the cautionary statements and our shareholder letter and the risk factors discussed in our filings with the U.S. Securities and Exchange Commission for more information on these risks. Ladies and gentlemen, I'm really excited to share with you our latest achievements. Firstly, we signed our first commercial contract with predelivery deposits. The U.K. operator eVolare has secured deliveries of 10 aircraft with the option to purchase another 10. eVolare will serve the greater London area with it. As part of the agreement, eVolare will make a pre-delivery payment to Lilium to secure aircraft delivery slots. The deal coincides with the formal launch of the Lilium Pioneer edition. Sebastien will give you the details about that in a moment. Secondly, we signed our first major commercial agreement in the Middle East with SAUDIA. SAUDIA will have the option to purchase up to 100 Lilium Jets and will establish an eVTOL network in Saudi Arabia. With this, we have a total order pipeline of 603 aircrafts. We will continue to convert and will use into binding aircraft purchase agreements in 2023. As such, we successfully completed our fundraising on November 22. Thanks to further investment from existing shareholders, new investors and strategic partners, we completed a capital raise of $119 million. We also made significant progress towards certification. We have now submitted about 80% of our certification plans to EASA, up from 38% in September. Next week, we will conduct our third Design Organization Approval audit. Lastly, our flight test campaign is advancing. Flight tests have continued including ground effects, downwash measurements and further high-speed testing up to 120 knots, which is about 222 kilometers per hour. Our second demonstrator aircraft is ready to join the campaign in early 2023. Let me now hand you over to Sebastien Borel, Senior Vice President, Commercial for a more detailed update on our commercial achievements. Over to you, sir. Earlier this year, we have clearly outlined our commercial strategy with a two-phase approach. The first phase addressing the premium segment including General and Business aviation and a second phase to address the scheduled regional services for the mass market. To support the first phase, Lilium launched a limited series to address sales to private individuals, the Lilium Pioneer Edition. This limited edition comes with a compelling service, tailored support, training packages, as well as exclusive cabin customization. The Lilium Pioneer Edition is limited to a total of 50 aircrafts, all of which we expect to sell by the end of 2023. All of them with predelivery payments of at least 50% of the purchase price prior to delivery. As Klaus mentioned earlier and in conjunction with the launch of our Pioneer Edition, Lilium has received its first binding contract with predelivery payments from eVolare, a subsidiary of Volare Aviation, one of the U.K.'s largest helicopter and private jet operator. With it's base in Oxford, eVolare provides access to prime locations around the U.K. including the Greater London area. This partnership includes a firm commitment for 10 Lilium Pioneer Edition Jets including predelivery payments with an option to purchase an additional 10, best is to hear from Volare Aviation directly. Going back to October, Lilium announced an MOU with SAUDIA with the intent to purchase up to 100 Lilium Jets and to deploy high-speed eVTOL network in the Kingdom. We believe that this partnership is a first of its kind in Middle East and totally aligned with Lilium's premium launch positioning. As part of the partnership, SAUDIA will support Lilium with local regulatory approvals. These two agreements, eVolare and SAUDIA bring the total order pipeline to 603 aircrafts. Lilium will continue to convert further with existing commercial MAUs into binding aircraft sales agreements in 2023. Lilium also views predelivery payments as an integral component of our future capital structure. This November, we announced the successful closing of a $119 million capital raise from existing shareholders, new investors and strategic partners. Participants included Aciturri and Honeywell, as well as LGT and its affiliated impact investor Lightrock, Tencent and B. Riley Securities. Lilium's CEO, Klaus Roewe, as well as three board members, Barry Engle, David Wallerstein and Niklas ZennstrÃ¶m, also participated in the capital raise. We are pleased to have such a high-quality group of supporters in a challenging macro environment. These proceeds will strengthen our balance sheet and allow us to proceed with the assembly and testing of our Type-conforming aircraft, as well as reaching final agreement with EASA on all our Means of Compliance. As we progress on our development, we are in active discussions to secure additional non-dilutive funding sources to finance our operations until Type Certification of the Lilium Jet. These include grants and subsidies from governmental authorities, as well as pre-delivery payments as discussed earlier in this letter. Additionally, we terminated the equity-line-of-credit facility in November. Overall, Lilium received proceeds of approximately $12.6 million from the ELOC. Let's take a look now at the Q3 financial results. Our total cash spend was â¬69 million in Q3. The increase in cash spend compared to the previous quarter of Q2 â¬63 million was driven by a ramp-up in one-time supplier payments, which included the e-motor development and battery industrialization with approximately â¬7 million. This is in line with our target budget of â¬250 million in 2022. Our liquidity as of the end of Q3 and prior to the recently completed investment round stood at â¬160 million at the end of Q2 as â¬229 million. Looking ahead, given the macro environment, inflationary effects, and market uncertainties, we have initiated significant cost conservation measures at Lilium. We are currently finalizing our budget for 2023 and expect it to be consistent with our 2022 budget. As I mentioned before, our certification program is making significant progress. Since our last update, we have submitted to EASA several more of our proposed certification plans, bringing the percentage of requirements recovered to about 80% at the end of November, up to 38% in September. Lilium's remaining certification plans are largely graphed and ready for submission. 72% of the Means of Compliance are already agreed with EASA and for the remainder, Lilium submitted its proposals to EASA earlier this year. Detailed discussions with EASA over the past months have led to significant progress on the remaining Means of Compliance. Based on those discussions, we anticipate that the EASA will accept our Means of Compliance in the first half of next year. In parallel, with the type certification program, Lilium is working towards the Design Organization Approval with EASA. The DOA is a necessary prerequisite for any aerospace company to obtain a type certification of its aircraft. Lilium's third DOA audit is scheduled to take place next week and the fourth and final audit is targeted for the first half of 2023. Onto our industrialization, with our first type conforming aircraft due to go into assembly next year, our detailed design and collaboration with suppliers is accelerating. Strong partnership with Tier 1 aerospace suppliers are fundamental to pass our -- to our path towards certification and industrialization. All the key subsystems of the aircraft need to meet rigorous aerospace quality standards. Lilium has agreements in place for aerostructures, avionics, battery cells, energy management system, e-motors, propulsion system, aircraft interior and landing gears amongst others. In total, we have now selected or contracted about 75% of the total expected aircraft bill of material cost. Right now, we are in the process of onboarding additional suppliers for the engine fans and the inceptors, the sidesticks used for maneuvering the Lilium Jet. Turning now to our flight test activities. Our flight testing continues with a current focus on high-speed maneuvers, ground effects and downwash measurements. Downwash measurements relate to the downward flow of the air from the aircraft and important to validate working of operations. Let's have a quick look at some highlights since our last call in a little video. An accomplishment of these latest milestones, the aircraft continue to perform precisely as predicted by our computer-aided flight models, the Phoenix2 demonstrator enables us to verify in a real-world environment of flight physics underpinning our series aircraft, the Lilium Jet and supports our certification program. In addition, demonstrate aircraft called Phoenix3 is in the final stages of integration testing and due to enter flight testing in Q1 next year. Having too demonstrate aircraft that a disposal will give us additional support for testing and learnings before the first flight of type controlling production aircraft. So let me please conclude with the following summary and outlook. We've made significant progress advancing our commercialization efforts in the third quarter with the signing of our first binding aircraft order including pre-delivery deposits and a breakthrough in the Middle East with SAUDIA MoU. Having successfully completed the latest fundraise, our teams are fully focused on achieving the development and certification of the Lilium Jet and building out our manufacturing and supply chain capabilities. We are confident we have the right technology and the right team to bring this transformational product to the market. In 2023, we will be working full steam towards signing binding agreements with deposits, securing government loans and subsidies, starting assembly of our type-conforming aircraft, building and testing our first battery packs, further flight testing with both technology demonstrators, receiving the Design Organization Approval, agreeing to full certification plan and Means of Compliance with EASA and last, preparing the manned first flight in 2024 of our Type-conforming aircraft. And now let me hand you over again to Geoff, who will open the floor for your Q&A. Thank you, Geoff. Thanks so much guys. Moving from having LOI's into actual deposits with customers is a pretty important step. And I'm curious about the conversation with those customers. What's been the key levers? Are you looking at the subsystem testing? Is it around the redundancy, like they mentioned in the video? How are you seeing any folks evaluate the product and decide to get over the hump and start spending some actual cash here? Yes, absolutely. We've announced very early on this year our partnership with NetJets, and we have engaged with a number of customers, some of which we announced during Farnborough and it became very apparent that some of the unique features of our aircraft became a unique selling point. And we are the only one having a full wing and sturdy engine. So yes, redundancy in the safety aspect is absolutely a major component compared to conventional helicopters. And so as we progress all service through our own program in engineering and the confidence by which we can really provide everything we need to put into an agreement, which is performance-related and warranties and as we're also progressing with our supply chain, we were absolutely able to transform all of the work we've done this year with the first phase segment, which is really right now the General and Business Aviation segment into a contract with deposits having binding terms on both end. Did I hopefully answers your question. Okay. I'll take it offline and dig into a little bit further. And then, Geoff, as you look at funding this business, obviously augmenting the balance sheet was an important step here. Could you talk a little bit about the key spend areas that you see over the next two years to really get ready for full commercialization and demonstration of the platform as you look through some of these non-dilutive opportunities? Obviously, project finance is one element, but -- in the customer deposits, but just trying to get a sense of the overall magnitude of the capital that you're looking for and where that would go from a business development perspective? Yes, great question, Colin. I think the headcount is stable, so that we don't really need to add additional headcount. The main spend that we'll be looking to add is really related to ramping up the supplier base and moving towards assembling the type-conforming aircraft for the flight campaign and then the working capital ultimately that will need to assemble the aircraft. And so if you look at CapEx, you look at manufacturer and you look at green jobs and you look at producing a product that customers want, that's why we're really focused on the subsidies and non-dilutive pieces from the pre-delivery payments that Seb and his team have been working on to government loans and subsidies and capital allows you to potentially add leverage as well. So, the contracts are also quite important, Colin as we look to that. And so next year we're really trying to hold the budget consistent with what we did this year, we're taking money out in the corporate but also focusing a bit on ramping up the supplier base with nonrecurring costs to get the supplier base going Colin. Thank you. We will take our next question. The next question comes from Alex Potter from Piper Sandler. Please ask your question. Great, thanks very much. So, Geoff just to put a finer point on that, you mentioned you want to keep the budget consistent in 2022, it was a cash spend budget of â¬250 million and you're targeting the same number in 2023. Did I understand that correctly? That's -- we're in the process of finalizing Colin, sorry, Alex. But I guess I would say is, we're looking at cost savings on the company and we're looking at the supplier side, so that is consistent. That's a good assumption for now the exact number, we'll give you guidance in our next call. But we're kind of looking at cost savings versus the supplier side right now. Okay, thank you. Very good. All right so then wanted to get an update on in how battery testing. I believe that you are in the process of establishing maybe some of your own facilities to conduct those battery test in-house. But my understanding is that it takes a while to get things like that permitted in Germany. So just wondering how long it will take until those facilities are completed. And then once they are how is your battery testing going to change versus what you're currently doing with third-party labs. Yes, I'll take it. Hi Alex, good to talk to you again. Klaus speaking. So it's not that we have limitations here on in Germany if you do those testing is not at all. We have our own test lab that we are using, by the way, since a couple of years and we are using it to test out new battery recipes but also cycling batteries and this is ongoing and it takes a long because you can run the battery about 8x per day. So if you would want to get into meaningful numbers of battery size, it always takes two months. So, but we are doing it internally, but we are also using external apps like energy assurance, which is I think a renowned app in the U.S. and you can see the results of our battery block which confirms that we have the energy density but also the power density that we need for our missions. And secondly, we have also started external testing of our batteries with another laboratory, the Idaho National, which is a very renowned laboratory also in the U.S., doing basically the same. So we would want to have two independent sources of test wise for sure. We are conducting our internal tests and also iron blocks, which you formally known as ZenLabs, for sure in ZenLabs also conducting tests. Okay. Great. So another question that I had, you mentioned that you've got your second test aircraft coming Phoenix3. How is Phoenix3 going to differ from Phoenix2 in terms of its capabilities? I'm just trying to understand if you're going to be able to do different kinds of tests with Phoenix3? Or is it more or less a carbon copy of Phoenix2 and you're just going to be able to do, I guess, test that twice as quickly now? Or is it a different kind of capabilities that are coming with Phoenix3? Yes, that's exactly the right view. So Phoenix2 and Phoenix3 are really identical. And there was no need to change Phoenix3 compared to Phoenix2 because Phoenix2 is already capable of basically performing all maneuvers that we would want to perform with such an aircraft, be it high-speed testing, transition flights, downwash, ground effects, what you saw on the video. And Phoenix3 is basically giving us additional capacity. So we also have additional flight crews so that we can intensify the testing in 2023. Okay. Great. Then maybe one last one, then I'll turn it on. So I'll pass it on. You mentioned that you've got your third EASA audit coming up here next week. I'm interested in knowing the extent to which that upcoming audit is going to differ from the previous two or the final one. Is there one out of these four audits that's more stringent or more difficult than any of the others? Are they all more or less the same in terms of hurdles that you're trying to clear. Just anything you can say about that upcoming audit would be helpful. Yes. Thank you. That's a great question. No, they are building upon each other. And so it's kind of a continuous journey. Basically, the third audit will attest that we really have the capabilities to design an aircraft and the fourth audit, but to get the DOA only with the fourth and conclusive audit is basically related more to things that you need to be able to do when you're in service period. So content-wise we are done to a large extent for the development part with the third audit. The fourth audit will be more for cost activities, continued awareness and so on. And for sure, we'll be a conclusive one which enables us to be granted to former DOA from the EASA. Thank you. We will take our next question. The next question comes from Bill Peterson from JPMorgan. Please ask your question. Yes. Hi, good afternoon. Thanks for taking my question. I'd like to follow up on batteries. Just to clarify, I don't want to miss it. So is the battery chemistry fixed? Or I guess, are you still doing more process optimization? And if so, what is the timing sufficing the process? And I guess, secondarily, the types of tests you're doing or whether internally or externally, what is the status of, I guess, performance, repeatability, thermal characteristics, charging, speed, thermal runway, cycle life, especially cycle life what kind of levels are you able to achieve now? Yes. Also a great question. Thank you for that. So yes, I would say we are in the process of fine-tuning our battery recipe. We have contract internally, but also externally, we have the energy density, which is essential for getting the range of the aircraft, there's the power density that we need to lift up and lend the aircraft. We also have got confirmation that we get enough battery cycle life to enable our, I would say, extraordinary good cost position that we will have when flying the aircraft. So we are doing these tests in a repeated way. The test results are very consistent between our internal ones between the ones of energy assurance. And with the Idaho National Lab, we are about 25% through the test program, which is going to be completed in early next year from what we see from the first 25% of the test program, they are absolutely coherent with what we have seen internally and also with the energy assurance lab. Okay. Thanks for that color. I wanted to get the latest thinking from Lilium on, I guess, its own network, the Lilium Network. It seems like, obviously, you've gotten a lot of preorders, 600 MoUs. Is this still, I guess, critical to the business? And if so, like what should we think in terms of timing? Will this be two, three years after additional sales? Or how is the team thinking about this? Yes, it's certainly not off the table. So we intend to pursue this, but our first intention and all our energy has been put together today in getting our aircraft certified. And then for the first one to two years, for sure, we are largely serving the premium segment. We want to then honor our MoUs and agreements we have with a more kind of general aviation type of customers like SAUDIA and afterwards difficult to give a timeline, but I would say not in the first three years, we also think about opening our own network. That's still the plan, but it has been really pushed behind the other two. And if I may add on this one. I think what's important to understand is that the premium actually segment is helping us tremendously as we are talking to authorities, as we're looking at the lending sites, for all of those premium customers, it's actually helping us as well, paving the way for the network. So it's definitely something we want to do, but it's actually good to start with another segment, which helps us developing it. Okay. If I could sneak one more in. One thing we haven't heard of recently is related to what Lilium is doing in terms of infrastructure development. I think in the past, you talked about Ferrovial. What are you doing with your commercial partners in terms of infrastructure? And I guess you have a lot of agreements to private individuals. Will these use existing airports or heliports like any specific infrastructure requirements for these applications? Excellent question. Thank you. We are still actively working with our partners on the infrastructure. We're actually looking at a few others in different regions of the world to accelerate. But this is exactly what we just discussed. And if you look at Florida and other places where we like to have a scheduled service with a higher network, it takes some time to get some of the permitting to get some of the land agreement in place. So we are actively working with them. However, as you just mentioned as well for the private individuals, much easier. You're looking at private estates, you're looking at luxury resorts, golf clubs. We have actually been talks with many, many, I would say, tourism industry and luxury industry players that have existing helipads where we can upgrade them into a vertiport really with a charging station on top and looking at some of the ground side. But it's much easier to go from a private general segment than it is to go from a commercialization segment. So yes, it's absolutely right. We will work with them and they have with us sharing their locations with us and we're working on it. Thank you. We will take our next question. Next question comes from Adam Forsyth from Longspur Capital. Please ask your question. Good morning. Just on the Pioneer Limited edition, great to see that launched, obviously. In terms of sales going forward, are we likely to see these as single aircraft sales? Or are we going to see something more similar to the Volare deal numbers of aircraft being filled through a kind of dealership-type structure? Good question. We're looking at both, to be honest with you. We do have direct sales discussion, and we have also a reseller type of people that can look into aircraft and have it in a specific location. And what's important for us is we have the right ecosystem around our end customer to make sure they have the maintenance that they have people to fly the aircraft, et cetera, et cetera. So you always have -- most of the time, you always have someone helping us out with the end customer, but we do have interest going directly to us. Okay. And just a slightly technical one, just you mentioned ground effect issues in terms of the testing that's been going on with [technical difficulty] have been an issue around ground effect. And I wondered if it has any particular advantages in that area and within your design. Well, on the aircraft side, first of all, we have what is called a devalue, which is a diameter of the aircraft, really, of 14 meters. So we can actually use most of what's called it [indiscernible]. So most of the helipads in Europe have at least 14 meters of a diameter. And so we can use them. Now then we have to look at the ground effect and the downwash. And there are ways for us to actually look from a trajectory perspective to look on how we can accommodate this with its specific terrain. So we're doing a lot of analysis right now on some of the vertiports or helipad upgrade to fit our aircraft. It's something which we can manage, like I said, from a trajectory perspective, and that we're not that too concerned about. Hi, afternoon, and thanks for taking my question. Just first one is around the means of compliance and the band of first half. It seems a little bit on the wide side, not to make a light of it a significant challenge and uncertainty that's going on there. Just wondering what are the key drivers or levers that could cause it to go one side or the other as you're working what they asked on that? Yes. It's basically the workload. So as I said, we have submitted our proposals. They are at the EASA, and we are discussing them. It's basically working through the pile of documents. So I'm not foreseeing any technical, I would say, surprise or uncertainty. It's just getting the work done. And as you can see, we have also progressed significantly on the certification plans. So it's the two, which we are working through for the moment. And we have decided, together with EASA to keep this pace. We are in permanent exchange with them and vis-Ã -vis also with FAA. So it's just getting the work done and balancing out the completion of the MLCs and also certification plans. That's helpful. And then looking at the flight demonstration, it seems like it's not designed as a range flight, but with the advent of Phoenix 3, could you just discuss what you've gone as far as range on the flight so far and what the plan is to convert to maybe a little bit more range testing in 2023? Yes. We haven't done a lot of range testing, and Phoenix -- the both Phoenixes are demonstrate the aircraft. They don't have the batteries that we are using now on our test facilities, and we are going to use in Pegasus. So we would not be able to take a one-hour flight with them. But it's also technically, it's kind of meaningless to do is because we don't learn anything by flying straight away. We are rather spending our time on making maneuvers like the ground effect, which as people in from the vertical take on landing business, no, it's a very delicate business. We could be flying some 15 to 20 minutes with this aircraft, given the batteries to drive in style. We may do it at one point in time, but we feel from a technical learning perspective, it gives us nothing whilst what we are doing now, tuning our flight control laws and the likes what we have seen on the video for us is much more fruitful. So we have preferred to do this. We may do longer and we may also do much faster flights in next year when we have the second aircraft available so that we have more capacity and bandwidth. Helpful. And then for Geoff, you did disclose in your most recent filing that there's significant capital and I appreciate the discussion on how you plan to fill it. I guess I'm wondering why you would choose to terminate the ELOC though, given that, that was an option, what the thinking was behind that? Yes. I think given the size of this offering, we wanted to let the market settle and send the message that we were planning on utilizing that. So that's one. We also found that an ELOC is something that you put in place before your seasoned issuer. So some of the mechanics were a bit suboptimal. So we then get out of it as much as we could from a mechanical perspective, but we really want to let the market settle given the most recent deal is the main reason. Thank you. We will take our next question. And the question comes from the line of Savanthi Syth from Raymond James. Please ask your question. Thank you, and good afternoon. Can you talk a little bit about the PDPs, like how Pioneer just -- the 50% is timing of those? Like when you expect those to start flowing in or how the agreements will be done? Yes. I mean they are very much in line with industry standard, whereby we have the first deposit in a schedule until delivery of the aircraft. And you can imagine the kind of milestones we're going to have in between the time of delivery and the first deposits. So it's a spread PDP schedule. Based on some of the milestones and like I said earlier, we're going to be getting more than 50% of the aircraft purchase price prior to delivery. Does that mean to be seeing some kind of PDPs coming in 2023? Or is that more of a 2024 event? Got it. And then I thought the service support and training package being included was interesting with the Pioneer Jet. And I was wondering if you could provide a little bit more color on how that's set up in terms of -- are you doing that a lot of that in-house or if you're going to have partners of it and just how you might have gone around kind of setting pricing around that, given all the uncertainties around training and things like that still? Yes, absolutely. So first of all, the Pioneer, the Lilium Pioneer edition has a comprehensive service package to make sure that we can take care of everything A to Z type of solution, right? So it's talking about maintenance, we're talking about flight training and so on. We do have like, I would say, two different packages depending on the type of partner we're going to have if they are certified for maintenance and flight operations, obviously, they can do things on aero. Going back to flight training, we do have an agreement with Lufthansa aviation training, and we have an MOU with FlightSafety International. I'm not able to comment more on this, but we do have partner working on the flight training side so we can provide trainings to the crew, but also to the mechanics and so on. So it's really -- the Pioneer edition comes with training package, tailored services and maintenance services along with, of course, cabin -- quite a bit exclusive cabin and customization options. That's helpful. And if I might just ask a quick follow-up question. Just can you talk about the cost savings that you're kind of looking to do. Could you describe a little bit more about kind of where that's coming from? Cost savings for the company, I think we reviewed all external spend, reviewed all necessary activities. So I think a lot of it is really as the program has progressed really defining what really needs to be happening and eliminating anything that is a nice to have. So it's spending a lot of time really sharpening the goals and reducing any kind of extraneous spend as the best way I could describe it. Okay. With that, I think we've come to the end of our Q3 2022 business update. Thank you once again for joining us. We look forward to speaking with you again next year. Everyone have a great break and a great start to the New Year. Cheers.
EarningCall_1833	All right. Welcome, everyone. This is Gavin Clark-Gartner and Josh Schimmer from the Evercore ISI Biotech Research Team, and we're very happy to be here with the AbbVie team. Full-house, we have Rob Michael, who is the Vice Chairman and President; and Jeff Stewart, Chief Commercial Officer; Tom Hudson, SVP of R&D and the Chief Scientific Officer; Scott Reents, Chief Financial Officer; and Roopal Thakkar, who's the VP of Regulatory Affairs and R&D Quality Assurance. Thanks for joining us, guys. So, we only have 20 minutes today for our fire side. So, we're going to dive right into Q&A. And maybe a good place to start is with the Humira biosimilars. So, recently, we saw that Optum is putting other biosimilars at parity to Humira. Do you expect more plans to manage biosimilars this way? Yes. Hi Gavin, it's Jeff. Thank you. Thank you for the question. We do. We expect that our strategy going into the biosimilar event would be to defend the volume, concede price as we needed to make sure that we would have a good formulary position or a preferred formulary position. So, I think what you've seen with Optum's announcement is consistent with our primary strategy. And as we've highlighted before, we're projecting at least 80% of the market will behave like that. We haven't closed all of the deals. So, that's in process, and we'll certainly, by the end of the year, that will take place. But I think what you'll see is exactly as you highlighted with a co-preferred or a parity position across many of the major plans in the United States. Yes. So, given the choice, why would any provider or a patient choose a biosimilar then? Do you think there will be any type of financial incentives that play here? Well, as part of these contracts, if you're a preferred product, the payers typically cannot sort of put together programs that would encourage the use of one preferred product versus another preferred product because the concessions and the formulary has been set. So, for example, we don't anticipate, based on the contracts that you would say, Oh, well, you can use Humira or continue to prescribe Humira, but there's lower co-pay tiers, for example, on the biosimilar. They will be literally at parity, so an equal set. Now, in terms of the question over why would physicians move away, I think you'll see a couple of things. I mean we know from some of the modeling we've looked at in some of the analogs that there are going to be physicians that will try and use the biosimilars that are on there, whether it's because it's a manufacturer that they trust, for example, Amgen, they may have samples, they may be curious. Now typically, those â that volume will be on new patients, not necessarily the intent to, sort of, let's say, try a new Humira or a follow-on Humira for existing patients, for example. So we do anticipate that there will be some volume degradation. Overall, we think it will be relatively modest. But that's how we sort of see the marketplace shaping up. Yes. So, I guess what I wonder is, if this is the setup, at least for 2023, how would there be anywhere close to 45% erosion in the first year? Well, it will depend on the price concessions that we had. And obviously, this is a unique marketplace. We haven't seen anything like this certainly around the world in our experience or I think in the history of biosimilars. So, you have a first mover, right, in early February, which is a very sophisticated manufacturer with Amgen and AMGEVITA. They have the leading share globally with their products. So, they know how to play in this area, not just with the immunology class, but other biosimilars. So, theyâre a sophisticated manufacturer. And they â as you might expect, they will negotiate hard, okay. And then you have, in the middle part of the year, as we've highlighted before, up to nine additional biosimilars. We've not seen that competitive intensity anywhere. When we launched in Europe, we had three and then another one, a fourth. So, that's something that we have to deal with, and you can imagine with that level of competition, negotiation in terms of where your pricing position might be for your preferred or co-preferred formulary position has been quite intense. So, the answer will be, if you're looking at saying a co-preferred position, the revenue approach will be based on what sort of pricing does AbbVie need to concede to have that type of [volume assurity] [ph] in 2023. So, that's something that we'll continue to navigate here towards the end of the year. Yes. Got it. And maybe just a last question on Humira biosimilars. What's kind of the timing of the price concessions the rebates over the year? Is it the type of thing where there will be kind of a big step down in Q1, and that will be more or less maintained for the year or will it be kind of a gradual onset or maybe step down and another step down halfway through the year as more competitors come online? Yes, it's a great question. So, we, obviously, in our contract negotiations contemplated, sort of a first half, second half dynamic. And so, while we would look at an annualized net price, that net price may change as the quarters move based on how we've done the contracting. And I think that's important, right? Because both the payers and AbbVie would have had to contemplate things like, well, what happens in the middle part of the year? Maybe there's more ferocious competition. We've already had some bids perhaps. So, you'll see, sort of that net price move over time based on how we've structured the contracts. And we've done that strategically to make sure we could close the annualized co-preferred position with the biosimilars, as you highlighted. So, when we give that full year guidance on the Q4 call, you shouldn't assume that the first half of the year would replicate the second half. You would expect to see â we'll have an average erosion for the year, but I would expect that second half erosion to be greater than the first half given the mere entry of a number of competitors and the formulary negotiations. Yes. That makes sense. And then how dependent are Rinvoq and Skyrizi on the Humira context, but both from like a gross to net perspective and also from a payer access perspective? Well, initially, it was important as we started to establish Skyrizi and Rinvoq, but it's less and less dependent. The dependency is not very significant, because of the size of those assets as we look now. I mean the running rate on Skyrizi is very impressive. Also, I would say that Rinvoq, even after the label change is a very unique animal in later lines, okay. So, it's not really â doesn't have full access anymore. It has second-line access. So, in some ways, there's also a moat around Rinvoq given the size of its indications and more and more coming. So, I think the way to think about it in terms of how you should think about both value and also access is look at the assets themselves, both together and individually. So, we have 3 or 4 head-to-head trials. Again, it's great standards of care for Skyrizi, where we have gross superiority. We're able to promote in the market. Rinvoq in later lines is just absolutely exceptional. We also have head-to-head trials there that can clearly show it can rescue a TNF, and it's also superior to ORENCIA in a head-to-head trial. So, we basically structured the clinical program so that these assets in the formularies can stand on their own. I think through that differentiation, as well as the time on market, obviously, both Skyrizi and Rinvoq, their lead indications were proved in 2019. You've seen a very nice ramp for both assets. And so, as we look at a payer's book of business, the rebate stream from those two products has grown in significance. And so they do kind of stand on their own over time. But the other thing I would highlight is, it doesn't mean as these products get larger, become a bigger book of their business that there won't be incremental rebates over time. So, it's not to say that there won't be incremental rebates for Skyrizi and Rinvoq, but it's not because of the biosimilars Humira or other biosimilars that will come in the future. I got it. So, maybe the gross to net and the access side of things, put that to the side. As we kind of look to 2024, 2025, and beyond, when we'd likely start to lose some Humira patient volume, will there be any type of stumble or, kind of hiccup that say Rinvoq, kind of in terms of driving switches to the brand potentially? Yes. I guess just the Humira volume starts to decline over time, do you lose any type of ability to drive switches from Humira to Rinvoq and Skyrizi? Okay. Well, it's an interesting and important question. The way that we basically present those assets to the physicians, is as follows. So in other words, we don't encourage to say something like, hey, you can take a Humira patient and put them on Skyrizi. What we are able to highlight is basically what we call, sort of raising the standard of care. So, we've got data from our clinical trials that show if you're not, let's say, at a PASI 75 or a PASI 90 in terms of your skin clearance, what happens when those people that aren't under full control, which is increasingly defined by the medical community as higher and higher levels of skin clearance, what happens to them if they move to Skyrizi? Well, they simply get better. And so, we're, I think, appropriately raising the awareness of physicians to say, you don't need to, sort of tolerate underperformance of the first generation of biologic or those assets when you have drugs that have proven superiority. So, that's how we do it. We leave it up to the physician with the discussion of the patients. It's the same thing, for example, on Rinvoq, where we know that if you have a Humira patient that doesn't have their joints fully under control, you know their ACR scores aren't basically at the right level. They're not in what we would say is remission. We have data that we can highlight to say, hey, [Technical Difficulty] anyway, this person is going to go into a deeper remission, if you think about Rinvoq for those patients that aren't doing well. For patients that are doing well, they should stay on the medication that their physicians prescribed. So, we do that today. We think we do that appropriately based on our label and our science. And so that's we don't see things dramatically changing as time progresses. That makes sense. So, thinking about Skyrizi a little more broadly. As we move through the decade, what do you see as the other potential obstacles that the brand may face, whether that's biosimilar store, in-class competition with TREMFYA, maybe some of the orals with [indiscernible] what do you see as [the potential barriers] [ph]? Well, I do think the perspective on Skyrizi over time is, first, is the IBD markets are probably underappreciated. So, this gives us some significant momentum. And we're doing that right now. So, we've launched Skyrizi Crohn's in the United States. We've got a few months under our belt there. It's progressing rapidly in the international markets. And basically, Skyrizi for Crohn's and then you see is going to be very, very meaningful. And this is a very special product given its efficacy, its endoscopic healing, its overall safety profile, convenient dosing. So, we anticipate that's going to be a big catalyst. Now, if you look at what the potential barriers could be, we thought about strategically the emergent potential biosimilar, which we think will come for Stelara. And we thought about that, and it drove one of our decisions to do a head-to-head trial against Stelara, even the higher doses of Stelara because we believe that we can outperform that generation of products. So, as we look at that, we think that, that â again, that head-to-head trial, something a payer and a physician can get their hands around will really help us sort of sustain the momentum in that space. In terms of other orals, we see in certainly psoriasis and PSA that there's what we â almost like an oral pre-biologic market, but in some cases, those aren't the same patients. Those are just the patients that wouldn't sort of declare themselves ready for a biologic anyway. And so we still think that the orals are operating in different spaces. And so overall, look, we're always very wary of the competition. That's why we anticipated with some head-end trials against the biosimilar as I highlighted. But we've got a nice setup with this product. This is a very special drug, more and more indications coming. And again, as I highlighted, we've got a strong position. We're capturing one out of every two naive patients in the psoriasis market. That's substantial. And so that's just going to essentially allow our market share to continue to drive forward to a very, very nice level over time. Yes. That makes sense. Maybe just one question on Rinvoq. How are payers managing the product in atopic dermatitis today? Are they requiring Dupixent use first or are they allowing after a systemic treatment, even if it's not Dupixent? And then secondly, how are the providers actually using the product today? Yes. So, thanks for the question on atopic dermatitis. So, I think it's important that our utilization from our label, typically, payers will basically prior authorize the product consistent with the label. And so our label does not require a step-through Dupixent. It's a step-through through an oral systemic or a biologic. So, it's not an and. So â and basically, the payers don't demand to step through for Dupixent. Some of the more rigorous payers, they will basically declare them say like, look, you got in addition to an oral systemic [or a] [ph] biologic, you have to show that you've gone through topical steroids or in some cases, even light therapy. So, depending on the rigor, but those things happen for [indiscernible]. So, it's relatively similar. Now, in reality, what we see is at roughly a 35% to 65%, about 35% of the use of Rinvoq in the United States is frontline. So, they have not been exposed to Dupixent. And about 65% is after Dupixent. So that's what's happening in the market, but that's typically a physician behavior effect, not necessarily at all a payer control effect. Got it. So, on the aesthetics franchise, [let me just] [ph] ask the question this way. Let's say that hypothetically, there is a pullback in demand in 2023 due to macro conditions and a weakening consumer. If that does happen, again, hypothetically, how do you think kind of the rebound in the demand may look? Yes. So, as we say this pretty carefully when we acquired Allergan, studying the global financial crisis 2008, 2009, we also then had the pandemic. Right around the time of the close of the transaction, we've had two examples of seeing this type of pullback and studying the recovery. What we've seen is a very strong recoveries as recently as [indiscernible]. By the end of the summer, we saw a very robust demand bounce back. And so, it probably takes the form of more of a V-shaped recovery once you start to come out of those conditions. In 2008, 2009 for about five quarters, the business declined by high single digits, but then for the decade following grew mid-teens. And so, we saw a very robust growth. And so, probably the best way to think about it is when that occurs, there will be a fairly robust recovery, which is why we continue to be very confident in our long-term guide of high single digits, greater than $9 billion of revenue by the end of the decade. This is a business that's quite resilient, but we'll go through a transient period here with economic pressure and then bounce back very strongly. For Imbruvica, how provider has been reacting to some of the recent Imbruvica data and evolving [indiscernible] data? And what's going to be enough to return the franchise to growth? Yes. So the reaction â we haven't had much time to see the reactions with the large prescribers to the BRUKINSA head-to-head trial. We'll know more over time, but that data is still just coming out now. What I would highlight is that the reaction to the recent changes in the NCCN or the U.S. guidelines has been largely consistent to what we saw when our label change. So, you know our label basically that highlighted the cardiovascular risks, which is a little bit more heavy than what we see with Calquence or certainly BRUKINSA, which is not yet approved and certainly in CLL, that's largely consistent. I think what we can say is there's two dynamics that we see with Imbruvica. First is that because of the head-to-head trials, and certainly, this recent BRUKINSA data will continue the trend as we continue to lose basically new patient share to both Calquence and BRUKINSA across our indications. At some point, that will stabilize, and we do have a pretty large installed base. We're not seeing any switching that's taking place once a person is stabilized on Imbruvica, and that's largely consistent with what the guidance has been from the regulators and the KOLs. So, we've got that ongoing pressure on market share based on these head-to-head trials and the guidelines, et cetera. We also have a tough market condition where the market, the CLO market, which is the big driver of Imbruvica is still down about 20% from pre-COVID renewables. So, net-net, what we see is that Imbruvica will not be the same growth driver that we thought it was a couple of years ago, right? That growth, that lack of growth will be partially offset by Venclexta in terms of our overall heme franchise, which will also be encouraging where we look at high-risk MDS. You look at basically multiple myeloma, [1114, T1114 ]. And then we start to build starting this year with the new Heme assets â sorry, next year, I'm sorry, Gavin, in 2023 with Epcoritamab and then basically with Navitoclax and so forth. So, we see stabilization, some decline with the core Heme until we basically get this ramp back for growth with a very nice new indications and assets that we have in the pipeline. So, given that dynamic, likely for oncology, the way to think about it is 2023, 2024, given Imbruvica will be declining and Venclexta won't be able to fully offset it, you'd like to expect a decline for 2023, 2024 and then 2025 when we start to see the pipeline kick in through that through the end of the decade, strong growth in oncology once again, but the next couple of years, given the pressure on Imbruvica, it's fair to model a level of decline. Yes, I got it. And maybe just one more question to close this off your [kind of] [ph] we're just on time. It's kind of two questions rolled into one. But you're on the lower end in terms of the industry for R&D spend, and at the same time, it seems like the Allergan deal worked out really well. So, I guess as we're moving through the next, call it, 3 years to 5 years, how are you going to looking at sourcing innovation internally versus externally and thinking about growing the business, kind of beyond the end of the decade? Yes. I mean look, we feel very good about the portfolio we have today with the combination with Allergan. We've got [indiscernible] long-term growth. So, we're not in a position where we need to do something in terms of M&A to support that guidance. We base that long-term guidance on the portfolio we have today, what we have in our pipeline. We supplemented it with external innovation, putting that 2 billion aside for a few years. We're going to go into 2023, we'll have more flexibility clearly because we'll pay down the debt to a level we'll have our balance sheet in a good position. And so, we won't be limited by that $2 billion per year anymore, but we won't need to [indiscernible]. We'll certainly have more flexibility. I'd say as we look at our R&D investment, we always look to fund the pipeline. We've more than tripled the investment since inception in terms of the internal investment for R&D. We supplement that with external innovation. I think at times, people focus on percent profile, but that's not necessarily the best metric. Because when you think about our large Humira revenue footprint, doesn't require really hardly any R&D resources other than on-market support. We think about aesthetics being a lower intensive R&D investment versus a traditional pharma investment. But that said, we're going in 2023 with gross profit will be declining because of U.S. Humira. We're going to continue to invest in R&D. We're not going to cut investment. In fact, I would expect over time, we'll grow investment, but we always do it from the mindset of we're going to fund the pipeline to drive long-term growth. We have the luxury of having top-tier operating margin. So, we can certainly â we have the flexibility to invest more in R&D if we need to. We see those programs, we fund them. So, that's certainly the way we think about R&D investment. We're very committed to growing that investment to support the long-term growth. Yes. Got it. That makes sense. Thanks for the time, guys. Really appreciate you all joining us today, and hope everyone has a great rest of your day.
EarningCall_1834	Okay, thanks everyone for dialing in. Itâs Brett Simpson from Arete again. Now our next session is our last of our tech conference but the good news is weâve left the best to last. So Iâd like to welcome Raghib Hussain, COO of Marvell Semiconductor. We also have Ashish Saran, who as you all know, is SVP of IR at Marvell. So Raghib, Ashish, thanks for coming on today. Really appreciate it. Great. And as most of you know, Raghib was Co-Founder of Cavium and has a long history in the networking space. And then we're definitely going to cover off some of those areas in our discussion over the next 45 minutes. And it's also quite timely that we're having this session right after Marvell reported late last week. And I think we'll also look to Ashish for a few questions around the sort of what -- how to think about the business post quarter. So maybe by way of starting out, Raghib, maybe you can start with a quick intro and spend a brief period talking a bit about the strategy at Marvell post all the acquisitions you've made, how the portfolio sets up, particularly in comps, in data center and autos more broadly. And then we can maybe talk a little bit with Ashish about what are the sort of points to highlight post results and what's the that for you, Ashish. Yes. Okay, thank you. Thank you very much. My name is Raghib Hussain. As you introduced, I was a co-founder of Cavium. And then, of course, since we made Marvell, I think Marvell is driving product strategy as well as business selection and so on. I'm Vice President of Products and Technologies at Marvell. In Marvell, we a few years ago, about 4 to 5 years ago, we did actually put together a strategy to focus on data infrastructure. It's a very well thought through strategy because we did realize as data volume is growing, it has to drive the kind of build-out of the data infrastructure. Because if you really want to drive the value out of this data, the economy, data economy will be driven by how good of a scale do you have in the data infrastructure. So obviously, it had to be done at the right efficiency levels and so on. So which means you need to optimize essential silicon products to enable this data infrastructure, right? And that is the vision that we had and that is what we have been driving for the last 4, 5. And of course, to enable that, you have -- we recognize that you have to be able to handle all aspects of data which means to be able to store data, move data, process data, secure data which means that the components which are needed are really the networking high-bandwidth interconnect, the storage, how do you store data, data-centric compute as well as security. So those are the areas we focus on and we made it a goal that we not only want to be a technology leader in each one of those areas but we also want to have our market-leading products in each one of these areas. So over the last 5 years, our -- all the things that we have done internally, or organically or inorganically are all focused with that mission to achieve that goal. So that's why all of our M&A had a focus. It's not like a random okay, whatever is available, go get it a good deal. We never looked at it. We came on with the plan that say these are the areas that we are good at. We are going to invest organically. And these are the areas that we need -- maybe we need to augment through M&A and that's exactly what we did. So today, the reason I'm so excited and the reason I'm kind of still driving here and I believe Marvell can be very fast-growing company in driving data infrastructure because data growth is happening, it's still happening and is happening. Actually, the rate is increasing, right? So if you look at the overall continued long-term model, data infrastructure will keep growing at a much faster rate compared to any other segment and especially the markets that we focus on which is data center, carrier, automotive and enterprise. So out of those 4 markets, 3 markets are growing at a much faster rate which is data center carrier and automotive. And in enterprise, we are sharing -- gaining shares -- so as a result of that, our growth is good over there. So another key item of indices is that a lot of fundamental building blocks needed for each one of these markets, products needed. We can easily share the investment across various markets, right? So that is why I believe the choice of our end market that we chose and the target market based on the size of the market and the growth of the market. It was very well thought through strategy. And we have been successful in executing that strategy through our organic and inorganic investments. And that is why I personally believe Iâm excited about it that I believe Marvell is the most, well-positioned company to provide the essential semiconductor needed to enable this scale in the data percent. Yes. Perfect. Great introduction. Maybe I'll just add 1 kind of a couple of minor things there. From an M&A perspective, not only do we acquire kind of the right companies, these are basically all kind of the number one market share leaders in their space, right? So it wasn't just about we need an asset. We actually got essentially the best assets out there. And if you this thing from a building block, as Raghib mentioned, if you are a data center, what do you need in compute, you need acceleration, you need security, you need storage, you need high-speed networking, right? All those building blocks are now one of the same roof and with the acquisition of Avera which does custom silicon, I think this is where we really have a unique differentiator, right? It's our ability to mix and match our IP along with our customers and give them something which is very unique but much faster time to market relatively lower cost and much higher probability of success. I think those are some of the things that Raghib will touch upon later when we talk about our cloud optimized program. In terms of near term, I mean, yes, we just our Q3 results, we guided Q4. Our first actual results were very strong. We grew revenue 27% year-on-year. Now clearly, we're heading into an environment where clearly macro pressures are in play and semi industry is coming off of very high growth here, including us. So we didn't guide down our Q4. But if you stand back and even at the midpoint of our Q4 guidance, only our revenue growth is still going to be a very impressive, north of 30% year-on-year, well above our long-term target. And when we look at really what we are seeing in the near term, it's -- most of what we are seeing in Q4 is really an inventory correction primarily on the storage side, right? Within data center, it's hard to strive and its SSDs. This is an area where we supply to our OEMs and then they supply the end customer. So visibility is probably not as good and we were -- I would certainly say a little bit surprised by the amount we are seeing -- correct itself. The good news is, instead of kind of kicking the can down the road, let's just kind of do this as quickly as we can. So expect that to kind of bottom out in the next couple of quarters. And as we look into next year, what's really nice for us is 1 is we see a few quarters of inventory correction but all our key growth markets are still very much intact. And these are fundamentally growth markets. These are not markets which grew outside through the pandemic and now basically go ex co is quite the opposite, right? This has fundamentally secular growth in front of them. On top of that, we have a number of, call it, somewhat market independent growth drivers. We have a number of cloud optimized silicon designs which are now already going into production and will ramp to an aggregate of $400 million of revenue next year. The 5G business is doing very well. We expect that to be a strong growth driver next year. Our automotive business just hit another milestone, we crossed $200 million annualized in revenues in Q3. So that's going to keep growing. So overall, I would say we're set up extremely well. As we get into next year, like I said, we've got a few quarters of, call it, an inventory correction to manage through. But then beyond that, I think we're very much back on the firm beyond the growth at. And before we get into the sort of nuts and bolts of the strategy, maybe just 1 follow-up, Ashish, is China. Obviously, there's been a decoupling and some concerns building about the appetite for China semis demand, particularly for U.S. companies. But can you maybe just frame China as I think you talked about it more in terms of the size of the business and it's clearly weakening near term. I think you mentioned 30% for Q4. But help frame the sort of China situation for Marvell and how you see it playing out? Absolutely. I mean China is clearly a very large customer for the old semi industry. I think we have the consumption numbers. We've seen somewhere here, 1/4 of semis actually did come. We have a much lower exposure not because we don't want but just happens to be without advanced technology platform, we've seen much more of an attached to it, I would say, to more kind of big U.S. hyperscalers, so big multinational networking companies. So our average exposure across the business to direct China OEMs in Q4 is going to be below 10% revenue, right? And even when taking a higher number, call it, a few quarters back, it was still probably in the low teens, right? So first point is China is important, it's call it a little more than 10% revenue in general but it's now a big part of our overall business. We did see softening starting in Q3 and accelerating into Q4 from China, clearly, I think in response to some of the macroeconomic conditions they are managing through. And most of the impact we saw is in our Enterprise Networking business, right? So I would say at this point, I would say you should assume China is kind of, to some extent, bottomed out. I think it's slightly [indiscernible] at this point. And I think in general, you should assume China as a percent of revenue is going to be somewhere in this, call it, 10% plus or minus range. This is a great question because I think a lot of people look at our Ship 2 number which obviously is a very high number but we realized most of that just gets into and stem back around and comes like fairly low. Okay, that's clear. That's clear. And I mean, maybe for Raghib, I guess there's been some concerns building amongst investors around the growth study in Marvell and I appreciate the near-term inventory correction. And a lot of this is centered around storage. But is there a risk in your mind as we go through this downturn that this could spread into other parts of the business? Do you -- when you look into the setup for 2023 or even 2024. Are you thinking differently about some of the opportunity sets in front of you? And specifically, when it comes to like hyperscaler visibility, how do you feel sitting here today in December, looking out into '23 and beyond? So as I said earlier, the -- if you -- if you look at the multiyear view, their model itself, the trend is upward. The overall investment that these hyperscalers are going to do and planning to do will keep continuing. There may be there's an impact of inventory digestion or some adjustment of the year-over-year CapEx and so on. But if you look at the overall trend line, that has to be -- that is upward. And the reason for that is if you look at really, these cloud guys, their model actually is to -- still there's a huge amount of business that we need to grab, like especially the hosting. So there are 3 big hosting guys right there. I should say three big guys focusing on hosting, let me put it this way, right? And the goal of each one of them to land as many customers in their cloud as possible. And one of the key driver of the value proposition of driving this is to keep driving the efficiency, right? How much -- because we all know the performance of the cloud is limited by the capacity and the three aspects of capacity the bandwidth. -- which is the number one by the way, because the performance of the system is dependent on the bandwidth and then the compute and a lot of time which is not that much paid attention to is the storage. Most of the cloud guys actually measure their customer in terms of storage because when there's of sales, okay, I'm bringing this new customer, the question asked to the sales guys is, okay, how much storage are you bringing? Because that is their sticking the way to have a stickiness on the customer by having more of their data in their cloud. So to provide the value proposition to their customers that why they should move, they have to provide the lower latency storage, they have to provide the high bandwidth capability and so on. And as a result of that, they cannot just take the decision -- hey, just because something is happening in the industry. I will not switch to, let's say 800 PAM4 or 1.6T. Because whoever makes that decision actually probably going to save a few hundred million dollars but probably going to lose hundreds of billions of dollar business in the next 2, 3 years because once you are benign, you are behind. So -- and in terms of how much money is needed for this investment versus how much money these big CSPs have does not make any sense to let somebody else take the lead, right? So that is -- if you look at that -- how the technology is transforming and how these needs are actually implementing efficiency the going forward trend is positive, right? So that is why I say if I look at the -- take a long-term view, I am very optimistic and very bullish actually about it. I do not think it is -- these things are going to slow it down. In fact, just to add to that, what we've seen and to some extent, right, there's a focus on maybe some ROI in the short term from some of these customers, actually, the push for optimization is uneven higher, right? So our design win opportunity funnel has actually gotten bigger, quite frankly. I think their impetus to say we actually want to move to more -- I mean you've heard one of our -- one of our -- 1 of the large cloud customers had a big conference last week. And if you noticed right, a lot of what they talked about was more optimization, more ability to really improve the total TCO. But overall investment, the message with the overall investment will keep increasing because that's what drives the revenue engine in the future, right? So even start as to your specific question, while yes, it's going to go through an inventory correction. Once we are through it, yes, our anticipation is it's going to go back to growth within data center because there are alternatives side, the total storage capacity, nearline is still going to be critical -- for acceleration will remain critical. And then we can talk later, we actually have some very innovative new architectures around CXL to help them even more optimize. So I think weâre in the driver's seat and helping these customers get to their long-term goals. We'll definitely circle back to CXL a little later. But I guess, as we start to look at coming out of this period and we start thinking about recovery. Where do -- where does Marvell have undisputable kind of leadership positions today? And where do you see the share gains are going to be most pronounced over the next couple of years? And what are the product areas do you think that Marvell has a real opportunity to scale up in where you can take that individually? Yes. I think first and foremost, as you know we've got market leadership by far within the optical connectivity space, right? When it comes to electro-optics in the data center through the Inphi acquisition and we essentially added more resources right after we acquired them. So very much expect that -- as Raghib mentioned, 800-gig PAM4 [ph] is already being used in volume in AI applications. And as you go into the next generation of switch architecture, we'll be driving the 1.6T terabyte road map for the industry essentially. So this is an area where I expect to continue to lead. I think we've already made major strides right in the 1 area where we did not have a great socket was in data center switching. But with the acquisition of Innovium, right and our ability to now get more substrates going forward, you should expect this is going to be a big growth area for us, right? And obviously, we got hard at work at essentially coming out with the next generation of high-speed optics in the companies with silicon. So I think you should expect us to make some pretty big leaps, I think, on the switching side. I think when it comes to cloud optimized silicon, this idea of basically customizing our IP to our customers we saw this, I should really get further to Raghib and Matt, who saw this right after the Cavium acquisition. And I think we put our foot down and I think we've got a massive lead on everybody else. I mean you can talk a little bit about it. I think it's very important to understand that customization is not something just wake up 1 day and say, "Well, I can build a standard product. I think a lot of this credit goes back to the original design of OCTEON. So let me pause and I'll let Raghib talk about that flexibility and then we can talk a little bit more. But I think it's a very important point to convey. Yes. So I think a lot of people -- even a lot of customer went that route and learn hard way and came back. So it sounds like, oh, we can get ARM core from [indiscernible] and we can just put them together and we can put together some and put a kind of data centric processor. It's easy to say and very complicated to get it done. Because how do you really implement the interconnect, how do you do the balancing of resources. How do you allow the sharing of the -- a lot of common resources in which requires a lot of tuning and a lot of expertise that we've developed over the last 20 years. And that is what is the kind of unique aspect of the platform that we have which we call -- call it, OCTEON platform, DPU platform whichever platform you want to call it because there are different people, people are calling it differently. But in the reality, it is a platform which allows you to provide what we call the data-centric compute. And what is data-centric compute? It is a compute which allows you to manage, handle a lot a high volume of data to be able to take in a high volume of data, process in real time that high volume of data based on the application needs of processing and then manage it means move around and store properly and so on. So this whole platform needed to process the high-volume of data requires a very good system which has a very well balance of a general-purpose compute, like our own type of compute plus the kind of some more specialized type of process like DSP and so on. And then, some more specialized blocks had -- more of a hardware abstraction blocks, right? Things like car compression, crypto or AI processing, a bunch of other type of video processing and so on. So the combination of these blocks, how do you design those resources? And how do you allocate the share -- because they all need to share the common memory, for example. They all have to share various IOs and so on. How do you implement the system that it is a very balanced system and gives you the most efficiency out of the full SoC. This is where the unique expertise and IP lines, okay? And this is where you can bring a lot of differentiation. Now based on the target application, you can tailor this combination more focused to, let's say, video processing or more focused to, let's say, AI processing or more focused, let's say, implementing disaggregated historic solution, right? or maybe more focus towards security processing, right? So these are various kind of data-centric processing and application SoCs that you can develop. But there is 1 unique commonalities in all these things how flexible are your interconnect of sharing these resources, right? And how well can it scale across because in a typical SoC, there are hundreds of engines running there, right? There are general purpose core, a special purpose core, micro engines, hardware engines, all that. They all need to share these reporters. How do you scale as you keep adding these capabilities, how do you scale to the higher and higher bandwidth capability to process higher bandwidth. And that is what is unique about this capability that we have that we developed over the last 20 years. Perfect. Thank you for that very much. So Brett, maybe just finishing off a few of the other growth drivers and then we can go deeper, if you'd like, in any of these. I think I can just say going through our end markets. I think on data center, obviously, you have opportunities in CXL which I still think were leading the market and developing new solutions, we actually announced a very big design win on the call last week I think in 5G, you know the story really well. I think most investors do. So you know weâve been leading in that space. Weâve driven massive revenue growth. We just announced an ongoing extension of our collaboration with Nokia right. This is the same OCTEON 10 which Raghib just talked about our DPU platform. I think in automotive, our Ethernet business continues to win design wins. We crossed an important milestone well on our way to be kind of more than half the market. So I think got a number of IP growth engine and a number of these that will drive growth even next year, even despite being a challenging macro, in my mind, 5G, cloud optimized, automotive. These are all going to drive year-on-year but despite what is probably going to be a tough economic environment. Yes. And do you still see Marvell growing the business in 2023, just given all the puts and takes that you see at this point going into 2023? I think we'll see what actually happens. I mean, the reality is it's a tale of 2 halves, right, the first half probably the industry is 1 where there's obviously going to be some inventory renormalization and that's going to have a pull-down effect. On the other hand, we know weâve got these multi-hundred million of incremental revenue to our drivers. So as we get through the end of the year, obviously, the year-on-year growth will start to become meaningful towards the end of next year. It just depends on whether they completely neutralize these other, we end up growing a little at this point to be completely honest. I think as Matt said on the earnings call, our expectation is weâll be able to hopefully drive some growth. We just donât know quite frankly at this point far out. But I think the setup for growth coming back and accelerating as we get later into next year, I think that would look quite good. Yes I wanted to talk a little bit about content growth drivers within business, particularly data center. And I think you were talking earlier, Raghib, about bandwidth and data speeds and feeds are going up significantly. We're starting to see servers embrace PCIe 5. We're going to soon see PCIe 6 coming and Ashish mentioned, obviously, CXL and the standardization that's going to come over the next 2 or 3 years. When you sort of look at these generational jumps and probably do the same with PAM4 DSP versus NRZ and we could go into various different levels of speeds and feeds going through generational jumps. Can you just talk a little bit about what that does to Marvell's business? The content sets within these generational jumps. And whether there's a consolidation play that's also going to arise from this -- maybe we can start with the PCIe landscape because this shift to PCIe 5 and then PCIe 6 feels like it's going to be a good growth driver for Marvell. So definitely. So first of all, as you go from the lower bandwidth to the higher bandwidth, the number of players that can bring the solution will keep getting reduced, right? So that is 1 angle that puts Marvell in a unique position because we -- at this point in the industry, we have best technology, whether it's optical and copper in high bandwidth connectivity, right? Secondly, all the customer to drive the right bandwidth, they need to transition to a newer solution, right? So in other words, let's say, if they had their own standard product, they need to switch the product which support PCIe GEN6 or they have the custom, many of the DCI speed actually have custom solution. So they need to switch to the newer custom solution with these capabilities, right? And this is where it is a great opportunity for us because we have actually invested in these areas. And combined with our other custom capabilities, it puts us in the best position to gain more design and more market share over there. So that is on the custom side. So there's a huge aspect of how many people are capable of that and how many people can provide that custom solution with stability. And then coming to the standard product side, if you look at the -- on the connectivity side, when it comes to high-speed copper as well as the optical both connectivity, right? So we have the market-leading position, right? So as these -- especially, let's say, PCIe Gen6 or even the Ethernet connectivity closer to server and it goes to the higher and higher bandwidth. The need of these specialized product to be able to handle the proper signal strength and all that will keep growing, right? So whether it's the PCIe Gen6 or whether it's a higher bandwidth like 100-gig type of Ethernet you need a different type of, for example, re timer product or other type of connector we're going from an RD to, let's say, electric optical or are on the AC type of connectivity and so on. So all those things drive for actually going in the direction which is our core strength, right? And that is where our opportunity is to gain more market share and that is the growth -- the share growth is going to be driven by a lot of those things in the data center connectivity, if you say. At abstract is to a high level, very simply put, when you have more bandwidth, you need more speed but you need more speed. The link speeds go up pretty dramatically. At certain point, the link can be a simple analogy. You need to manage the data. It's the whole idea of data processing, like the data, moment you need to do that, that's where our strength comes in. And you can look at these examples in multiple end markets, right? If you look at why is automotive market adopting Ethernet, itâs because those speeds are going to the point where point-to-point analog simply doesnât work. So you need more advanced technology. If you look at the data center, you look at kind of the simplest numbers link which has been out there for a long time is the switch, right, top of rack switch to your silver connect. At some point, you are already starting to see where you need that asset copper cable is not going to work anymore, right? You need [indiscernible]; that means DSP technology and guess whoâs the leader of PAM4 DSPs, right? And thereâs other examples. But I think very simply, as you think about bandwidth growing, link speed growing, you need to manage data, if you need to manage data, this is a line for you. So this is exactly what Iâll give is on to talk about. Yes. Maybe we can change a little bit directions to talk about switching. And maybe starting off with enterprise switching and it's been a great year actually for Marvell. I think you've taken quite a bit of market share and it's been a good market conditions, if you like. Can you talk a little bit about whatâs happened in the last 1 or 2 years in enterprise switching and had tremendous growth this last couple of quarters. How much of that was the market versus share gains? Where do you think your share is today? And I know weâre going -- maybe weâve overshipped into that market to some extent, the growth maybe isnât going to be as dynamic going forward -- but can you talk about some of the drivers around the upgrade to 10 gig switching or multi-gig switching in enterprise? Yes. I mean the story really -- I mean most of the revenue you see, Brett, gets shown up in what we call our enterprise networking end market. And the story here is not just switching. It's really switches as well as the PHYs, both are very important elements. And this really slowly really started 5, 6 years back. In Raghib's opening remarks, he talked about while we did a lot of M&A, we had a lot of self-help as well, right? And one of the biggest self-help areas really within Marvell was taking this Ethernet franchise which, quite frankly, under the Prime management had kind of all look sideways be as polite as I can. And so the first thing we focused on is saying, look, at the end of the day, there's still only really 2 large companies in the world which are known for doing high-quality switches and fibers, still essentially a very small market where customers want choices. And clearly, Marvell was viewed as 1 of those but we need to invest and we did that, right? Takes -- when you go fix the franchise, it takes about 2 to 3 years in semi. So it's only the last couple of years, to your point, whether the benefits of those things are to show up. Now it only very started to show up last year because our customers have given us new wins but they have made the new platform change yet, right? Because the whole networking market has been a little bit depressed if you remember the last few years. It's only last year, you saw, hey, all the design wins we had started to come through, right which are in play today. Our customers introduced their new platforms, right, as the world now shifted to a hybrid working environment, handling video at a much higher bandwidth speed, at much higher security requirements, right, because you have users from multiple endpoints coming in. I think it's a combination of those things is what drove the strong revenue growth. So I would say share gains in switches and PHYs along with on gains, better, higher ASP switches, multigigabit PHYs, the shift to WiFi 6, a shift to more video within the office itself is what's driven a very big increase in multi-gig. And the multi-gig PHYs, I mean, this is -- it's a pretty high ASP product. I mean the ASP is not few percent higher than gigabit. It's multiples higher, given it's a very difficult problem to use existing cabling but get 2.5, 5 or 10x of bandwidth. It's a very difficult signal processing problem. So we get a lot of share there. So overall, I don't know if anyone follows the market shares anymore, so I don't have a public data point to give you -- but you can see that we are driving, call it, on average, 20% to 30% year-over-year growth for the last few years, very recently even higher than that in that which has very low single digits, right, almost by definition, we'll be gaining share. In terms of over shipping, I would say this is a case where I quite [indiscernible] inability to get supply probably helped us. So it's kind of difficult when our customers are still escalating even a few weeks back, right? So we probably were one of the "Golden screw. " So I think the -- unlike HDD, where obviously, those parts were easy to get. So we've been able to shift to whatever they ask us for. I do think that as you look into next year, we should be conservative to assume that the end market, China has already come down, as I mentioned earlier. I think our expectations are, our customers still feel very good. But we'll be cautious, I would say. But we still feel good that we would expect to still see some share gain next year. Multi-gig PHYs will continue to increase as a percent of the total market. It still is very small number. They actually still on in the single digits, right? So there's a lot of headroom here. So we will not agree year-on-year next year should be a more kind of slow year, right? But enterprise networking but I think fundamentally, our position is very strong. And, networking is 1 of those ubiquitous technology. It's not talked about but every shopping mall, every hospital, every data center, every enterprise, guess what, you all need networking. The fundamental need for this is never going to go away. A high-growth market, it's a very essential market which we have for us. Yes, makes sense. We're going to maybe take 1 more from me before we open up for Q&A. And I think my colleague, Jim is standing by. I just wanted to touch on data center switching. And you mentioned the Innovium acquisition. And I think you'd said earlier that the business should be doing about $150 million in revenue. I think it was this year. And I wanted to sort of just get a sense as to how that is playing out, particularly on the sort of 12.8 and 25T switching market. And then I wanted to also get an update on 51T with regards to Innovium. And I know Broadcom's talked about taping out or certainly going through some sampling. Where are you in that sort of journey towards customer sampling and eventually commercialization? Yes. Let me take the first part and then I'll let Raghib talk about the whole 1.6T, is really what the question should be about. That's what actually buys a road map, right? Because you can have a switch but without the optics and come to be one. So first, in terms of where we are with Innovium, very happy with the acquisition fully integrated, right? We got and shifted over to our 5-nanometer process. This is an area where everyone knows we've got a very large customer which came along with an OEM. We were unfortunately very supply constrained, right, all the way till almost now. So in terms of our full year revenue, data center switch of $150 million, I think we're get pretty close to it, I would say, maybe not exactly there but pretty close to it. And then next year, we do expect most substrate availability, right? Probably one of the only positive outcomes of industry slowing down is going to start to get more parts. So I think we'll see a next year. And then let me transition that over to Raghib and he can talk about how we think about kind of the long-term roadmap. Raghib? Yes. So of course, we have very well established ourselves as what is called a cloud switch solution through Innovium but of course, we are also investing in the next generation. And the way We see it is not we do not see it as a switch is the only 1 socket, sort of a thing. We look at what is needed for the whole platform to be delivered. So if you look at the value of the next level is really you need -- of course, you need a 50T switch but you also need something to connect with it, right? So the cost that -- the CapEx cost of connecting all the optical is much more than the actual switch in any data center. So the way it works out together is 1.6T is where the 1.6T works with 50T and we are making sure we are investing in both of them and we deliver as a solution because that is needed by the industry to have the right solution, right performance and efficiency and the right cost point to be tell you that for us to be able to deliver the overall solution which will drive the key type of bandwidth out of the switch and of course, through the network. We are actually implementing both of those. We are in the -- bringing in the process of bringing both of those them together. And of course, we are working very closely with our lead customer to make sure that when these products are delivered. They work together, obviously. And then in the timing wise, they are kind of delivered to bring the system-level solution instead of just 1 component and waiting for the others. Yes, we should expect something in the next -- I think in now we're trying to get this ready to go, call it, in the near future, right? So I can't say much more than that. But I think the most important thing is we were aligned with the cloud ecosystem which we obviously have great contacts with given everything else we do for them. I think we're all in alignment and I think you should expect movement here over -- in the near future, essentially. Weâve got a few questions in the hopper. The first 1 is, does Marvell own the IP for CXL and what is the relationship with Intel? I mean on CXL, we're basically we've been investing internally for a number of years, especially as cloud customers came to us a couple of years back. Pushing us that this is kind of the next big thing. This is what lets them finally completely kind of virtualize their infrastructure. This is a missing piece. And they recognize that you need someone like us because if you think about CXL, if you think about standard and Raghib, can talk a little bit more on, these are very complex. This is not like a simple expander to connect once DPU and just kind of fan out, right? It's a lot more complex given the protocol translation. And once you start getting from expanders, to pooling devices, complexity goes up massively. So Raghib, maybe you can talk a little bit about what need for CXL? So first of all, CXL is an industry standard. I mean, in fact, the success of CXL is tide to how standardized it is because it cannot be, oh, 1 vendor control it and it is not going to happen. One of the reasons that PCI is so successful is because of the fact that it is a very well-understood and established standard. And that is what industry, especially the consumer of CXL, they are making sure they're driving it that way that it happened that way, right? And of course, there are multiple levels of IP needed to enable the CXL solution. So the interface bus standard is 1 thing, right? So it is just like think of it is as complex, if not less is as PCIe buses. But that is just the interface level protocol and how the bus work and so on and so forth. But then as you go behind this, in implementation itself, you need to worry a lot about the latencies because if the latency -- if the SerDes is not tuned with the application need of the CXL application, then your whole application use goes away, right? If the latency goes higher, as an example. Now what makes us unique is that we control our SerDes. So we can tell our SerDes designer to it. This is targeted for this CXL application and I need -- I want you to save last 4 nanosecond in this point which sounds I needed why are you saying for a second. But in the bigger picture when nobody expand, every nanosecond counts, actually. So we are really tuning the entire IP end-to-end from the CXL interface SerDes all the way to memory DDR interface SerDes because that counts, right? The complete the chain has to be optimized for the solution. So that is 1 aspect of the complexity. The other 1 is when you are implementing, for example, pooling or adding multiple devices and so on, how do you share the resources? How do you make this coherent memory subsystem so that it really serves the need of the CXL. And this is where we have a lot of IP that we have been developing, to provide a scalable way to connect these high disaggregated high-bandwidth processors or the end devices and so on. So those are the areas that we have invested a lot and that is why we are working. We have [indiscernible] design winner. In fact, the way we work in this, we really work closely with the customers to really understand the end application needs. And that's how we optimize our IP and that's how we take the market leadership. Well, we work with multiple partners, as Raghib mentioned, right, whether it's supporting on the CPU side. So whether it's Intel, we actually -- there was a press with AMD earlier. Yes, you should imagine we work with and tell you work with AMD, we could work with kind of the memory provider. So we know very well because of our great NAND business. I remember, we also know that equation really well. So it's a broad partnership and that's kind of Raghibs' point. This whole thing actually works because it's an industry standard and it's quarter by multiple component providers would go into that data center stack essentially, right? So you should imagine we work with everyone. Just on that point, guys, when do you think that we start to see CXL in the sort of cash coherency or the low latency examples that you gave, whether it's 3.0 or 2.0. When do you start to see this aligning with servers, so you really start to see the community come together and really scale up to CXL as an enabler. I think the next couple of years, I think you'll start to see -- I mean, remember, these are now -- these are not experimental things with these large cloud customers. These are massive revenue-generating properties. So they're going to go through a pretty long process of -- this is a big architecture change. So we can give you an example which is, hey, we've got a good design win. It will take us a couple of years to kind of chip out there right and then start taking it. So you're looking at I think there's going to be a lot of work, right which we'll be working with. We've actually got an entire platform from a software and a format perspective which we are giving to customers for simulation and modeling. The next 2 years are I think about, hey, how do you do the implementation? How does it work? In all, there's a lot of chip development going on. So I would say you're looking at 2 years of that and then call it calendar '25 onwards is where you start to see physical implementation in starting a volume. And I would like to add 1 thing on what Ashish said that this is a platform. This will keep bringing new use cases and so on. So to me, it's by the time CXL will be as established as it is PCI and all that, like a 10-year process we are talking about but the initial application will start showing up in the next couple of years and then more and then more and then more. And we have first-mover advantage. I think that's the other key point to kind of keep in mind is it Raghibs' point, this is going to go from expanders to pooling devices to switches to accelerators over a year of lifetime. I think we're kind of driving this with the big U.S. hyperscalers and I think that's the key point here, right? And we made these investments, quite frankly, what they asked us to, with everything else going, you want Innovium brilliant, you got the data center switch support. We're looking at this kind of be the next big thing and we don't want to rely just on start-ups to make this happen. So we did have an acquisition as well but that's the message here. Is the huge ECU value for all large hyperscalers exactly? That's why everybody is so much interested in this getting it sooner and later, let it put it this way. Sure. So last question, how does Raghib think about the size of the DPUs of content from attaching compute to networking/storage? So DPU content attached. So the thing is -- so are you talking in the context of the data center or overall DPU because to me, anything which we said is a combination of the general compute, DSP-type compute and hardware acceleration is a data-centric processor, right? So it goes beyond data center. It has data center aspect and then it has wireless, it has even enterprise and so on. So can you elaborate a little? Let's maybe keep that in the sort of data center bucket, if you like, how do you think about sizing that market? Do we see -- for example, every server has a dedicated DPU engine inside. How should we think about the time line for DPU adoption and what the adoption rates look like on a sort of 5- or 10-year view. How do you think about that? Yes. Yes. So let me give you a first high-level view the way you should think about it. As the data volume is increasing, the need of data-centric compute will keep growing more and more and more. right? So the thought process that thought process that every server needs a DPU, actually every server will need a DPU or more actually multiple types of DPUs or maybe the relationship of server to the rest of the DPUs will keep getting in favor of data-centric compute more and more [ph]. So to me, the overall compute market will grow exponentially driven by the expansion of the overall volume of data and because of the need of the efficient compute needs. So this heterogeneity of the compute will keep increasing. And as a result of that, the size of the market, of the data centric compute will keep increasing and compared to the organic growth of the traditional what I call the application centric compute. Fantastic. Well, I think we're out of time but we could go on. I've got a lot of other questions. We'll do this in another time. But I really appreciate your time, guys, thanks Ashish as always. And Raghib, great to see you on our tech conference. I don't know if there's any closing remarks you want to lay out Ashish or Raghib but feel free. Thanks. We really appreciate the opportunity. Weâre very well positioned to navigate through some of the short term. And I think all of the key growth drivers remain very much intact. So looking forward to continue the conversation. Very excited to be here.
EarningCall_1835	Good morning, ladies and gentlemen. My name is Daisy, and I'll be your conference operator today. At this time, I would like to welcome you to Ferguson's First Quarter Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Good morning, everyone, and welcome to Ferguson's first quarter conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings web page. A recording of this call will be made available later today. I want to remind everyone that, some of our statements today may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Additional information on these matters is also included in our earnings announcement and in our Form 10-K available on the SEC website. Any forward-looking statements, represent the company's expectations only as of today. In addition, on today's call, we will also discuss certain non-GAAP financial measures. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures. Thank you, Brian, and welcome everyone to Ferguson's first quarter results conference call. On the call today, I'll cover highlights of our Q1 performance. I'll also provide a more detailed view of our performance by end markets, and by customer groups, before turning the call over to Bill for the financials and our outlook for fiscal year 2023. I'll then come back at the end, to share some thoughts on how we're executing our strategy particularly as it relates to acquisitions and conclude with some closing remarks before Bill and I take your questions. First quarter saw our teams deliver another strong performance. We'd like to express sincere thanks to our associates for their remarkable efforts to serve our customers, helping to make their projects simple, successful and sustainable. We've continued to leverage our consultative approach, our scale, our global supply chain, and our strong balance sheet, to support our customer's projects. This drove 17% revenue growth, as we appropriately managed and passed through price inflation. We were disciplined with cost, to ensure strong profit delivery with adjusted operating profit increasing 13% and adjusted earnings per share increasing 18%. We've declared a quarterly dividend of $0.75 per share, implying a 9% increase when annualized over the prior year, as we transition away from historical semiannual dividend distributions. Our balance sheet is strong and we continue to execute our strategy of investing for organic growth consolidating our fragmented markets through acquisitions and returning capital to shareholders. On the M&A front, we were pleased to welcome one acquisition during the quarter, and two, subsequent to quarter end. I'll touch on acquisitions in more detail later, but these bring annualized revenues of approximately $270 million. We're proud of these results, which came in as we expected, and we're confident in the strength of our business model as we go forward. Turning to our performance by end markets in the US. Demand remained robust across our markets with growth moderating slightly as we came up against increasingly challenging comparables. We continue to take share across both residential and non-residential end markets. Residential which comprises just over half our US revenue saw solid growth. While new residential growth has started to slow, repair maintenance and improvement has been more resilient. Our residential revenue grew approximately 15%. The pace of nonresidential growth eased from quarter four due to tough comparables, but grew by 20% over the prior year with broad growth across commercial, civil and industrial end markets. As we've discussed previously, we will continue to focus on maintaining our balanced end market mix, and while we expect growth rates will fluctuate over time, we seek to maintain this healthy balance. Turning next to revenue growth across our largest customer groups in the US. All customer groups saw growth in the quarter despite challenging comparables. Residential trade grew by 15% and building and remodel grew over 20% with strong repair maintenance and improvement activity. HVAC where the majority of our business serves the residential end market grew by 18% with a two-year stack of 41%, while residential digital and commerce grew very modestly against a strong comparable as we've seen a slowdown in the do-it-yourself consumer. Waterworks continued to deliver very strong revenue growth of 27% driven by price inflation on top of a prior year comparable of 50%. The commercial mechanical customer group continued to grow and within other our non-residential industrial, fire and fabrication, and facility supply businesses saw strong growth. It's through these nine customer groups that we achieve broad and balanced end market exposure. In aggregate, this allows us to serve our customers' needs in a more holistic way and bring more value to the total project. Thank you, Kevin. And good morning or afternoon, everyone. Net sales were 16.6% above last year with growth rates slowing through the quarter as expected. Organic growth was 12.7% with price inflation stepping down from Q4 to Q1 to 15% indicating a small volume decline in the quarter. Acquisitions contributed 2.7% to revenue with a further 1.5% from an additional sales day partially offset by a 0.3% adverse impact from foreign exchange rates. We were pleased to deliver gross margins of 30.5% in line with Q4, but down 80 basis points over the prior year as expected. This was driven primarily by strong prior year comparables during a period of rapid commodity price inflation and supply chain constraints. Tightly controlled costs, partially offsetting the year-on-year gross margin decline enabling us to deliver adjusted operating margin of 10.9%. Adjusted operating profit of $864 million was up $97 million or 12.6% over the prior year. Adjusted diluted EPS grew by 18% driven principally by the growth in adjusted operating profit as well as the impact of our share buyback program. And our balance sheet remains strong at one times net debt-to-adjusted EBITDA. Moving to our segment results. The US business delivered another solid performance. We continue to take market share with net sales growth of 17.4%. Organic revenue growth of 13% was bolstered by a further 2.9% growth from acquisitions and 1.5% from an additional sales day, delivered adjusted operating profit of $845 million, an increase of $93 million or 12.4% over the prior year with operating cost leverage driving an 11.2% adjusted operating margin. Turning to our Canadian segment. The business performed well with organic revenue growth of 8.2% as we lapped a 13.9% prior year comparable. One additional sales day added 1.5% to revenue growth but adverse foreign exchange rates reduced revenue growth by 6.1%. Total revenue growth was 3.6%, similar to the US non-residential end markets performed better than residential in the quarter. Adjusted operating profit of $33 million was $1 million below last year, including a $2 million adverse impact from foreign exchange rates. Turning to cash flow. We take a disciplined approach to cash generation. It continues to be an important priority and quality of our business model. Adjusted EBITDA in the quarter was $912 million. As expected our working capital investment of $357 million was lower than the prior year, as we have begun to reduce inventory as supply chain constraints start to ease. Inventory was down approximately $100 million during the first quarter. We generated $501 million in operating cash flow, an increase of $510 million over the prior year. We continue to invest in organic growth through CapEx, principally invested in our market distribution centers branch network and technology programs. As a result, free cash flow was $408 million, an increase of $470 million over the prior year. Our balance sheet position is strong with net debt-to-adjusted EBITDA of one times. We continue to target a net leverage range of one to two times and we intend to operate towards the low end of that range through cycle to ensure we have the capacity to take advantage of growth opportunities as well as to maintain a resilient balance sheet. We allocate capital across four clear priorities. First, we're investing in the business to drive above-market organic growth. I previously mentioned on the cash flow side, our organic investments were driven by a combination of working capital to support our growth and CapEx investments, which are broadly split between our market distribution center rollout, technology investments in both front-end customer-facing capabilities as well as the modernization of our back-end systems and investments in our branch network. Second, we continue to sustainably grow our ordinary dividend. We previously announced our intention to transition from a semiannual dividend to a quarterly dividend and have today declared a $0.75 per share dividend. This implies an increase of 9% when annualized over the prior year, reflecting our confidence in the business and cash generation. Third, we're consolidating our fragmented markets through bolt-on geographic and capability acquisitions. We purchased three businesses since the start of the fiscal year bringing in approximately $270 million of incremental annualized revenues. While the pace of deal activity in the market has slowed, we maintain a good pipeline of potential deals and we remain focused on executing our consolidation strategy. Finally, we remain committed to returning surplus capital to shareholders, principally through share buybacks when we are under the low end of our target leverage range. During the quarter, we returned $366 million to shareholders through share buybacks, using our share count by approximately $3 million. This leaves approximately $600 million outstanding, on the share repurchase program at the end of the quarter. Turning last to our view of fiscal 2023 guidance, which remains unchanged, we expect to deliver low single-digit revenue growth for the year, driven by continued organic market share gains and the benefit of completed acquisitions, on top of markets which we expect to decline in the low-single digits. We expect growth rates to continue compressing as we move through the year, driven by increasingly difficult comparables, a reduction in inflation and deterioration in market volumes. After stepping up adjusted operating margins by 230 basis points over the last two years, we envision some normalization and have provided a range of between 9.3%, to 9.9%. We expect interest expense to be between $170 million to $190 million. Our adjusted effective tax rate should stay broadly consistent, at approximately 25% and CapEx is expected to come in between $350 million to $400 million. So to summarize, the business is performing well and we remain focused on executing our strategy. We believe the combination of our strong balance sheet and flexible business positions us well for the remainder of the fiscal year. Thank you, Bill. We continue to drive ongoing end market outperformance, while investing to build on our competitive advantages for the longer term. Our strengths and our strategy, translate to long-term value. First, we hold leading positions in large, growing and fragmented markets with approximately 75% of our revenue generated from our number one or number two market positions last year. Our supplier base is fragmented, our customer base is quite fragmented and our competitor base is also highly fragmented with more than 10,000 small and medium-sized mostly privately-held competitors. And while there are macroeconomic headwinds on the horizon, markets we compete in have historically grown above GDP. Secondly, our scale delivers sustainable market outperformance. On average, we delivered 370 basis points of U.S. organic market outperformance over the past five fiscal years. We're confident in our ability to continue to outperform by leveraging value-added solutions, that help make our customers complex projects simple, successful and sustainable, a supply chain that delivers breadth and depth to our customers where and when they need it and a suite of digital tools that offer our customers an omnichannel experience and our people, leveraging long-standing relationships within the supplier and the customer communities. As I talked about earlier, we complement this organic growth model by consolidating our fragmented markets with consistent bolt-on acquisitions, driving 2.2% incremental annual revenue growth from acquisitions in the past five fiscal years. All of this has produced a long-term track record of outperformance and cash generation by a dedicated team with long-term experience in the business. As we discussed, acquisitions are a key part of our growth algorithm, allowing us to continue consolidating highly fragmented markets. We acquire companies at attractive multiples and then leverage our scale to drive revenue, gross profit, and operating cost synergies to generate strong returns. Our strategy targets two types of acquisitions; geographic which allow us to expand and fill in our existing geography, consolidate our markets, and bring in associate expertise and customer relationships. We have a repeatable process that allows us to quickly integrate these acquisitions and leverage our scale to generate these synergies. Capability acquisitions, in which we bring in new products, or services associate expertise, and customer relationships that we can then leverage across our platform opening up these products and services to our more than 1,700 locations and 1 million customers to rapidly expand that offering. In both cases, while we're acquiring physical assets such as locations and trucks and inventory, the real value we gain is from the talented associates, their expertise, and the customer relationships that they have. Therefore, we spend a lot of time ensuring we have a good cultural fit and align values to make sure we have a successful acquisition. And as we present our company to potential targets, we believe that we're the acquirer of choice in our industry and that we offer those associates access to the best platform and capabilities in the industry and a proven ability to grow their careers far beyond their existing opportunities. One of the principal focus areas of our acquisition strategy is HVAC, particularly as we look to better serve the more than 65,000 dual-trade plumbing and HVAC contractors across North America. This year we've added two great examples already. Airefco is a leading regional HVAC distributor operating from 11 locations in the Pacific Northwest. Trading since the 1950s and operating with a strong service ethic, Airefco is very well-aligned with the culture of Ferguson. We're pleased to welcome the 191 associates who partner closely with the customer base to help make their projects more successful while also maintaining strong relationships with Carrier as well as various other vendor partners. Marino is another distributor of HVAC equipment and parts with five locations across the New Orleans metro and Gulf Coast areas. This accelerates our geographic expansion in Louisiana and Mississippi, while strengthening our relationships with key vendors in the region. The HVAC area continues to be an attractive space for acquisitions due to the estimated $70 billion of highly fragmented market and we'll continue to use our strategic initiatives within this customer group on both organic and inorganic fronts. To close, let me again thank our associates for their remarkable efforts to serve our customers. The result was a strong start to the fiscal year building on our market-leading positions and our key strengths, while investing in the future of the business. We are well-positioned with a balanced business mix between residential and non-residential, new construction, and RMI. We have a flexible business model and a cost base that allows us to adapt to changing market conditions and we're maintaining a strong balance sheet operating at the low end of our target leverage range. Despite slowing end markets and more challenging comparables, we continue to position ourselves to outperform fundamentally solid longer term end market demand. Thank you for your time today. Bill and I are now happy to take your questions. Operator, I'll hand the call back over to you. Thank you. [Operator Instructions] Our first question today is from Matthew Bouley from Barclays. Matthew, your line is open. Please go ahead. Good morning. You have Elizabeth Landan [ph] on for Matt today. I was just wondering, if you could talk a little bit about your guidance with the low single-digit growth? Are there any changes to your underlying expectations, within your end markets specifically, within resi or commercial? And if you have any details on your expectations for inflation or the cadence throughout the year that would be really helpful? Yes. Good morning, Elizabeth this is Bill. Thank you for the question. Really, if you think about how Q1 played out for us, it was really right in line with our expectations. And as Kevin said in his prepared remarks, expecting those growth rates both inflation and volume to compress as we stepped through the year, and that's exactly what we saw in Q1. So as we finished really in line with our expectations, really no change to that full year guidance and full year outlook. If you think about what's embedded in that, we have talked about the fact that we expect inflation rates to compress. Inflation was about 15% in Q1. That stepped down through the quarter. We would expect that to lap those tougher comparables as we step through the year, and likely for the full year inflation ending up in the mid- to high single digits for the full year, with volume then also stepping down in the year and ending in the high single to low double-digit volume decline. You add that up together that comes back to our market decline expectation in the low single digits for the full year. And then, we expect to continue to outperform those markets, plus the tail of acquisitions gets us to our low single-digit revenue growth guidance for the full year. So, really no change, but hopefully that frames the underlying assumptions for you. Thank you. That's really helpful. And as far as the channel dynamics go, are there any verticals in which you're kind of seeing more or less destocking or any excess inventory in certain groups? We're not seeing a large amount of channel destocking with our end customers. What we have absolutely done is, focused on bringing our inventory levels down and you saw that in Q1, reducing our inventories by about $100 million as we started to see our vendor supply chain constraints improve and product availability improve. We've talked about some of the areas that still remain pressured from a supply chain perspective like HVAC, like high-end appliances, like ductile iron pipe on the Waterworks side. There are still some pressure in those product categories. But as things have generally improved, we are starting to ensure that we bring our inventory levels down and you should expect that to continue through the year. But we're going to remain really mindful of the current market dynamics. And if need be, use our flexible balance sheet and our balance sheet strength, to ensure we have proper product availability. Yes, Elizabeth, this is Kevin. To build on that, with some exceptions, we didn't see a pull forward of demand in shipment activity. We did see a pull forward during supply chain pressures of ordering activity. And to Bill's point, we have done a good job of reducing inventory, by reducing committed inventory inside of our systems for good projects and getting our customers ordering patterns back to a more normalized place. Thank you. Our next question is from Mike Dahl from RBC Capital Markets. Mike, your line is open. Please go ahead. Hi. It's actually Chris calling on for Mike. Thanks for taking our questions. Just going back to the implied market volume outlook for the full year '23 guide, the high single digit low double-digit decline. Could you help, break that out, how you're thinking about the split between new residential RMI non-res kind of how that all baked into that outlook? Yes, certainly, expecting more pressure on the new res side of our business. Remember, new res is only about 18% of what we do. In total, in terms of price and volume, we are expecting new res to be down high single, low double digits. On the resi RMI side, we expect that to hold up better. We expect in total again price and volume that to be down low single digits for the year. And then on the non-resi side, there's some more strength there and particularly as we look out further ahead with some of the support offered from some of the government programs that will likely play in towards the end of our fiscal year and into fiscal '24. But we expect non-resi to be up slightly for the year from a market perspective. You put all that together, that gets us our implied negative market of low single-digit decline for the year. Understood. That's helpful. And just turning to the pricing outlook one more time. I mean, are you seeing any price elasticity in the marketplace today from these increases, given the outlook of pretty significant volume declines to materialize the next quarter? What are your guys thoughts on kind of maintaining the price on the non-commodity side? And then in terms of the commodity normalization, how are you guys factoring that into your outlook? Yes. So, I guess, I'll start with -- we don't see any catalyst for further abnormal price inflation. As we look at how product will trade in the coming quarters, remember that, just under 15% of our business is in commodities. And as we've said, we expect to see some movement on the commodity side of the world, although, we do not believe, that we'll see those commodities move together. For example, cast iron, ductile iron, PVC, carbon steel, stainless steel, we've seen a touch of pressure on the carbon steel stainless steel side. But generally speaking, we've seen pretty supportive pricing levels on PVC, polyethylene, cast iron and ductile iron. So, we do expect to see some degree of pressure or change from a commodity perspective. On the finished goods side, we haven't seen any significant impact. From a pricing perspective, we do believe, that there are some structural floors underneath, those pricing levels. As we look forward, not the least of which would be the labor costs associated with those manufacturers and what their pricing levels need to be coming through our fiscal year. So, short answer to the question would be, we haven't seen any discernible movement from a price elasticity perspective as demand has started to slow on new construction residential. Thank you. Our next question today is from Kathryn Thompson from Thompson Research Group. Kathryn, your line is open. Please go ahead. It appears Kathryn has disconnected. I'll move on to the next question. Our next question is from McClaran Hayes from Zelman & Associates. McClaran, please go ahead. Your line is open. Hey, good morning. I wanted to get a bit on the non-res side of your business. Have you guys seen any leading indicators of weakness there, whether it's project delays or cancellations? Thanks, McClaran. We have seen some albeit very small delayed activity on some of our commercial build-out activity. It hasn't been very large and it's been spotty in different geographies. What we are energized by is again some of the larger scale projects as we look to non-resi, things like electric vehicle, battery, LNG, pharma, semiconductors even normalized activity like refinery turnarounds downstream chemical and mining activity. Those projects generally take a bit longer. And so as we expect, we'll see some softening in new residential construction. We also believe we will see those projects start to take hold as we go through our fiscal year 2023 into the spring and summer. And as we look at those projects in particular, those are good projects for our company as a whole, as we take a more one Ferguson approach, towards that owner, engineer, architect, general contractor to bring all the customer groups of Ferguson together on the project and on the site. So we've seen a touch of slowing in some areas of knock-on build-out commercial nothing discernible, but a good level of activity in what we would call megaprojects as we go forward. Got it. Thanks. That's helpful. And then on the M&A environment, I think you noted in your prepared remarks that the pace of deal activity has slowed a bit, but clearly you've still been able to get deals done. Have you begun to see any change in sellers' expectations as they're looking out for 12 months and they may be sharing a similar outlook to you? Yeah. We've seen, McClaran we're still seeing to our point earlier, a pretty good pipeline in terms of what we maintain and still good deal activity, as we look out into the future at least through the rest of this fiscal year. I think what you're seeing from a seller expectation perspective is as maybe there's a bit more cloudiness on the horizon from a potential recessionary environment perspective, you are seeing valuation expectations certainly looking back 12 months and facing valuation on what could be considered peak profits for some of these potential acquisitions. And so we're maintaining quite a bit of discipline as we think about value and valuation, but really a bit of slowing in the marketplace, but nothing significant in terms of our pipeline. A couple of times on the call you mentioned DIY residential business versus pro contractor. And I'm pretty sure that, the predominant percentage of your business is pro, but could you tell us approximately how much of it is DIY today? Yeah. Thanks, Dave. So, about 6% of our business would be considered direct homeowner consumer business, so call it DIY or direct-to-consumer. Got it. Okay. Thank you for that. And then more broadly, here as we enter fiscal 2023, could you maybe update us on a few of your initiatives and strategies. You touched on a couple of these, but could you talk about the MDC rollout? You talked a bit about Durastar but maybe own brand initiatives more broadly. And then the One Ferguson approach that you just referenced maybe talk about some progress that you've made there and what you expect for fiscal 2023? Yeah, Dave, in terms of the MDC rollout we maintained â we're right on track with that. As you know, we opened Denver and Phoenix within the last year. Houston is set to open in the next couple of months. So we're receiving product into Houston now. We'll begin shipping in the next couple of months. And then that will be followed by Dallas, Washington DC Metro area and Nashville, which will come out over the next call it 12 to 18 months after that. So we're continuing that rollout really in line with that call it two to three per year, and that is clearly going to be a multiyear-phased approach for us. Yeah, Dave. And then when we think about owned brand, owned brand is a part of our overall product strategy, which our associates are going to help to guide a customer, to the right product solutions for their project, to make it successful, but also to guide them towards those products that will make it more unique for Ferguson, and potentially be gross margin accretive for us as a company. As you remember last year, own brand was a bit overshadowed in terms of its growth because of what happened in the commodity side of our business. As price inflation drove commodities, we saw the impact of our own brand growth be minimized, which kept us in that 8% range. Even though last year, we had over $400 million in growth of our own brand activity. That progress continued into our first quarter. We saw $170 million worth of growth in the own label side of our business. And that was driven â or that drove us up to about 9.5% of our overall revenue inside of Q1. It's good broad-based activity. M&A, where we're bringing on solid companies that we can leverage across our bricks and mortar across our digital platforms, and then also organic expansion of categories where we believe that we can bring a good owned brand potentially through some of the M&A that we've already brought in play like Jones Stephens, like Signature Hardware and expand that across our bricks and mortar. So that's been a good success story during Q1. When we think about One Ferguson that's an extension of how we drive that consultative approach, to make sure that that project is better, but we take it from the trade professional for the individual customer group, up to the general contractor and the owner. And again, as I said earlier, that's one of the energizing things around what's happening with non-res mega projects, as we're starting to get involved much earlier in the design process and construction process, to bring everything from underground water, wastewater storm water infrastructure up through commercial mechanical piping systems HVAC, fire suppression and the like to the non-res side again across a variety of those different end uses like electric vehicles, chips and the like. So pleased with what that progress has been to-date and what it can be as we go towards the end of fiscal 2023. Thank you. Our next question is from Kathryn Thompson from Thompson Research Group. Kathryn, your line is open. Please go ahead. This is actually Brian Biros on for Kathryn. Thank you for taking our question. First one, can you talk about the activity you're seeing in the Waterworks segment? Activity there is give read-through for further activity. Just in general construction-wise seems project there are continuing funding their solids. Any further commentary on that segment would be helpful. Yes. Thanks, Brian. Waterworks' growth was good 27% in the quarter. Felt good about the activity level. If I take a step back what we're most pleased with from our Waterworks business is great balance across new residential construction single-family and multi, public works infrastructure, commercial infrastructure, municipal spend, metering, metering technology, erosion control, soil stabilization that broad mix has and will continue to serve us well. The activity levels are good. We're just now starting to see the Infrastructure Act start to play out. We think that tailwind plays out more as we get into calendar year 2023 and we continue to see good activity levels even inside of residential construction activity in terms of new multifamily projects being put in the ground. So generally speaking still very supportive in terms of what that customer group looks like. Got it. Thank you. And a follow-up question. I guess just on gross margin compression in the quarter, I think, it was 80 basis points. You guys touched on this throughout the call. But I guess just to clarify is that purely a function of that price cost gap narrowing from the inventory pre-buy dynamic, or was there any actual pricing declines in other categories so far? Thank you. Yes, Brian. No pricing declines. As we indicated earlier pricing -- we're still experiencing price inflation and we haven't seen any significant price deflation nor do we expect that in the short-term. If you think about that 80 basis point decline year-on-year it's really more a factor of what -- how we performed last year when we had significant commodity inflation. And that gross margin of 31.3% that we delivered last year was really a peak gross margin for us. And we had expected that to normalize as pricing traded more sideways on a sequential basis. So we've seen that compress over the last few quarters, but really pleased with that 30.5% delivery in Q1. Thank you. A couple from me if I could please. The first just around your guidance, which I think implies a small sales decline for the remaining nine months of the year. Does that start in Q2, or is that more of a H2 issue against the tough comps do you think? And then maybe perhaps you could just talk around overhead, which I think grew around 14% year-on-year in the quarter given where headcount has been and like-for-like wage inflation we might have expected that to be slightly higher run rate of inflation. So could you just talk about some of the measures you're taking to keep that check please? Thank you. Yes. Well, I'll take the start about those questions. From a guidance perspective, you're correct. It does imply a slight revenue decline for the rest of the year in that low-single-digit range based on where we delivered our Q1 results. Look, I think growth is going to get more challenging as we progress through the year as those comparables step up. So, if you just look at -- let's take a two-year stack, fiscal 2021 and 2022, from a comparable perspective, growth rates in Q1 were in the high 20s range, stepped up or will step up to the low-30s in Q2 and will step up into the low-40s in Q3 and Q4, a combination of inflation and volumes. So, I think those growth rates will continue to decline as we move throughout the year. In light of that, we're making sure that we're taking the right actions from a cost base perspective to ensure we path the cost base of the company appropriately. So to your point, we have started to reduce headcount. We really think about headcount on a full-time equivalent basis. And so we start in a cascading effort between reducing overtime followed by a reduction in temporary associates, followed by allowing attrition to play through and then ultimately taking targeted actions where we need to. So in Q1, we actually have reduced full-time equivalents by about 400 from July through October. And as I said, we're continuing to take some targeted actions as we step into Q2 to ensure that we path that cost base down appropriately. And you saw the total cost dollars decreased slightly from Q4 into Q1 and we'd expect that to continue as we make sure we manage the cost of the business. Thank you. And just a follow-up there. A couple of your peers have talked about some of the extra costs they've incurred in the last couple of years when supply chains have been tight, in order to maintain service for their customers. And that if supply chains normalize, some of those extra costs logistics and so on, might start to ease out. Is that something you experienced again you might get some benefit from if supply chains get better or not so much? Yes. I mean, look, we certainly had some inflationary cost pressures over the last couple of years, but I would submit that those inflationary cost pressures are not decreasing yet. If you think about our cost base, well, you know it well 60% is labor. We're still experiencing wage inflation in the mid to high single-digit rate. And so we're working hard to offset that, but we're still seeing cost inflation in other areas such as truck costs, rents, effectively everything that we buy is still impacted by some level of inflation. So, we don't see cost inflation pressures alleviating significantly, but we're working very hard to offset that. Hi. Good morning. Thanks for taking my questions. So I have a few questions please. So the first one if you could just give us a sense where you're currently trading. So let's say compared to the 13% organic, I think could you just give us a sense where that's running at? And I appreciate it's sort of a slowing slope I guess? Second question would be then on gross margin. So, you flagged for a long time you'll be in the mid-30s that's where you landed. Do you think, you -- is a picture sort of that that's going to remain the same, or is there anything going on that we should think about for the coming quarters as trading comes through whether there's anything impacting that gross margin? Thank you. Yes, Gregor if you take our organic growth rate -- and maybe I'll just go back to Q4 we're about 20% organic growth in Q4. That stepped down to 13% in Q1. That was a pretty sequential step down as we went through the quarter. We exited in the high single-digit range organically at the end of the quarter in October and that has continued to compress as expected. So, for the month of November, we're in the I'd say the low to mid-single-digit organic growth range. So, continuing to face those tougher comparables and stepping down as we expected. In terms of gross margin, we were quite pleased to deliver that 30.5% gross margin. I think we've talked about the fact that that could be anywhere in that 30% to 31% range likely for the year in the low 30% range. So, we'll continue to manage that. To Kevin's point conducting and focused on our product strategy of which on brand is a big component of that and then managing price in the marketplace and recognizing that look we're operating in a pretty dynamic environment. So, lots of impacts and factors that can play through gross margin but pleased with where we landed in Q1. And Gregor we'll continue to work hard to take price in the coming quarters. But if we think more along the medium term, we're going to consistently look to add value-added services that make the construction process more productive for our customers. We'll continue to add to that world-class supply chain to make product availability better for our customers and we expect to see gross margins increase modestly over time, call it, 10 basis points a year for the foreseeable future. Yes. Good morning. Thanks for taking my questions. I've got two please. The first one is actually just checking something you said earlier when you were talking about the inflation rate over -- or I think towards the end of the year you talked about mid to high single-digit. Just to be clear are you talking about that as an average for full year 2023 or are you talking about that as the exit rate for full year 2023? And then the second question I had please was I think back at the Capital Markets Day earlier this year, you talked about a sort of potential flow [ph] for the adjusted operating margin of 9.2%. I guess two things please. Firstly, is that still valid? I appreciate that's below the low end of the range you've guided to, but is that still a sensible number to think about as a sort of worst-case scenario? And then, also just remind us, why you think it can't fall below that in a more negative number? And then, what has the efficiency of the business changed materially since where we were two or three years ago? Thank you very much. Yeah, Harry, the inflation rate that mid-to-high single-digit expectation from a market perspective that was a full year average. Given the fact that we are at 15% in Q1 that stepped down through the quarter and it's continuing to step down that would be a full year average. In terms of the adjusted operating margin to your point, 9.2% is below the guidance that we've put out this year, of 9.35 to 9.9%. We do believe that, we've stepped up the operating efficiency of this business over the last couple of years. And that we can continue to operate in that range. If you think about part of the impact on that operating margin has been a step up in price. A good portion of that step-up in price has been on finished goods, which represents 85% of our product sales. And finished goods pricing as we've talked about in the past tends to be more, sticky. So we don't see significant price deflation risk that would erode that operating margin below that 9.2%. With that said, you said, a worst-case scenario. Certainly, if we got into a significant downturn, there are different scenarios that could play out, which we don't expect at this point. So we're very comfortable with the guidance for the full year. That remains unchanged, from what we said coming out of Q4, to land in that 9.3% to 9.9% range. Thank you. This is all the questions we have time for today. So I'll hand back to Kevin, for any closing remarks. Thank you, Daisy, and thank you all for your time today on the call. I'll end the way we began, with a thank you to our associates. Really a remarkable effort to serve our customers and make their projects better, make them more simple, successful and sustainable. And we were very pleased with the quarter, with revenue up 17% operating profit up 13% and diluted EPS up 18. And so it came in really as we expected. And as we go throughout the year, albeit, some macroeconomic headwinds particularly in new residential construction, we do believe we're extremely well positioned with the balance of our business mix and our business model, to continue to progress and outperform what are fundamentally solid longer-term end markets. So thank you very much for your time. Very much appreciate it.
EarningCall_1836	Good morning, and welcome to Scotiabank's 2022 Fourth Quarter Results Presentation. My name is John McCartney. I'm Head of Investor Relations here at the bank. Presenting to you this morning are Brian Porter, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Phil Thomas, our Chief Risk Officer. Following our comments, we'll be glad to take your questions. Also present to take questions are the following Scotiabank executives: Dan Rees from Canadian Banking; Glen Gowland from Global Wealth Management; Nacho Deschamps from International Banking; and Jake Lawrence from Global Banking and Markets. Before we start, on behalf of those speaking today, I refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. Thank you, John, and good morning, everyone. I will begin with a review of the bank's performance and progress over the course of fiscal 2022, after which Raj will review the financial year in more detail. Phil Thomas, our Chief Risk Officer, will review risk performance. We will be pleased to then take your questions. . Given that this will be my last quarterly call as CEO, I will close off with a few final remarks. The 2022 fiscal year was indeed a year in which the diversification of our businesses by both product and geography allowed us to continue to deliver strong all-bank results. Despite heightened market volatility and rapid monetary response to deal with elevated inflation across our operating geographies, each of our businesses performed well. The bank delivered adjusted earnings of $10.8 billion in fiscal 2022 or $8.50 per share, a healthy 8% increase over 2021 and a strong 15.6% all-bank return on equity, both exceeding our medium-term financial targets. Our common equity Tier 1 capital position at 11.5% has us well positioned to continue to support organic growth initiatives while continuing to return capital to our shareholders. Loan growth was robust, up 15% with deposit growth of a commensurate 15%, which is a result of concentrated efforts and strategies to strengthen our core deposit franchise. As Phil will detail, we continue to observe very strong credit metrics across our portfolios despite the inflationary pressures that have been a reality for businesses and households alike over the course of the past year. Our full year PCL ratio was well within our guidance of 25 basis points provided at this time last year. Strong underlying fundamentals and our higher-quality secured exposures have us confident that we will deliver against our previously provided expectations in the coming year. Specific to Q4 results, adjusted earnings of $2.6 billion or $2.06 per share represented a solid finish to the year. Canadian Banking delivered earnings of $4.8 billion, a very strong 15% increase over the prior year and more notable progress against strategic initiatives in support of future growth. Our Business Bank, which includes our commercial, small business and Roynat franchises, delivered another strong year in 2022. This business has been a key driver of Canadian Bank performance, and we are particularly pleased with the important role that our team has played in helping commercial clients expand their businesses post the pandemic and the strong funding profile that this business provides the bank. This year's launch of Scene+ is another example of our ongoing efforts to further deliver value to our retail customers. The addition of Empire Company to the partnership and the inclusion of its brands, including Sobeys and IGA to the program, have added flexibility to earn and redeem points on everyday grocery in addition to banking, entertainment, dining and travel. The Scene+ relaunch has resulted in more than 1.2 million new members joining the program, which now totals over 11.2 million Canadians. And we continue to see strong performance at Tangerine, Canada's leading digital bank. Tangerine grew deposits by over $4 billion this year and continues to grow assets through a focused strategy to become an everyday bank of choice for value-oriented Canadian consumers. Our Global Wealth business showed strong resilience in fiscal 2022, generating earnings of $1.6 billion despite the revenue impact of softer financial markets on fees, in the asset management business. Expenses continue to be well managed. Market share gains and strong investment results in dynamic funds provided some offset to the AUM impact of lower fixed income and equity markets during the course of the year. On the advisory side of our business, double-digit growth led to record results in each of our private banking, ScotiaMcLeod and Private Investment Counsel channels. We continue this year to build and introduce new digital tools and platforms to enhance the customer investment experience, including Scotia Smart Investor and Scotia Smart Money by Advice+, as well as a new generation of our iTRADE mobile app. Our Global Banking and Markets business had a solid finish to the year in Q4, resulting in earnings of $1.9 billion for the fiscal year, down a respectable 8% year-over-year in a very challenging period of market conditions. Our GBM business in Latin America reported in the International Banking segment continued to show strong momentum, delivering record Q4 and annual earnings contribution of $232 million and $809 million, respectively. And rounding out our GBM strategy, our business in the United States has also grown significantly with earnings up 11% in the fiscal year. Our International business delivered significantly improved fiscal 2022 earnings of $2.4 billion, up 37% from the prior year, a result of stronger loan volumes, expanding margins and impressive expense management, while also benefiting from a lower tax rate. Our IB retail businesses performed well and continued to benefit from the efficiencies that resulted from our continued efforts to further digitize our platform. Our Caribbean businesses performed well delivering earnings in the quarter of $110 million, up 42% year-over-year and has been -- the Caribbean unit is back to a more normalized level of contribution. Our results this year clearly reflect solid contributions across our businesses and the ability to absorb periods of volatility as evidenced by the challenging conditions faced by our market-sensitive businesses in recent quarters. Turning to our outlook. Global growth prospects have clearly been impacted by the central bank score on inflation, and affected our various operating geographies in different ways and at a different pace. Central banks in Canada and the United States appear to be nearing the end of their tightening cycles as inflation finally appears to be slowing. In Canada, the economic growth is moderating, but economic levels of activity remained robust. The strength of our labor market and strong balance sheet, along with robust commodity prices, are providing a counterbalance to the impact of a less blunt European and Asian economic environment. In the Pacific Alliance countries, growth is moderating from its recent pace that's seen over the past year. Central banks in our key Latin American economies have responded early and aggressively to inflation with orthodox monetary policy. And despite this, we have not seen any meaningful reduction in capital sources in the region. We are confident that this decisive action will allow most central banks to hit terminal rates soon and allow others to ease during fiscal 2023. The bank continues to be recognized for industry excellence throughout our footprint. We were again recognized as Bank of the Year in Canada for the third year in a row, and Investment Bank of the Year for the Americas by The Banker and Best Bank in Canada by Euromoney. Fiscal 2022 was also a year of great progress on our commitments to the environment and the communities in which we live and work. We have now mobilized a total of $96 billion of client-related financing, up from $58 billion last year, putting us well on track to achieve targets communicated in our inaugural Net-Zero Pathways Report published earlier this year. Since launching ScotiaRISE, our $500 million 10-year community investment commitment, we have partnered with more than 200 non-profit organizations and made more than $60 million in community investments globally, creating opportunity for hundreds of thousands of people in communities where we live and work. And our Scotiabank Women's Initiative continues to grow. Our capital deployed to women owned and women-led businesses grew to $5.6 billion, against our target to reach $10 billion by 2025. And finally, one of my proudest moments as CEO. Just last month, we were recognized as one of the top 25 World Best Workplaces by Great Place to Work Institute, the only Canadian headquartered company and the only bank to be recognized in the field. Overall, we are very pleased with our financial results and progress on many strategic growth initiatives over the course of the past year. Thank you, Brian, and good morning, everyone. This quarter's net income was impacted by certain adjusting items of $504 million after tax or $0.43 of EPS at about 2 basis points on our common equity Tier 1 ratio that was recorded in the other segment. This consisted of a $66 million restructuring charge relating to the realignment of certain GBM businesses in Asia and ongoing technology modernization, $98 million of support costs relating to the expansion of our Scene+ loyalty program and a $340 million currency-related loss resulting from the sale of investments in associates in Venezuela and Thailand, as well as the wind down of operations in India and Malaysia. All my comments on the bank and the other segment that will follow will be after adjusting for these items. So starting on Slide 5 on fiscal 2022 performance. The bank ended the year with adjusted diluted earnings per share of $8.50 and a return on equity of 15.6%, both exceeding our medium-term objectives. Revenue was up 2% and expenses increased 3%, resulting in negative operating leverage for the year. Our business lines, particularly our P&C businesses, had strong performance. Canadian Banking earnings increased 15%, while International Banking earnings increased 37% on constant currency basis. Global Wealth Management earnings of $1.6 billion were down a modest 1% year-over-year as higher net interest income and brokerage revenues were offset by lower mutual fund fees, driven primarily by market conditions and higher volume-related expenses. Global Banking and Markets reported earnings of $1.9 billion, down 8% compared to fiscal 2021. Solid business banking performance, including strong loan growth momentum, was offset by weaker capital markets performance in which the industry faced challenging market conditions. The bank's earnings in 2023 are expected to benefit from higher interest income and noninterest revenue, but be impacted by higher funding costs, higher expenses, normalizing provisions for credit losses relating to the end of performing along its releases and a higher tax rate in both Canada and certain international countries. Once rates stabilize, the bank is expected to benefit from asset repricing, resulting in net interest margin expansion. The bank's capital and liquidity position is expected to remain strong in 2023. I'll now review the performance for the quarter on Slide 6. The bank reported solid quarterly adjusted earnings of $2.6 billion and diluted earnings per share of $2.06 and the return on equity was 15%. All-bank pre-tax pre-provision profit increased 2% year-over-year, impacted by the other segment as the pre-tax pre-provision profit of the four business lines in aggregate increased 7% as detailed on Slide 25. Revenues were up 4% year-over-year as an increase in net interest income of 10% more than offset a decline in noninterest revenue of 3%, mainly driven by lower Wealth Management revenues lower unrealized gains on non-trading derivatives and lower income from associated corporations. The net interest margin declined 4 basis points quarter-over-quarter, mainly driven by the increase in funding costs due to the velocity of administrative rate increases. The impact of the Canadian Banking net interest margin of 3 basis points was partially offset by the 13 basis points expansion in the International Banking, which benefited from asset repricing. The PCL ratio was 28 basis points for the quarter, up 6 basis points from last quarter. Year-over-year adjusted expenses increased by 6%, driven by higher personnel costs and performance-based compensation and spend to support business growth. The productivity ratio was 53.7% this quarter, while the whole year operating leverage was negative 1.1%. Slide 7 provides an evolution of the common equity Tier 1 ratio over the quarter as well as the quantitative changes in risk-weighted assets. The bank reported a common equity Tier 1 ratio of 11.5%, up 10 basis points from last quarter, primarily from strong earnings net of dividends that accreted 21 basis points. Risk-weighted assets grew $9.6 billion in the quarter, mostly related to foreign exchange. Excluding the impact of FX, loan growth was $6.1 billion. Combined with positive migration, the CET1 ratio benefited 2 basis points. The impact of higher rates on the bond portfolio held for liquidity purposes and fair value through OCI had a 14 basis points impact on the CET1 ratio this quarter. Our priority remains to deploy capital to support organic growth initiatives in each business line while prudently managing capital in the face of a less certain economic outlook. Canadian Banking reported earnings of $1.2 billion, a decrease of 5% year-over-year, while pre-tax pre-provision profit grew 10% year-over-year, driven by revenue growth of 11%. Net interest income increased 13%, as loan and deposit growth continued, while the net interest margin declined 3 basis points since Q3 as lower spreads, in particular the prime CDOR compression, the lag on fixed rate asset repricing and lower mortgage prepayments were partially offset by higher deposit spreads. As expected, quarter-over-quarter mortgages grew a modest 1%, but increased 11% compared to the prior year. Business loans grew a strong 25% compared to last year. Deposit growth during the quarter was strong at 7% year-over-year, driven by an 8% increase in personal deposits and a 6% increase in non-personal deposits. Noninterest income increased by 3%, due primarily to higher banking revenue and foreign exchange fees, partially offset by lower mutual funds distribution fees. Expenses increased 12% year-over-year, driven by higher technology and personnel costs to support business growth. The segment generated positive operating leverage for the year of 1.5%. The PCL ratio was 15 basis points, an increase of 6 basis points compared to the prior quarter or 25 basis points compared to the prior year. Canadian Banking revenue growth is expected to be driven by deposit and loan growth with stable margins while mortgage growth is expected to decelerate. The segment will maintain strong expense discipline to generate positive operating leverage. 2023 earnings are expected to be impacted by normalization in provision for credit losses and a higher tax rate. Turning now to Global Wealth Management on Slide 9. Earnings of $368 million declined 6% year-over-year. Revenue declined 4% due primarily to lower fee income driven by lower assets under management and iTRADE volumes, partially offset by higher interest income driven by strong loan growth and improved margins. Expenses declined 3%, driven by lower volume-related expenses, while the productivity ratio this quarter was 61.2%. The wealth business line has generated positive operating leverage in 10 of the last 12 quarters; and adjusting for performance fees, generated operating leverage of positive 0.8% for the full fiscal year. Assets under management decreased 10% to $311 billion, while assets under administration decreased 3% to $580 billion, primarily due to market depreciation. Despite a challenging market environment, we continue to be ranked #2 by assets in the Canadian retail mutual fund industry. Investment returns have been strong across Scotia Global Asset Management with 72% of assets in the top 2 quartiles over a five-year period as of October. Dynamic Funds is ranked #3 among independent asset managers with 87% of assets in the top 2 quartiles over a five-year period. We also saw strong growth in our key international markets with double-digit earnings growth across the Pacific Alliance Wealth Management businesses. Global Wealth Management expects modest revenue growth, and we'll continue to invest in the business while remaining focused on managing expense growth in line with revenue growth. Earnings are expected to remain stable in 2023, reflecting the slowing economic backdrop and a higher statutory tax rate. Turning to Slide 10. Global Banking and Markets generated earnings of $484 million, down 4% compared to the prior year, but up 28% compared to the prior quarter. Results were driven by strong loan and deposit growth as loans grew 31% year-over-year while deposits grew 12%. Revenue increased 15% as net interest income grew 35%, driven by strong volume growth and expanding margins. Noninterest income grew 6%, as higher banking revenues was partially offset by weaker primary and secondary markets. Capital Markets revenue was down 9% from last year. However, it rebounded 19% from the prior quarter. Expenses were up 18% year-over-year, due mainly to personnel costs and technology costs to support business development and the negative impact of foreign currency translation. GBM and Latin America, which is reported as part of International Banking, reported record earnings of $232 million, up 29% year-over-year with particularly strong results from Chile and Brazil. Global Banking and Markets are expected to deliver earnings growth in 2023. Through the Americas strategy, the segment continues to deepen client relationships while also adding new clients. Capital Markets results are expected to improve, driven by more favorable market conditions and increased levels of client activity. The segment plans to deliver on disciplined expense management that is expected to result in positive operating leverage to more than offset any increase in provision for credit losses. Slide 11 highlights this quarter's strong International Banking results. My comments that follow are on an adjusted and constant dollar basis. The segment reported net income of $650 million, up 25% year-over-year. Pre-tax pre-provision profit grew 9% year-over-year with the Pacific Alliance growing 6% and Caribbean and Central America up 18%. Year-over-year, loans grew 12%, with commercial loans also up 12% and mortgages up 16%, while personal loans and credit cards grew 9%. Revenue was up 8% year-over-year, driven by higher net interest margin, strong Capital Markets and Banking fees and partially offset by lower gains in investment securities. Quarter-over-quarter, the net interest margin improved a strong 13 basis points. Assets repriced faster to offset the increase in funding costs and impact from changes in deposit mix. Provision for credit office ratio decreased year-over-year by 2 basis points to 89 basis points. Noninterest expenses increased 7% year-over-year, driven by business growth and inflationary impacts, partially offset by the benefit from efficiency initiatives executed last year. The tax rate of 13.6% for the quarter and 18.9% for the year benefited primarily from higher inflation benefits in Mexico and Chile. With lower inflation expectations in 2023, the tax rate is expected to return to more normal levels starting in Q1 2023. The segment generated positive operating leverage of 1.8% for the whole year. Revenues in the International Bank are expected to benefit from loan growth and modest net interest margin expansion as a result of the expected stabilization of interest rates and potential rate reductions in the second half of 2023. Expenses are expected to grow in line with revenue, supported by strong digital progress to deliver positive operating leverage. Earnings are expected to be impacted by normalizing provision for credit losses and a higher tax rate. Now turning to the other segment. We reported an adjusted net loss of $100 million compared to a loss of $35 million in the prior year. Year-over-year, the change was a result of higher funding costs resulting from higher interest rates and asset liability management activities. Thank you, Raj. Good morning, everyone. For fiscal 2022, the bank reported an all-bank PCL of 19 basis points, well within our guidance of 25 basis points. As we look to 2023, we remain confident that our PCL ratio will be in the mid-30s basis point range. This is driven by three key factors: a higher quality customer mix; a more stable and predictable portfolio driven by a higher level of secured lending; and our strong credit and underwriting fundamentals, which position us well for macroeconomic uncertainty. Despite higher interest rates and inflation, our customers' financial health remains resilient. Canadian retail deposits, on average, are 13% higher than they were in February 2020. And delinquency of 90-plus days for Canadian retail has been stable at 15 basis points for the last three quarters and roughly half of the pre-pandemic ratio. We remain confident in our Canadian mortgage portfolio. After six rate hikes by the Bank of Canada this year, our Canadian variable mortgage customers continue to maintain high liquidity with approximately 36% higher balances in their deposit accounts compared to fixed rate customers. Our uninsured mortgage portfolio has an average LTV of 49% and average FICO scores of 799. In International Banking, our retail portfolio remains 72% secured versus 65% pre-pandemic. High-quality rated customers also remain at 96% of originations. Portfolio delinquency of 90-plus days increased marginally this quarter by 8 basis points, in line with slowing economic growth but remain well below pre-pandemic levels. Finally, in Business Banking, we have observed upgrades across the portfolio due to customer performance. Credit quality and liquidity levels remain strong. While Business Banking gross impaired loans are up slightly quarter-over-quarter, they are primarily driven by foreign exchange fluctuations and One Accounts in International Banking. Now turning to PCL on Slide 15. PCLs this quarter were $529 million. This increase in our PCL ratio this quarter to 28 basis points reflects normalizing trends and forward-looking indicators. The increase from last quarter was mainly driven by Stage 3 PCLs up $105 million as delinquency levels rose modestly, primarily in International retail and GBM, though remaining well within our expectations and well below pre-pandemic levels. Year-over-year, performing PCLs were up, driven by a less favorable macroeconomic forecast and strong portfolio growth. We continue to be focused on high-quality credit originations and diversification across markets as we look to fiscal year '23. Our current allowances for credit losses this quarter were $5.5 billion, up $204 million quarter-over-quarter or an ACL ratio of 71 basis points. Nonperforming ACL increased slightly this quarter as we saw small increases in yield formations and net write-offs primarily driven by International retail and commercial. Total ACL coverage represents about 12 quarters of net write-offs, almost double our pre-pandemic levels. While current macroeconomic environment continues to be uncertain, we remain prudent in building allowances in response to these changing conditions. Our coverage reflects the quality of our portfolio, strong credit practices and changes to mix. Looking ahead to fiscal 2023, we expect strong credit performance to continue. While pressure from inflation and interest rates will continue to be a factor, we believe our efforts to derisk our portfolio have positioned us well to manage economic uncertainties. For these reasons, our earlier outlook of PCL ratios in the mid-30s basis point range remains unchanged. And finally, I would like to congratulate Brian and thank Brian on behalf of all Scotiabankers globally for his 41 years of service and leadership. Thank you, Brian. Thanks, Bill. We'll now be pleased to take your questions. Please limit your question to 1 and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please? Good morning. So I guess maybe, Raj, for you on the net interest margin. If we can just break down in terms of the outlook for the margin consolidated versus the Canadian and the international banking NIM. You gave some color earlier. But what happens to the 3 -- net interest margins in a world where Bank of Canada, the central banks are hiking rates. And do we actually need rate cuts in Canada for the Canadian Bank NIM to stop going lower? Yes. Thanks, Ebrahim, and good morning. I'm not going to forecast margin quarter-by-quarter, and I'll ask Dan or Nacho to comment on the specific business line margins. But I would call out four important factors and I think our net interest margin evolution over the next two years, '23, '24, lots of changes that are happening. Trajectory of central bank industry changes definitely is going to be a factor of how our margin reacts to it at the all-bank level. The schedule of assets repricing, that's actually quite well underway both in IB as well as starting to do in the Canadian Banking business segments. And thus, we expect it to accelerate. Changes in business mix as the bank expects to generate less low-margin mortgages, the business has slowed as I said in my prepared remarks in the Canadian Bank and, of course, deposit margin behaviors. So these factors have always been a key for the net interest margin evolution for this bank, and I think it will be a key to how it's going to evolve in 2023 and into 2024 as well. Dan, do you want to say something with the Canadian banking margin or Nacho? Ebrahim, it's Dan here. I would just say that we expect margin in the Canadian bank to build the Q4 levels as they look at the full year of next year. Certainly, the change in business mix has an impact. And of course, the speed of loan repricing is underway through the course of this quarter, and we expect that to expand into next year. The composition of deposits is important to bear in mind here. Obviously, as we grow our business banking book, there's a fair portion of non-maturity deposits in there for which the deposit NIM has been a tailwind this quarter, and we expect that to continue for the next couple of quarters. And I think our emphasis on deposits may well have been overshadowed in the front half of the year where we saw strong mortgage growth. Clearly, in the last two quarters, you've seen deposit growth rates in Canadian Banking equal or beat loan growth rates; and in Q4 in balances, deposits grew faster than loans. So that emphasis on a balanced balance sheet will continue in '23, and that should help NIM. And Ebrahim, in terms of more in terms of International Banking, NIM was of 13 bps in the quarter, and this was driven by the Caribbean and Central America, while in the Pacific Alliance countries, where central banks moderated the pace of interest rate increases the NIM stabilized compared to last quarter. In the Caribbean, we have 50% of our balances are U.S. dollars. NIM increased 38 bps in the quarter, driven by the benefit of higher Fed rates. And in the Pacific Alliance countries, NIM increased 3 bps in the quarter with assets repricing faster than liabilities. I would say Central banks in the Pacific Alliance countries to proactive measures in advance of the Fed to increase interest rate the tightening cycle is sending, and it is likely there will be some of the first countries to start a reduction trend in 2020, starting with Chile. But just one follow-up on that, Dan. Why is the Canadian NIM not going higher $112 billion of variable rate mortgages? Is the spread compression offsetting the increase in benchmark rates or am I missing something? Look, there's just a lot of moving parts, Ebrahim. Certainly, we did see in Q4 the movement to fixed in mortgages occur as we have been indicating for some time. So that would have been a component the movement out of low pay deposits into term as consumers were anxious about equity markets, that would have been a component. There's a lot of moving parts in margin, where we ended in is about where we expected. We gave back some of the expansion you saw in Q2 and Q3, and we expect to be growing through the course of next year in the aggregate. So there's a lot of questions popping up around variable rate mortgages. And obviously, Scotia is one of two banks that offer variable payment, variable rate mortgages. And you addressed it a bit in your prepared remarks, but wondering if you can dive down a little bit deeper just in terms of how those higher interest payments are impacting consumer behavior if at all, sort of give us a flavor maybe for what proportion of converted to fixed payments or again, any kind of pressure or payment behavior you're seeing? Sure, Paul. It's Dan here. I'll start and maybe Phil could add if he would like. We really appreciate the question. We believe strongly that a variable rate mortgage should have a payment that varies. We are not seeing credit pressure in that category during Q4, full stop. We are certainly preparing for and are having lots of conversations about cash flow management at the customer level. But big picture, the creditworthiness of the variable customer is higher than fixed. And as Phil would have mentioned in his remarks, deposit balances are substantially higher. And as we look at the liquidity position of checking and savings accounts combined in the variable customer balances that are with us, we see well over a year worth of excess liquidity to absorb payment increases of $200, $300, $400 per month. So we're not concerned about the credit side of the mortgage position. And on the other hand, we're not seeing tremendous pressure on payment levels. In other words, credit card balances expanded this quarter, as you will have seen, and our personal deposits are holding in on the non-maturity side. So from a consumer behavior standpoint, the variable customer is in good shape. I think our proportion of mix there is not showing up in the credit line, and we're confident with the transparent structure and the conversations with that we're having with customers to date. The final thing I would say is on a big picture basis, strategically, we've been focused in the mortgage business at cross-selling into the deposits. We've been doing that year-on-year now for the last three years. 50% of our mortgage holders have a deposit account with us. And within the first six months of opening variable rate mortgage, customers now have three or more products, so are the into there health and strength is good, and we're comfortable with our position, as we said last quarter. Just to add to that, and Dan added a lot of comments that will be consistent with mine as it relates to the credit performance. But just speaking in generally, we're not seeing any sign and do stress across our portfolios, whether in Retail or in our Business Banking segments right now. And we continue to monitor -- as Dan mentioned, we've made significant investments in our ability to looking and see how our consumers are behaving and the type of performance they have both in retail and in Business Banking. And we're not seeing any signs of liquidity pressures in our Business Banking book. And certainly, we're seeing the health of the Canadian consumer considerably stronger than they were pre-pandemic and holding. And so -- and from a credit perspective, we're quite comfortable with how these folks are performing right now. And maybe just to add to that, I think it's also important as we look forward, employment or rather unemployment continues to be strong in Canada, and this is all pre-determinant of as we hit sort of bumpier times, but we're not seeing any changes to that. And certainly, we're also seeing wage increases consistently across our customer base as well, particularly for those customers that participate in the variable mortgage program. I just wanted to go back to the Canadian banking NIM discussion, and I'm not sure if this is for Dan or for Raj, but I think thereâs an interplay between Corporate and Treasury and Canadian Banking. And maybe I can just ask it this way. If the other or the treasury costs in corporate were actually allocated out, the divisions are allocated back to Canadian Banking, would that decline this quarter had been worse, no different or better? And can you talk a bit about that? Yes, sure. I'll start, Doug, and see if I can help you with that. Transfer pricing is a factor and that -- So what I want you to know is that doesn't apply only to the Canadian bank, whatever is in the other segment. Transfer pricing generally from an asset repricing perspective will track to that. Deposit transfer pricing happens quicker, because very simply put, the deposit rate tracks what would be the wholesale funding rate from a transfer pricing perspective, while the asset transfer pricing will happen as assets reprice in the business line, and that's to ensure that the business line NIM is consistent. This is not inconsistent with what other banks do. So I wouldn't attribute it only to the Canadian bank. It's just a nuance when you have significant rate changes up or down, how it manifests itself in our bank and the other segment. That's the comment I'd make. But I would suggest that you take it up to the higher level, just look at it from an all-bank perspective, net interest margin. And if you understand the reasons why it moved up or down in any particular quarter, I think generally will be... Okay. So the squeeze between the deposit costs went up faster than the asset repricing is actually being captured within the other segment. I think we've talked about this before. And I guess the way to really kind of just high level, just thinking about the -- track the all-bank, that's what you're suggesting. Yes, that's what I'm saying. Doug. I think it's easier. And at the all-bank NIM compression is the simple way to think about it as our funding costs have grown quicker. And when asset repricing catches up, you shouldn't see that problem. Also, what happened in IB this quarter. Good morning. And Brian, best of luck in your retirement, not that you need it, but it's pleasure engaging with you in the past nine years plus. My question is on Canadian Banking margin. We talked about asset yields or spreads that are tightening. I suspect that mortgages spread dynamic in that business, plus the impact of prepayment income probably at the client? And then just a less field question, it could be a quick yes or no answer. Is there any thought to -- or progress towards converting the RWAs in the International segment to the AIRB model? I'll take the second one first, and then I'll start on the Canadian Bank. And I'm sure Dan will have more to say. No, we're not looking to move any of those portfolios here any time soon, Gabe. I think that's the short answer. On the Canadian Banking NIM, there's a couple of nuances in this quarter. So weâve called it out in the disclosure. On the movement one is the timing of prime CDOR. And that's always going to be a factor not necessarily for Scotiabank, but for the other banks because the price of prime and then the CDOR moves in advance, particularly in a rising environment. So that should normalize next quarter once prime catches up, which happened in the last week of October. Mortgage prepayment. When rates go up, you expect to see less prepayment happening, and that's what we're seeing in the Canadian Bank's net interest margin. And like Dan talked a little bit earlier, that margin will continue to modestly expand in line with how the assets start to reprice and the pace at which a business mix changes will happen in the Canadian Bank as the mortgage volume growth will slow down in '23 compared to what we saw in '22. We haven't quantified it before. I don't think it's substantial. But if you back it through the NIM disclosed, you will probably be within the ballpark. Sure. So Raj, just get started first with going back to Ebrahim's opening question. He asked for whether the all-bank margin could only improve once rates decline. And the reason I want to go back to this is your disclosure indicates that the bank is positioned for falling rates. Higher rates lead to lower NII, lower rates lead to higher NII. So can we interpret from your disclosure that the all-bank margin can only improve once rates start to fall? Or is that too simple an interpretation? I'd look at it two ways. Directionally, you're right, Mario. Yes, we will benefit from falling rates. The balance sheet is positioned that way. One of the key factors which applies now is the pace of asset repricing. And depending on how fast that reprices, the benefit will be higher than what we show in that disclosure. But directionally, you're right based on disclosure. Okay. Different type of question then. This is probably the most frequently asked question through this last quarter. It relates to debt service costs. We can all appreciate that unemployment is an important aspect of the Stage 1, Stage 2 performing loan provisions. But debt service costs and debt service ratios clearly are going materially higher. Could you talk about how that factors into your performing loan provisions and whether it's really just a matter of time before all the banks have to start building performing loan reserves for their mortgage book? Yes, I'll start. I'm happy to take that. Itâs Phil here. Thanks for the question. I go back to some of the comments I made in my prepared remarks and my comments from a few minutes ago. While TDSRs have been increasing just because of the cost of the mortgage, we're not seeing any sort of reciprocal stress. And as I said, most of our customers still are maintaining high levels of liquidity in their portfolio, in their deposit accounts. So for example, our average customer is up 13% versus pre-pandemic in terms of the level of liquidity. FICO scores continue to improve up to 799 basis points, 800 plus, 840 with customers with HELOC. And so what we've seen actually is positive credit migration over the last quarter or so. And so as we're looking at performing loans and we look at our forward-looking indicators, there's some built in pessimistic scenarios for macroeconomic. But what we're seeing more importantly is the credit change in quality is actually a tailwind for us from a performing loan perspective. And I think that's important to note as you're looking forward. So I would be less focused on TDSRs, and I'd be more focused on health of the consumer, quality of the portfolio, sort of the shift in the dynamic within the macroeconomic that we're seeing today, which is positive. Okay. Final question then. Did the bank talk about how you managed to get securities gains in the quarter in a rising rate environment? I was a little surprised because over the last few quarters, we haven't seen any. And then this quarter, a nice meaty number. Could you help me think through that? Sure, Mario. As you know, investment gains will be lumpy, right, in any quarter and in any year. The first three quarters of this year, I think we had $1 million, if I remember my numbers right. We didnât have any opportunities, but we continued to roll those because these are high-quality liquid assets. We rolled it for liquidity purposes. And depending on when we invest and when we think it has reached its economic value to the maximum, and we don't think that it's going to raise in value, so to speak, because of interest rate changes, we monetize it. We just had the opportunity to do it in some of the securities -- debt securities. This quarter, that's what you're seeing. Like I said, it will be lumpy. It all depends on the time at which we put on these securities and how much value it does gain based on rising rates, falling rates, all these are factors. It's a large portfolio. I'll kind of switch to capital for Global Banking. More specifically on the Business Banking side, revenues been up a lot year-over-year, driven by corporate loans, both on a quarter-to-quarter and year-over-year basis. So my question is like whatâs driving that robust growth in this segment, if you could provide perhaps a little bit of an outlook? And if that did contribute to the higher personnel costs in the quarter? Great. Thanks for the question, Scott. So there's a few things in that question. First thing I'd say is, we're very focused on our existing clients and adding in new clients. And that's been core to that loan growth that you're seeing in the business. A big part of that loan growth is happening in the U.S. where we're focused on the Americas strategy. And I think that's important to note because we've talked about that several times. Q3 was a very quiet DCM quarter. Not a lot of activity happening. So we saw a lot of clients come into banks for its facilities. We're going to see that monetize as we move into 2023. Excuse me, I've got a bit of a hoarse throat. So we're quite confident we're being there for our clients. We're putting out balance sheet, and we're doing it on both sides. The deposit line continues to grow, and we have an LDR in the business below 1, which is positive, I'd say. In terms of performance costs in the quarter, Q3 was an air pocket for the capital markets industry. And what we saw happen was a step back in the performance cost for the year. That stepped up ahead when we delivered what we felt was a pretty solid Q4. Does that help you answer your question, Scott? And Brian, also best of luck in retirement. I just wanted to dig, Dan, a little bit deeper into the mortgage question. You mentioned in your remarks that -- or in response to one question that there was a shift from variable to fixed. But when I look at slide -- what slide is it? 35, I don't see a change quarter-over-quarter. And there was in a lot of rate increases that just recently happened. So my question on the portfolio of mortgages is, really significant to a couple of different areas, first and foremost, if there is a shift happening from the existing variable rate mortgage portfolio to fixed, could it be that originations are heavily variable rate mortgage related, and therefore, you don't see an overall shift in the portfolio? Are you in fact suggesting to customers to continue to go down the variable rate mortgage as a preferred vehicle, especially since you think rates are going down? And lastly, with respect to the average loan to value, for the whole portfolio, I see it rising a little bit. You have a very heavy concentration in Ontario, where house prices are falling. So maybe you can speak to what you're seeing there on loan to values of the portfolio and where you think that's headed over the next couple of quarters, please? Sure, Darko. There's a lot there, and I am sensitive I think RBC's called at 9. So I'll make this brief and we can do a follow-up in detail, if you like. My comments around shift to fixed was new business flows during the fourth quarter as opposed to I think the slide you're referencing is a photograph of the stock in the portfolio. We are not on the front foot with regards to devising customers strongly into or out of variable effects. We work with the customer based on their unique situation. Often, you're seeing renewals come forward. And therefore, I think our view is balanced there, whether it's by channel or by term. So the movement out of variable into fixed did begin to happen in Q3 that continued in Q4 as expected. In terms of outlook on LTVs, I wouldn't say we're over-indexed in Ontario necessarily. I would say we're slightly under-indexed in Quebec versus the rest of the marketplace. Clearly, as house prices have deflated over the last number of months, the emphasis on loan to value at origination will be maintained at, call it, Phil Thomas' credit risk standard. As the book comes in for renewal, where we are concerned about any consumer situation, we will reappraise the value of the home and decide whether we want to renew on that basis. We are not leaning into high LTV, high TDSR, long amortization, our credit situations in the mortgage book, we believe very strongly that immigration, employment, wages, shortage of housing will be constructive for the housing market once we get through this price adjustment period, and as margins return as the prime CDOR compression dissipates. Thank you. And Brian, congratulations on a very illustrious career. Phil, I have just maybe a quick clarifying question. I think you've talked about normalization, I'll call it, on the PCL into the mid-30s. Can you just talk a little bit more detail on that? What sort of an unemployment rate does that assume? Where is that, performing versus nonperforming? And how does it kind of -- which line items or business segments or geographies would you say you're kind of, I guess, over earning in right now on that line? So would just be adding to performings in mortgages in Canada, or is it nonperformers in business lending in LatAm? Or just if you could give me a little bit more color as to how we get to that [new clarities] and what sort of assumptionsâ¦? Sure. Thatâs not a quick question, but I'm happy to maybe answer it and you and I can maybe spend a little bit of time together offline. But I'd go back to -- we -- if you look at where we were a year plus ago, this bank has done a tremendous amount of work to derisk our portfolios. And so as we head into '23, a new normalized run rate is sort of in that mid-30s basis point range. I would say the mid-9s basis point range for International Banking. And so we continue to grow our mortgage book in International, continue to put on more secured lending. Our focus has primarily been on affluence for the higher-end segment. And as I mentioned in my remarks, about 96% of our originations in IB are sort of that higher credit quality segment now. And so we're really -- as we normalize, it's sort of a new normal in sense of the portfolios have really shifted. Again, higher -- big focus on high investment grade at corporate and commercial lending. And so as I look out into next year, I'm confident in the guidance. And we'll continue to work very, very closely with Dan and Nacho and Jake and James and others to make sure that we have that focus on higher quality credit moving into the year. I would also say that this bank has made a significant amount of investment in the collections. And we've built collections hubs. We've invested in technology. We've invested in analytics, and so we're doing a lot of preemptive phone calls to customers who we may see had a bit of stress. And so both from a quality of the portfolio, the processes that we have in place to help our customers and from a collections perspective, we're feeling pretty good as we go into to next year. Yes, obviously, we stress test our portfolios on a regular basis every day. And we have a number of stress scenarios for unemployment that we put into the stress scenarios. And I'm happy to maybe spend a little bit of time with you offline, we can go into those. It would be based on a whole bunch of different factors, including unemployment, our outlook, how we're thinking about our portfolios, what is performing, what are we looking at for nonperforming, where are we focused on in terms of growth of assets. It's all the time we have for questions. I would now like to turn the meeting back over to Mr. Porter. Thank you very much. I wanted to extend my sincere thanks to the analyst community for your ongoing coverage of the bank and to our investors for your continued support of the bank. I'm extremely proud of our team of over 90,000 Scotiabankers for their tireless efforts to put our customers first. And I have every confidence that Scott Thomson and the entire leadership team will continue to build on the strong foundation we have established and the many successes we had achieved over the past decade. Together, we have built an enduring resilient institution that continues to champion Canadian values around the world. It has been the privilege of my lifetime to serve as CEO of the storied institution and I have every confidence that the bank's best days are yet to come. And I wanted to wish you and yours all the very best for the upcoming holiday season and beyond. Thank you very much. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
EarningCall_1837	All right. Thank you, everybody. Happy to have MongoDB. Mike and Serge work together, they have for years. They insist theyâre cozy enough with each other, they insist on snuggling up on the sofa together. No issues. All right, itâs all good. So, let's kick it off. Obviously, your results last night, generally, the Street is liking it, but for those that may have missed it or missed some of the nuances, do you want to -- just because it's fresh just spend a couple of minutes, Mike, on what you thought were the highlights? Yes, happy to. Thank you, again, for having us. Great to be here. And happy that weâll do it right on the heels having reported last night. Q3 was another strong quarter for us, 47% revenue year-over-year. Atlas continues to grow well. Atlas, 61%, and it's now 63% of revenue. Overall, itâs really quite strong results. One of the things that we've talked about in terms of like how to think about the businesses, to think about new business, and then the expansion of existing business. So, we continue, despite the challenging macroeconomic environment, successfully compete and win new business. We did not see any deal slippage, elongation of sales cycles that people are talking about. We really haven't experienced anything outside of the norm. So, it's great to see the value prop resonating and MongoDB continuing to be a priority for our customers. When it comes to existing workloads, that's what dictates growth in the near term. We saw a healthy recovery, not quite back to historic levels, but an improvement versus Q2 in terms of the expansion rate of existing customers. So that was great to see. It was particularly pronounced in some of the areas that have seen the greatest weakness and slower growth in Q2, so that's the mid-market globally, as well as Europe. So that was great to see. We also think we're beginning to see some marginal seasonal effects there, which we can talk about. So, really strong overall. Pleased with the revenue performance. Enterprise Advanced, our self-managed product, also really surprised with the upside, 26% year-over-year growth, and really strong continued customer adoption there. We tend not to win a lot of new customers on EA, so these are existing customers who are seniorizing MongoDB or leaning more into MongoDB workloads. So, that was really quite successful. Kind of -- and then kind of further turbocharge or whatever going call it by multiyear deals. We saw a little bit more than normal activity there, which is great to see. And then lastly, maybe just comment on further down the income statement on the op income. Strong results there, $20 million in non-GAAP operating income, about 6% operating margin, which is great to see kind of the operating leverage of the business. So, why don't we start by digging a little bit into why the appâs usage recovered September, October, November? That seems a little counterintuitive to everybody. We're in one of the roughest IT spending periods in a while. You called out a little bit of usage pressure back in July. So, why in the last three months would it have gotten matter? Yes. So, here's a walk through. I think that our dynamic is -- every company has their own dynamics. And so, obviously, let me walk through kind of what we're seeing in the consumption behavior. So, the way that revenue recognition within Atlas works, the way that consumption works for us is itâs really a reflection of the underlying end-user activity of the application, right? So, this is not more developers starting to develop application. This is not more analysts writing queries. This is not some of those other kind of like internal intra-customer dynamics. This is actually end-user behavior of our customers' customers, right, the end users of the application. And what we can see is we can see more usage, right, more reads and rights of the database flowing through to that underlying activity. That was what we strengthen, and the growth rates on that improved from the lower growth rates that we have seen in Q2. And our kind of working hypothesis, if you will, relates to some seasonal components. Let me explain kind of on the working hypothesis kind of what we mean. So, we only really have six quarterly data points on Atlas overall. Atlas is six-years-old, so quarterly, you got six data points. The first few of those Atlas was pretty subscale. The fourth of those data points, Atlas is affected by COVID. So, we kind of have two data points at scale not directly influenced by the pandemic. And so obviously, you can draw a line with two data points, but your confidence that, that's the right line is a little limited. And so, what we've said, though, is the behaviors that we see, because it's across regions, because itâs across industries, because it's so broad-based, it's not tied to specific industries, it's not tied to specific applications, it's not tied to specific use cases, itâs so broad, mirrors the underlying behaviors of people being more active, working harder, being more intensive, if you will, which sort of maps to seasonal vacations and things like that. And the data that we saw, we mentioned that Q2 saw a slower growth. We said -- in the Q2 call, we said that August was in line with Q2. So that would sort of continue the slower growth trend. What we saw in Q3, overall, was strength, which means that September and October were quite strong. We also said in last night call that November was in line with Q3. So, sort of indicating kind of that strength that you would expect from people returning, engaging more with applications as users of applications, as consumers of applications. But again, it's not -- our customers building more or increasing their rate and pace, it's their underlying user activity. So, hopefully, that helps. And obviously, as we get more data, as we get more insights, we'll continue to share those. But just in the spirit of transparency, we kind of want to share our latest with you. Maybe this question gets to fundamentally business model difference versus the likes of Snowflake in AWS. But Mike and Serge, you're aware that that's not the message that other usage-based models are conveying. In fact, Snowflake said quite publicly that they saw a usage lull in October. AWS partners are talking about a usage lull in October. Elastic said the same thing. So, maybe you could draw a distinction why that group seems to be suggesting that and you're seeing something totally different? Does it -- maybe it gets to a fundamental difference in the model? Yes, I think that's exactly right. So, people like to say usage, people like to say consumption, that's more of a revenue recognition sort of similarityâ¦ It's not a business model -- exactly. And fundamentally, when it comes out to us, I'll just repeat what Michael said, which is the usage that customers experience on our platform is directly related or the second derivative of the application growth that they see in the applications that they've built. And we've seen this recovery in Q3, in the latter half of Q3, which is, by the way, still below historical standards, so we still see a macro impact. But that is because people are interacting with their applications more. And it's not regional-specific. It's not industry specific. It's not necessarily a run up to the holidays, so the retailers or the e-commerce are like provisioning more capacity. It's much more broad-based than that. It goes to the underlying growth in the sort of application portfolio because what we now believe is seasonal dynamic of people being more active in [indiscernible]. I think the only other thing that might be interesting to add is if you think about that dynamic and how that plays out, if I'm a customer of MongoDB, right, I'm an organization, big or small, doesn't matter, I've gone through the effort of building this application, right, which means I've probably taken my most scarce and expensive resources, i.e., internal developers, right, and decided this is an important application of a build. I want and need that application to actually get used, right? I want end user activity. User, of course, would rather pay MongoDB less rather than more like given a choice like who wouldn't, right? But the reality is I want that application to be successful. I want that application to grow. So, some of the dynamics that we hear in other business models are saying, okay, I kind of -- I want to prune this part of the estate or I'm not getting good ROI on that because I -- maybe I shelved this to cold storage or I don't run these many queries or whatever it is in the different business models isn't really our dynamic, because you've gone ahead and you've invested in building the application in the first place, and we have this very tight linkage or kind of value equation to the bill that our customers ultimately receive, right, versus the underlying usage that they're seeing from their customers for this application they built. Yes. One more on this, if you don't mind, just because I think it's super important to understand MongoDB. And that is, what the profile of applications running on MongoDB databases look like? Because if point you're making is that end-user activity picked up, it'd be good for us to collectively know what kind of apps run on MongoDB databases so that we can be in the business of trying to predict usage changes. It's going to be hard exercise. But are you able to offer up at least high-level apps profile at all? So, I'll actually maybe share an anecdote from one of our meetings earlier today where one of the [interesting thing] (ph) that I talked to a bunch of our customers, and it was such a broad array of use cases and applications that I couldn't no matter how much we try like be able to kind of pigeonhole you like a relatively... And that was a great secure from somebody doing their independent research, because that sort of fundamentally, we believe our value proposition. General purpose, very broad-based, whether it's system of record, system of engagement, system of insights, whether it's a REIT heavy or more right-intensive applications, it is very, very broad-based. That's fundamentally sort of the long-term opportunity here, but that does make it sort of like if you were to try to marry us to a more narrow experience other than something is very broad and macro, it usually tends to fall because of how diversified we are in. I think the other thing that Iâd call out, because I do think it's important, Karl. So, the other thing that I'd call out is, if you think about the diversity of that portfolio, it really is like a portfolio. So, there's an enormous amount that could happen under the service with a particular sector or a particular flavor type of use case or whatever happening, and usually, that all just sort of net out, right? If you think about the COVID, people weren't traveling and there wasn't as much hospitality activity, but there were other sectors or issues that were sort of rising. That same dynamic of things sort of offsetting each other across the portfolio is generally what we experience. And so, when we tend to call out changes, they tend to be things that are broad-based, right, because you're not seeing -- again, usually the other parts will kind of wash themselves out. And so, when we talk about the macroeconomic factors as others because we sliced and diced in all the vertical and geographic kind of [indiscernible], and it's a trend that persists across, which is the benefit of being highly diversified and being a general-purpose platform. So, let's move from unpacking your 3Q performance to talking a bit about what the two of you are embedding in your fourth quarter guidance. Because it sounded like what you were conveying on the call last night was that, after the recovery in usage in 3Q, it should moderate a little bit in 4Q. But Mike, you just said that November was pretty strong. So that basically implies that December and January have to moderate a little bit. Why would that be? Is that the same sort of travel seasonality issue? That's exactly what it is. And so, if we think about fourth quarter as a whole, again, relatively limited sample but [working on what we got] (ph). We don't think there's either a positive or a negative seasonality when you look at the total quarter. But that's the story of two pieces. One, November tends to be the best month for the quarter. We've just seen that happen again. And then there's a bit of slowdown in usage because it's the holidays, people disconnect from their apps and that sort of slower growth persists for the rest of Q4. And so, it's not some incremental conservatism, it's not calling the world to get worse, it's, again, the intra-quarter seasonality, and overall, it should end up a wash, and therefore, not have the seasonal benefit that Q3 have. Yes. Sorry. Yes, thank you so. As you think about EA and again, I think at this point in the year, it's most helpful to think about the guide sequentially. So usually, Q4 is a sequentially strong EA quarter. And we actually are reasonably happy about our outlook for EA in Q4. However, we had an exceptional Q3. And you -- Michael mentioned sort of a couple of pieces of it. One, just upselling activity was strong across the board, macro notwithstanding. And then, we have the added kicker of more than expected multiyear deals, and that means that under ASC 606, you get the entirety of the -- quarter of the entirety of the dollar amount recognized as revenue immediately. So, just -- if Q3 is higher -- much higher than expected, then you won't see that, that sequential uptick that you usually see and thatâs what part of the guide. Looking a little bit on the other part of the growth driver, and that's the new business element that, Mike, you led off saying was actually pretty solid. So, I've often thought that, that part of the business is really at its core, driven by the pace at which your customers are building new apps, and therefore, creating a need to run them on MongoDB database, for instances. Sort of in the same way that your predecessor, Brian Robins of GitLab was in the seat just an hour or two ago. Just like GitLab is a beneficiary of continued help in new app development. So, basically, what you're saying is that the new app development process, at least as it relates to Mongo feels healthy, why in a tough budget environment wouldn't that also get impacted? Why wouldn't CFO say, "Look, we've got 100 app development projects. Letâs defer a third of them and prioritize on the big ones, and why wouldnât that trickle down to pressure on Mongo?" You're evidently not seeing that, which is great, but why wouldn't [indiscernible] the macro? Yes. So, maybe I'd say a few things here because I think there are different factors in play. So first, yes, there continues to be significant new application development. And as the leading modern alternative, we win at least our fair share of those. We also do see migrations, whether it be from legacy relational or other technologies. So, it's not the entirety of pie, you wind up using both. But I think there are a couple of dynamics at play. I think in terms of customers, many will feel under pressure in a more challenged environment. But one of the pressure points that they'll feel is not just on cost, but on the need to innovate more quickly and compete and differentiate their offerings in the market. So, there's sort of an offensive and defensive component, and different people are in different business positions. But certainly, we see plenty of folks trying to take a more offensive approach saying, "Hey, I need to be able to innovate more quickly. I'm tied to this legacy infrastructure that is slowing me down, and I want to move more quickly." Secondly, while it's not our primary dynamic, we can be a source of cost savings in part because of developer productivity, in part some of the speed-to-market in some of these developments we're talking about, in part Atlas can be a real cost saver as people get out of the business for managing infrastructure, and people -- and so, I think those kinds of value props resonate. And I think the third thing that I'd say is, overall, even if budgets were to be flat at or even shrinking in a worst-case scenario, we have such a small share of the existing spend that our opportunity set is still so large. And given those first two points I made, we're pretty well positioned to capitalize that. So, I've been pleased that we've been able to execute well. I've been pleased with the value proposition that has been resonating. But obviously, it's something that we don't take for granted and weâll monitor closely. We'll monitor closely, okay. Serge, you were talking a little bit ago about the on-prem EA business, which you said had an outstanding quarter. Mike used the term a bit turbocharged by an uptick in multiyear deals. Why was that? Was that MongoDB-induced customer change? Do you mind describing that shift? Yes. Multiyear deals tend to be customer-driven. It usually happens with our larger customer where there's sort of a track record of adding workloads onto the platform and visibility on incremental work, and [indiscernible]. Once you sort of start making that commitment and a database layer, which is very sticky, you want some pricing. We know we have pricing power in EA. We have in the past raised prices in EA. So that's basically a customer coming and saying, "I want to have internal sort of protection certainty, whatever you want to call it, let's do a multiyear deal." And they're hard to predict, they're the minority of the business. They tend to because of the ASC 606 dynamic create lumpiness, and it's not a new dynamic, it happens every once in a while. But when it's a meaningful amount to be a part of the story around the quarter, we want to make sure that you guys are aware. Yes. It's a regular dynamic, we have a baseline forecast, but when we see something -- a little bit of a step, we just worried that people will take the results and sort of straight line it or do whatever if we don't provide a little bit of context of what's happening under the hood. Actually, no. And we definitely -- as EA kept sort of -- kind of as the quarter comes to the end and the forecast keeps moving up, like that was one of the first questions asked, we're going to look at what can be done. Good. If we talk about next year, which you didn't talk about last night, and you probably won't until early March when report the January... Maybe the way I can phrase it is my concerns are, are there variables that you would encourage this group to keep in mind as we model growth next year? How is that for an attempt? That's great. I guess I would say two things. One is the fluid environment and just look at the story of Q2 and Q3 for us as sort of the consumption trend. And so, we will learn a tremendous amount between now and March that will determine, frankly, the starting point for the year and dramatically increase our confidence in terms of what the performance will be. So, it's not for a desire to be secretive, but for the purposes of actually giving you accurate information that we'll do, what we always do, which Iâll provide in March. Then the only other thing I will say, if you look at this year, it's really the consistent theme in terms of strength has been EA outperformance. So, as you just think about that and ASC 606 dynamics, like that is take-up for more difficult compares on that side of the business. Okay. Got it. I know from covering Mongo for a long time that sometimes there can be shifts in the renewal base from quarter-to-quarter and year-to-year. So, maybe just to press on that, when we look out next year, is there anything unusual to call out on the EA renewal base that might help our modeling exercise? No, I think the seasonality is similar to what we talked about in the past, that yearly, Q4 is the highest renewal base followed by Q1, followed by Q2, followed by Q3. And so -- and that tends to generally rhyme with the new business and therefore the ASC 606 that affect associated with it. However, we just told you that when you have an exceptionally strong quarter like you did in Q3 that kind of missed that pattern, but the renewal basis is what we said before still holds. Let me just double click on it, just so people understand, right? So, to your question, if you think about -- if you're thinking fiscal '24, right, we just reported Q3, we just talked about a strong EA quarter. So yes, that's a tough compare, right? And we've had EA strength throughout the year. But in particular, when there are multiyear deals, which there are every quarter, but as we called out, there were a bigger factor here what that's going to mean in Q3 of next year, as an example, is that not only will the comparable be difficult, right, you'll see that in the denominator, but the numerator will not have the term license revenue because if a three-year deal, you would have recognized the three years of term license in the current period, right? So that sort of exacerbates the compare. And I feel like most investors understand the compare as it relates to its impact on the denominator, but miss that the numerators kind of void from the normal term license component that would have in the recurring revenue model, right? And so, as people think about things like that, that will -- those will be important sort of aspects of [fiscal â23] (ph). On the margin line, you put up a great quarter as well. I guess what I'd like to understand is to what extent was the upside on the non-GAAP operating margin, a function of on-prem EA with more upfront rev rec falling through or any shift that the two of you made on gross margin trade-off, OpEx control and timing? So, the first thing I would say is, it does begin with revenue, and it's not just EA, Atlas was a bit better than we expected. So, just in terms of absolute dollars, delta versus guide, EA was more of it. But when it comes to Atlas, it definitely outperformed, and it does -- much of the raise in Q4 is actually Atlas benefit, right? And so, you're right, that incremental revenue was just sort of gross margin effect that flows through the bottom line, and that's a meaningful portion of the improvement in the operating margin, but it's not all of it. The rest of it was our contract decisions to focus incrementally on our OpEx growth. And it sort of comes in two flavors. One is -- well, so the overall message that we give internally and wouldn't be surprised to anybody in this room is that cost of capital is higher, therefore, the bar needs to move higher in terms of what we fund versus not fund. And that's what you sort of start seeing a bit of in practice as you look at our Q3 and Q4 -- Q3 results and Q4 revised guide, which is we revisit some of the projects that were already approved. We asked the question around the business case, so the conviction that we have and the return that we expect to have, that results in the margin impact to how we think about growth in our headcount. And then also results in how we think about some of the discretionary expenses in the travel and internal events in particular, and that's benefited us in Q3. That's the part of the reason why the raise on the operating income is what it is for Q4 as well. Okay. When we think about the gross margin profile for next year, I can think of a couple of things that might be important variables, but you tell me if they're important or not. One is, because Atlas is so vastly outgrown on-prem EA, you're going to get a continued mix shift to Atlas that weighs on gross margins? And then, the other slightly more nuanced thing is we've seen a bit of a power where some of the other software companies that have large portions of the revenues running on AWS, and they're consuming a ton have renegotiated those deals. One was an example where they press released a couple of weeks back. Is there an opportunity for Mongo to do that? And might that help you marginally on the gross margin side? So that is exactly the right two trends. So just to repeat. One is we continue linear movement in Atlas as a percent of business and sort of the pressure that, that puts on the gross margin, okay? But the second one is important, which is Atlas margin itself has continued improving. And so, that delta between EA and Atlas margin is much narrower than it was the time of the IPO. So, the headwind from the first trend is less than the year. Your second trend there's two flavors in which we approve -- improve generally speaking, Atlas margin. One is efficiencies that we can control, ability to focus more on certain regions, commit to certain smaller instances of AWS to get to -- or other cloud providers that improves our overall economics. And then the other one is the one that you mentioned -- and those, we work on all the time. And then the other one is the deals, when you actually get to renew a large cloud provider. And next year, we'll lap it. And so, when you're thinking about the gross margin dynamic, that's kind of what is at play. Whereas the first point is sort of -- that sort of ongoing optimization that I think of is sort of related to route density and scale and things like that, that's ongoing. But the big sort of chunky things in terms of renegotiating cloud deals, you don't do every quarter or every year, and we have a new one of those that just kicked in at the end of January, I think it was. Those were -- that's an exhaustive list of questions on the print. I think we covered everything. I've got a few questions broadly on the business that I'd like to go to next. But just as time winds down, if any of you have questions on the results last night or the broader business, you'll see a QR code in front of you. You scan it, hit me with a question. It will pop up on this tablet next to me, and I'll ask Mike or Serge. Quick, right? I can ask our IT guys. So, let me ask you this, you -- Mike, you mentioned a few minutes ago the legacy migration. So that's one of the aspects of the Mongo story that we got a little bit more [indiscernible] about earlier this year where we were starting to hear customers talk about running more "enterprise-grade applications" on Mongo that might have otherwise grown on an Oracle or other relational database. Can you update us on that progress and that potential growth driver? Yes, we continue to see that as a trend. We are incredibly well positioned for new applications. But increasingly, as people reach the sort of limitations or see the brittleness of the cumbersome nature of the legacy applications and they get sort of bogged down on those, they need to re-platform and refactor those, and MongoDB is an excellent choice for those. And we do continue to see that happening at scale. And from numbers perspective, most of Atlas tends to be new builds. And you get into a little bit of a semantic discussion of like if I'm UBS and I have an application and it's been around for a while, on side base or some legacy technology and I try to move it to the cloud and everything else? Do I call that a new application? Is it a re-platforming? Like, you get a little bit lost in the semantics. So, I would sort of discourage folks from getting, like, too deep in the weeds on this, but we're increasingly seeing big, large organizations building mission-critical applications historically ones that used to run on relational. For the EA business, it's about a quarter of the business, a relational migration that held up in a fairly consistent even as the EA business has grown over time. And I think we're increasingly seeing banks, utilities, other people that have sort of the most demanding, most rigorous, highest kind of needs for guarantees of data integrity and data consistency picking MongoDB. Does that happen organically, like, are there things that MongoDB can do to encourage that? Can you turn the dials on things like sales comp to motivate them to go after those kind of workloads? So, people are focused on them. I don't think it's -- I wouldn't think of the sales comp dialogue, specifically. I think a couple of ways that I look at it are, first is the product needs to be there, which it now is, right? Secondly, people need to be aware that the product is there. That's not always the case, right? There's still a bunch of people who -- you've had 20 years of SQL and relation on to your belt. You think that is the gold standard. Anything else is new-fangled and kind of not up to snuff. And so, educating people about that, right? We made now several years ago that we introduced multi-document ACID support, right? Not everyone still knows that, right? And so, there's sort of a communications and marketing and developer awareness aspect to it. I've tried MongoDB six years ago, it couldn't do A, B, and C, and we've continued to invest enormously in the product. So, I think it's mostly about awareness and then sort of opportunity, right? Like if you think about the database market today, $84 billion, as per IDC, going to $138 billion in 2026. Not every dollar of that is an RFP every year, right? If you have an application in UBS or anywhere else, built on relational, and it's working just fine, you're going to spend those scarce and expensive development resources to really new capability, right, new future functionality. You're not eager to re-platform. But when we run into challenges, right, when it comes so cumbersome and so brittle that you can't innovate, that's when you say I really need a modern alternative. And that's what we're seeing happening more and more. And that would suggest the third course, if you think about quality of the product and the awareness, there's also -- we keep trying to reduce friction. We try to keep reducing the point in which the point of pain that you require as a customer to re-platform. Because re-platform does require work, does require partially rewriting the application. But we've been doing things like MongoDB University like providing professional services. We watched the product earlier this year called relational migrator to simplify that because that's -- we don't want it to be such that it's only when the app is crumbling that you consider this point, but itâs actually earlier in the cycle of that. Let's ask two questions on the competitive front. I think when investors think about the competitive set for Mongo, conversations changed. It's not other sub 1 billion NoSQL databases anymore. I was having that conversation ten years ago, and I think MongoDB has won that battle. It's more of the hyperscalers. And so, when we think about AWS facing the magnitude of revenue detail we are now, it's possible that they want to start moving up the stack a little bit more, not just be a per minute per hour provider of compute storage capacity, but moving up more earnest into the database. And in fact, I was at AWS re:Invent, and that's exactly their message. So, maybe if you could just hit on the competitiveness versus the efforts that AWS and Azure are making to step right in your space? Yes, why don't I go first? So, first of all, you're right, the competitive set is and has been for a while now for hyperscalers. It's not the incubators, it's not the legacy, the Oracles of the world, itâs really the right cloud provider. And weâll get to the dynamic of cooperation and competition, I think weâll start with both of them. So, on the competitive side, they're moving up the stack is not a new thing. AWS, last Iâve heard, has 17 different database offerings, relational and non-relational, sort of every player you can imagine, right? And that's been the case for a while. So -- and the reason why they want to move to the new layers because they know how strategic it is, and they know that, that sort of increases the customer walk-in effectively, right? And so, we've been competing quite successfully for a while against them, frankly, on the strength of the products, on the strength of sort of the developer productivity and the scalability and the usability. And that sort of results we believe in the change that we've seen from the hyperscalers and sort of the movement of the needle from competition more in the direction of corporation. How does that play out? As the infrastructure layer becomes more competitive to your point, as end market matures, then the value of a MongoDB customer on their platform, the hyperscaler trended better. Not only do we bring the storage and compute with that customer, but all the other services that they sell, and they will, that's a multiplier of dollars on the database spend. And that's resulted in what we've seen a meaningful change over the last, let's say, two years of increased focus on cooperation, increased focus on working well in the team, comping their teams to in order to align incentives and that's been a very encouraging sign for us. Obviously, we don't forget that it's both cooperation and competition, but we've been encouraged by the trend. Yes. I think there will always be a competitive angle. The other thing, I think, just even just thinking specifically about AWS is I think they're incredibly smart, run a great business. I think they're very customer aware. Every single customer I talk to is definitely afraid of cloud lock-in. And so, the idea of picking a proprietary cloud native database is really unappealing to them, right? And the fact that we can run MongoDB as a multi-cloud, where you can move from cloud to cloud if you need to reduce that lock-in, it's just so important. And so yes, of course, AWS would have to love every dollar. They got some of our dollars from a cloud standpoint, and then all the attached and ancillary dollars or a multiplier of that. So, I think there will always be a competitive component. But I think deep down, they know the value in partnering with us, and that's become clearer over the last kind of a year or two. Second question is more of an out-year potential risk in that Snowflake. Snowflake has communicated to everybody in the room. Their unit store vision of the transition from being a pure analytics player, just stepping into the operational database world. Why shouldn't the investors in the audience be worried about that? Okay. So, let's talk about how we see the world, and then we may try towards the end to address that them may or may not mean for sort of other players. So, the North Star for us has always been the application to it. So, we were a company founded by developers to help other developers solve data problems, and those data problems started with the database and now we're a broader solution development data platform. And as we think about the sort of the trend that everybody likes to talk about, which is the convergence between analytic and operational workloads, the way we really see it play that out is that there will be more need for in-app analytics. Applications themselves are going to want to have access to more data and automated insights to make experience better for their end users. That's fundamentally, we believe a developer problem. Who's going to build that application? It will be the application developers. As you look at what we're doing in the field of analytics, it's not broad, it's not meant to turn us into a warehouse or expand their offering that way, it's really to facilitate building that smarter application of the future, one that will require more analytics capabilities for the developer to build into the application. And so, as you think about other offerings out there, I would just encourage you to think about who is the persona that they're targeting? Is it really the application developer? Or is it more like a business analysts and data scientists or of some of these [indiscernible] the data engineer? They are different, different use cases, theyâre different technical expertise and theyâre different needs. And so, as long as we continue serving the developer, which survey the developers, you will understand how popular we are, as long as you sort of remain in that path, we have an amazing growth opportunity. Okay. Great. We've got time for one or two questions from the audience. So, just reading from the tablet here. Maybe Mike, just because you hit on the seasonality earlier on, why are we only seeing seasonality this year? What's more pronounced about this year versus years past? Why? So, what I tried to say before is we don't have a lot of history. And so, we saw this dynamic last year, but with one data point, it's hard to know if that's a trend or not. We're still not convinced it's a trend, but we think it may be a trend, and that's why it worked out. Okay. Good. Second question is back on the topic I was bringing up earlier about what the apps profile looks like. And the question is, well, we understand that it's broad. Assuming there's a pretty decent indexing to things like e-commerce and digital activity, why wouldn't there be some softness from at least that portion of your apps profile given the macro? That's right exactly. And so, we kind of heard this during COVID, like in the early days of COVID, when the world was shutting down, people thought that we were the new economy database, and the Netflix and the e-commerce companies in the world who are built on MongoDB and that we were going to actually see acceleration into COVID, we didn't. We saw a slowdown then as well because it was sort of a macro pause for a while, which again -- and we're seeing it again today, which again speaks to just how broad-based we are. And we really go out of our way to demonstrate that with when we share a customer -- so oil and gas companies, old school financial services and on and on and on, they use this in a variety of ways. And just to put it in context in terms of the size, we talked about this, I think, last quarter, but about 15% is in the mid-market and the digital natives are a minority of that, right? So, when we're talking about like diversification that will give a sense. I think people think just because we're modern, we assume all customer base is modern as opposed to understanding thatâs big, large bank utilities, telcos, et cetera, et cetera. Why don't we stop it there? I know some of you have 2:00 meetings. So, Mike and Serge, that was a great conversation. I enjoyed it.
EarningCall_1838	Good day and welcome to the Bilibili Third Quarter 2022 Financial Results and Business Update Conference Call. Todayâs conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Please go ahead. Thank you, operator. During this call, we will discuss 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 from those mentioned in todayâs news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only. Definition of these measures and our reconciliation table are available in the news release we issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Bilibili IR website at ir.bilibili.com. Joining us today from Bilibili senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer. And I will now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen. Thank you, Juliet and thank you, everyone for participating in our third quarter 2022 results conference call. I am pleased to deliver todayâs opening remarks on behalf of Mr. Chen. Our community, which is the foundation of our business and key to our long-term success, continue to expand. In the third quarter, DAUs reached more than 90 million and MAUs nearly 333 million, both up 25% year-over-year. Average daily time spent per user was 96 minutes in the third quarter, up 8 minutes from the same period last year. With that, the total time spent on Bilibili grew by 37% year-over-year. Having said that, we still face macro headwinds and uncertainties that is all over the industry. To cope with the challenging environment, we have reprioritized our goals and promoted to focus on two key topics that will help us turn the corner. First, our users and our MAUs have reached a sizable base of nearly 333 million. We think that itâs time to shift our primary focus to DAU growth. DAUs not only represent the quality and the sustainability of our community, but also directly linked to our inferential power as a platform, as well as various commercial prospects, particularly in terms of revenue generation for our advertising and VAS business. With our improving product offerings and refined algorithms, we can continue to grow our DAU base and improve our DAU to MAU ratio with reduced sales and marketing spend. Second, we are committed to improving our financials by expanding our gross margin and narrowing our losses. After a challenging first half of the year, revenues in the third quarter grew to RMB5.8 billion, up 18% quarter-over-quarter and 11% year-over-year. In the third quarter, we continue to take various actions to tighten our spending. Gross margin improved to 18%, up 3 percentage points sequentially. Sales and marketing expenses as a percentage of total revenues were 21%, down 3 percentage points sequentially. Our non-GAAP net loss ratio are narrowed by 10 percentage points compared with the prior quarter. Looking ahead, we will implement a number of additional cost potential measures and further rationalize our marketing expenses and headcount planning. Specifically, we are streamlining our investment in R&D and cutting down on projects with lower chance of success and being extra mindful when exploring new opportunities. At the same time, we are centralizing our resources in areas related to improving commercialization efficiency and user experience. These adjustments will be completed by the end of this year. Accordingly, we expect our sales, marketing and R&D expenses to peak this year and start to decline in 2023 with net loss narrowing further accordingly. With that, Iâd like to provide a brief update on our core pillars of content, community and commercialization. Starting with content, over the years, the young generations on Bilibili grow up and enter into new stages of life, their interest involved, driving greater passion as well as expansion of our content categories. So on top of our traditional strong content verticals, we have seen emerging categories such as automobile, home decoration and internal design and baby and maternity. In the third quarter, 3.8 million monthly active content creators on Bilibili readily accommodated these varied needs, creating near 15 million new videos on a monthly basis, up 14% and 54% year-over-year respectively. The expanding content library drives the overall traffic growth on our platform. Total video views grew by 64% year-over-year, driven by both PUGV and Story Mode content, which grew by 34% and over 470% year-over-year respectively. Particularly with improving content distribution capabilities of Story Mode, content creators can build their fan base more easily, sharing their content with other contract spreads on Bilibili. The various monetization process we have cultivated for content creators continuing to offer more creators, more opportunities to make money while doing things they love. In the third quarter, over 1.2 million content creators under income through multiple channels on Bilibili, up 74% year-over-year. Looking at our community, we consistently deepen our user engagement in our community with our featured and diverse content. As I mentioned earlier, the average daily user time spend reached a record high of 96 minutes, up 8 minutes from the same period last year. Our monthly interactions also increased 41% year-over-year to 14.4 billion. Furthermore, the number of official members on our site was up by 37% year-over-year to 183 million, maintaining a stable 12-month retention rate above 80%. Now, letâs look at our commercialization and the prospects for near and long-term monetization. First, our VAS business. Our VAS revenues was RMB2.2 billion, up 16% year-over-year in the third quarter. By further integrating live broadcasting with our PUGV ecosystem, we maintain our unique platform advantage. We had 57% more live broadcasting hosts in the third quarter this year than for the same period last year. The number of live broadcasting paying users increased by 79% year-over-year in the third quarter. The number of premium memberships for the third quarter grew 12% year-over-year to 20.4 million. In December, we plan to launch our self-produced Chinese enemy title, The Three-Body Problem. This highly anticipated title is expected to attract a wide range of sci-fi lovers to our platform. Looking at our advertising, despite softness in macro environment, net revenues were RMB1.4 billion, an increase of 16% year-over-year. We further strengthened our integrated marketing campaign offerings by combining diverse ad products and conversion modules across different video viewing scenarios. Story Mode ads as part of ads offerings continue to capture more performance-based ad dollars in the third quarter. Our top advertising verticals in the third quarter was against digital products and home appliance, skin care and cosmetics, automotive and food and beverage. And for games, our game revenues grew 6% year-over-year to RMB1.5 billion, largely driven by the new titles we launched in the domestic and overseas market in the third quarter. Develop in-house, distribute globally remains our core game strategy, which has started to bear fruit. Revenue generated from self-developed games contributed 9% of our total game revenue in the third quarter. Looking at our pipeline, we have two games approved for domestic release this year and earlier next year, including 1 self-development title. 5 titles are slated to launch in the overseas markets early next year. Facing the marketâs macro uncertainties, our primary goal is clear: improving our gross profit margin and narrowing our net loss. By expediting our commercialization, we believe our top line can catch up with our community scale. While we remain committed to a goal of reaching non-GAAP operating breakeven by 2024, we will also actively manage our cash position and liabilities. We believe we can weather through the macro uncertainties and emerge as a stronger, more efficient and more resilient company. This concludes Mr. Chenâs remarks. I will now provide a brief overview of our financial results for the third quarter of 2022 and the outlook for the fourth quarter of 2022. Total net revenues for the quarter were RMB5.8 billion, up 11% from the same period of 2021. Our total net revenue breakdown by revenue stream was approximately 25% mobile games, 38% VAS, 23% advertising, and 14% from the e-commerce and other business. Cost of revenues increased by 13% year-over-year to RMB4.7 billion. Our gross profit in the third quarter was RMB1.1 billion and our gross margin was 18.2%. Gross margin recovered by 3.2 percentage points sequentially attributable to the top line growth. We expect to show continued sequential quarterly improvements in the first quarter and the coming year. Total operating expenses was RMB2.9 billion, flattish compared with the same period of 2021. We cut sales and marketing expenses by 25% year-over-year to RMB1.2 billion. Sales and marketing expenses as a percentage of total revenues, was also down to 21%, compared with 31% in the same period last year. G&A expenses was RMB543.4 million, up 14% year-over-year. The increase was mainly primarily due to increased headcount in G&A personnel and higher rental expenses. R&D expenses was RMB1.1 billion, representing a 43% increase year-over-year. The increase was primarily due to increased headcount in R&D and increased share-based compensation expenses. Net loss and adjusted net loss was RMB1.7 billion and RMB1.8 billion for the third quarter of 2022, respectively. We successfully narrowed our adjusted net loss ratio by 10 percentage points sequentially in Q3 and we expect the narrowing trend will continue in the fourth quarter and the coming years. Turning to our capital allocation and the liability management, we currently have three outstanding convertible bonds totaling $2.5 billion, among which the full [ph] price of $746 million is accessible in June 2023, $429 million is accessible in April 2024 and $1.3 billion is accessible in December 2024. As of September 30, 2022, we had cash and cash equivalents, term deposits and the short-term investments of RMB23.9 billion or $3.4 billion. And we believe this level of liquidity is sufficient to repay the aggregate balance of all outstanding convertible bonds by their respective maturity without considering any external funding resources available to us. Meanwhile, we are taking further actions to narrow our losses and reaching breakeven. We will be prudent with our CapEx and we will closely monitor our cash outflow. At the same time, these convertible bonds are currently traded at discounted price and we will continue to evaluate the option to repurchase and retail them at a reasonable price. As of October 31, 2022, we had repurchased and retailed a total principal amount of $329 million of these notes for a total cash consideration of $247 million, generating $82 million net cash position. We will stay opportunistic when continuously evaluating options for the best use of our capital. Finally, our conversion from a secondary to a primary listing on the Hong Kong Stock Exchange becomes effective on October 3, 2022. Bilibili is now a new private listed company in Hong Kong and the United States. This conversation will further expand our investor base and provide more liquidity for our securities in the capital markets. With that in mind, we are currently producing net revenues for the fourth quarter of 2022 to be between RMB6.0 billion and RMB6.2 billion. I will translate myself. So in the previous prepared remarks, management mentioned that the user growth focus will switch into daily active user, DAU. So could you maybe elaborate more about our future user growth strategy? Thank you. And we raised the MA centered around MAU strategy back in 2019. And in the past, we have successfully expanded our MAU from 110 million to nowadays 330 million and this is quite successful and showed our excellent execution in the past few years. Well, if we are able to grow 3x in the past few years, which supported the thesis that the Bilibiliâs business model, which is the community plus the content ecosystem works and is quite successful and shows our ability to maintain a high quality, highly sticky community while we deliver a very impressive user growth. Based on our 2022âs work progress, we still see a lot of room for our MAU growth. Even in 3Q, we delivered a 25% year-on-year growth. And if we carry on the current strategy, we believe we can still achieve the 400 million MAU target by next year. Starting from 2022, we also put a lot of work in terms of the DAU growth, because we do believe that DAU compared to MAU can present the quality of the user growth as well as the sustainability of the user growth. In addition, it also directly linked to the commercial perspective of our community. Like I said, the growth is not the purpose. Itâs just a way to achieve our goal of increase the quality of our users. And in the end of the day, the growth over MAU roll directly linked to the growth of DAU. And thatâs why starting from this year, we are putting more emphasis and resources to increase our DAU. And if you look at our DAU-MAU ratio, it has already improved from 26% in 2021 to 27% in 2022. As you may all aware that we are facing multiple challenges from the macro environment and putting profitability at first is one of the most important task for the management. The reason why weâre putting more emphasis to DAU instead of MAU, we believe from one aspect, it can help us to increase the monetization efficiency help us to grow our revenue at the same time to reduce our sales marketing expenses and to achieve breakeven often as possible. We are very confident to the DAU growth next year, and we believe this will be more sustainable for the core company as well as be very beneficial to our commercialization efforts. And as for the outlook for next year, we hope to increase our DAU to MAU ratio to 30%. Starting from 2022, we have already taken actions to control our sales and marketing expense. In Q3 this year, our sales and marketing expense already declined 25% year-over-year. As weâre shifting our focus from MAU to DAU, we expect we can further reduce our sales and marketing expense and the magnitude of the decline will be even bigger in 2023 compared to 2022. Thank you. We will now take our next question. This is from the line of Lei Zhang from Bank of America. Please go ahead. Thanks, management for taking our question. My question is mainly on the profitability. I noticed that our operating loss narrowed in the third quarter. So how should we look at our gross margin and OP margin trend and which costs as we see for the room to control and also any change to our breakeven target? Thank you. We raised the target of reach breakeven by end of 2024, and we will stick to that mission and goal. And as we move through 2022, obviously, there is been multiple challenges across the macro environment to reduce loss and putting profitability first is the priority for the company. And this is something I personally work after and taking charge. We have already taken actions to reduce our cost and expense. And so far, the unit cost for our server and bandwidth continue to decline. And as I mentioned earlier, sales and marketing continued to decline year-on-year for three consecutive quarters. And move forward, we will take more efforts to reduce our sales and marketing expense as well as G&A and R&D expenses. In terms of the efficiency improvement, I intend to reduce investment on the non-core business and allocating and centralize our resources in areas such as improving our commercialization efficiencies. At the same time, we will also take actions to optimize our organizational structure to reduce the fat and increase the lean, and we expect this adjustment will be completed by end of this year and will start to show on P&L starting from first quarter next year. Yes. I will take the question in regard to the gross margin and expense trend. The company takes out more actions to reduce costs and prioritize probability. We expect our gross margin will gradually increase going forward. Sales and marketing expense in 2022 has already declined year-over-year, as mentioned by our Chairman and will continue to decline next year. And we expect R&D expenses, which will peak in Q4 this year and start to decline next year. In 2023 and the future period, we expect overall operating expenses in absolute dollar terms will decline year-over-year, and net loss will further narrow down until reach our breakeven target. At the same time, we are paying very close attention to our cash flow and tightly controlled CapEx and investment as we narrow our losses. We aim to keep our cash balance at a healthy level. My question in regards to advertising, considering the impact of COVID-19 and the weak macro environment, whatâs your strategy for advertising business and how should we think about revenue growth in the first quarter and next year? In addition, during the Double 11, we noticed that Bilibili has advertising products related content e-commerce could management share more details about it? And I also want to know, is Bilibili considering launching Tojo at the present? Thank you. Despite weaken macro environment of the ad revenue in third quarter reached RMB1.35 billion, an increased 16% year-over-year. This â we consider this is a job well done and especially the ad revenue from performance-related formats increased by over 20% year-over-year, and we have continued to take market share in the ad market. In 2023, we plan to continue to enhance our integrated marketing capability and to build a friendly and welcoming environment for advertisers. And we will continue to help advertisers to effectively reach our young generation through Bilibiliâs multiple products and multiple scenarios and help them to build their brand equity. And we intend to further combine our content ecosystem with our ad business, particularly in those â in our drilling vertical increase our ad inventory and accelerate ad momentum in the consumption and transaction scenarios. For example, we are already among the top five market player in verticals like game and 3C and digital products. Another example would be for FMCG ads, which are part of young generation necessity continue to grow, such as food and beverage, skin care and cosmetics. And as we move forward, we expect verticals like automotive, baby and maternity and home decor and appliances will have great potential especially as the young generation continue to grow with Bilibili as they enter into different life stages. And in Q3, actually, the automotive sector grew over 80% year-on-year within Bilibili. You mentioned about the content e-commerce. I would rather define the content commerce in Bilibili ecosystem and consumption and transaction scenario. First of all, itâs an infrastructure for us and it is also one of the very important scenarios for commercialization. In 2023, we plan to further connect the transaction scenario with the Bilibili community and with advertising business. For example, in the past two quarters, together with Taobao, Tmall, Jingdong, Pinduoduo and other brand advertisers. We are already starting to explore the seating consumption and transaction model, including video and live broadcasting-based e-commerce as well as traffic acquisition within the Bilibili community. With that, we hope to explore the different commercial values of Bilibili, unique consumption and transaction scenario. During this yearâs Double 11 despite the weakened macro environment, we still recorded a 47% year-on-year growth for our advertising revenue, among which the performance-based format of advertising revenue grew over 80%. And in the future, we are looking to further expand and be very open about the transaction and consumption scenario. We welcome more of the brand advertiser to join us to further explore the commercial value within our unique ecosystem. As for the pre-roll, which is an old fashion format of advertising, actually only takes about 3% to 5% of the overall advertising market in China, and itâs declining rapidly, along with its unit price. We believe some people might have been overly optimistic about the pre-roll potential with the Bilibili. And most of the Bilibili content about 2 to 5 minutes long. If we add pre-roll to all of them, it will not â it will only generate very limited income but be extremely disruptive to user experience. We believe it will bring more harm than the goods, which we will be very cautious to try out. Iâll give you some examples of how are we exploring the ad format thatâs more adaptive to Bilibiliâs ecosystem. For example, we can explore within the video player frame, such as metaverse, bullet-chat ads and other innovative formats within the player frame, or we can explore the model that combines performance-based ads with both app download conversion module and CPS, we call it a game partner model. And another example would be the Story Mode ads, which we believe is a very good format to carry on the performance-based ads. And as the Story Mode traffic continued to grow will open us more â it will open more ad inventory to us. Lastly, would be the content e-commerce plus user acquisition within the Bilibili model. We will continue to refine and optimize our goal to improve those performance-based ad efficiency. All of above-mentioned formats of advertising, we believe will generate higher income as well as itâs more sustainable to our overall community. We are still very, very confident that our app business in 2022, 2023 will continue to outperform the overall industry and we will continue to take on more market share. Thank you. Thank you. We will now take our next question. Please standby. This is from the line of Lincoln Kong from Goldman Sachs. Please go ahead. So, my question is about the gaming business. Given that Mr. Chen, you have personally taken control of the gaming business, whatâs our sort of strategy and targets and change posture taking over? And after the reduction of the mostly gaming, how is the company are looking for our overall gaming business growth outlook, especially of our sales buildup games as well as the overseas gaming strategy and progress? Thank you. I raised the strategy of putting video and game as Bilibiliâs is core business back in 2019. As a matter of fact, Bilibili is starting to explore game business from very early days. Actually, Bilibili is the platform that has the most condensed and concentrated gamer in China. At the same time, we have lots of content offerings in terms of live broadcasting and video on our platform. At the same time, the areas that we invested in regional animation and comics, has great synergies with our game business. So, naturally, itâs just a natural extension and natural course for Bilibili to put in at our core. In the past 2 years, the game business didnât perform as well as we planned, which I believe is mainly due to the slower-than-expected self-developed game progress. The reason is that we were exploring in multiple directions by multiple teams at once, but end up spreading too thin and only just to double on many, but didnât bear fruit. As I personally take on the game business, it doesnât mean we are making any change to our original strategy. As a matter of fact, we will carry out more diligently to that strategy, which is develop high-quality game in-house and distribute globally and putting gaming business at our core. I intend to focus on only one or two directions focusing our best resource and our energy on doing the least, but the best towards the highest industry standards. At the same time, I will strengthen the life cycle management of our self development project to increase the investment in projects that meet patients and quickly iterate out projects that do not meet the expectations. Moving forward, my requirement for the gaming business will be to be very, very down to earth and do our best to produce the best product and try our best to increase â to enhance the business. Because we have the perfect environment in game content, I am still very confident whether itâs self-developed games or licensing games, we can deliver sustainable growth in the sector. Thank you. We will now take our next question. Please standby. This is from the line of Yiwen Zhang from China Renaissance. Please go ahead. So, my question is regarding live broadcasting. So, the integration between the live broadcasting and the media streaming has been on for a while. Can you share more color on the strategy and discuss our expectation on live streaming business? Thank you. We think the live broadcasting business has meet our expectations this year. The first three quarters this year are live broadcasting revenue grew by 30% year-on-year. And our growth live broadcastingâs gross margin also starting to recover this year. As I mentioned in the past, we have always believed live broadcasting as a capability for the platform. Itâs a natural extension of the video format of content. And our strategy has always been combined the live broadcasting ecosystem with our video ecosystem to generate fast synergies among this two. From the supply content side, we have continuously explore within our ecosystem to convert our content creators to host and convert first to content creators. In Q3, content creator/host, the number of those content creators/host has increased 73% year-over-year, which is a quite impressive growth. And this demonstrates how our strategy is working, and we are increasing the supply side of the content. We are also exploring from the demand side to fine â to discover the users that they might be both interested in the same vertical of content, whether itâs in the format of video or itâs in the format of live broadcasting. And in the third quarter, we have seen the DAU penetration of live broadcasting continued to increase and the MAU for live broadcasting also recorded a 79% year-on-year growth. This is also very, very impressive growth. Last quarter, we have combined the operation of live broadcasting with the PUGV. And from an organizational perspective, itâs the same team thatâs looking over the content creators operation as well as live broadcasting host operation. And itâs also the same team thatâs paying attention to user, which user is watching certain content category and what kind of live broadcasting content he or she might be interested in. We believe this change are really lining up and aligning our goals of our operation target at the same time need to increase our overall organization operations. And we are combining the operation for the same vertical in terms of live broadcasting and PUGV. And for example, in terms of the V-UP [ph] content categories, now we are opening up the video materials for video inventory to both Vtubers as well as the virtual life â virtual content creators. This has significantly increased the live broadcasting host frequency of opening up their live broadcasting program and increased our overall content supply. Another example would be the knowledge sector. In the past, we might think that for the knowledge sector content creators, itâs difficult for them to monetize through live broadcasting. However, we have discussed in the law area or in the relationship areas, itâs very suitable for the live broadcasting host to connect directly with the participants and do a Q&A session. And actually, we have seen one live broadcasting host to gain their â gain her 1 million follower milestone just through the live broadcasting services. So, this will be another example after the inclusion of the two operations, we can explore new opportunities. As such, I am very confident as the integration further penetrates within the live broadcasting and PUGV, the live broadcasting revenue as well as its gross margin will continue to increase in 2023. Thank you. That does conclude the question-and-answer session. So, I would like to turn the conference back over to Juliet Yang for any additional or closing remarks. Well, thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Bilibili Executive IR Director or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found on todayâs press release. Have a great day. Bye-bye.
EarningCall_1839	Let's try this again. Good morning. Thanks for hosting us here, Elizabeth, for the second time this morning. We will be making forward-looking statements today that are subject to certain risks and uncertainties. For a full description of these risks and uncertainties, please consult our IR website or our SEC filings. No worries. Next year, we're going to be in Miami. So we'll be a lot happy. You won't have any glitches. It will be great. Just as one quick administrative note that I perhaps mentioned before, there is a separate chat Q&A function, which I can see all the questions that you guys put them in. So feel free to add them as we're going along, but on to the main event. So Jason, you're now a few months into your new role as CEO. Can we start on some of your early impressions from the seat and sort of where you're focused on now? Obviously, it's been an eventful few months. Yes. Sure. Thanks. Thanks, Elizabeth. Thanks for having us, and thank you, everyone, for joining us. It's great to be here today and, as you mentioned, Elizabeth, looking forward to perhaps the next one being in-person. But the short answer to your question is I continue to be very energized about the opportunities in front of us. We obviously just had our first quarter release here several â a couple of several weeks ago. And a lot of the key themes that were in that Q1 were around an underlying demand environment that has been very resilient, stable, predictable. That kind of led to fairly consistent Q1 results versus our expectations. But we understand that we do still have a lot of work to do. And so, we continue to be very focused on our three key priorities. First of all and probably most important in the short-term is our medical improvement plan. We recognize that this business needs to be improved. It's been impacted dramatically by the inflation impacts of the global supply chain constraints. And within that this improvement plan, we have a plan in place to enable us to deliver at least $650 million of segment profit by fiscal 2025. So within that plan, the first and most significant impact will be to mitigate that inflation. That by itself is a $300 million impact. That was a similar impact that we had in fiscal 2022, it's what's in fiscal 2023, it's the net impact and we're on track for mitigating that inflation. In Q4 of 2022, we were mitigating about 20% of the gross inflation, Q1 that improved to 25%, very consistent with our expectations. And our expectations continue to be unchanged with where we expect to exit fiscal 2023 at 50% and then, ultimately, mitigating all of the impacts by the end of fiscal 2024. So that is the primary component to allow us to get to a more normalized level of earnings for that segment. But in addition to inflation mitigation and pricing, we also have three other key actions to drive the underlying core performance of the business. The first of those three is optimizing and growing our Cardinal Health brand portfolio. This is through new product innovation as well as investments in our capacity to be able to deliver more of that volume. The second one is growing our â and accelerating the growth of our growth businesses, primarily in the Med segment, that will be our at-Home Solutions business. This is a business that's consistently grown the top line by 10% per year, and we think that growth can continue. And we're, of course, working to ensure that as much of that as possible falls to the bottom line. And then the third component is more of the blocking and tackling that we've done a lot of over the last several years, and that's just driving simplification and continued cost optimization. We have taken some actions more recently as it relates to some portfolio decisions, like selling our non-healthcare gloves business, our portfolio of product there, to simplify the underlying business and help derisk our underlying portfolio. So that medical improvement plan is the big piece of it in the short-term, but we can't forget about Pharma. The biggest part of our company is the second component in that plan that our primary priorities and focus areas, and that's to build upon that growth, the resiliency we've seen there. I already mentioned, Q1 was fairly consistent with expectations. The prior year, what, was 5% earnings growth. So that business has shown its resiliency after we saw the volatility of the pandemic subside here in the middle of last year. But we are focused on improving that further, further growing it, and that's in a couple of areas. Of course, specialty is the primary growth area. We're investing both organically and inorganically there. And we've restructured the team to be more focused on this business by consolidating a lot of the key leadership activities, bringing the right people into the right roles and simplifying how we approach both our customers as well as our manufacturing partners, and we've appointed Debbie Weitzman as the CEO of that segment. But we also have other organic investments that we're making in our Navista TS platform. Again, I mentioned inorganic growth through the Bendcare GPO acquisition, as well as other investments in the business. And of course, Generics continues to be operating very consistent with what we've seen in the past. And then the third stool, leg of the stool is the maximizing our shareholder value, continuing to look through our capital deployment through the lens of our shareholders, driving consistent profit and cash flow generation and then returning that in a very balanced manner to our shareholders. That was shown through our share repurchases. Last year it was $1 billion. We've guided to $1.5 billion to $2 billion for this year. Q1, I announced the completion of $1 billion already in the first quarter through an ASR, and we â that's all in addition to our ongoing $500 million plus dividend. So we're demonstrating that through our capital allocation priorities. But we've also made some other enhancements to our governance structure. Of course, we've recently added four new Board members, and we've established the Business Review Committee that I chair. That's supporting a comprehensive review of our strategy, our portfolio and, of course, the capital allocation framework. And we'll provide a lot more details with that in an Investor Day within the first half of the calendar year. So, a lot going on, a lot to be excited about, but a lot of work to do, but we're very focused on these priorities to ensure that we have the best chance of success. That makes sense. That's a great start. Lots to unpack there, so we'll take a stab at that. So maybe just starting on sort of the order that you had it focusing maybe on the Medical first. PPE has clearly been a source of volatility over the past couple of years. What are the latest trends you're seeing? I mean how stable are â is pricing in your like remaining glove business and then maybe PPR â I am sorry, PPE more generally? And then like how are we thinking about inventory levels versus earlier in the year? Yes. And so when â let's just kind of step back and make sure we're all level-set on the problem statement there. With PPE during the pandemic, we had a shock on really all aspects of the business. Demand was volatile, very strong. Supply chain was strained, and that drove just crazy swings in cost that then flowed into price. So all aspects of the economic model, demand, supply, price and costs, were all very, very volatile. That created a lot of uncertainty. And of course, what we did is we try to protect our customers by buying a lot of inventory that ended up taking way too long to be pushed through the supply chain. So what we've been talking about over the last year is having a higher cost of inventory on our balance sheet that has had to work through. And embedded in your question, Elizabeth, is the fact that volumes then reduced over that period of time because our customers ended up having sufficient levels of inventory. We started communicating that six to nine months ago, and we saw that the volumes seem to have bottomed in terms of the pull-through demand to us in the fourth quarter of last year. We indicated in our Q1 call that volumes were fairly flat sequentially, although we do think that the bottom was there in the fourth quarter. So a little bit improved, but not very dramatic. And so underlying that is it felt like our customers had started to now begin to replenish some of their inventory, but at very weak levels compared to the historical levels and certainly we compared to what was during the pandemic. So not a lot of new news here on this topic, very consistent with the dialogue that we had during the Q1 call, that cost remains high in our inventory, and we would expect, at least the next couple of quarters, for us to further work that through, all entirely consistent with our guidance. But by the time we exit fiscal 2023, we would anticipate â because we know that weâre buying this PPE right now at a much more competitive cost, so we would expect prices to continue to come down, volumes to continue to improve over this period of time, such that by the time we exit fiscal 2023, we think it will be a much more normalized environment. And just as a reminder, normalized for us is fairly consistent demand at relatively low margins. This is not a business that weâve historically made a lot of money on, but itâs been a very predictable level of margin in the past that we just havenât seen more recently. So we continue to see us working through that path and, importantly, our customers working through their inventory over the next couple of quarters. Yes. No, that makes a ton of sense, and I appreciate what you are saying in terms of sort of a more normalized sort of sell-in, sell-out through the period. If we think about where PPE pricing is now, and I donât â if you want to use sort of gloves or generically sort of the category as an example, how elevated are we still versus fiscal 2019 kind of levels? Yes, so itâs come way down from the peak, but still elevated from where we were pre-pandemic. And when you think about costs in general, thatâs consistent with that. I would say inflation is still obviously very elevated in a lot of different areas. In some cases, itâs pulled back from the peak levels. But given that the cost inputs are still elevated, that means that the economic model is such that I would expect prices to be elevated versus pre-pandemic. And so itâs going to be possible they will never get back in terms of a pricing perspective. But when you think about the magnitude, itâs nowhere near where it was at peak. And I would expect it to settle closer to pre-pandemic levels than certainly at the peak. Okay. So maybe weâre still at like, I donât know, 20% versus pre-pandemic, but itâs sort of slowly coming down maybe at a slower pace versus... Whether youâre talking gloves, masks or ICA, itâs a very different answer and then there is different SKUs within that. So there is not a short answer to that question. Itâs a much more complicated discussion. But in general, yes, it will be elevated from pre-pandemic levels, but nowhere near the peak that it was before. So closer to pre-pandemic than to the peak level. Got it. Okay. That makes sense. And then if we think about like across Medical, maybe outside of PPE, how is the product cost trend â cost inflation trending versus earlier in the calendar year? And sort of can you talk about sort of the continued work on mitigation that you are doing? Yes, there is a few points within that. So first of all, the most important takeaway as it relates to this topic for us is that there is a couple of really key data points that have been unchanged the last couple of quarters, and there is no new news here as it relates to that, which is we continue to expect that overall net impact in fiscal 2023 to be about $300 million. So, the impact of inflation, net of the pricing and other mitigation actions that we are achieving. And we expect the exit rate in fiscal 2023 to continue to be at a rate of offsetting that gross impact by about 50%. So what is important to us is the fiscal year impact, but itâs also important to us that we continue to show progress towards a normalized level of results, which means we have to â the underlying inflation is going to be volatile, itâs going to move day-to-day. Our objective is to make sure that whatever that number turns out to be, we offset it. Weâre not expecting to improve our margins, but we donât accept that we should have lower margins as a result of the inflation. So the key takeaways is that weâre on track to that. Thatâs very consistent with our plan, entirely consistent with our guidance. Now to answer other elements of your question Elizabeth, itâs very choppy, right. There are certain aspects of inflation that have come down dramatically. And the biggest one is the international freight. The cost to ship product from Asia to the United States, even though weâve diversified our supply chain and we have a relatively small percentage coming from places like China, we do still have a relevant supply base there. We think the global diversified supply chain is in the best interest of ourselves as well as our customers, and we continue to lean into that. That cost of shipping product from Asia, especially to United States, same thing as to the prior discussion on pricing for PPE, is weâve come now back in line with close to pre-pandemic. Still a little bit elevated levels of international freight. But when I think about all the impacts of that net $300 million, international freight is the only one thatâs shown a material improvement in its trend. All the other ones have been choppy and bouncing around. Like I said, labor, of course, will never come down. Maybe the rate of increases certainly will come down, but not the actual level of that cost. The other commodities, which, when I think about the impact of that $300 million, it was international freight, it was other commodities and it was domestic transportation. When I think about those other two categories, commodities and domestic transportation, they remain very high. Even though oil has come down, and thatâs an input to a lot of that, a lot of the byproducts and the products made from petroleum still remain very high. Some of our inputs like nonwovens are actually still increasing. And thatâs got some other supply and demand dynamics beyond just the cost of inputs like oil that are going into that. So, we do see that these costs remain very elevated. Itâs why our pricing is more than just temporary price increases. We are having success at rolling these temporary price increases into permanent price increases. Itâs a necessary element of this strategy because we do not see that these costs go back down to pre-pandemic levels. Some categories will, but they will be elevated permanently. And therefore, our prices have to be elevated permanently, and we continue to be on track with that. But it continues to be a very volatile environment, but pluses and minuses. And so overall, thatâs why we still think the $300 million is the right number, and weâre on track for it, as well as the exit rate in fiscal 2023. Got it, okay. So, there is a bunch of stuff there. So, it sounds like sort of that and sort of based on what you are seeing in your first comment that you are mitigating sort of 25%, I think, of the inflation impact, as you were saying, in the first quarter and on track for 50%, we should think of that as being sort of more gradual in the first half of the year and then accelerating as we get into the back half, right. Thatâs sort of the way to continue to think about it based on what youâre saying about freight costs and whatnot, itâs not like ratably across the quarters. That 50% is the exit rate, and so the 25% is what the all-in Q1 rate is. We had some increases at the beginning of Q1. We also had some increases at the beginning Q2. We do have some additional increases planned for the beginning â or within Q3. And so those increases are not each stair-stepped. And behind the scenes, every day, we have contracts renewing that are also increases. So, it will be a bit more of a stair-step than not. But it will â from 25% to an exit rate of 50%, weâre going to have to make progress each and every month in order to be able to get to that 50% level. Got it. And then I think in the answer to the sort of prior question, we think about sort of not just like the temporary price increases that you have been asking for, that sort of played out at this point like in terms of having gone out to everyone and sort of getting the different [indiscernible] out. Maybe weâll start there, is that sort of the correct characterization there? Yes. Yes, so in terms of the temporary waves of price increases, we had the first one in March 1, then July 1 was second one and October 1 was the third one. We do anticipate a fourth wave of price increases in our fiscal third quarter, first calendar year. So, every quarter we are making adjustments because we are trying to measure this we donât want to get out too far in front of it. And of course, weâre working with the GPOs and our customers very closely to make sure that we are bringing that together at the appropriate pace. And then behind the scenes, when those contracts renew, we are anticipating that those temporary price increases then flow into the permanent price increases, with the appropriate adjustments baked into those agreements so that we donât have the same issue in the future if we see through. Okay, that was my next question. So those sort of contracts are now structurally different than they were previously in terms of â like how to â is this sort of an agreed upon price increase? Is it kind of just like hereâs my invoice and this is my â like how does â how do you sort of think about that? Yes. The primary objective is to have some type of index we can attach it to in order to make the appropriate adjustments. Why this process will never be perfect is that thereâs not indices in place for every single cost input. But itâs important to have a mechanism that allows for those adjustments and that are reflective of that type of environment. And again, it will never be a perfect type of surcharge that is put in place every single week to every single cost element. It wonât be that. But it should be something that within a quarter or two of some significant shocks, you see us getting back to a much more normal type of level of margin. So we should not have these years of gaps like we do today. And of course, we wouldnât expect a shock like this to reoccur anytime soon. But if it does, we would expect that impact to be much more timely. But there will always be elements that are hard to foresee. And so no contract structure will ever be foolproof, but it will be much, much more consistent with what we would have seen in the past. Okay. Got it. And is that true, again, we think of obviously sort of more of the GPO contracts on the hospital side of the business? Is it sort of the same structure for the like how Cardinal at-Home products? Is that kind of a different mechanism? Just to make sure that weâre understanding across your scope of businesses? Well, we have a variety of different customers within at-Home, and so some of them are more real-time types of price adjustments, others are more like a GPO type of structure. So we have a very diverse set of customers and it depends on what type of customer that flows through. Itâs much less of an issue for at-Home than it is for the core Medical products and distribution business. And so thatâs where the primary issues are for the whole enterprise. And as a reminder, I think most people understand this, but we donât have those same issues for the Pharma business, because, again, the product cost is one that we largely pass through. Itâs â we do have the inflation on our distribution fees or distribution costs, and so thatâs something that does need to be addressed through other means. But the magnitude relative to the size of the business for Pharma is very, very small. This is really just our Medical, Cardinal brand medical products that is the primary issue. And thatâs more of a core Med issue and outside of that at-Home business. Got it. Thatâs helpful to remind people [ph]. So I mean the other thing Iâm just sort of thinking about your expectations for the fiscal 2023, how do we think about medical utilization? Because obviously, from all the managed care players and from you guys and everybody else, itâs sort of like utilization has been broadly sort of suppressed still this year. In terms of your expectations now from what youâre hearing from your end market customers and sort of your expectations, what do you â how are you sort of thinking about the back half of this fiscal year? Yes. Itâs another example. Thereâs not a lot of new news here for us today, but let me kind of remind us what we talked about a few weeks ago. Letâs go back again. With the onset of COVID, we had significant reductions in the utilization and we had significant volume impacts in our business. And we communicated about a year ago that we were starting to see that get back to close to pre-pandemic levels. And since then, itâs been what I would call choppy. It has been fairly close to that level, but a little bit short. And we indicated that Q4 of fiscal 2022 appears to be our low point for volume in general, which a part of that was PPE. But we also saw just a little bit of that weakness across the Board. But we did see sequential slight improvement also across the Board going from Q4 of last year to Q1 of fiscal 2023. And so that continues to be the environment that weâre in, where it just hasnât gotten back to the pre-pandemic levels, but itâs a whole lot closer to that than where we were during the depths of the pandemic. So itâs at a manageable level. Itâs the one that we havenât called out any fluctuations other than PPE more recently. So itâs something that is manageable within our model. But like everyone, weâd like to see a little bit more volume, but itâs â what we expect is a gradual improvement over the course of the year. So weâre not expecting a significant improvement, but we do believe over time that we will see utilization continue to improve, but at a gradual level. Got it. Okay. That makes sense. And then if we think about sort of the financial crunch that hospitals and others have been under just from labor costs, et cetera, how does that sort of change like what theyâre looking for from you in terms of their â some of their supplies? Yes. I think everyone in the supply chain is doing what we can and looking for opportunities to be more efficient, to take cost out, so that we have to pass through as little as possible to the customers in the form of pricing. This is everyoneâs issue and everyoneâs obligation to do as much as possible to mitigate that. With that said, pre-pandemic, we had a relatively low margin rate. And we certainly donât have the margin embedded in our business to be able to absorb these types of shocks. And so our â and thatâs why weâve been working with our customers though, too, for a fairly prolonged period of timing. When you think about from when we started incurring the cost over a year ago to when weâre committing to getting all of this mitigated, itâs like a three-year process. So weâre doing our part to absorb this in a way that allows our customers to get this push-through to the payers and ultimately to the patients. But in any economic model, inflation has to be either mitigated in some fashion or pushed to that final customer. Most businesses, most industries donât have the margin in the middle just to absorb it. And certainly, we started out at 3% to 4% types of margins for the Med business, 1% margins for the Pharma business. Thereâs just not enough there to deal with shocks that, in some cases, were impacting our cost inputs by 10x. So weâre working with them. Weâre doing our part. But ultimately, we need to assist them in figuring out a way to get this pushed through. So that ultimately, it gets to the end of the supply chain. That makes sense. Okay. Maybe shifting over to the Pharma business and maybe focusing on sort of maybe the shorter-term things and then we can go broader. So in terms of the second quarter, what are some of the drivers of having Pharma profit dollars sort of flat Q-on-Q in the second quarter? Yes. So first of all, to think about the â think about our implied guidance for Q2 implies flat sequential dollars from Q1 to Q2. It also implies kind of flat year-over-year. And the primary reason for that has less to do with Q2 of this year and more to do with Q2 of last year. You may recall that Q2 of last year, we highlighted about a $20 million favorable one-time item that is not expected to reoccur by its nature, itâs a one-time item. And so when you adjust for that $20 million in the prior year, those growth rates are actually quite consistent with the historical levels that weâve seen for that business. So thereâs really nothing unusual that we anticipate in this year. But as a reminder, what is included in the first half of this year as a headwind is the inflation, because inflation for the Pharma business really picked up. There itâs more the domestic transportation, some of the labor costs. That was a Q3 of 2022 increase. And so for the first half of our fiscal 2023, we still have the year-over-year comp that is challenging or thatâs a headwind from a year-over-year perspective. Now we have a few tailwinds like opioid legal expense and our IT investments from rolling out our broad ERP system, those items generally offset. And so when you highlight all those, those all offset. And then you account for that prior year onetime item, itâs still in that low to mid-single-digit growth rate like what weâve guided for the full year. Got it. That makes sense. And I think you talked about this in terms of some of the freight costs and things on the Medical side. If we think about sort of the labor costs and things like that on the Pharma side that you just mentioned, how are those like trending versus earlier in the calendar year? Is that something you view â obviously, you just talked about the comp issue, but would you give us sort of those costs as continuing to increase at that kind of higher rate now versus, say, six months ago? Or is it kind of like the economy is a little softer, so itâs a little bit better? Like help us think through the different puts and takes there? Itâs really the same answer as the broader inflationary comments I made. In general, what weâre seeing is that costs are still elevated. Labor rates and wage increases are still higher than historical, but not at the same level as what we saw six to nine months ago. So it does seem to be weakening, but still at high levels. Itâs again, very consistent with our expectations. This is how we forecasted and estimated this would roll through the fiscal year. Itâs still early, and these are the things that are incredibly important to us. And so we, at this point, donât see anything thatâs very surprising for us as it relates to that. The Fedâs work seems to be doing its job, where itâs taking off some of the pressure. Weâre seeing attrition still at elevated levels, but not at where they were at the peak of when the wages were increasing the most. So those all are pointing to the same type of real outcome, which is still something we have to work on, itâs still something weâre very aware of and have initiatives against. But weâre seeing it start to ease. Got it. That makes sense. And then I think your very first answer, you talked about it a little bit, but maybe we can expand upon that. Can you tell us a little bit more about whatâs going on with the sort of Pharma restructuring? What are some of the short-term benefits? You say, okay, obviously new management in place, et cetera. But then how does that give us â what does that do short-term and then sort of maybe as we think about 2024 and beyond, like what changes over the longer term? Yes. And as a part of that restructuring, we effectively took out a layer in the organization to shorten decision-making timelines and you get the business more connected in that regard, as well as brought together the core PD and Specialty businesses so that we had more of one face to both the customers and then one face to our manufacturing partners. So by doing that, thereâs a couple of things that come out of it. It is a lower cost structure, that wasnât the primary reason for doing it and itâs not something thatâs material for the business. But it is a lower cost structure. But most importantly, it was the effectiveness of the structure. Again, quicker decision-making, having a more simple structure for our customers and our manufacturing partners to do business with. And it allows us to have an intense focus on this key growth area. Specialty is an area that we have broad capabilities. We have leadership positions in some of the ologies, but not all of them. And we have room to further improve that growth. So itâs an area that not only has grown nicely, but itâs an area that we have high comments will continue to grow. And so we wanted to make certain that we had a structure in place that would set us up for success going into the future. Got it. And I think if we think about sort of specialty going forward, how do you go about sort of tackling some of those opportunities? And we can talk about biosimilars in a minute, but like you said youâve strength in certain areas, obviously, less so in others. Like how do you sort of â is that something you kind of like want to fill in across different therapeutic areas? Is that something you just kind of go deeper with certain clients? Like, where â what are the sort of specific opportunities there? Well, yes, first of all, the way â even the way you ask the question is the right way. I mean, thereâs so many different opportunities there. Thatâs part of the restructuring is to make sure we were structured as a team to be able to be a bit more decentralized and be able to go after each one of those opportunities in a way that makes sense. But how I would start to think about it is separating these opportunities into more of the provider-facing opportunities, kind of the downstream work as well as then the upstream manufacturing services. Thatâs how we structured the business, and thatâs how we are launching our investments, and our focus are very much in that way. So as I think about the downstream provider-facing, certainly, oncology is a huge opportunity for us. Thatâs one of the areas of least penetration for us, but still large and very relevant. We have a lot of great programs and platforms to be able to further grow that business. Navista TS is one that weâve invested heavily in. And thatâs very much in the leading edge of being able to offer that value-based care, especially as we go to the new CMS enhancing oncology model, weâre well positioned for that. But in the other ologies, we continue to invest in as well. In rheumatology, already well positioned there, but weâve also added to that with our recent tuck-in acquisition of the Bendcare GPO, as well as our investment in their MSO that has further expanded our capabilities in that space and contributed already to some new customer growth. But on the upstream of the manufacturing services, again, itâs an area of space that we have a lot of strong foundations in already. Our 3PL and Sonexus business, well positioned but continue to invest in that. But again, back to the org structure, weâre just hyper focused on this now. A team that is not only structured the right way, clear accountability, that we have people that will be driving each side of that to ensure that we optimize it based upon where the market is going. Okay. That makes sense. And then maybe turning specifically to biosimilars. Obviously â Humira is coming about Generic in 2023, as we all know. But we just heard from like UNH yesterday a little bit about publicly, their formulary where theyâre going to keep Humira for the different categories, but then to also bring in like biosimilars. Then some of them obviously have interchangeability, some of them donât have interchangeability or they only have it in the formulation of fewer people â like thereâs all sorts of like, I guess, nuances to how this comes out. Like so how do we think about sort of the opportunity in 2023? And is this really like more of a 2024-plus type of opportunity for Cardinal? Itâs already been an opportunity for us. I mean itâs a tailwind for the business. Itâs still, compared to other parts of our business, small but growing quickly. So it has been a nice contributor over the last couple of years, and weâd expect it to be a nice contributor this year. Itâs going to take more time and for the business to grow bigger for it to be meaningful enough that you start to see us call it out. So weâre not anticipating that soon. But itâs a part â itâs a relevant part of the growth that weâve already seen, a relative contributor to that growth. Part of what gets us excited about biosimilars is that, especially as we expand into the â biosimilars expands into new therapeutic areas and sites of care, where biosimilars seems to be going from a broad overall market perspective is where we have better penetration. And so we think that will work to our advantage as we go forward. But to your point, there's a lot of inputs to this whole model that are very hard to predict at this point. So I would â right now, we look at it like there's a rising tide. We have strong confidence. We'll continue to benefit from that rising tide. Exactly how much that impacts us, will be dependent upon exactly what you indicated. Not only the pipeline, but the payer and PBM decisions are going to be incredibly relevant to determine where we can add more value in that whole chain. And so that is just too early to tell, broadly, but we have a role across the board as it relates to these opportunities and believe we'll participate, we'll create value for our customers and we'll benefit from it. But the significance in the word of magnitude is something that will still need to be determined period-to-period. We have a pretty good viewpoint of what the Fiscal 2023 pipeline looks like. That's all been included in our guidance from Day 1. So again, it continues to â we continue to expect that to be a nice tailwind for the year. But nothing that we would anticipate being a real shock up or down relative to our fiscal year. And of course, as we get closer to Fiscal 2024, then we'll have more visibility as to what some of those decisions are by the payers and PBMs that will then determine better where we can add value. Got it. No, that makes sense. And maybe just conceptually, I mean, I think a lot of us think about your Medical business, when they think about your Pharma business is like two distinct entities and two distinct businesses that you run. Can you talk about where those businesses are most tightly integrated and where having both of those gives you a benefit? Sure. Yes, I think there's three key areas when we talk about the synergies between these businesses. Two are kind of broader and a little bit more conceptual and there's one that's a little bit more specific to how you asked the question. The first two that are a little bit broader, common customers. This is an industry where we serve the same customers in both segments of the business. We have strong relationships that do benefit from each other. And especially as health care continues to evolve, some of those lines â traditional lines of health care will probably continue to blur a little bit. And having the ability to work with customers and solve their problems across the spectrum is an area that we think that there's value associated with that. The other area that's kind of a broad philosophical point of synergies is just the cost synergies. That when you think about we do distribute products in both segments; they're different products but similar core operational capabilities so we can leverage that scale and that expertise across the enterprise in ways that are hard to define explicitly, but certainly implicitly there's something â there's something there that we're â like freight and transportation is a great example. That's one that's much more explicit. But there's other elements that that expertise is harder to find. Then the third component is we do have very specific offerings that do span the whole enterprise. They are some of our smaller businesses, our growth businesses, but they are definitely relevant for those businesses. The two primary ones are at-Home and OptiFreight, where we have very explicit opportunities as well as business between the different segments that they facilitate and leverage. So those are the areas that are most significant when thinking about the interrelation between our Med and Pharma segments. Got it. No, that makes sense. And I think over time, you've also talked about some investments. I think you've sort of alluded to them at various points in terms of some IT functionality, et cetera. Like where do you see as the biggest opportunities for you guys on that â on the investment front? Yes. Well, right now it's definitely on the medical improvement plan. So investing in â the product innovation tends to be more R&D and that type of investment. And while that's larger than what we have done historically, it's not a massive number and certainly not something that we've called out. On the CapEx side, what we guided towards this year at around $500 million of CapEx is about $100 million higher than what we've historically spent, and that's very much driven by the need to invest in more capacity and capabilities within the Medical segment. And these are all, well, largely investments that are focused on our Cardinal Health brand products. Products that again are higher margin, better growth areas, certainly parts of the market that we think are growing as well. So it really hits that sweet spot where we have a good market position. We have a good margin product, and we have an expectation that volumes will continue to grow. That's where we want to lean in and invest in more of that capacity. The one example we've talked about is our surgical glove portfolio, where we're building an incremental plant. We've been investing in getting more capacity out of our existing plant for the last several years, but there's only so far you can take that. So now we have a step-change opportunity to further invest in that to get to the next level. So those are some of the areas. I also would expect us to continue to invest in areas like automation and technology, even in the DC, the distribution center type of environment. These are â why I like these investments is that they are a good balance of risk and return. These are investments that we can roll out in a handful of our distribution centers, see how they do and then multiply that by 10 or 20 by rolling them out to the other distribution centers. And this is an example of if the technology works in the Medical DC, it could very well work on Pharma DC. And so these are the areas where I'm most excited about further opportunities. And when you're talking about the level of investment, while it's higher than what we spent in the past, it's still small relative to the capital that is the cash flow that is being generated in the business. And so it's affordable, but of course, we want to balance that with returns across other decisions for our deployment. Got it. And maybe since we're running around time, when we're sitting here next year in Miami, what do you think is going to be the big focus for you at that point? I think it will be the same topics. And with the medical business it's clearly going to be â because we're not going to get the end game a year from now. We will have a lot more data points. We'll be exiting fiscal 2023 at 50% mitigation and I'll be 1.5 quarters into Fiscal 2024. So we should start to see how close are we to getting that 100% mitigated just two to three quarters in front of us. So we're going to have a lot of additional data points on how that rollout is going. And you're going to have, I would expect, more data points on the other three growth areas of the Medical Improvement Plan as well. Within Pharma we're very happy about the underlying environment being as predictable and consistent as it has been more recently. I hope we're saying the same thing a year from now. That's something that is welcomed after the volatility of the pandemic. And right now, we don't foresee there being substantial changes as it relates to that, but that's the whole definition of a surprise is that you don't see it coming. Within the Pharma business, of course, it will be those other â the progress and the investments that we're making in the Specialty business, talking about the success of what we've rolled out and where we're taking that business going forward from there. And then finally, capital deployment, I don't think it will be different than the messages that we're seeing now. But there's an interpretation that that the lens that we're going to be looking through, anticipated being the same. But whether that â that the level â the order of priorities will be the same, but that remaining piece of deployment, how much goes into repo versus other growth, is one that we need to continue to evaluate how we're receiving that operating leverage from that. No, that makes sense. Well, unfortunately, we are out of time. But thank you so much, Jason. This was a pleasure. It was great to catch up and here your sort of, most updated thoughts on everything that's going on. So...
EarningCall_1840	Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Third Quarter 2022 Financial Results Conference Call. At this time all participants are in listen-only mode. After the speakers' presentation, there will be a Q&A session. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Jingjing Du, Head of Investor Relations. Please go ahead, ma'am. Thank you, operator. Hello, everyone. Welcome to our third quarter 2022 financial results conference call. Joining us today are Mr. Zhou Yuan, our Chairman and CEO of Zhihu; and Mr. Sun Wei, our CFO. Before we start, we would like to remind you that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today's announcement and this discussion. The company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see our earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhihu.com. Thank you, Jingjing. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu. Thank you for joining Zhihu's third quarter 2022 earnings call. We've delivered another quarter of solid execution on our community ecosystem first strategy and are delighted with the strides we have made promoting our community's prosperity. Starting from the beginning of this year, we shifted our specific focus toward growing quality users and further bolstering the strength and resilience of our content-centric business model. In Q3, the activeness rate of our app users at DAU over MAU reached its highest level in the past three quarters of this year, and the time spent per daily active users climbed both year-over-year and quarter-over-quarter. Despite the still challenging macro environment, our community ecosystem demonstrated strength and resilience during the third quarter. Total revenues were up by double-digit on a year-over-year basis as we continue to expand and optimize our content offerings and enhance our content creators user experience. Furthermore, our initiative to heighten operating efficiencies drove significant improvements in our bottom line performance for the quarter. In Q3, total revenues reached RMB911.7 million, increasing by 11% compared with the same period last year and net loss narrowed by 39% quarter-over-quarter. Our paid membership retained robust growth momentum increasing by 88% year-over-year and contributed 37% of the total revenue during the quarter. Meanwhile, vocational training services continue to accelerate their contribution to total revenues with a 458% growth rate year-over-year. Continuing efforts to refine our business lines and improve operational efficiencies during the quarter helped to make our ecosystem stronger and more resilient. The Zhihu community is striving and becoming more healthier and healthier. The result of our efforts gives us further confidence to invest in long-term growth while striving for profitability in the near-term. Now, I'd like to share some more details on third quarter achievements. The first part is by users. At Zhihu, our differentiated fulfilling content and a unique content-centric ecosystem not only resonated with users, but also well-positioned us to address their evolving demands. In turn increasing user interaction attracts more content creators and inspires their creation driving the healthy and sustainable growth â community growth. With this in mind, since the beginning of this year, we have shifted our focus from user expansion to quality user growth, which has produced remarkable achievement in the third quarter. On top of our record high activeness rate for our app monthly active users DAU over MAU in Q3, the time spent per user grew by 26% year-over-year and 14% quarter-over-quarter reaching 29 minutes. Average MAUs were down in Q3 by approximately 4% year-over-year as expected. We continuously expand the breadth and depth of our high quality content to support user interaction and introduce timely and fulfilling new content. For example, our GaoKao related content significantly drove up the time that young users spend on our platform during the summer vacation period. Moreover, our timely content offerings during the quarter not only attracting more male users, but also encourage them to engage more deeply in rational discussions within the community. In Q3, we also continue to innovate in content format development, aiming to encourage user interaction in more diversified content formats. In particular, our new thought format has caught on quickly among creators and users alike. Thanks to its flexible nature and broad appeal. It's now becoming a more frequent format for both content creation and content consumption. Accordingly, in Q3, the new active follows [indiscernible] one of the ways that our users interact with each other grew by 16% year-over-year and 19% quarter-over-quarter. Second part is about content. We believe that when we better meet user demand for more high quality content, higher quality user growth is the net result. In Q3, we continue to improve user experience and enhance our competitiveness by expanding our content offering, diversifying our multimedia content format and further enhancing our recommendation algorithm. As of the end of Q3, the cumulative pieces of content in our community reached 579 million, representing a 26% year-over-year increase. Of these, 485 million were questions and answers representing a year-over-year increase of 22%. Our scenario-oriented content cultivation approach has proven to be effective not only in exploring and satisfying the demands of our various user groups, but also in motivating concentration and boosting content consumption. For example, during the last summer vacation period, we presented Wilderness Talks on your free time an eight-part series of high quality, self-produced programs where in our content creators [indiscernible] exchanged their thoughts with other young people on how Generation Z sees the world. Through this innovation format, we were able to share a brand new world from Gen Z's perspective and help our viewers better understand their view on life. The series resonating content attracted many young viewers generating MAU penetration rate of 28.4% for the quarter. Content offerings associated with self-improvement also proved popular with users between 18 and 25. Driven effectively by these scenario-oriented activities the percentage of new users between 18 and 25 among our total new MAUs was four percentage points higher compared to the same period last year. In September, we further expanded our content offering in our career development segment through diverse content formats, including videos, live streaming, talks and text and picture, T&H. The expanded content format generated huge interest. For example, the thought provoking video speech, how we should get along with our work, presented by historian [indiscernible] produced over 20 million views within just two weeks. Here in September, more than 13% of our DAUs consumed career development related contents and their retention rate was higher than that of our overall DAUs by 15 percentage points. Moving to content creators, our content creators are the most important assets in driving sustainable growth within our community ecosystem. As end of Q3, our cumulative number of creators has reached a new high reaching 61.2 million, a year-on-year increase of 15%. We are committed to providing our content creators with an enhanced creation experience as well as fruitful rewards. We work towards this goal by leveraging the solid foundation of our content-centric ecosystem, and by providing a broad array of creator-centric programs. In Q3, we are delighted to see thousands of content creators from a cross section of ranking levels and the verticals including eSports, career development and education. We received financial incentive from the RMB 100 million from and the future plan. Furthermore, on September 13, we officially launched the [indiscernible] program under the Zhihu platform. [Indiscernible] will award specific subsidies to the top 10 content creators who make significant contributions in the field of science or humanity. The third part is about community culture. In line with our community ecosystem first strategy, we are committed to better serving our users and content creator with clearer community rule and guidance, better products and features and enhanced protection. In future our regular surveys show significantly increase user satisfaction with our community governance and services. In addition, these surveys also indicated a significant improvement in content creatorsâ net promoter scores across an array of subcategory scores, including creating tools, growth guide, creator benefits, and a copyright protection. As a leading online content community during the quarter, we continue to fulfill our social responsibilities by leveraging our technological capabilities to promote rational, multidimensional, and the constructive discussions on our timely content offerings. For example, we enhance the emotional monitoring function on our Zhihu hot list to ensure a professional and a rational community environment. Next part is about monetization. However, growing content library, thriving creator ecosystem and the flourishing community, are the assets that differentiates us in this class, evolving and highly competitive market. During the third quarter, our high quality content-centric communities saw sustainable improvement in our monetization ecosystem, enhancing the resilience of our business model and creating new growth drivers for our longer term development. Our paid membership has maintained a year-over-year growth every quarter for the past three years. In the third quarter of 2022, revenue from paid membership increased by 88% year-over-year, contributing 37% to our total revenues. At the same time, our average monthly paying users exceeded ten million for the quarter. These achievements were driven by the expansion of our premium content library, especially in the vertical targeting male users. Meanwhile, the enhanced influence of our premium content endorsed with the exclusive e-book rights also contributed to this growth. Better satisfied user demand for a sustainable supply of premium content with further strength support for premium content creators to encourage their creation efforts and enhance their creation experience. In Q3, we were pleased to see an increasing number of our premium content become mature commercial IP. This in turn rewarded their creators with the better income. Furthermore, our upgraded copyright protection features helped content creators trust and reliant on the Zhihu community. In the third quarter, the average income earned by premium content creators increased by almost 30% compared to the same period last year. Earlier this year, we set a target to help 100 creators earn more than RMB1 million, while our paid membership plan, we are now setting a new target on planning to launch a new ambitious program creator. A new super novel program established and the future plan will have greater funding resources and we'll aim to help 500 content creators earn more than RMB1 million over the coming three years. We first established our vocational training and business team in 2019 to better meet our users evolving needs for knowledge related content. Now, after nearly three years of development, we are well positioned in the rising demand markets with our trusted brands, improve technical capabilities and mature team structure. In the third quarter, revenue from our vocational training business was quadrupled year-over-year and contributed 9% to our total revenue, clearly demanding this business segment as our emerging growth drivers. During the quarter, we continue to expand our core offerings facing our userâs undergoing scenarios and in two major categories, academic improvement and career promotion. We further enhance our technical capabilities, including our CRM system, and improve our operational efficiency to better support the robust growth of this business. Our effective customer acquisition strategy paired with diverse high quality program drove a 300% year-over-year increase in vocational training paying users in the quarter. In Q3, we acquired a new vocational training brand in Zhihu that specialized in professional teacher qualification certification. In doing so, we further broaden our vocational training program coverage to better meet our users needs. Going forward, we will continue to explore greater growth opportunities to drive the sustainable development of our community ecosystem. Now moving to our advertising and accounting commerce solution, based by challenging microdynamics in Q3, Zhihu continue to gain traction in marketing budget share and increase greater recognition from brands and merchants. Our CCS and advertising business maintain its growth in our leading industry, including IT and 3C, automotive, and gain. The quarterâs top five revenue contributors for CCS and advertising were IT and 3Cs, cosmetics, e-commerce, automotive, and education. We continue to upgrade our Zhihu platform in the third quarter with additional improvements in the platform infrastructure. We also released a new version of the commercial value index to further improve matching efficiency between brands and content creators. Due to continuing weak market, big market conditions for online advertising, CCS revenue decreased slightly in Q3 year-over-year, but show a double-digit quarter over quarter growth. Total income earned by content creators through the Zhihu platform continued sustainable growth in Q3. We have long been dedicated to delivering better marketing performance through technology and innovation. As such, our incentive IT based, sorry â our invented IT based marketing campaigns has become an attractive extension of our traditional advertising program. The IT based campaign we released, including curiosity labs, auto lab, ingredients lab, and the tutorial lab have gained great market reformation by advertisers in various industries such as consumer goals, automobiles, and e-commerce. In Q3, we launched a new visiting factory IT campaign. Content creators as experts in different views were encouraged to visit the factory and R&D facilities of different brands seeking answers submitted by our users. This campaign has received positive feedback from both our users and the brands. The resulting high quality content helps our users better understand this brand's product and enhance their trust in each brand to transparent communication. To sum up our long-term strengths are impacted and our fulfilling content and the user quality are well recognized by brands and merchants. We expect that we will continue to win market share in the growing content marketing industry. And moving forward, we will continue to expand our portfolio of marketing solutions to empower our clients in reaching their goals. Meanwhile, we will continue to enhance Zhihuâs competitiveness to broaden our fulfilling content, drive user engagement, improve operating efficiency, and further enhance our trustworthy community culture. The road ahead is long and will involve many challenges, but with determination, perseverance, and our goal insight Zhihu is well positioned to further pass the growth and the profitability. This concludes Mr. Yuanâs remarks. I will now turn to our financials. In the third quarter, our community ecosystem first strategy continues to effectively strengthen the resilience of our content-centric business model. As evidenced by our solid operating and financial performance, total revenue grew by 11% year-over-year reaching RMB911.7 million in Q3, and our net loss margin narrowed significantly by 26 percentage points over Q2. Thanks to our discipline cost countermeasures. The strength of our multiple growth engines in the content-centric business model, once again proved itself in the third quarter with a further balanced revenue structure. CCS and our advertising business combined contributed 51% of our total revenue. At the same time, the paid membership and the vocational education accounted for 37% and 9% of total revenue respectively in the quarter, up 4 and 3 percentage points quarter-over-quarter respectively. Our paid membership maintains rapid growth momentum in Q3 with revenue increasing by 88% year-over-year to RMB3.4 billion. The average number monthly paying users reach a record high of 10.9 million, representing a percentage rate of 11.2% amounted total average MAU in the Zhihu community. And notably, the revenue from our emerging growth engines, vocational training was an over twelvefold year-over-year increase to RMB78 million in the quarter. Revenue from CCS and our advertising business came under pressure in Q3 impacted by the overall weak market conditions for online advertising. Total combined revenue for CCS and advertising for the quarter was down 23% year-over-year, and the 3% quarter-over-quarter. Gross profit for Q3 was RMB4.4 billion. Gross margin was 48.7% up 1 percentage point compared to the last quarter, remaining at the high end across industry. The quarter-over-quarter improvement in gross margins was primarily attributable to our continuous rigorous cost control and ongoing efficiency improvement. During the quarter, our relatively fixed cost mainly including cloud services, bandwidth, and the personnel cost, along with the content cost continue to decline as the percentage of total revenue. Continuing our effort starting from the beginning of this year, it further works to optimize operating expenses and the streamline operating efficiency in the third quarter. Our work is yielding food. Total operating expenses for the quarter â for the third quarter were RMB7.2 billion leading to our improved operating margins both year-over-year and a quarter-over-quarter. As we continue to shifting our focus from user expansion to user engagement built on marketing expenses decreased by more than 10% quarter-over-quarter. For our R&D and G&A expenses will continue to optimize the expense structure to improve our operational efficiency and R&D and G&A expenses as a percentage of revenues decreased by 9 percentage points and 3 percentage points quarter-over-quarter respectively. We are exactly reducing our net loss. Our GAAP net loss for the quarter was RMB297.6 million compared with the net loss of RMB487 million in previous quarter. Our adjusted net loss, which primarily excludes share based compensation expenses, was RMB250.6 million for Q3 compared with RMB443.8 million last quarter. As of September 30, 2022, the company had cash and Cash Equivalents, term deposits, restricted cash and short-term investments of RMB6.6 billion. And as of September 30, 2022, we have repurchased approximately 4.9 million Class A ordinary shares at a total cost of US$13.2 million. This concludes my prepared remarks on our financial performance for this quarter. Letâs turn the call over to the operator for the Q&A session. Thank you. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. Todayâs first question comes from Steve Qu with Goldman Sachs. Please go ahead. Thank you for taking my questions and congrats on the progress of cost contained initiatives. I have a question on MAU, so noticing that your MAU has declined over the quarter, yet the time spent and monetization efficiency per MAU was much better. Did you shift your strategy from pursuing absolute MAU growth to extract the lifetime value for the high quality user? And could you share some insights on our long-term user growth potential? Thank you. [Foreign Language] Thank you for this question. The answer from Mr. Zhou Yuan, the CEO of the company. At the beginning of the year, we set our annual strategy as a year of transitioning that is to keep our community ecosystem first, and that means a good experience for content creators, fulfilling content as well as a good atmosphere for the community. And more importantly, that is to have a commercialization that goes in line with our current community or simply to achieve stability â profitability as soon as possible. [Foreign Language] In the year, while we are pushing forward our strategy of year of transitioning and community ecosystem, first, we had make some adjustment. We believe that our volume numbers remained quite stable and we had hit our strategy target such as revenue and volume output targets. [Foreign Language] In the past year, we have made quite a lot of effort in fulfilling content optimization, quality control, as well as the algorithm improvement on the user side, the rewarding to the content creators as well as upgrades of our product. And I would like to talk a little bit more details about this. [Foreign Language] Be more specific, we keep improving the experience of the content creators. They are more active on our community. High level content creators on this quarter had an increase of 27% increase of daily activity rate, and they keep injecting high quality professional content to our community. And in May this year, we have launched our high yen plan4.0. And in this system, the content creators with specialties in key areas are enjoying better tools and growth support, as well as rewards to their content creation. And the average income per income making creator had a revenue increase of 47% in Q3 year-over-year. [Foreign Language] Second is ever growing fulfillment content that we have due to the optimization on the product and algorithm that we provide to the users, and they have better experience in consuming our content and they go deeper in consumption and as well as the intensity of content consumption gets better. And the third quarter, you can see that our daily time spent per user has been as long as 29 minutes with an increase of 26% year-over-year and 14% quarter-over-quarter. [Foreign Language] The third point is that we keep optimizing our community atmosphere and our community services, both for the users and content creators. On the user side, there is satisfaction rate for our governance of community and services, both increased significantly. And on the content creator side, their net promoter scores, as well as other subcategories for satisfaction rates such as creator tools, growth as well as revenues are all seeing very nice growth. [Foreign Language] And the last point is that our users are getting more active. For instance, our app DAU and MAU are getting increase for three quarters consecutively, and also we believe that we focus more on the commercialization that goes more in line with our community, so that our high quality users will keep giving us drivers for commercial growth so that we can develop a virtual cycle of healthy community and sustainable business growth. In the third quarter our app pool had a year-over-year growth of over 15%. [Foreign Language] So overall speaking, we believe that improvement for the ecosystem takes time and there are a lot of details to attend to, and it takes time for us to generate greater value for the community through a better ecosystem. And if you improve the user experience this will organically drive up the user base in a more sustainable way. And for the long-term, we believe that it is the most efficient method that we have for the user base growth. [Foreign Language] Overall speaking, our target remains unchanged that is to drive profitability. And for the short-term, we do see some slightly changes in our users. And for the third quarter, to be more specifically, our monthly viewers grow by 23% year-over-year. And we see that our users are getting more consumption on our content and will keep increasing and improving their content consumer experience â consuming experiences and create more commercial values out of our community. [Foreign Language] My question is related to paid membership business. The membership business once again demonstrated strong growth this quarter, so could the management share more details about the reason behind it, and how should we think about this business in the long-term? Thank you. [Foreign Language] Thank you for this question. Well, it was three years ago, since we are beginning to launch our membership program. And up to here now, you see our membership growth is faster than our expectation at the very beginning. We believe that the demand for the paying for the premium content is still there and will remain resilient for a long time. And it corrects as a matter, only relies on the supply of the good content that weâre paying for. And we believed our entire community serves as a supplier for great contents. And that is why you see that we have entered into a very good cycle of supply and demand for premium content was paying for. And as a result, you could see that our membership business started off with losing money, and now itâs getting more and more sustainable in driving profit and also to the net profit we have as a whole community. [Foreign Language] Our membership growth is a healthy and a fast one. And as you can see our high quality content and high quality content creators are the main drivers for our membership business. And the third quarter our membership content creator â member content creator had an increase of 40% year-over-year and the income per member creator increased by 29% year-over-year. And our most popular YanPlus content column had an increase offering of over 130% year-over-year. And this popular content has transformed more new members to us. For the third quarter, our monthly paying users is over 10 million, and as of September effective paying user number is over 11 million. And we see that this number keeps increasing and we think that these had provide very good driver force for paying members both in and outside of the website. And so far we havenât seen any sign of slowing down of member growth. And I â we think that this is thanks to the momentum that we cultivated through our community content based business model. [Foreign Language] We do value â the value created by our content creator YanPlus to our community. And in the past three years, the cap creating high quality content for us. And we just launched our Supernova program for the next three years, as mentioned by my colleague, Mr. Sun Wei, that we had hit this yearâs target ahead of schedule. So with our next three years program, we hope to create more content creators with revenue over RMB1 million. And we hope that more people can join us and benefit from our platform for more close and read word. [Foreign Language] Our membership business actually is emerged from our ecosystem and itâs ever growing size proved again that our member paying system from premium content based on community screening is really powerful and highly potential for the meet long-term, I think that our membership business will not be limited to the community growth. We think that premium content is attractive across the internet, and there is this general growth of willingness to pay for premium content as a general trend across our industry. And this will help us to further grow our membership growth in the long-term for the future. Iâll interpret, Iâll translate by myself. My question is related to the ADS and the CCS revenue. Whatâs the driver of third quarter decline and how is the fourth quarter outlook? Could management provide more color by different verticals? Thank you. Well, thank you. Overall speaking in our third quarter demand decreased â slightly decreased from the ADS and CCS. This is mainly due to a weaker market environment as a whole and also a struggling environment due to COVID. I think overall speaking, if you compare advertisement and CCS as a whole, our CCS business remained more resilient against a struggling environment compared with traditional advertisement business. So theyâre rather resilient and they only had a single digit decrease. [Foreign Language]. Okay. Overall speaking in our key and strength sectors, the results remain positive, especially in IT, 3C, automobile and games. They all registered year-over-year increase. [Foreign Language] And IT, 3C, automobile and games are exactly the strength areas that we have in our community and also in our content offerings. So that in a way proves that our content and our community are really popular amongst the users as well as the merchandisers on CCS area. Okay. [Foreign Language] And if you refer to the specific approval we get from our merchants, theyâre spending per paying client still increased by five percentage points year-over-year even with a weaker macro environment. So this proves that we are still trustworthy method of marketing and we keep gaining market share even despite some headwinds in the entire economic backdrop. [Foreign Language] Okay. By way of attracting and gaining market share against this market headwinds, we try to iterate our product from the lab IP [ph] series to cheese platforms to tree planting. Weâve tried various ways of marketing to showcase the brand so as to bring longer lasting and sustainable marketing values for our client. And I think this has been proven by our results and also in our premium content in our CCS product. [Foreign Language] Okay. Our advantage that based on the commercial product, based on the premium content and community has always been our competitive advantage. And for the long term, this will remain so for the future. So when the market comes back, when the consumption recovers, we will be able to go back to a fast growth track due to our advantageous position in CCS and gain more market share in the marketing world. Okay. [Foreign Language] As for the look-out for the fourth quarter we believe that we will register a double-digit growth, but compared with the high base in the fourth quarter of last year the â to be business for advertisement [indiscernible] in fourth quarter will probably be still subject to the COVID situation and the weaker economic environment. [Foreign Language] As for the projection in the 2023, I think it pretty much depends on the macro economy as well as the COVID policy evolution. So we're keeping close eye on those market situations. But so far we are not able to make an accurate prediction as to what will happen next year. [Foreign Language] Thank you very much. The answer from CEO, Mr. Zhou Yuan. So for our vocational training business for this year we had already registered multiple times of growth for three consecutive quarters. And for this quarter particularly the contribution from vocational training to total revenue is expanding to over 8% and will continue to increase in the coming days. And our vocational training curriculums center around our target users demand scenarios i.e., academic improvement and career promotion and we are expanding our paying curriculum offerings in those two specific areas for our users. [Foreign Language] We provide a diversity of curriculums to matter â to cater for the needs for the users to study and improve their skills. To be more specific the graduate school examination related program saw a record high enrollment numbers, and our users are really happy and give us some positive feedbacks for our high quality contents. And exam related for instance, CSA or CPA as well as some skills training for instance, new media operation, writing courses as well as video editing are also main contributors and key contributors to our revenues. And in a third quarter, our paying user number increased by nearly 300% year-over-year and with a quarter-over-quarter 40%, but still right now the paying users are relatively small and still has a great, great room for further growth. And we will keep diversifying and enriching our training programs to cater for their needs and to give them better content for their demands. Another point I want to make is to expand our vocational training business through M&A activities. In October this year, we had acquired a teacher qualification training company so as to make our offerings more comprehensive. And also thanks to the great branding value and word of mouth and reputation, we are able to attract more people in this area and to be supplementary in this area so as to attract users. And we are also relying on our brand in Zhihu and our technology advantages to empower the inquiry companies. For instance, as of this quarter, the revenue of our inquiry company had registered a 60% increase with ever growing paying users. Thatâs about our future plan. While actually our vocational training business emerged from our community userâs demand and in 2019, we just started to launch our education training part of our business, make our first trials in vocational training. And over the past three years, we had roughly develop a business presence, either by self operating or acquisition or mergers or cooperation in operating, of the businesses. And as we keep expanding it, we believe that the successful business model will gradually been expand and be able to provide premium content and drive commercialization for users across board. And we had made quite a lot of effort in launching products in this area. For instance, in June this year, the learning zone went live. And on this learning zone, we launched multiple popular programs for instance, the AI. And we will also launch a special platform for training in December this year which is an app called Zhixuetang. The official version will be released soon. And this will help us to cover the full category of training curriculum for the future development. So overall speaking, I think relying on our technology advantages, we will keep optimizing and transforming the content, and also to increase de-commercialization efficiency of vocational training for our business. Overall speaking, vocational training will serve as an important second curve for our business revenue. We believe that this will continue to benefit the overall sector and also benefit our company Zhihu. Thank you. Thank you. And ladies and gentlemen, this concludes our question-and-answer session. At this time, I will turn the conference back to Jingjing for any additional or closing remarks. Thank you all once again for joining us today. If you have any further questions, please contact our IR team directly or TPG Investment relationship. Thank you. Bye. Ladies and gentlemen, this concludes todayâs conference call. We thank you all for attending todayâs presentation. You may now disconnect your lines and have a wonderful day.
EarningCall_1841	All right. Welcome, everyone. This is Josh Schimmer from Evercore ISI biotech team. Pleased to welcome. From Regeneron, we have Neil Stahl, Executive Vice President of R&D; John Lin, Senior Vice President of Immuno-Oncology and Head of Bi-Specific Program. From the Investor Relations group, we have Mark Hudson, Matt Feeney and Ryan Crowe. So thank you all for joining. A whole lot of moving parts on Regeneron, not a lot of time, but I'm hoping we can spend some time on the bispecific and ADC portfolio, high-dose EYLEA and IRA and hopefully cover as much territory better as we can. So why don't we start on the bi-specifics and the CD28 bi-specifics starting to generate a fair amount of interest. So I guess the first question is, why start with PSMA and prostate cancer for CD28 as opposed to like in theory, any other solid tumor setting you could have gone into? John, just before you get started, I don't mean to interrupt, but I just have to read this for legal reasons. But I'd like to remind you that remarks made today may include forward-looking statements by Regeneron. And each forward-looking statement is subject to risks and uncertainties that could cause actual results and events to differ materially from those projected in such statements. Description material risks and uncertainties can be found in Regeneron's SEC filings. Regeneron does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I think John is probably best suited to answer that why PSMA first. I'm glad to answer this question. In fact, we didn't specifically take any particular antigen to begin our closed (ph) inventory bispecific technology development. From the outset, we are interested in looking into whether any antigen will be -- we will be able to make such a bispecific antibody and make it work, first of all, in animal model. And PSMA happens to be the first one that we tested just purely for technical reason, it was the first antibody that we were able to make a CD28 bispecific against. But in general, we think it's also a good place to start only because it is a very kind of resistant to immuno-oncology, especially checkpoint inhibitor. It has no -- very, very, very low single agent response rate to anti-PD-1 agent. So if we see anything in the setting, even in a single-arm dose escalation study, we will be convinced if it has any activity. Okay. Got it. And so you're starting to see some interesting signs of that efficacy also some intermediate talks (ph) like, is there a plan to try to mitigate the talks while preserving efficacy and if so, would that be? Yes, definitely. We put patient safety as our priority. And therefore, currently, we are actively exploring different dose levels as well as different ways to mitigate the potential safety concerns. So as we conduct more and more studies in these patients, weâre hoping to find optimal dose to go forward in combination with Libtayo. Sure. Yeah. So it's hard to know whether we could prevent the emergence of any immune-related AEs. And so probably the first thing is to be more vigilant in monitoring the patient symptoms as they are emerging any sort of symptoms or signs that are kind of consistent with immune-related AEs, then we could react more actively. So I think that's probably the number one is to be more vigilant. And as we see emerging -- any sort of emerging signs or symptoms, we could potentially combine with other drugs, for example, there are publications in the literature that suggests, maybe IL-6 receptor blocking body will be one way to mitigate immune-related toxicity from immune checkpoint inhibitor or the combination of PD-1 and CTLA-4. So we obviously are aware of all these potential mechanisms and we're actively considering them. Sure. So I guess the theory is that the PSMAxCD28 itself may not have dramatic efficacy. But when you pair it with Libtayo, it can, I guess, how do we -- how does the data support that? And just for context, right, Amgen's PSMA CD3 bi-specific's looking quite good. We've got PSMA targeting radio label therapeutics that look quite good. Like, how do we know the Libtayo is really necessary or not? Yes. That's a great question. We were asking ourselves all these questions when we were starting the research. In our research studies, we definitely noticed that because CD28 is a co-hosting receptor for T-cells, and it doesn't work unless you trigger T-cell receptor activation. So that's the Signal 1 TCR versus CD28 is a Signal 2 concept. And we know from multiple type of experiments, including PSA -- PSMA project as well as other projects. If we don't have Signal-1 in place, just adding a hosting signal to bi-specific, it will not have any antitumor activity. So we figured that that's kind of a given. And given that prostate cancer traditionally has not responded to anti-PD-1 very much [Technical Difficulty] the patient has some sort of [indiscernible], otherwise, they don't have great responses. So we figured that prostate cancer is a great place to test. And in the initial patients that we had disclosed earlier this year, we do see that during the first -three weeks of PSMAxCD28 alone, that's sort of the safety leading period where we were trying to figure out whether the drug itself is safe enough. During that three weeks period, we saw steady increase of CR and PSA level in the patient. And indicating that just by giving a PSMAxCD28 alone doesn't seem to control the tumor burden. And yet as soon as week four, we start dosing Libtayo, suddenly, there's a precipitous drop in PSA. That gives us sort of a dynamic view of how the patient's tumor responding to single agent as well as to the combination. Sure. I think we intend to have follow-up data on these initial patients as well as patients that we enrolled post the top line report at a scientific meeting in the first half of next year. Maybe we can toggle to the MET bi-specific. And specifically, like how are you thinking of that program differentiating in the MET field that includes an advanced ADC, TKIs, et cetera? Sure, Josh. The data that we presented at ESMO demonstrated kind of our initial dose escalation study for our METxMET bi-specific antibody that blocks internalize and degrades the c-MET oncogene in non-small cell lung cancer. As you know, MET amplification and over expression is often accompanied by the resistance to eGFR inhibitor in lung cancer, patients whose cancer is driven by eGFR mutation. And therefore, there's a great interest in the field to study whether blocking c-MET, oncogene signaling could add to the anti-tumor efficacy in the case where patient develop resistance to eGFR inhibitor. So there is this concept out there. And as you know, some of our competitors have now recently demonstrated that this probably is indeed its case. And we are asking the same question ourselves whether we do see that. In fact, in our dose escalation, we do see some responses in patients with eGFR mutation and with -- and then also accompanied by c-MET amplification over expression. So I think it's a good sign that we do see activity of our METxMET bispecific antibody. And the competitive advantage at this point, I think it's probably too early to say. But one thing I do want to point out is that we do not see exactly the same toxicity profile as the MET, TKIs. So as you know, many companies have MET TKIs that produces very high percentage upwards of 40% to 60% of peripheral edema. And in our trial that we presented at ESMO, we saw only 9% of peripheral edema. And in fact, all of the patients with peripheral edema is the grade 1 or grade 2. So it's much diminished. So one could speculate that maybe the TKI is still not totally specific to c-MET and therefore, an antibody will be more specific and will be safer. But -- and so on the efficacy side, in fact, we are very excited about a second molecule that is derived from this METxMET antibody, which is the METxMET ADCs. So we attach autopsy payload to the same -- exact same bi-specific antibody. And we found that MET is a rapidly internalizing receptor on the tumor cell surface. It actually serves a very, very good mechanism to bring in ADC to the tumor cells. So we are also -- on that end, we are very excited to see whether we can bring more efficacy to patients with lung cancer with or without MET amplification because -- in the recent ADC field, we realized that if you design the ADC correctly, one can also bring efficacy to patients whose tumor target is not over expressed. We can toggle over to high-dose EYLEA for a little bit. I guess the question that I continue to wrestle with is if you can apply the same redosing criteria in PHOTON or PULSAR to the 2 milligram EYLEA arm, what would that look like and how do you know has that ever been done? Right. Well, I mean, I don't see a lot of points speculating on data that we don't actually have, but the only relevant place to do so would be in PULSAR because they had the same loading criteria. And so after week 16, we saw that when you look at the comparison of the patients without fluid that the 8 mg was superior to at 63% to the 2 mg at 52%. So I would guess at that point that you would have more shifting backwards of the 2 mg EYLEA dosing and not going for longer interval. And typically, the physicians treat to dry and so we think that the outcome in the real world would be the same. Maybe on the strategic side for Mark or Ryan, the IRA introduces kind of an interesting dynamic here where, on the one hand, if high dose was considered a line extension and a biosimilar version of EYLEA were launched, it would exempt a high dose from any near-term pricing negotiation consideration. On the other hand, we talked about the strategy of potentially having a separate BLA. How are you thinking, like, what is the latest in terms of how the IRA may affect your high-dose EYLEA strategy, if at all? Good thing to call it a strategy, Josh. I think it's more just what we think is in -- within the regulatory framework and what's in the best interest of patient safety selling dosing errors and the like. But yeah, the dynamic with the IRA is certainly interesting. And while the ink is still barely dry on that lawn (ph), it's hard to project how this might be interpreted or implemented down the road. We have a similar view in that if we were to file aflibercept 8 milligram as a new BLA, which we intend to and we have alignment with the FDA on, we would be shielded from a negotiated price for its first 13 years on the market. And similarly, if for whatever reason, we were unable to file it as a new BLA instead as an SBLA, because biosimilars may be introduced prior to 2028, that would potentially exempt 8 milligram aflibercept forever because of the biosimilar carve-out or negotiation. So I don't want to say anything definitive on this, but our interpretation is similar to that of the expert I saw on the no patient left behind webinar a couple of weeks ago. Yeah. What is the role of the J-code in all of this. If it's under the same BLA, is it the same J-code, if it's a different BLA, it means a new J-code, how does that influence? Yeah. Itâs exactly, right. So if you -- we plan to file it as a new BLA, as I said, separate from EYLEA and if approved, the CMS, as a matter of course, whether issue a new J-code since the new reference product. And clearly, that's important from a pricing standpoint. So with a new J-code, you would not be bound to the ASP for EYLEA. And that's both dosed on a per milligram basis. So you would potentially have linear pricing for 8 milligrams versus 2, and that would be a very different outcome that I think will probably land with our final 8 milligram price. Maybe quickly, we canât ignore Dupixent just given how strong trajectory has been and appears to be like, how do you rank order the top two or three growth drivers at this point, just because there are so many ongoing expansion efforts in play here? Sure. I can maybe take a shot at that and others can weigh in that would be great. So AD is really the largest opportunity today, and there's plenty of runway to grow there as well where we're only at 9% penetration in adults. And just recent approvals in younger AD populations, I think we'll only continue to see atopic dermatitis be a primary growth driver for the foreseeable future asthma, another large untapped market. And we recently received pediatric approval there as well. So an additional age cohort to add to that indication. Nasal polyps, we are continuing to expand there and seeing substantial growth in these even more recent new indications, eosinophilic esophagitis, which was approved around the midyear and prurigo nodularis, which is only approved at the end of September. And between those two, I believe we have upwards of 115,000 to 120,000 new patients that could potentially be eligible for Dupixent therapy. And I think it's important to note that Dupixent today is now number one in every indication that we compete by new to brand share. So in addition to having a lot of runway in these indications, we also have leadership. And where would COPD fit or rank? Ryan, it does it lead to the top of growth drivers, just given the size of the market dynamic? Is it more asthma light, which not to understate asthma, but it doesn't seem like as big a driver is like atopic derm? Yeah. I think -- before we get ahead of ourselves, I'd like to see what the data looks like and how clinically meaningful the result is. But yeah, there are several hundred thousand patients in a type 2 COPD market that would be addressed should Dupixent have favorable data in the clinical -- in the pivotal studies. So I don't want to get into how big it could be until we actually have a data set to look at. But clearly, there's a lot of underserved patients. There hasn't been a lot of innovation in the space and we would probably be there on our own in terms of new launches or at least a while and that's very exciting. We should have data in the first pivotal readout in the first half of next year and the second pivotal probably by early '24. I don't think so and I know there's new competition in the atopic derm space, but I think competition really does make us stronger and a lot of the promotional dollars that will come into the market by these new entrants will only serve to increase awareness of the category, drive more patients to doctors' offices and because of Dupixent's leadership position, probably more Dupixent prescriptions. So I don't really see a lot of headwinds to growth for Dupixent and really, we have a really remarkable antibody and are excited about its opportunity going forward. Got it. So a number of oncology updates next year that you've outlined the COPD Phase III next year, the firing and FDA decision on high-dose EYLEA, what are the -- anything else key that we should be keeping an eye on in '23? I guess I would just add one more. The two year data in -- for high-dose EYLEA will come out with AMD and DME in the second half of next year, and that will be important for durability standpoint. And then Neil, maybe do you want to talk to the amyloid precursor protein data set that we expect in early '23? Yeah. We have a collaboration with Alnylam to look at siRNA and CNS against APP. And we have several biomarker readouts in the [indiscernible] that will tell us how well we're engaging the target. And I think this -- if it's successful, even from a biomarker point of view, it just opens the horizon for CNS treatment with other siRNA for other validated targets. So it's just a huge bellwether, I think, going forward, regardless of whether in this instance it cures Alzheimer's or not, which would be somewhat of an upside. Excellent. Something else to keep a watch for it. Thank you so much for joining us, and thanks everyone for tuning in, and happy holidays.
EarningCall_1842	Okay, great. So hi, everyone. Thank you for joining us. My name is Shannon Cross, and I'm the IT Hardware Analyst at Credit Suisse. So anyway, today I'm joined by Dr. Jeff Evenson, Chief Strategy Officer at Corning. So I think before we get going with Q&A, Jeff, would you like to introduce yourself and tell us a little about your role at Corning, and then we'll head into Q&A. Sure. Thanks, Shannon, and good morning, everyone. Just a reminder that I will be making some forward-looking statements today. You should check our SEC filings to see reasons why actual results may differ materially from the perspectives that I share today. Also, we will be discussing our results using core performance measures. Now I'm Corning's Chief Strategy Officer. I've been at Corning for about 11 years and today I'd like to spend a few minutes discussing our value creation model, how it informs our relationship with stakeholders, and how it's driving performance across our market access platforms. So let's dig in. We are world leaders in glass science, ceramic science and optical physics. We transform that expertise into products using our four proprietary manufacturing and engineering platforms. Our leadership in these areas makes us highly relevant fundamental secular trends playing out across the globe and across society. We address these trends by applying our capabilities to invent category defining products, developing scalable manufacturing platforms, and advancing strong trust based relationships with customers who are leaders in their industries. Our contributions help move the world forward and lead to profitable franchise like businesses for Corning. We seek to create mutual success among a diverse set of stakeholders, our people, our partners, our communities, our investors, society, and importantly, future stakeholders. Our most sweeping impact is enabled by our technology. Our inventions help deliver benefits to an overwhelming percentage of the global population. Through our more than 170-year history, and our current contributions, we clearly demonstrate that Corning is vital to progress. We find that the more we advance our expertise, the more options we have to provide value to society, and the more content we drive into our markets. We call this a More Corning approach. It expands our total addressable market and reduces our sensitivity to economic cycles. With that in mind, I want to highlight some of the life changing contributions we're delivering across our five market access platforms, optical communications, display, mobile consumer electronics, automotive and life sciences, and I'll share an update on our objectives for each. In optical communications, we're helping build a more connected world and playing a key role in bridging the digital divide. For example, in August, we announced a new manufacturing facility here in Arizona during an event attended by AT&T CEO John Stankey, and U.S Secretary of Commerce, Gina Raimondo, whose leadership help pass infrastructure legislation dedicated to the idea of internet for all. Our new plant will boost optical cable capacity to meet growing demand as AT&T builds on its mission of connecting the unconnected. We continue to meet our goal of outpacing optical market growth, which is today driven by broadband, 5G, densification and cloud computing. Our innovative, low-cost, faster to deploy and greener optical solutions as well as our growth enabling capacity allow us to build our leadership and to participate in a multiyear wave of growth for passive optical networks. Moving to our next market, access platform. We're helping our customers create a world with large lifelike displays. In display, we're executing well on our goal of stabilizing returns even as panel maker utilization this September reached the lowest level since the fourth quarter of 2008. We are the industry leader with a global manufacturing footprint, cost advantages, distinctive capabilities and leadership in Gen 10.5, which is critical to capturing long-term growth in large screen televisions. And we expect to exit this current display industry correction with strengthened customer relationships, and a refresh manufacturing fleet. In mobile consumer electronics, we're enabling a world where the most powerful applications can be accessed from the devices you carry with you every day, and a more equitable world in which billions of people have access to knowledge at an unprecedented scale. Our objective is to outpace growth in smartphones and semiconductor equipment. Our leadership at innovations, think scratch, drop optics and surfaces, our ability to expand into new categories such as bendable phones and augmented reality technology as well as our leadership in key components for semiconductors are driving outperformance in the face of soft near-term consumer demand for smartphones and IT devices. Progress in the third quarter included industry leading customer -- customers further adopting premium and new to the world materials such as Gorilla Glass Victus and Ceramic Shield for their major product launches. Longer term, we expect to continue outperforming the market through our product leadership, our More Corning approach and our ongoing contributions, our collaborations with industry leaders. Moving to automotive, we're helping build a world where software and displays are enabling new in-vehicle experiences and where vehicles are increasingly green. This year, we're continuing to outperform the market as we make progress on our objective of $100 per car content opportunity. We're seeing growing adoption of our technical glass for displays, windows and sensors. At the same time, we're continuing to build on our long standing leadership in emissions control products by delivering important new innovations for hybrids. In the third quarter, we deepened our role in the global automotive ecosystem, CarUX, a leading car display company owned by Innolux, one of our display customers, announced its use of our ColdForm Technology to offer innovative automotive interior displays. Looking ahead, glass is critical for more advanced design oriented cabins, enhanced driver assistance features and autonomy and the overall user experience. Our relationships and capabilities position us to capture the expected growth. Finally, in life sciences, we're helping support the discovery and delivery of new medicines, including biologic medicines that are personalized, effective and safe, and we're tracking well toward our current objective to outpace the market. Throughout the year, we continue to commercialize innovations, including a new cell and gene therapy production platform. And looking ahead, we expect to see continued growth in bio production and 3D cell culture as well additional wins for our premium pharmaceutical packaging portfolio. Now stepping back, Corning is not immune to the effects of a macro slowdown. And like all companies, we are dealing with challenges in this complex external operating landscape. Nevertheless, our cohesive and focused portfolio provides strategic resilience that is playing out well in the current environment. We've established a deep relevance to secular trends, and we're driving more content into our markets. Consequently, we expect to maintain our strength throughout an economic downturn and to deliver a profitable multiyear growth. We feel great about the contributions we'll make in the years to come as we continue to deliver innovations that help move the world forward, and we will continue to execute with discipline, invest where we see strength and pace to demand. Thank you so much. Can we talk a little bit about the current macro environment? And one other things that I really admire about Corning is the fact that you have such a conglomerate diversified base of business that allows for something to overachieve, while maybe something else has been a bit of a challenge, given some of the macro that's going on. So I guess, what are you seeing out there? What businesses -- are you most excited about, say, in the next 12 months, 24 months? And which ones are you a bit more concerned? Sure. Our objective is to be leadership in the three core technologies and four proprietary manufacturing and engineering platforms. And as we select opportunities, we're looking for a couple of things. One, what is the highest and best use of our capabilities, and that lets us serve a fairly diverse range of markets. But really, by reapplying and reusing what we already have in many cases. And that gives us the benefits of some diversification, but we also get great focus that comes out of that, and lets us move forward and extend our leadership kind of regardless of what we're working on in that space. The other thing that we're looking for, is a certain characteristic of growth. One is that the market itself will be expected to grow over a long period of time. And also that there's an underlying technology adoption curve in those markets. I think in times of an economic downturn, what we really focus on is making progress on those technology adoption curves, keeping our relationship strong, getting our size and capacity in line with the overall market demand, and do things that let us perform well in the environment, whatever it is, but also position us for growth when that occurs. And I think that that is a way that we probably can execute without exquisite precision in our market forecasts. Having said that, we're really seeing some opportunities across our portfolio. I would say today that around half of our revenue is in markets that have pretty low demand, I would say cyclically low demand. The other half, things are pretty good, I would say not at peak demand, but pretty good. And I think that -- those kinds of cycles will let us keep going reasonably well, regardless of what the macro economy holds, whether the 50-50 chance of a soft landing turns which side it turns out on. If I think about our markets for next year, there are markets like automotive and display. And when we look at display, it's really the demand from the panel makers, which has been much lower over the last two quarters than demand at retail, think those generally have upward biases as we go into next year. I think that over the next 2 years for optical communications, there's going to be tremendous activity going on. I think, right now we're seeing some pauses as we talked about on our most recent conference call. And then in mobile, consumer electronics, smartphones and IT devices are at fairly low levels of demand at the moment. So I think there's some upward bias there as well. And life sciences is more of a constant demand environment. As long as labs are open, that's what we learned during the pandemic. And that one depends on kind of where we are in our technology cycles. I mentioned the Ascent platform for cell growth that is important, we think for gene therapy and sort of medium scale production of cells. That's an exciting new technology for us. And also, earlier this year, we announced Velocity, which unpacks the technology stack for Valor and delivers it, we think to more customers in a -- in an easier way for them to gain adoption. So we're looking forward to growth in that area as well. Great. And I guess, thinking about the optical business, I understand there's a pause right now, but there's a significant amount of stimulus that's going to be coming in. Obviously, there's a big push for internet everywhere. How do we think about the timing? How do we think about the magnitude of the benefit? How are you positioning the company to make sure you take optimal advantage of what might be out there? Yes, our view is that the big spending from the stimulus gets underway in 2024. We've timed the opening of our new Arizona plant to be consistent with that. The other aspect that we're working on hard is to communicate the value proposition of our solutions to a larger set of service providers and data center operators. In the environment we're in today, labor is tight and our solutions significantly reduce the amount of labor that you need in the field, and the training that labor needs, because we've done a lot of the work in our own factories to make essentially bespoke, but snap together networks. It's like a custom LEGO set. And it's a little more sophisticated to assemble than a LEGO set. But we're getting to the point that you can even have a consumer in a rural area do a self installation, and we've had some good success with those trials. So I think as people understand that they reduce their costs, they reduce their need for labor, that solutions are really positive opportunity for us both from a sales growth and a margin expansion perspective. I can appreciate the complexity when we renovated our house several years ago. My husband's very techie, and he actually we have -- we had fiber throughout the house and he and my son sat there and splice the fiber. And my son actually got to be pretty good at it, which he could see better because he was losing his eyesight like my husband, but â¦ Exactly, exactly. Maybe just on Hemlock, how do you see the benefits there? How should we think again, it's a lot of it may be stimulus driven. There's obviously a long-term bias to solar. So how are you thinking about opportunities within that? And also, how do you think about the invest the Inflation Reduction Act, just in terms of maybe I think the EU had some, I don't know if this is something that would hit you, but there's some anti-competitive concerns that are kicking around out there. The Hemlock is a business that's been in some form in the Corning portfolio since the 1960s. It was originally founded as part of Dow Corning to supply highly pure silicon to the emerging semiconductors industry. And indeed, it's a leader in doing that, but we also make solar grade capacity. Corning acquired majority control of Hemlock in September 2020. And since that time, the solar both the semiconductor market has grown, and the solar market has grown significantly, and that business is approaching double the size that we acquired it to. So a great success. That acquisition was paid off in about a year and a half from the cash flow from the business. And we see a bright future in solar. Right now we're evaluating the benefits of the Inflation Reduction Act, which contains a number of incentives for solar production in the United States at all stages of the value chain. We believe that it's an important contribution to the world that Corning could make by expanding its presence in solar. And we'll be back to you with more details. But I think thatâs certainly -- this year, it's been a great growth area for us. And I would expect it to be a meaningful growth area for us in 2023 as well. Is this an area that will require a lot of CapEx? Or do you feel like you have sufficient capacity to meet needs for the next few years? This year, we focused on opening mothballed capacity. We have a significant amount of mothballed capacity that we could still open. And there could be opportunities where we'd go beyond that, that become very attractive with IRA and we're evaluating those now. Got it. And maybe the conversation or one of your investment points is the ability to increase content for per product. And yet I look at my iPhone, and it's a lot of Corning already. So I'm wondering when you look at -- I understand like, autos, I get where you can go there, but how do you convince your customers, I guess, to become even more dependent on Corning? Where do you see the biggest opportunity for increased content? And even like in displays, I think, do you continue to expect, what about, I think an inch and a half increase in display size, which effectively is increased content over time. Yes, we really see More Corning opportunities across the portfolio. In display, I think the largest More Corning opportunity for us is the increased screen size, because we're such a leader in Gen 10.5. When 65-inch and up displays get purchased, odds are those are on our Gen 10.5 class because that's by far the most cost effective platform to build it on. So that's a more a Corning opportunity for there. In more -- mobile consumer electronics, I think there are a number of More Corning opportunities. One is as we improve the performance of our products, whether that's with Gorilla Glass Victus and its successors, or whether that's with ceramic shield and its successors, we offer more value to the consumer and to our customers. And that's a way to increase our sales per device, even if we don't increase our area per device. But I think there are also ways to increase the area where it's we've had great success and the camera lens covers, we're doing bendables. And then if you think of mobile consumer electronics broadly, I think augmented reality is an emerging device where we could play a key role. And then the other part of our specialty materials business is -- has semiconductor plays. And the ones I'm most excited about our role in EUV, we are the standard for the material thatâs used in lenses in all EU V systems worldwide, where glass is increasingly getting used not only for wafer handling, but also being later stage development for packaging. And then as new types of semiconductors come out and new fabs get built like for silicon carbide, then our optics are really important in doing wafer evaluations and measurements and things like that. So then lots of More Corning opportunities there. You referred to auto where we have great opportunities on the interior and the exterior of cars that we're making great progress on, that was certainly a great spot for us and growth in 2022. Life sciences, more cell-based medicine, increasing in packages. And I think that's the full extent. And beyond the More Corning, what about from a market share or competitive standpoint? Do you see opportunity for market share gains? And maybe what drives that -- what drives the market in terms of share beyond just pricing, which obviously [multiple speakers]? Right. I think I will just give you one example of how we think about that and I will go back to optical communications. A narrow definition of optical communications market is how much gets spent on optical fiber and cable and the connectors. That would be the passive market. That would be the passive market overall. But maybe a better way to think about that from the perspective of the value we create is that you should think of the market as all of those things plus the labor that you have to install it. And our opportunity is to take a greater share of that labor. Similarly, in Corning pharmaceutical technologies where we put out, I think the benchmark glass packaging in the pharmaceuticals industry, that it's not just how much do companies spend on vials today, but it's how much do they spend on the vials plus the amount on quality assurance to keep issues with those vials out of the market, which turns out to be 3x to 4x higher than what they spend on the vials itself. With our vial, you don't need to do that because it's sort of self -- it either doesn't break or its self-monitoring that you really see it. So we can get a premium because of that. So we try to think broadly about what our addressable market is. And sometimes by redefining it, we see new ways that we can create value with our expertise. Great. And then maybe if we can move to margins. I'm just curious maybe on a segment basis, if you can talk about margins. And then is there an opportunity to improve margins segment by segment or from an overall Corning perspective, is it more just a mix story and maybe scale and leverage over time? I think that there are both sets of opportunities for us. As we get to the end of the year, one of my jobs as Chief Strategy Officer is to step back and look at what has happened during the year in all of our businesses, what the priorities are for next year. And I think that there was some good progress on certain manufacturing things that lead to cost reduction this year. And we have a robust set of initiatives underway to improve margins in each of our businesses in 2023 and beyond. So I think we can make some real improvements there. I think it's harder sometimes to see from the outside because inflation still is plaguing us. There are certain materials and energy that have had more of an impact later in the year than we expected going into the year. We are working hard to offset those. But I think we have margin improvement opportunities in each business. We will look, in some cases, to go back for additional price increases to help us where we have to offset the inflation we've seen. And then in terms of mix, sometimes that helps within a business. I talked about solutions in optical being positive for our margins in that business because we save the customer so much money and we share in that benefit. And then as an overall company, there's mix, and you should think of display and mobile consumer electronics as our highest gross margin businesses. Those are running at, I would say, below the normal run rate of demand right now. So I think as those increase, that's positive for our margins as well. So I think we have a number of levers to improve our margin structure. How do you think about where you place your R&D dollars? Like what is the process internally to say, Display gets this and Optical gets that? Or is it more on a product or a program-by-program basis? Yes, it really depends what stage we are in the research. I think the way we've designed our portfolio, we can pursue many things at the early stage at very low cost. For example, quantum communications and quantum computing, we have some really important contributions to make, in my opinion. Most of the records for quantum communications have been set on our optical fiber. But the research we do to produce that fiber is really about how you make even more perfect optical fiber and lower latency optical fiber. And we actually productize those with advances that are important for certain data center customers and undersea and things like that. So at the early stage, there is a lot of thinking about what -- how we want to advance our capabilities. We have certain senior members of our R&D team who are fellows, but you can really get going on a lot of things because we have so much in place within our portfolio for a low cost. As you get to the point that you're engaging in development and starting to use factory time and like that, the customer pull is really important. And I think one of the things we've done over the last 5 years or so is emphasize the need for meaningful commitments of customers to a product to get a real priority on our R&D resources. I think Apple's investments from their manufacturing fund are one of the most prominent examples of that happening, but there are many others. Do you see an opportunity to find -- I mean, maybe in some of the stimulus packages in that, is there an opportunity for the government to help fund some of this R&D and new development? Yes, for sure. I think that we've taken good advantage of that with building out our capacity for pharmaceutical vials and that funding has come from BARDA. Another place that we've taken advantage of it more recently is the expansion of our Fairport facility for semiconductor equipment where we are making a lot of metrology and wafer assessment tools. Senator Schumer and Governor Hochul joined us in August to announce that support from the CHIPS Act. And we'd certainly look at that in other areas. I think one area where I'm personally very excited about is what we can do in climate change. And I think that there are some great opportunities, whether it's using our honeycomb substrates for direct air carbon capture or using our new ribbon ceramic, which we are excited is the #3 most exciting photo that National Geographic took in 2022 according to their most recent issue. So you could see a picture of it. It's used in various climate initiatives from batteries to electrolysis for green hydrogen production. It's a really exciting platform and nothing is like it in the world. We've kind of taken some of the things that we do with glass in terms of Fusion and made a form factor of flexible ceramics that hasn't existed before. That's awesome. I remember when I went up to Corning, I was amazed by the technology, it's really remarkable. It was -- I guess I was -- I won't say I was surprised, but I was pretty amazed by all of the various areas there. In terms of your capital spend and CapEx requirements, cash flow, what's going on in terms of the interest rate environment, understanding you have the longest duration, I think, out there. But how are you thinking about cash usage and priorities, given some of the macro challenges but also some of the opportunities that you have? So our view is that in the current macro environment, there are certain areas of our business that need some additional capacity. But overall, we feel in a reasonably good shape and well, I'm not giving specific guidance. I think for modeling purposes, if you assume our capital investments next year are similar to what they are this year and what they were last year, that's a pretty good assumption. I think optical communications is one area where we see significant growth in the coming years that you will see as a priority. Upgrading our display fleets have been a priority while we've had a pause in demand. And I think there's a lot of refreshing that we do. And when we do that, we add capabilities and we reduce cost. It's an important way we expand our margins. So I think those are some of the big things that we are doing. And in terms of cash, we are cautious about the demand environment. We are -- when I talk about pacing to demand, I'm talking about the size of the company in terms of headcount, in terms of facilities, and we look at all of those things. So I think that -- and we look at inventory, which I think, no secret, grew too much in 2022. So I think you will look -- you will see us focusing on those priorities as we enter 2023. Great. Well, with that, I think we've come to the end of our discussion. Thank you so much for joining us and â¦
EarningCall_1843	Well, excellent. Hi, everyone. My name is Rich Hilliker. I am a software analyst at Credit Suisse. We are excited you are all joining us, and we are particularly happy that Fastly could be here today. So we have got CEO, Todd Nightingale; and CFO, Ronald Kisling. Guys, thank you so much for being here. So, maybe Todd, first and foremost, congratulations. We are excited to have you up here. 90 days went by quickly. If you are in the saddle, you are doing really well, it sounds like. So would love to hear your perspective, joining the company, eyes wide open, kind of drinking from the fire hose, how has it been? What were you most pleased about? What were things that you are going to spend a lot of time focusing on? Maybe give us the lowdown of your first 90 days? Yes, itâs been amazing. I think you when you are considering taking a job like this, you do as much research as you can, meet as many people as you are allowed to, I guess. I was lucky to have known Fastly to some extent in my previous role at Cisco. And I thought I knew a decent amount about the business, but I spent a good amount of time and kudos to the founder, Archer and the former CEO, who went way out of their way to make sure I got every possible question asked â answered. But â yes, when you come in and all of a sudden, itâs â you are doing it every day and you are going through every ounce of data, there were some super interesting pieces. I think the biggest one for me, the biggest maybe positive surprise was the innovation roadmap, the velocity of innovation at Fastly and the way the roadmap is playing out, I think was in a lot better shape than I thought perhaps from the outside, especially in that there is sort of a core business in network services and content delivery and there is a growth engine â a growth business in security, especially with the Next-Gen WAF and Signal Science acquisition. And there is an incubation technology area in edge compute and we just did a very early launch of another incubation area in observability. And I think from the outside, it was hard to see that these modules were sort of like well-formed and that there was kind of core growth incubation, which is that durable innovation strategy that I want to run. And so coming in, it was just really nice to see that in the engine, the sort of innovation velocity was in such great shape. It was a gift. It was my like biggest question mark coming in. And I feel like maybe what maybe comfortable joining is thatâs sort of where I come from. I come from the innovation side of the house. So yes, that was amazing. And then maybe my surprise on the challenge side, not the negative side, was maybe also kind of tied to that with sort of how well the products are packaged together and how these modules are sort of demonstrated and brought to the market, which is part of the reason I think I had a hard time seeing it from the outside. And so we are working feverishly on packaging right now to get really kind of teed up a new way of bringing technology to market in the new year, but yes, itâs been great. The only other thing Iâll say is coming back to an organization of this size, just it just feels great. Like, it was just incredibly welcoming. I just spent the last week with my family in New York. Thanksgiving is my favorite day of the year. And almost all of them told me, you look so happy now. So that was really nice to see. Well, thatâs great. Well, congratulations again. And I think this is a perfect segue. I would love to talk about â you outlined a number of priorities on the call a couple of weeks ago, one of which was product packaging. So maybe could you help us understand a little bit more of your vision here to kind of really reveal to the market, as you mentioned, this durable growth engine, right? There is such a line of sight towards all these different products. So how are you thinking about going to market and the steps to bring this to life and maybe the time to value there? Sure. Yes. I think thatâs incredibly top of mind for all of Fastly now. I think every organization is a product of where we come from. And at Fastly, we are sort of born in the publishing, media, entertainment customer base. And those are customers where the network service content delivery that they are buying from a vendor like Fastly so important to their business that they want to lean all the way in and they want to buy it piece by piece and negotiate every feature in every product. And they like the kind of pure consumption-based utilization model, which is great. And we are â thatâs how our business runs. Our core business all runs that way. The security business runs as a SaaS model, but the core business runs that way. The problem is that there is a lot more of the market that wants a reliable, predictable price. They â every month, they want to know that they bought the whole solution that they are not â that their engineering and development teams arenât going to find some new feature they want to use that will be priced differently or that will be a surprise. They want to buy the entire kind of package and have that bundled with enterprise support, all the bells and whistles. And so by providing that as an option, we bring something to the rest of our customer base that they kind of sorely want and we hear this from the rest of the customer base, like it could be easier to buy things from Fastly. And I think we have a real opportunity to do that. There is a secondary effect of it, which I think is really, really important. And that is that it radically simplifies the operation within the company. It means that we can do standard package, standard discount â sorry, standard package, standard discounting strategy and hierarchy throughout the team with a standard price and it affords us the opportunity to approach the channel in a new way, because when you have a standard package, standard discount deal registration that opens up the opportunity to run a high-velocity motion with the channel. And so just making our operations simpler, increasing the speed with which our sales team can operate, I think, has a huge lift to how efficiently we can run. And so our teams are kind of, I think, excited about this across the organization. Absolutely. So as you touched on the partner ecosystem, what would the vision be here? I mean, a lot of ideas, I am sure you are having and coming up with as you move through here. But that streamlining, lowering the barriers to adoption in some ways, how are you thinking about â or which areas of the business do you think are most ripe for the partner involvement? Yes, thatâs a great question, because this is a discussion thatâs like happening at Fastly right now. Itâs incredibly important. There is a lot of partnership opportunities for Fastly. We can OEM technology, we can become an OEM to people that we call a platform partner, etcetera, where Fastly â where their site and their offering becomes powered by Fastly. We have the opportunity to do different kinds of co-marketing, etcetera partnerships. All of those types of partnerships are â there is all levels of different opportunity and cost and risk, etcetera. But I think itâs become clear to our leadership team in my first 90 days here that the channel partnership, the systems integrator channel, has enormous upside for us in that so many systems integrators come with the software expertise, the development expertise, to onboard on to Fastly so quickly to drive all the value that our end customers want out of an edge cloud platform. And they can bring business into Fastly and then they can help service those customers for higher customer set. And so that is just a â thatâs an amazing kind of limited downside high upside potential kind of opportunity. And so we have decided to like really lean into that channel partnership. And so the packages are being built standard with standard pricing, standard deal registration etcetera to run a partner program that can be a high velocity motion. I will also mention like thatâs sort of where I come from. So I am like eager to sort of rekindle that motion. But one other thing is that Fastly in the Signal Science acquisition brought in a business that ran through the channel very efficiently. And because of that, the security product line at Fastly is like ahead of the game. Itâs already packaged in a SaaS motion. It already has predictability in pricing. It already has a channel motion that works and channel partners that are engaged. So we donât have to start from scratch. We just have to take those channel partners and really make them Fastly wide partners. And thatâs amazing. Got it. Well, maybe on Signal Sciences, you have talked about it as sort of the growth area of the business, right? We have talked about they have a channel motion. I would love to know your thoughts in terms of â if you were to give coming in â giving Signal Sciences, Fastly combined here, like integration, like what sort of score would you give it? How happy are you with the progress that exists now? And then maybe looking forward as to the vision, how far are we along in completing the vision and then also kind of executing against that vision? Yes. So on the go-to-market side, I think the integration, I would say itâs 60%. Iâd give it a B. And the reason why is that internally in Fastly, weâve really â we brought the teams together. We have one go-to-market motion. Thatâs amazing, but the channel still is kind of security only, while Signal Sciences has now sort of been brought in to become Fastly Security and weâve added some Fastly products into that product line, etcetera. Itâs still only the security products that are running the show. So when we are able to bring the channel across the portfolio, Iâll give us a A. But on the product side, to be honest, I agree, wouldnât be as good. There is still an enormous opportunity for us to unify the user experience. One unified UI, one unified API, a unified user experience, a unified developer experience. And by doing that, we sort of open up the door of a land-and-expand motion where every single content network service customer at Fastly, with a single like click, they can onboard the security technology. They can enjoy best-in-class Next-Gen WAF and DDoS and the security technology thatâs built into the platform, 100% feels like one experience, one â almost like one continuous use case. And then the teams are working on that right now because I think there is a huge opportunity here. Once that path starts to be well trodden, we also, I think, will â that will sort of demonstrate this durable innovation strategy of landing, expanding from content delivery to security, to edge compute to observability and what comes next. Got it. Okay. That makes a lot of sense. Maybe about developers. Youâve always been developer-centric. Archer â that was some of the key founding principles. Youâve acquired Glitch, youâve reestablished the fast-forward community. So clearly, a lot of effort and focus here to continue to drive velocity there as well. What have you found? And how are you thinking about targeting the developers to continue to capture that mind share and kind of move down that multiproduct expansion motion, have them standardizing. So where are you going to be focusing time? Well, Iâll tell you, the Glitch acquisition was hard to understand externally. Internally, the incubation of edge compute at Fastly is so critical because in so many ways, it is sort of the next generation of the core value proposition. Content delivery â like, traditional content delivery had been for years about sort of protecting the web server from loads, so under high surge load, your web server would stay up and you your content would still get delivered from the CDN. Fastlyâs value proposition is about user experience. Itâs about how reactive and how engaging the application, the website, the web experience, the streaming experience is for the user, for the end user. And in order to deliver that, edge compute is sort of like the next big step where you can have fully dynamic content, driven by custom data, etcetera, delivered right from the edge, and we can bring the latency down to the point where itâs just completely immersive. And that sort of next step in how Fastly delivers our core value proposition is so critical. In order to deliver that, you just have to be close to the developers, right? And edge compute is about pushing real custom workloads right to the edge as close to the user as possible, providing the lowest latency experience and really delivering experiences that are compelling enough that they change the user experience. They change how frequently carts get converted, how frequently e-commerce customers click on a recommendation or media customers look on a recommendation. They have â edge compute has the opportunity to change the way we deliver gaming or digital IoT services. And in order to do that, we have to stay super close to the developer community. And thatâs why Glitch has just been incredibly valuable resource. And so weâre we are really focused on continuing to grow and sort of curate that community and really use them as a resource to drive our edge compute road map, which is exactly what weâve done. Weâve focused on language support and API support to build the most developer-friendly edge compute platform in the world, and that has been very, very successful for us. Excellent. Sounds like more to come there, too. Well, very good. So maybe we could talk a little bit about consumption versus recurring services. Would love your thoughts, like longer-term, as we think about the business, weâve talked about â youâve got a lot of irons in the fire, right? A lot of opportunity, things that youâre working on. I mean, how should you encourage us to think of that, right? Because historically, the core business is obviously consumption. You mentioned SaaS model for security. So as we think about like the mix moving forward, how should we be thinking about that? And how does â how do packaged services that youâre working on, how does that impact that mix? Yes. So I think that pivot does level set today, security being one of the recurring revenue. And essentially all our delivery is on a consumption basis. With the packaging that Todd spoke about, when you get below kind of just our top high-traffic customers, as they start to buy packages, thatâs going to be sold on a recurring revenue basis. So itâs going to provide predictability to those customers. Itâs going to drive a bigger percentage of our revenue is going to be on that sort of SaaS model and recurring revenue. And then also, from our perspective, going to reduce some of the revenue volatility that we see from consumption as we see more and more business coming as recurring revenue-based contracts. Got it. Okay. Thatâs really helpful. And then as we think about how traffic on the network might evolve, like how are you thinking about that, right? You talked about some really interesting partnerships and opportunities. Youâve talked about private relay, traction and edge compute or Compute@Edge rather. How are you encouraging this evolution? As we â and then relative to the mix of recurring relative to the packaging, kind of bringing it all together. Yes. I think for us, this sort of innovation trajectory this land and expand motion, it gives us a kind of differentiation, the kinds of services weâre offering. It also â which changes our traffic load and actually makes it more efficient, the more diverse the cost, the product suite is, the more efficient our infrastructure to run, which is great. Maybe itâs not the best â maybe that not a reason to do it, but thatâs a nice lift. But as far as the kind of vertical mix goes, I think it does open door to a broader set of customers because itâs a more and more complete solution, right? And to me, thatâs sort of the long-term road map at Fastly is building the most complete edge cloud platform. And in that â in doing so, every customer whoâs looking to build an immersive like responsive, engaging user experience, will turn to Fastly. And the more complete our offer, the easier it is for development teams and DevOps teams to onboard. I think the faster weâre going to adopt those new customers and drive that motion. So I guess to me, part of this portfolio completion play is diversifying the customer base. Absolutely. I think all of these questions so far have led us up to probably around your favorite topic, gross margins, right? As we think about the completeness of the platform and establishing this multi-product to market motion, how are you thinking about the progression of gross margins, right? There is been a lot of debate on topic, itâs been topical. Maybe walk us through what the path forward looks like from here. Sure. I think one of the things when you look at say, 2022, weâve had a lot of sort of kind of noise on that. If you sort of extract that and kind of look at kind of the long-term trajectory, going back to â20 and â21, our gross margins were kind of in the low 60s. Coming out of that high spike in traffic and some of the supply chain constraints, we made sure we had adequate equipment. We deployed some of that a little bit earlier. Some of our processes around aligning traffic expectations going into â21 and â22, those processes werenât quite as well defined. And in some instances, we overbuilt capacity. And so the gross margin declines that you saw largely in â21 and through 2022, were largely driven by just kind of overbuilding the network, some international expansion, which initially when you set up a presence in a new market, typically, you do have an impact on margins until you build enough traffic to accommodate that site. And thatâs really been the driver. What we put in place over the last year is a robust process around planning, engaging with sales to do a much better job of understanding traffic expectations from our customers and really deploying in-line with that traffic expectations so that weâre driving more optimum utilization in our network. And so weâre still in that process of seeing that utilization get to where we want it to be. And thatâs what weâre starting to see in the second half of this year where we saw gross margins improve 300 basis points in Q3, where we expect Q4 to be another couple of hundred basis points higher. And then as we move into 2023, there is other levers around weâve renegotiated some of our bandwidth costs to reduce those. Weâre increasing the use of peering networks, which is extremely low cost as that percentage goes up, our costs go down. bandwidth is really our biggest cost. And then we continue to work with the engineering department and making our servers more efficient. And so as we increase that efficiency 40%, we can use 40% less servers. And so those drivers are going to continue to allow us to see year-over-year improvements in gross margin through 2023. And I think if you want to kind of level set in terms of what that opportunity is, I think as you get to the end of â23, weâre sort of within striking distance of 60%. And then I think on top of that as you get beyond that, the packaging around delivery, the growth around security which again that diversity of traffic allows us to utilize network more efficiency or all opportunities to drive gross margins even higher into the low and mid-60% as products become a bigger piece of our revenue pie and we start to sell a lot more of our delivery around packages and recurring revenue. Excellent. That was really helpful, a lot in there. So, maybe we will touch on a few of those. You talked about traffic planning. And I know that you have done a lot of work on forecasting and understanding â trying to understand the traffic, the patterns and being able to build for whatâs appropriate, right. I was wondering if you can kind of help us understand some of the changes you have made. Yes. I think the biggest thing when I came in on forecasting whether itâs on revenue or traffic patterns was it seemed to be pretty siloed. Finance was sort of doing their work, sales was doing their work, and engineering was doing their own. And so one of the first things I did was bring together initially sales and finance to come up with kind of the single forecasting process. And one of the things that we did because we are consumption based business is we engaged with all the sales reps to talk to their customers on a regular basis. And for our top 100 customers, we talk to them regularly and we get an estimate from that sales rep in terms of what is the outlook for that customer. And I think thatâs whatâs important in a consumption business, to provide better visibility and reliability. That was really kind of the first priority. And I think thatâs been working very well this year. Itâs also just driven really great partnership with the sales team, but given us better visibility. And then once that was in place, we put in place kind of a build plan, meetings with infrastructure that included finance and the sales team sort of leverage our revenue forecasting, which was based on traffic as well as sales outlook in terms of whatâs coming down the pipeline, what are some of the new deals, where are they located. And have those discussions around what those are, where do we need to invest, when do we agree to invest in the network based on pipelines and opportunities. And so thatâs really kind of how thatâs evolved. I think with our new leader, we have a new leader running our infrastructure team. I think that process is getting even more refined with a better understanding of even traffic patterns and how we even layer traffic of low priority traffic, how do we optimize that to the network, how do we route traffic during peaks to minimize bandwidth cost. Excellent. Well, maybe another topic that you originally touched on was peering. I know Todd, we have talked a little bit about this, too. How are you envisioning your peering strategy relative to what itâs been historically? And how does this, in your mind, really help â you talked about it being low cost. Like, how do you attack the strategy? How do you establish it and how do you drive the most value here? Yes. Itâs a good time for us right now when it comes to peering. I mean I learned about peering in my grad school when I was learning how the Internet is built. I never thought it would be such a core part. Yes, we buy our biggest driver of cost is network costs. And so when our traffic gets to a certain scale, it makes sense for different types of network providers to peer with us and just have a direct â usually costs for your very low-cost link to connect our two networks. And thereby, we can offload the traffic thatâs going to their users directly. We donât have to pay the very high bandwidth costs. And so every time our scale increases, we become kind of a more attractive peering partner, and that allows us to offload more traffic in those low cost â to those low cost lines and basically take track off of the very high-cost upstream link. Thatâs â so because of that, we just have this natural opportunity to be able to peer more aggressively as we scale. Every time fast as traffic doubles, we become a more attractive peering partner, thatâs good for our business. But the other side of that is also technology side. The network automation, the network engineering thatâs required in order to orchestrate all of this â all of these peering links, in one, it makes the Fastly offering the premium offering that it is. Like, the most well-connected POPs in the world, driving the closest proximity possible to the user, the best possible user experience. And the network automation, the network engineering there, like this is an area I am super comfortable from a technology point of view. And itâs amazing. I mean I think we have an amazing team there. And so thatâs been a phenomenal step forward. The automation, it makes our offering better with better connectivity, but it also â we have a lot of opportunity moving forward because as we get more and more peering links, more and more well connected POPs, we have the opportunity to do cost optimized routing and service level-based routing. And thatâs a huge opportunity. We havenât really even scratched the surface of yet. So, as we continue to scale we have the sophistication of the network automation to add more and more peering, which is going to be good for our cost of revenue. But I think itâs really important. Itâs something that we talk about a lot internally because it has the added benefit of increasing of making the actual offering better, the actual responsiveness of the system better, which is great. I mean how many times do you lower your cost and provide a better offering to the customer at the same time. Yes, itâs amazing. Want some exciting opportunity. And maybe at the time, if anyone has any questions, feel free to raise your hand. We have someone who is running around a mic, so we will give you guys a second to think on it. And if not, I have got a couple more here we can go through. Okay. We will keep on going then. So, maybe Ron, I was wondering if you could talk through your guidance here a little bit that you issued. Nice results. And then as we think moving forward here, like whatâs your level of visibility and confidence given all of what we just talked about earlier, right? How are you feeling about that? There is a little bit of conservatism from other companies in the market in general. But we saw really is â what I thought, a strong guidance from you. So, I am wondering if you can walk us a little bit through that? Yes. I think to kind of level set kind of how we have approached guidance is given kind of the level of visibility we have. And I think at the beginning of the year, we provided full year guidance. And the visibility two quarters, three quarters, four quarters out was much less visible than so at this point, we are kind of looking one quarter out. And so itâs a lot easier quarter to guide. But if you look at whatâs been really driving kind of the growth this year, itâs really been expansion with our existing customers and new customer acquisitions. And so I think a lot of times we get the question about given some of the economic headwinds, how are you feeling and why are you confident about your growth. And I think a couple of dynamics are, one, we have a relatively small market share in a relatively large market and also relatively small penetration in a lot of our largest customers. And so â that really has been the driver of our growth is expanding within our existing customers and market share gains. And so we see that continuing. And personally, I think from an Internet traffic perspective, where how customers actually deliver their product to the end user, whether itâs streaming, whether itâs commerce or financial. So, we are kind of like the utility. So, we are one of the last ones that certainly will shut off. So, as you take those sort of dynamics into place and then look at how we have built our forecasting process, I think our guidance strategy is the same. It is we are providing our outlook based on what we have high confidence in terms of success in Q4. Q4 does tend to be seasonally higher. There is a number of sort of high-traffic events. Itâs a high traffic quarter for e-commerce as well. And as we have talked to our customers, this is how we came up with kind of the guidance that we feel really confident about and continuously reflects that expansion within those customers and new customer acquisition. Excellent. Okay. And maybe, Todd, busy 90 days, it sounds like. But I think you have had so many conversations at this point, customers, partners, a number of investors. Where is everyone maybe agreeing on â or in your conversations, where would you say there is a misunderstanding amongst those groups? Is there any sort of area that you think needs to be clarified? Yes. I mean I think there is a â there is definitely clarity around the margins. So, I am glad we got to talk about it today. I get tons of questions on that from the investor community. And look, I think we have a huge opportunity to correct our margin just on cost control, just on getting the costs right, building an efficient infrastructure and sort of leveraging the technology that we already have developed. So, thatâs maybe like the biggest sort of misconception. And then I think the vision is key here. I mean I think in 3 years, if people think of Fastly as a CDN business, we would have failed, like that would be a huge issue. We are an edge cloud platform. Thatâs where we deliver value to our customers. We are not trying to relieve load from peopleâs web servers. We are trying to deliver the best possible user experience and edge cloud platform is going to be the answer for that for years and years to come. And so I mean I think just unifying the message around that vision is something I am super focused on. Well, I think thatâs a great note to end on. We are grateful for you guys both attending, for Fastly being here, for everyone in the audience and online. Thank you guys so much, and I hope you enjoy the rest of the conference.
EarningCall_1844	Hello, everyone, and welcome to the Flora Growth Third Quarter 2022 Earnings Results Webcast. I'm Jessie Casner, Chief Marketing Officer at Florida Growth. Please note this webcast is recorded and will be published for viewing shortly after the end of the webcast. On the call with me today are Luis Merchan, Chief Executive Officer and Chairman of the Board; Jason Warnock, Chief Commercial Officer; and Elshad Garayev, Chief Financial Officer. Today, we will discuss the results of the third quarter of 2022. This morning our unaudited financial statements for the three and nine months ended September 30, 2022 were filed with the SEC under the cover of a Form 6-K, and we disseminated our earnings release. Copies of both can be found in the Investor Relations section of Flora's website and on EDGAR. Iâd like to remind you that during this webcast, managementâs prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Forward-looking statements donât guarantee future performance and therefore undue reliance should not be placed upon them. For detailed description of the factors that could cause our actual results to differ materially from any forward-looking statements made, please refer to Form 20-F filed with the SEC on May 9, 2022. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances except as maybe required under applicable securities law. Finally, please note on the call today, management will refer to certain non-IFRS financial measures such as adjusted EBITDA and adjusted EBITDA margin, in which Flora excludes certain expenses from its IFRS financial results. Such non-IFRS financial measures are explained in the company's earnings release. Thank you for the introduction, Jessie, and welcome, everyone. We appreciate the time you have taken to be with us here today. At Flora, we seek to create a world where the benefits of cannabis are accessible to everyone. We want to be the leader in providing safe, high-quality cannabis to markets across the globe. The third quarter was a record period for the company. We continue to execute on our strategic initiatives during the quarter, which led to meaningful improvements across all key financial metrics. Today, we reported approximately $10.8 million in revenue for the third quarter of 2022. This number alone represents more revenue than we generated during the entirety of 2021. This is the first-time we deliver over $10 million in one quarter and we're very proud of this milestone. Additionally, our third quarter gross margin improved from 29.6% to 46.2% compared to the third quarter last year. This was due to increased efficiencies across our operations, including M&A integration and optimize inventory management amongst others. We expect these types of improvements to continue as we head into the balance of the fourth quarter and the new year. This improvements were accomplished despite a challenging capital market, an uncertain regulatory environment and a volatile geopolitical climate. It's clear that Flora has upward momentum, momentum that continues to build across our three strategic pillars of House of Brands, Commercial Wholesale and Life Sciences. In our House of Brands pillar, we delivered meaningful top line revenue, representing more than 80% of our total sales. This included revenue growth from our top selling brands JustCBD and Vessel and we accomplished this while we finalized the integration of JustCBD, Vessel and No Cap. This integration helped us realize meaningful cost savings and sales synergies. On the Commercial Wholesale front, our 247 acre cultivation facility in Colombia is fully operational. We are now harvesting high-THC cannabis on a weekly basis, and we are operating under one of the lowest cost structures in the globe. We have already cleared the regulatory path to five countries for export, and we expect to add more countries to this list in the upcoming months. This year, we were awarded a high-THC cannabis quota of 43 tons by the Colombian government, that we intend to leverage through the remainder of 2022 and throughout 2023. These operational milestones come on the heels of significant announcements of positive regulatory changes for the industry in the United States, Germany and Colombia. As we achieve these key milestones across our core business units, we also added key executives to our roster, appointed Brandon Konigsberg, our former JPMorgan executive to our Board of Directors and Elshad Garayev, a former Boeing and Amazon executive as our Chief Financial Officer, further enhancing our Financial Controls and Corporate Governance capabilities. Finally, Flora has been active on the M&A front in 2022 with the acquisitions of JustBrands and No Cap. Earlier this month, we announced a definitive agreement to acquire Franchise Global Health, a pharmaceutical distributor with primary operations in Germany and licenses to import and distribute medical cannabis into the most important legal, medicinal cannabis market in the world today. We expect to close this transformative acquisition in mid-December and based on both of our company's guidance for 2022, we expect to have a company with at least $100 million in revenues for 2023. Our outstanding results and momentum are the product of the hard work, dedication and talents of our management, Board of Directors and staff around the world. Thank you, everyone. With that, I'll hand it over to our CFO, Elshad Garayev, to review our financial performance for the third quarter of 2022. Thank you, Luis. Revenue for Q3 2022 increased 414% year-over-year to approximately $10.8 million primarily driven by sales from JustCBD and Vessel. Gross profit in the third quarter increased 703% year-over-year to approximately to $5 million. The period's gross margin expanded significantly from 29.6% in the prior year to 46.2% and also improved from 43.9% in the first half of 2022, reflecting our ability to organically optimize our business. Increase in this margins were a result of improved inventory mix as well as new product pricing. Operating expenses in the third quarter were $10 million compared to $4.2 million in the same period last year. The increase in operating expenditures was primarily driven by OpEx from acquired businesses, administrative infrastructure, sales and marketing and expanding our operations, all of which are enabling us to deliver on our growth objectives. Net loss for the period was $7.4 million compared to $3.6 million in the same period last year. Adjusted EBITDA in the third quarter was negative $3.9 million compared to negative $3.1 million in the same period last year. Adjusted EBITDA margin improved significantly from negative 150.1% in Q3 2021 to negative 36.5% in Q3 2022, first a signal in our path to profitability. CapEx year-to-date was $0.9 million compared to $1.5 million a year ago. The decrease was primarily driven by completion of our investments in cost of channels and our Flora lab operations. Turning to our balance sheet. As of September 30, cash and cash equivalents were $5.9 million compared to $37.6 million as of December 31, 2021. The decrease was primarily attributed to $60 million cash paid for the acquisition of JustCBD as well as higher operating expenses related to sales and marketing of acquired businesses and one-time expenses for our cost of channels operations, Flora lab expansion and M&A-related transactional activities. Today, the company remains debt free. Thank you, Elshad. Since Flora's inception, the value of our House of Brands has been to drive meaningful consistent revenue streams that allow entry to new target markets regardless of the legal status of cannabis, opening up supply chains, distribution networks, and building customer bases. We continue to see this strategy bear fruit. The third quarter saw record sales, improvement in margins and strong direct-to-consumer and wholesale performance with more than 80% of Flora's revenues being driven by the House of Brands division, with the majority being attributed to JustCBD and Vessel. Both brands experienced year-over-year growth and margin improvement. We also continue to realize cost synergies between our primary revenue driving business units through general and administrative reductions, supplier consolidation and channel expansion. Sales teams have been consolidated, logistics and fulfillment are now housed under one roof and factory relationships have been leveraged to smooth out supply chain inconsistencies and get better economies of scale. In preparation for Q4 and early 2023, where we expect to see an increase in revenue for all brands given the demand of the holiday season, we increase our inventory position over 10% from our ending position in the first half of 2022 to reflect the heightened demand in the last quarter and overseas factory closures in Q1. Additionally, during the third quarter, we acquired No Cap Hemp Co. brand. This no cash royalty based acquisition bolstered our product offering. No Cap has been integrated into the JustCBD operations with the novel offering is creating opportunities for expanded product penetration in existing retailers and access to new clientele. I'll now pass it over to our Chief Commercial Officer, Jason Warnock, to elaborate on our cultivation and commercial wholesale business. As Luis touched on, we successfully exported CBD isolate into the U.S. and dried flower into Switzerland and the Czech Republic. Our ability to realize the full activation of our cultivation and export goals as quickly as we did is a testament to the Flora team and our growing list of global distribution partners, our strategic M&A activity and our strong regulatory connections. Although the ability of all Colombian cannabis growers to cultivate cannabis specifically for the export of dried flower was delayed by the passage of the government regulations for April of this year. We were able to meet our goal of harvesting and exporting cannabis flower in the fall of 2022. Today, we are actively cultivating four psychoactive cannabis strains including a balanced one to one strain and three high-THC cultivars for export into international markets. Additionally, we are producing THC derivatives for domestic medical purposes in Colombia and continue to produce CBD isolate, distillates and dry flower for the United Kingdom, Switzerland and the U.S. as well as any other countries where CBD markets are beginning to flourish. Flora is actively engaged in building the commercial export pathway for THC products, specifically through Germany, being our pending acquisition of Franchise Global Health. Leveraging their existing network of approved cannabis pharmacies, we expect to fully activate this channel in Q1 of 2023. The activation of these export pathways into the Flora supply chain will provide us a foothold in the European Union. To fully realize the potential of the EU market, we have redirected our EU GMP certification efforts towards the certification of dry bulk flower, and have actively engaged our European partners seeking distributors to fit strategically within our long-term commercial wholesale strategy going into Q4 of 2022 and beyond. Thank you, Jason. As we've mentioned, Life Sciences, the research and development of cannabis medication is a critical part of the future of our industry. We have achieved two key milestones this quarter. First, we have greater Flora lab 4, expanding our capabilities to manufacture custom formulations as our products with cannabis derivatives and traditional master formulas to serve the medicinal cannabis market in Colombia. Located in Bogota, then now 2,300 square foot facility was completed just a few weeks ago. Alongside the completed construction of Flora lab 4, we have formulated eight new prescription grade cannabis medications and are awaiting INVIMA certification of the lab to launch commercial. These science-backed medications are formulated to treat a number of ailments, including social anxiety and acne. With these successful operational and research steps completed, we expect that our Life Sciences division could begin realizing revenues via prescription formulations as early as the fourth quarter this year. And this completes our operational updates from our core business unit. I want to thank all of you again for attending our call today. Our third quarter has been a formative time for our company and despite the macro headwinds, I am proud to say that we are continuing to execute on our strategic goals and remain on the track to meet our 2022 revenue guidance of $35 million to $45 million. We're engaging meaningful M&A activity across the last 12 months. We have been hyper focused on the quality of our acquisition targets, integration and realizing the full opportunity of each of these throughout the year and of course this quarter. The last year was focused on our household brands and expansion of our consumer base. In 2023, we will see a full activation of revenues of our Colombian grown cannabis as we accelerate the supply to meet the world's demand for high-THC and high CBD products. Our pending acquisition of Franchise Global Health is a signal of where we are placing our bets for the future. Our future where cannabis is not hemmed in by geographic boundaries, but where cannabis is growing in the most advantageous locations and move to the areas of demand across the globe. We continue to set ourselves apart from the other players in the industry, appending what an international cannabis company looks like, supporting scientific research, working with international standard setting bodies, and of course, promoting best practices that continuously streamline our supply chain. I want to offer our sincere thank you to our customers, our shareholders, our Board of Directors and the entire Flora team. Flora growth exists to create a world where the benefits of cannabis are accessible to everyone and we are working every day to make this a reality. Thank you, Luis. This completes our prepared remarks. As a reminder, recording of this webcast will be available within 24 hours on the Flora Growth Investor Center. Thank you all again for attending Flora Growthâs third quarter 2022 earnings results call.
EarningCall_1845	Ladies and gentlemen, thank you for standing by, and welcome to HashiCorp's Fiscal 2023 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Alex Kurtz, VP of Investor Relations and Corporate Development. Thank you. Please go ahead. Good afternoon, and welcome to HashiCorp's fiscal 2023 third quarter earnings call. This afternoon, we will be discussing our financial results for the third quarter announced in our press release issued after the market close today. With me are HashiCorp's CEO, Dave McJannet; CFO, Navam Welihinda; and CTO and Co-Founder, Armon Dadgar. At the close of the market today and in conjunction with our earnings press release, we have published an earnings presentation that contains additional financial information pertaining to this quarter. We encourage you to review the presentation in advance of our call. You can access it on our investor website at ir.HashiCorp.com. Today's call will contain forward-looking statements which are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition, and our guidance for the fourth quarter and full year for fiscal 2023. These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek or will or similar statements. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with the Generally Accepted Accounting Principles. The financial measures presented on the call are prepared in accordance with GAAP, unless otherwise noted. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir.HashiCorp.com. We're excited to share with you that Q3 was a solid quarter for HashiCorp as we exceeded our guidance with revenue of $125.3 million, representing year-over-year growth of 52% along with the trailing four quarter average net dollar retention rate of 134%. Current non-GAAP remaining performance obligations reached $553 million, representing 50% year-over-year growth and we added 26 customers with greater than or equal to a $100,000 in annual recurring revenue to reach a total of 760. Our HashiCorp Cloud Platform offerings reached $12.9 million in revenue, representing 10.7% of subscription revenue in the quarter. We're excited about adoption trends as we continue to rollout new features and new capabilities. We're also pleased to announce that during Q3 we had our third customer reached $10 million in annual recurring revenue. This global financial institution has made significant investments across our three core products, and I'll discuss this customer's journey in a few minutes. Armon and I have spent the last few weeks meeting in-person with customers and prospects across North America, Asia Pacific, Europe, and also last week at Amazon re:Invent and I wanted to share some of our insights. Regardless of location, all buyers are under increasing scrutiny and pressure to do more with less, a theme I think will continue through next year. However, despite these pressures, for large organizations worldwide the transition to a cloud infrastructure remains a key strategic investment over the long-term. And because of the ongoing prioritization of cloud, even with economic pressures HashiCorp products continued to be a strategic investment for our customers. Our products are fundamental to running a modern infrastructure estate and conducive to cost control. As I've said before, organizations worldwide are still very early in cloud adoption. As they continue their transitions to the cloud and multicloud becomes the standard, our products become increasingly valuable because they offer operations, networking and security teams with a consistent operating model that provides a system of record across each layer of their infrastructure stack. During my travels this quarter, I continue to hear the most successful companies describe their use of centralized Platform Teams. Platform teams help these organizations move from tactical cloud adoption to strategic cloud programs, enabling a common infrastructure foundation for operations, security and networking. I heard many examples of how these teams prioritize the adoption of products that offer unique capabilities to help them extract more value from their cloud investments, and they continue to invest their tightening budgets with us. Before turning it over to Navam, I'd like to briefly highlight some of the announcements we made at HashiCorp in October, which focused on product enhancements and new offerings across security and infrastructure automation. Each of our new releases helps teams utilize automation to do more with less, which is important as skills and talent shortages threaten the bottleneck cloud programs. Many of these enhancements also help our customers with the most significant challenge, security, which is a critical component of the cloud operating model. Platform teams under immense pressure to secure massive attack services of different clouds, private data centers and remote workforces. Just as HashiCorp pioneered the concept of secrets management, we're building on another concept to help improve the security posture of the world's digital infrastructure, a differentiated approach to Zero Trust Security. And we are delivering the Zero Trust Security approach for the cloud. In fact, we're proud to note that AWS just named us North America's Security Partner of the Year at re:Invent last week, their Annual User Conference. To deliver our vision for Zero Trust Security, we announced the general availability of Boundary on the HashiCorp cloud platform at HashiCorp Global. HCP Boundary joins HCP Vault and HCP Consul to provide platform teams with the first Zero Trust Security solution, purpose-built for the cloud to secure applications, networks and people. To help organizations better manage cloud provisioning and infrastructure challenges, we also announced several new capabilities for Terraform. With these enhancements we are continuing to build high-value enterprise features into Terraform, which provide greater security, compliance and operational consistency as customers standardize their infrastructure automation for multicloud. Now, I'd like to turn your attention to notable third quarter transactions that highlight our Adopt, Land, Expand, Extend, Renew motion in action. First, a land deal, an APJ-based oil and gas corporation standardized on Vault enterprise in order to secure its configuration files. Additionally, Vault will expedite the customer's initiative to move to passwordless backend systems and improved reliability across its monolithic applications. Next, an expand deal. An international manufacturing company expanded its Consul and Vault deployments to support a rollout of a multicloud strategy for its next-generation smart building control services. With plans to deploy across all the major cloud service providers, HashiCorp has enabled a consistent approach for its development teams and provides a single control plane for both service networking and secrets management. And third, an extend deal. A top domestic banking company extended to use HCP Boundary to simplify, streamline and automate common developer tasks and workflows for accessing remote systems and applications provisioned by Terraform, secured by Vault, and connected by Consul. This is one of our first enterprise deals for Boundary since announcing general availability at HashiCorp in September. We are proud to count companies like these as our customers and are deeply committed to continue to earn their trust. And finally, I'd like to spend a minute on three HashiCorp's $10 million ARR customer that I mentioned earlier. This organization is another example of a customer who started working with us around a single product and expanded and extended over time. They became a Terraform customer in calendar 2018, then Consul in 2019, and then Vault in 2020 and 2021, starting with our Open Source products in each case. This global financial institution began its journey with us with an initial investment around its public cloud engineering teams and how they were going to scale operations using AWS. The early days with this customer began with the philosophical conversation around the future of infrastructure as code and the value of Terraform for its independence, given the reality of their hybrid estate. This led them to adopt Terraform enterprise for their early cloud Platform team. Then, starting in 2019, they made an investment in Consul to add application resiliency that was part of their data center migration projects. At the same time, Terraform saw massive growth across multiple units as it became the standard behind this company's cloud projects, working through platform teams as a main conduit into its global organization. Finally, Vault was deployed in 2020 as part of this company's blockchain initiatives that are now deployed across public clouds, and that allow it to provide global namespace, performance replication and disaster recovery. We are extremely proud of this partnership as this customer has been side-by-side with us on the journey to enhance our three core products, and we look forward to our continuing collaboration. Turning your attention to the top line financial results. We produced solid results in our third quarter of FY 2023. We grew our total revenue by 52% year-over-year. We continue to see strong expansions and extensions in our customer base, as shown in our trailing four quarter average Net Dollar Retention rate, which remained at 134%. On the expense side, we continue to focus on resource allocation efficiency in the business during Q3. Doing so allowed us to come in ahead of our non-GAAP gross margin, non-GAAP operating income, as well as our GAAP and non-GAAP net income plans. We achieved negative 24% in non-GAAP operating margins this quarter, and incurred a net loss of $0.38 per share on a GAAP basis and $0.13 per share on a non-GAAP basis. Before discussing guidance, I wanted to provide some background around the macro conditions we are seeing. We clearly saw solid revenue performance during Q3 which exceeded the high-end of our guidance, as well as our own internal expectations for what is historically a seasonally low quarter. In Q3, we also saw a stronger than expected multiyear contract activity from our customer base, when our existing customers recommitted to us as a critical vendor for the long-term. After reviewing some of our top Q3 multiyear deals with our sales teams, we believe some of this outperformance may have been related to larger customers looking to lock-in pricing with us against the volatile inflationary environment. This is a good outcome for the customer and it clearly helps us gain better long-term visibility to our business as well. Similar to last quarter, in Q3, we continued to see high scrutiny of spend by customer procurement and finance teams causing elongation in our sales cycles. The spend scrutiny was particularly high with new contracts from first time customers. We are incorporating the macro uncertainty we are seeing into our fourth quarter guidance. And as always, we are taking a measured approach to our revenue guidance for the next quarter. Given the macro uncertainty, we are also continuing to optimize our cost structure and being extremely considered in our head count investment plans over the next 12 months. Now on to our guidance. Despite the macro uncertainty I have discussed, we are very pleased to raise our full year guidance. For the fourth quarter of fiscal 2023, we expect total revenue in the range of $123 million to $125 million. We expect Q4 non-GAAP operating loss in the range of negative $54 million to negative $51 million. We expect non-GAAP net loss per share between $0.23 and $0.21 based on 189.1 million weighted average basic and fully diluted shares outstanding. For the full year 2023, we expect total revenue in the range of $463 million and $465 million. We expect our FY '23 non-GAAP operating loss in the range of negative $152 million and negative $149 million. We expect non-GAAP net loss per share to be between $0.71 and $0.69 based on 186.2 million weighted average basic and diluted shares used in computing non-GAAP net loss per share. We are pleased with our Q3 results. Thank you. Hi guys, great quarter, great results, nice execution. I guess, Navam, I'd like to kind of perhaps try to look ahead in time you're heading into the fourth quarter. Are there any preliminary fiscal '24 thoughts and modeling points you think we need to take into account as we think about '24 right now? Hi, Ittai. Thanks. Yes, we're very pleased with how queue - the third quarter turned out. And as we mentioned, we're very pleased with being able to raise the year as well. So all things considered, I think we're on a solid execution path for the rest of the year. We're - our normal practice, which we followed last year was to give you the year guide in Q1. So we're looking forward to execute for Q4 and we'll give you the update in Q1 next year. But overall, strong performance in Q3, which we're very happy with. Okay. Very good. So maybe I'll try to kind of dig into the go-to-market approach. Clearly, your portfolio is much bigger now and adoption is broad-based on multiple products. So first of all, is there any multiproduct color you can give us adoption-wise on your customer base? And second, as you move into next year how much tweaking do you think you need to do to comp plans? Do you think the way you incentivize people is going to have to change either given environment, either given customers preference? It seems like to sign more multiyear deals or for any other reason, do you feel like you need to make any material tweaks to your comp plan sales force? Hey, Ittai, this is Dave. Thanks for that. I'll maybe answer the two of them. The first one on what percentage of our customers continue to be multiproduct. I would just underscore, the $10 million customer that we talked about, itâs probably very indicative of how the motion works. I think as you know, we have a common buying center to a large degree the cloud program owners and they essentially adopt next use-case along next product along. And I think you see that being played out pretty consistently in the cohorts of customers. So we haven't seen a material change in that. By and large Terraform and Vault are where people start. I will say there's tremendous interest in Boundary, which is a relatively newer product. And I expect this multiproduct motion to continue, but we haven't disclosed specifics of that. But I would say, subjectively, it feels very consistent. On the - what we're thinking for next year? I think we feel good about the overall model truthfully, which is we have a multiproduct portfolio that address multiple challenges on cloud programs. And our sales organization goes - and sort of engages with those buyers in a very consistent way. I think we're pleased with the multiyear portion that we do. We're pleased with the multiproduct aspect. But the motion really continues to be very, very similar and I expect that to continue into next year. Again, so these are long-term ARC trends, these are long-term relationships we have with our customers, and we'll follow their lead in terms of what they want to buy from us. But it certainly feels consistent with what we're already doing. Thank you. I got one for Navam, one for Armon. On the message you were giving on the price lock-in, Navam, is that - are you saying that there was a pull-in of demand into Q3? Or maybe just clarify what you meant by that? Yes, certainly, and thanks for the question. The price lock-in is more - there's a lot of spend scrutiny happening in the market right now, and customers want certainty on pricing. So what they are doing is reaffirming us as a critical vendor of choice for the long-term. So they're coming in and asking for commitments over the next three years on pricing and that is factoring in long-term deals being structured by mostly a lot of our existing customers and larger customers. So that's essentially what's happening from the long-term side. On the pull-in side, no, it's a normal third quarter. There was no pull-in on - from Q4 to Q3. All said, very pleased with the revenue growth we saw in Q3 despite being a seasonal quarter. Okay. Great. And then Armon, can you talk about the technical differentiation for Boundary, especially relative to your main competitor there? And what's the sales playbook? Sure. Yes, happy to. So I think in some sense, the privileged access management market has - it's a very well established market. It's been around a long time. I think the shift is really happening at what are the types of applications being built in the cloud infrastructure environments that they're running in. So I think the backdrop is that the applications have moved to a micro service architecture, there's a lot more of them. You're in a cloud environment. It's much more dynamic. The workloads are much more ephemeral. And so I think that's the biggest opportunity as there's - Boundary was really built ground up for that cloud environment where you have these highly dynamic applications being built to manage by many application teams versus I think, the more traditional tools that assumed a relatively static workload, relatively monolithic, slow-moving infrastructure. And I think that gap has created an opportunity to architecturally solve it in a very different way that's kind of cloud native. So that's the core differentiator between the Boundary approach and maybe the more legacy solutions that are in the market. As we're going into the commercial side of it, there will be a differentiation as well between our open source and enterprise, really focus on what are the compliance and security needs of organizations using Boundary commercially at scale versus kind of more open source practitioners. So one of the announcements that we made at our HashiCorp event in October was the general availability of HCP Boundary. So HCP Boundary now is generally available, and we've done our first set of commercial transactions around it. That said, this is kind of late in our year. So early next year, we'll go into our sales kick-off. We'll be able to sort of really enable the field on the product. And then as you'd expect, these are kind of enterprise sales cycles around HCP Boundary. So I think it will take a little while to get the engine spinning, but it is now commercially available in op market. Great. Thank you very much and outstanding results. I was hoping you could talk a little bit about what assumptions you're making in your pipeline and what you're seeing in terms of the mix in your pipeline going into the fourth quarter. There's been seemingly a divergence in some of the other companies that are reported in the security space around the mix of customers in their pipeline relative to new customers versus upsell mix. And I was hoping you could give us some sense of what your assumptions are relative to closure rates and budget flush in the fourth quarter here? Thanks. Yes. Thanks, Alex. This is Navam. Why don't I take that one? We mentioned this a little bit during the prepared remarks. We are seeing the macro impact play out in the market. And when you think about where it impacts the most, it's the Land side of the business, which is new customers doing new contracts with us. And even with those, what's happening is more of an elongation rather than a loss of that customer. So in any given quarter's pipeline, there is a higher win rate on expand, extend and a lower win rate on Land. And we're seeing that sort of occur in Q3, and we expect that to recur in Q4. And our guidance in Q4 incorporates that elongation on the Land side as well. So that's what we've factored into our fourth quarter guidance. Yes. Alex, this is Dave. Maybe just pile on -- maybe just add a bit of nuance. I think as I indicated, Armon and I in particular, have spent a lot of time in customer facing environments over the last 45 days. And I think what it tells us is the demand signals for both existing customers and new customers are relatively consistent. What is less clear is how that progress progresses its way through procurement departments as Navam pointed out and that's really what's reflected in our guidance. So I think what we see, whether for new customers or for existing customers, our foundational role in their cloud estates is very, very clear. The procurement department is the wildcard, I think that's why our guidance is what it is, but our conviction is pretty profound for the year for the longer arc. Great. And one last question along the same lines. With the availability of HCP cloud, is that something that will see acceleration as a result of the tighter budgets? Or is that macro orthogonal kind of consideration where it's not directly impacted by the macro conditions? Yes, it's a good question. I think if we look at the HCP audience today, it's by and large our commercial segments or the SMB kind of long tail of customers. I think they're probably a little bit more macro sensitive than the larger enterprise customers. So I think there's always going to be a little bit of variability quarter-to-quarter for us on the HCP line. But I think, by and large, I think the smaller customers are seeing more of that macro impact. So that translates into more of a cloud impact, I think, near-term. Thanks for the question. More of a question for Navam here touching back on Jason's question. On those stronger multiyear activity with existing customers, can you quantify how many customers actually signed up for more multiyear, especially compared to when they were actually anticipated to, sort of refresh when that term license come up for refresh? And are you actually considering a pricing raise on your end that may have caused some of this volatility? Or why are they kind of sensitive around pricing for your solution, understanding they're sensitive around their own cloud costs, but just trying to gauge that? Thank you. Yes, sure thing. So on the multiyear, there's a range of contracts new and renew typically that we work on in any given quarter. We aren't going out and converting things that aren't up for renewal. So that's the base that we're working with and a good group of that converted into long-term contracts for us, which is, as I mentioned, very good for the customer and very good for us because of visibility into the renewal base. So we're pleased with that, and that does have the impact of revenue that we saw and the strength that we saw on the net retention rate where most of our renewals - most of our expansions came in as multiyear expansions as well. In terms of the, why, there's a number of factors. It wasn't driven by a price increase per se. But there's variability on the dollar on the FX side and many international customers who are seeing uncertainty there, and there's uncertainty on budgets and how to utilize the existing budget and locking in a total. So I think those were the factors at play. Overall, a very strong quarter in terms of being selected as one of the few customers of choice for a long-term. Makes sense. Appreciate that. License was kind of the main upside for what we were all expecting here. And it's nice to see that. But HCP, the cloud piece continues to grow nicely. But are you surprised at all by the continued preference for self-management? And as we think about next year, are you guys thinking about trying to incentivize the sales force a bit differently to drive more of that cloud adoption instead? Thanks, guys. Yes. No, it's a good question. So I think we're continuing to be excited by the momentum of cloud. Certainly, we're seeing a lot of customer interest and the new announcements continue to drive a new inflow of users to it. So we're excited about the cloud opportunity. To your point, I think there is a - the way we sort of often talk about is we're not the tail that can wag the dog. And I think what we see is given the Tier 1 nature of the fact that this is core infrastructure software, it sits at the foundation of both public cloud and private cloud infrastructures. Many of our largest customers have a preference and continue to have a preference to self-manage it, right? And I think that's - I think it's less of a question of sales compensation or the incentive for our field team, it's ultimately a question of the preference of the customer and how they view the sensitivity of this being Tier 1 software for them. So that said, we continue to see green shoots of very large enterprises making the choice to switch over to the cloud portfolio, right? We talked about a global bank last quarter that is adopting HCP Vault. We see - continue to see large enterprises moving on to Terraform Cloud. So there's certainly a cohort of these customers that are comfortable with it, and we're starting to see them move to cloud. But that said, I think the much larger majority of them are still building comfort with it, but we think there's a lot of opportunity ahead. This is Ryan on for Alex. Thanks for taking the question. So I just had another one on the cohort of customers that are signing multiyear deals here in advance. On the flip side of that, you also have kind of the headwinds from the macro to the land side. I was wondering if those two cohorts, like if there's any nuance based on a vertical perspective that you're seeing or if there's any trends that are unique to specific verticals that those customers are in? Yes. Thanks, Ryan. Let me just make sure it's super clear. I think what we communicated is we saw numerous multiyear commitments from our customers. These are deals that are up for renewal. They could have done a one year renewal, but instead they've done multiyear renewals, which is a really strong endorsement of the relationships. So they were not early per se. And they were not related to a price increase per se, it was more about our customers desire to lock-in a longer-term relationship for us. I don't think there's a particular vertical, honestly. I would say, certainly, internationally, you could imply from Navam's comments that against the foreign exchange variability some customers might want to lock-in multiyear commitments because they have clarity on what that price would be. They may not know what it would be like in the year because we bill in US dollars. So certainly, that's part of it. But I think more generally, it's an endorsement of our growing level of criticality for these larger customers and how they run their infrastructure estates. Okay. And just a second one here. As we left the Analyst Day, I think the thinking was we would see 10% op margin expansion in fiscal year '24. I think that was kind of the initial thought, not necessarily guidance. But is that - how we should continue to kind of think of expansion for next year? Or has that kind of thought changed? No. I think you're exactly right. We laid out our plan during Financial Analyst Day, and we're on track on that plan, and we'll be delivering continued leverage year-after-year. Very high level question. We saw deceleration by the hyperscale cloud vendors this quarter, and that's a continuation of what we saw last quarter. Just trying to parse what's happening there in terms of customers watching their expense there and their utilization, their consumption versus possibly investing still in cloud - new cloud app development and deployment of infrastructure that may be benefiting you. So how is that falling out? In other words, why is it that it's that cloud development still which is so tied to what you do, it still seems to be a positive tailwind even if customers are watching their OpEx spend in the cloud? How do we separate that out? Maybe I'll start that one. This is Dave, and I'll let Armon comment. It's interesting, I think cloud application deployment continues unabated. Sure, that maybe its the hypervisors might be seeing a slight slowdown, but the application deployment process is remaining largely unabated. I think there's probably a growing level of maturity in running those cloud estates is I would reflect upon. We certainly see companies using Terraform to control the over provisioning process and better control their cloud costs and their cloud spend by putting some constraints around what gets provisioned. So in a sense, our products get used as a basis of controlling access to that cloud estate. And so as applications are going, more of your applications might be going to cloud but your overall cloud budget may not be growing as much because you're getting a little bit better operationally. And clearly, that's one of the real value propositions of Terraform and its use cases amongst our larger customers. Yes. I think the other - and this is Armon. Maybe a little additional color I would add is, as we continue to travel and speak with customers, one of the trends that we see over and over is that there is a lag effect between when customers start on their cloud journey and how long it takes them to truly build maturity and start operating at scale, right? I think there's a lot of inertia as we think about it to these infrastructure transitions. And so I think that once underway, those are pretty robust, as Dave said, I think even though the clouds are sort of slowing down near-term. I think these programs still take a lot of time to build up to maturity. And I think there's a lot of other spend, whether it's in dev test environments or data consumption or things like that, that are a bit more bursty versus core infrastructure and core applications that tend to be a few years behind when customers start their cloud journey. Thanks very much Armon and Dave. And then Navam question for you. You talked about these longer-term deals, multiyear - but that's on a contract basis. What about the invoicing structure? Because as we know, there's - you have this arrangement, whatever standard, where the annual payments invoicing then it's licensed up-line - the license rev rec is upfront. But if it's an upfront multiyear payment, then it's ratable. So which way did that sway? And so in other words, what was the impact on rev rec of the invoicing structures this quarter? Yes, sure thing. On the invoicing side, just so you know, we have one standard contract which is, you pay annually regardless of if it's multiyear or one year. So one year paid annually or multiyear paid annually and the vast majority of our contracts were like that. So the ratability of our revenue remains at 90% plus this quarter. Okay. So just to be clear, there was nothing in those multiyear contracts that would force say or drive a larger amount of upfront rev rec? There's nothing unusual about the way multiyear was recognized. There were more multiyear contracts, obviously, which drove strong revenue performance. But all that being said, the ratability of our revenue still is 90% plus. Thanks and nice quarter. First question on kind of a go-to-market. It seems like you guys are really starting to build up more of a solution selling motion around kind of a complete Zero Trust platform, and that involves Vault, Consul and Boundary together. I guess, as you look at your playbook going into next year, how big of a go-to-market focus will this have kind of selling a full multiproduct suite out of the gate versus continuing to kind of tackle the market product-by-product? This is Dave, Derrick. Thanks for the question. I would say, in general, we do tend to land with a single product. I think what the broader Zero Trust conversation is really part of our Expand and Extend motion. So for absolute clarity, we generally land up with a single product rather than trying to land with multiple products. But we know that the next problem along and the next problem along is something that our portfolio addresses, which is why we have that Expand, Extend conversation and Zero Trust is a really good example. So I think that motion will continue because it is certainly working. If I step back and just describe the requirements of having a platform approach or a cloud program approach allows you to have this consistent way to the Zero Trust. It allows you to have a consistent rate of infrastructure provisioning. So there are actually multiple Expand, Extend conversations we can have all predicated on that single cloud program office. But certainly, Zero Trust is a key part of it, having one partner of the year from Amazon this year is a really good example. Understood. Thanks. Navam, one for you. Just on the number of net new G2K - or sorry, net new 100k customers, it has been trending down this year, I'm sure it could bounce around a bit. But as this metric show that it's a little bit longer sales cycle and getting customers to expand from kind of five figure to six figure. Or also are you pushing more go-to-market investment kind of upmarket to the six, seven figure deals because that's where - there's a little bit more visibility? Just hoping to get your thoughts on this KPI. Yes, certainly. And it's an important KPI for us. But in general, there's variability on that number, right? So quarter-over-quarter, there's just going to be some movement. And as you know, this is a seasonal quarter and it's also a quarter where macro plays an impact as well. So in terms of the guidance framework, we expect 80 to 100 on a TTM basis and we're well within that. The sales team focuses on the Global 4000, which is the prime set of those 100k customers. There was headwinds on land, obviously, due to macro this quarter. But all things being said, the expansion, extension cycle of those customers continue to be very strong. The growth in revenue per customer exceeded 18% this quarter. So we're very pleased with how that cohort of customers is growing their usage of our products. Thank you very much and I'll add my congrats on the solid top line performance. Interested in to what extent you might be accelerating any of the monetization efforts that would help the margin profile. For instance, I think what you've been doing with Terraform drift detection. And where do you see markets that you feel as though you've saturated it enough with open source usage and that kind of the time is right to work on accelerating the monetization? Yes. Thanks, Mark. I think in general, the way we think about it with every one of our products, we have a kind of, call it, a dial between how much we're invested in the open source versus how focused we are on commercialization of the product. With our core products both Terraform and Vault, we feel like both of them are established market standards, they're sort of leaders in their category. And so we've turned that dial much further over to the commercialization side. And our focus is really at this point, building commercial differentiation and enabling our field teams and adding value to the commercial customer base. So Terraform, you gave an example of a couple of those key capabilities. Vault, similarly, we're focused in on that side. I think our earlier products that are sort of in the emerging category for us, so Consul, Boundary is probably a bit more of a balanced development between commercial and open source, and then we have our community-focused projects. Okay. Thank you for that. And as a quick follow-up, Navam, can you remind us what is it that's driving the spread where the - this quarter, the upfront license revenue grows 80% while that recurring support revenue grows 38%? And do you see a catalyst perhaps for that support revenue, which is the bulk of the revenue to reaccelerate either into Q4 or into next year? Yes. Thanks for the question, Mark. The distinction between license and software is a very 606 accounting centric view of what's happening, just as a reminder to everyone, our contracts are basically a single contract where you buy the product with embedded support. And internally, there is a disaggregation per 606 and per assigning individual values to license and support. So the license line has a lot of variability to it, depending on which product, depending on the term of the contract and all those things impacted. So it's really hard to signal from that license line. We do expect to see sort of the license and support line continue to grow as we continue to see expansions and extensions and land customers in our self-managed product. And my congrats on the very solid Q3 results as well. Dave, I wanted to get your view on to what extent the sales message is being tailored to this tougher budget environment. With respect to sort of vendor consolidation, tool consolidation, getting customers to run their cloud operations more efficiently, is the team going out with the message about displacing incumbent solutions so that the total cost to a customer may come down by consolidating more spend across the HashiCorp platform? Or is there simply an ROI argument you're making? Just wanted to get a sense of going into a tougher budget environment, to what extent the sales message is changing to speak to those broader customer budget concerns? Sure. Thanks for that. I maybe think about that in three ways. I think first and foremost, we should -- just to be clear that our customer is the cloud program office by and large inside these companies. And that is actually a net new spend category, right, where they are really just trying to determine what vendors are going to be their partners for this next several decades. So it's very rare that we're displacing something because this is a net new construct. Yes, I had a security model in the private data center, but now I have cloud. That's a different vendor set. And I would say much like Datadog, it is relatively unpopulated. Number two, when we go into - and that is a unique opportunity for us, and that is why you see the efficacy that you do of our model. Number two, the value proposition of our products is always around reducing cost, reducing risk and accelerating time to market for new things, take Terraform, for example, are you overspending on your cloud estate, well, constrained Terraform's usage so that you apply policy and governance guardrail before you provision things and that will bring your cost down. So it's a very conducive message to the economic environment we're in, which certainly helps clearly our sales cycles. And that has always been a message and will continue to be a message. Point number three, I think it's probably an equally important one, which is I think our $10 million customer demonstrates the growing consolidation of spend across the multiple categories that we participate in with a single vendor. And I think in some sense, we have the benefit of incumbency for one, two or three of the problems in those companies cloud programs that actually accrue benefit to us as they look to consolidate next year. So it's not - it's less of an overt message, but it's rather just the reality that gets played back to us. And I think it certainly puts us in a good position going forward. Appreciate the color. That makes a ton of sense. And then Navam, the margin upside was really nice to see this quarter. And heard loud and clear on sort of the progress that you guys are targeting for next year. In terms of how that you're going to - in terms of how the team is going to materialize that margin improvement? Can you sort of remind us some of the levers that you're looking to pull to derive that, I think, 500 to 1,000 basis points of expansion next year? Yes. Sure thing, Sanjit. And yes, we're very pleased with the overall gross margin and operating income margin performance we had in the quarter. A lot of revenue flows directly down to the bottom line. So as we see the productivity emerge from our employees that we've hired over the past several quarters, and if that exceeds our expectations, we expect to see that drop to the bottom line and number one. And also from a gross margin line, we remain a high gross margin company, and we expect to remain a high gross margin company despite the mix shift happening in cloud. So both those things considered as we get economies of scale from - or scale from our existing team and leverage from that team, we expect to see most of that fall down into the bottom line. Great. Thanks for taking my question, guys. I wanted to ask a question about the net revenue retention, the $134 million holding nicely here. Are you seeing a shift towards the Extend versus Expand that's driving that? Would you say with the progress you're making in with customers kind of establishing the centralized platform teams, with that in place, does that kind of grease the skids, if you will, for more of that kind of cross-sell into other categories? Any color on just Extend versus Expand? Hi, Brad. Thanks. This is Dave. I think it comes down to cohorts is probably the best way to think about it. I think we generally find in year one people adopt one product, in year two they would renew that product and look to add the second product. So there is a natural cycle to it. And I think what you're seeing is sort of a growing crop of maturing customers that are now expanding and extending fairly consistently. But I think there's - again, these are enterprise products, enterprise cycles, deeply considered decisions that probably have a one year delay between them. So I think that cohort view is probably the way we think about it, and I think it is playing out sort of as you would expect. Understood. Great. Thanks. And then a question for you, Armon. You alluded to that dial kind of turned up more so for Terraform and Vault more mature offerings on the commercialization with some focus on added value there. Could you elaborate on what are some of those value adds that customers are kind of going for there? And what are some learnings there that you could apply to other products where we might see that in the road map? Sure. Yes. I think maybe if I zoom out and share the philosophical view and then we can talk about kind of the specific capabilities just because those won't generalize cross products as much. In general, the way we think about it is all of our products, there's almost two sides to it. One is, I'll call it, the kind of practitioner-oriented workflow set of capabilities. So for the end user, the developer who's adopting and pulling in the open source what are the workflow features they need to really use the tool and solve their problem in an elegant way. Then on the other side, you have a sort of what we consider kind of system of record capabilities which is really more about a large organization thinking about how do I manage a large state where I care about visibility, security, compliance, governance, et cetera. So that's kind of more system of record type capability. So for any one of our products, there's a set of features that kind of fall into either of those camps. By and large, the open source tends to be more focused on those kind of workflow-oriented things because it's about enabling the user to kind of download it, use it, see the value of it quickly, where the commercial side is more focused on kind of the system of record type capabilities. So if we talk about specific features, when we talk about Terraform, drift detection was one of those already mentioned on the call. That's a good example of when I'm managing a large day two infrastructure how do I across thousands of different applications and workspaces, I need to understand where is the drift in my environment, where do I have things that are running out of date, where do I need to apply patches. Those are all kind of day two concerns at scale that you really care about if you're in the CIO office, you don't necessarily care about that if you're the application developer, right? So that's a perfect example of the type of capability that sits in that system of record type function. We also announced improvements to our policyâs code engine. So that's a perfect example, if you're applying that kind of policy codes either for security or compliance or governance reasons, very much sits in that second category. And maybe a third example might be our low-code framework to simplify applications for less skilled teams, right? That's kind of an at-scale use case. So there may be some specific the general philosophy. So as we turn the dial more of the development moves to the system of record and less so on the kind of open source workflow. Hi, good afternoon. Thanks for taking my questions. Dave, I was hoping to go a layer deeper into some of Navam's commentary on the slowdown in elongation with new logos and building upon some of the questions you were just asked with respect to the commercialization engine for some of your more mature products. So maybe to ask you more bluntly. With the new customers, what is the factor that is posing the biggest hurdle? Is it either extremely happy Terraform open source users, who just haven't gotten to that specific tipping point where you can convert them over? I just want to better understand that just because it is your most widely used and most pervasive and most mature solutions in the portfolio. And then a follow-up for Navam, please. Thanks, Fatima. Sure, happy to answer to that one. The - I think it goes back to what Armon described, where people start adopting cloud, it's very tactical. When they start adopting it with a more centralized cloud program, they require a different set of capabilities. I might use Terraform for all 400 of my developers in my company, but they can all provision whatever they like versus no control access to the environment so we don't overspend through a central share Terraform Cloud account. And I think that's the difference between basically Phase 1 of cloud and Phase 2 of cloud. So the adoption of the commercial version of our product is largely predicated on whether that company has matured to that moment in time where they have established a formal approach to doing this, either within their company or within their business group. So largely, that is why infrastructure markets move at the pace they do because there's an organizational reality to this. So I think what we've seen is actually real consistent acknowledgment that using Terraform is different from the needs of a team using Terraform. So you're basically either buying our commercial product or you're having to build some kind of scaffolding around it to have people work with it. And I think we're really, really bullish on how that market is progressing, as we've gotten larger, as our customer base has gotten larger, we're actually seeing that time to conversion accelerate at commercial products, but there is a reality of organizational constraints in our customer base that just are the way infrastructure markets move. Understood. And Navam, you called out the multiyear renewal within 3Q. I'm wondering if there is a larger body of transactions there that are perhaps from a seasonal standpoint up for renewal in 4Q? And your expectations around what type of behavior is embedded in guide, but certainly what you're seeing in customer engagements now? So basically, should we expect some of the 3Q multiyear renewals and sort of duration impacts persist into 4Q and in terms of the performance and transaction activity? And that's it from me. Thank you. Got it. Thanks, Fatima. So very pleased with the third quarter and the activity there in terms of what our customers are doing. Our fourth quarter guidance philosophy has always been the same, which is there's a range of outcomes and we take a solid execution path and we exclude from it any large transactions where timing is inherently unpredictable and sometimes those may be multiyear deals. So our guidance in Q4 basically incorporates the macro headwinds that we're seeing here and the high levels of deal scrutiny, which may lead to Q4 sort of seasonality muting. But we're pleased with how Q4 is going to turn out or pleased with being able to raise the Q4 guidance. I don't think we're expecting any change on multiyear behavior from normal ranges in our guidance. Hi. Thank you very much. Congrats. Dave and Armon, I saw 65,998 people at AWS re:Invent, but somehow missed the two of you. So good to see the flow you're getting there. Your booth was extremely active. And given that at AWS, we saw a bunch of announcements that were either foundational at the network layer, the chip layer or more so at the application layer, the database, data integration, AI, et cetera. There wasn't a whole lot said about the infrastructure layer, and you have cloud watch, which helps at a potentially recessionary time. AWS helping its customers to control cost. And then you have your place here. I'm wondering how much more influential can AWS be as a true partner that actually not only works with you guys from a business development standpoint, but can actually bring your leads even more actively given everything that's going on in the world going forward. Navam one for you. I know that you said that you - that the revenue upside drop through to the bottom line. Are there any other measures fundamentally at a unit level how you're watching costs and expenses, maybe this thing blows over, maybe it's here to stay forever? But how are you managing expenses, not just managing the revenue upside to trickle through to the operating income? Thank you so much. I'll take the first one. This is Dave. Yes, I think I agree with you, there were not massive announcements at re:Invent, but I think that might be indicative of having reached a state or maturity in cloud where we've reached that comfortable stage of infrastructure where, yes, this is just the reality that everyone's working with, everybody's estate includes Amazon and Azure and a few other things. And there's some level of maturity there. I would not conflate that with the fact that many, many companies are still haven't done that yet, but I think the notion is not very sensational any longer that should we adopt cloud. I think that's a good thing for the market. It's a good thing for us. We certainly see that reflected in our customers. We certainly see really good co-engagement with all the cloud providers. And you see that partner of the year type awards are just indicative of it across all of them. So I actually wouldn't - I expect this to be the steady state. Multicloud is just the reality. They've all accepted. They all appreciate that everybody's estate needs connect to other things and in many instances, we're the how they do that. So actually - I'm actually very encouraged by that sort of acknowledgment of market maturity. And I think we continue to see better each month engagement from the cloud providers with us. Yes. Kash, and this is Navam on your second question on the spend side. We're absolutely pleased with what happened in the third quarter. And then we mentioned this during the Financial Analyst Day our spend envelopes or spend plans are intently predict - or are scrutinized based on the unit economics of it. So on a unit level, we're very focused on CAC payback periods, and that is the driver of acceleration or a reduction of revenue of expenses. All right. Thanks, Kash. So we have a couple of questions left, but we're kind of running up on time. So if we could just limit it to one question for the remaining folks that would be appreciated. Thank you. Hi, team, it's Jeremy on for Pat. Thank you for the question. Navam, can you just remind us of the main drivers of gross margin? And then how should we be thinking about the trajectory of that metric just given the mix shift to cloud? Thanks so much. Yes, absolutely. There are three components to our revenue, our self-managed revenue, our cloud revenue and then the services and other. Services revenue is broadly held at near zero to negative margins slightly and subscription revenue is a high margin business. So what's really pleased us is the amount of gross margin leverage we're getting on our cloud products. And we're seeing continued upticks in gross margins in cloud. And we believe that over time, as this line scales, we'd get to the 70s, high 70s margin. So as that walks up, I believe we're in a good spot from a gross margin perspective. But in Q3, it was a great outcome from a margin perspective there. All right. Thank you for squeezing me in here. I guess you if you can just close it out with one on the macro. So I was just hoping to get more color on maybe the change in the macro that you saw over the course of the quarter, if there was any impact between September and October in those deal cycles? And then you had mentioned last quarter a $4 million to $6 million headwind, is that still what you're baking in current guidance for the year? Thanks. Yes. So Miller, I'll maybe give the view. It's certainly - the news headlines sort of bounced around a bunch in October and I think that was probably reflected in sentiment in October, in particular, felt a little different than September. But overall, I think it's pretty consistent, certainly overall. Yes. I'd add to that the same, which is originally we had $4 million to $6 million as the impact for the back half of the year, and it's playing out as expected and the - it's the same range. Yes. I mean I think we are - we have a rich product portfolio that we're really focused on pursuing is the simple answer. And I think that's the direction that we always - we have seven or eight products that we are in the process of commercializing and we have plenty of portfolio to work with. So I'd just like to close by expressing my thanks for the participation from everyone here. We certainly appreciate you dialing in for all the questions and look forward to speaking with everybody soon. Thank you.
EarningCall_1846	Ladies and Gentlemen, thank you for standing by and welcome to the Box, Incorporated Third Quarter Fiscal 2023 Earnings Conference Call. All lines have been placed on listen-only to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Cynthia Hiponia, Head of Investor Relations. You may begin. Good afternoon. And welcome to Boxâs third quarter fiscal 2023 earnings conference call. I am Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box Co-Founder and CEO; and Dylan Smith, Box Co-Founder and CFO. Following our prepared remarks, we will take your questions. Todayâs call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investors. Our webcast will be audio only. However, supplemental slides are now available for download from our website. Weâll also post the highlights of todayâs call on Twitter at the handle @BoxIncIR. On this call, weâll be making forward-looking statements including, our Q4 and full year fiscal 2023 financial guidance, and our expectations regarding our financial performance for fiscal 2023, fiscal 2024 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings and the impact of foreign currency exchange rates, and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies, our ability to achieve our long-term revenue and other operating model targets, the timing and market adoption of, and benefits from, our new products, pricing models, and partnerships, our ability to address enterprise challenges and deliver cost savings for our customers, the impact of the macro environment on our business, operating results, and our capital allocation strategies, including M&A and potential repurchase of our common stock. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to our earnings press release filed today and the risk factors in documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from statements made on this earnings call. These forward-looking statements are being made as of today, November 30, 2022, and we disclaim any obligation to update or revise them should they change or cease to be up-to-date. In addition, during todayâs call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and in the related power point presentation which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. Thanks, Cynthia, and thank you all for joining the call today. We delivered strong third quarter results, with revenue growth of 12% year-over-year or 17% on a constant currency basis. Our sharp focus on profitability drove record non-GAAP operating margins of 24%, up 330 basis points from 20.7% a year ago. Gross margins remained strong at over 76%, while our net retention rate increased slightly versus the year-ago period. We are particularly pleased with these quarterly results and our substantial year-over-year bottom line improvements, given the increasingly difficult macro environment. Over the last couple of months, I've had the opportunity to chat with dozens of CIOs and CEOs across nearly every sector and in companies large and small, and it's clear that companies are facing a very dynamic environment in front of them. In every industry, companies are dealing with a complex mix of economic pressures, while at the same time, needing to drive significant transformation across their businesses. My customer conversations and our Q3 results confirm that companies are prioritizing strategic IT initiatives that allow them to better serve their customers, operate with speed and agility, enable an increasingly distributed workforce, all while seeking to reduce complexity of their technology stacks and keeping their enterprises secure from threats. These remain the top priorities for nearly any business or technology leader that you talk to today. So, while IT budgets might tighten and some larger deals may require more scrutiny across verticals and geographies, we are in a unique position to help our customers become future-ready. At center of the future of work is how companies protect, share and manage their most important content. Whether it's the creative media that goes into a blockbuster film, the research that goes into producing a new life-saving drug or vaccine, the client data used to onboard a new customer, or project files that go into producing a new breakout consumer product, every business runs on content. Yet we see today that most enterprises are dealing with a mix of legacy enterprise content management solutions, network file shares and point collaboration and signature tools to work with their content. This fragmentation creates security risks, lowers productivity and ultimately cost enterprises far more than they need to spend. The Box Content Cloud helps companies drive up productivity, reduce risk and save substantially in the process. Examples of Box delivering this value to our customers in Q3 include, a global technology leader who has been a Box customer for more than 10 years, purchased a seven-figure Enterprise Plus ELA in Q3 to double down on leveraging Box for their business strategy, which includes M&A. With Box, they plan to retire redundant systems and technology with the goal of saving millions of dollars each year, while also improving productivity and reducing risk by protecting their sensitive data. A global entertainment company implemented Enterprise Plus in Q3, to secure and protect content and reduce cost and complexity by consolidating data assets and network file shares from M&A activities into one content cloud solution. Despite ongoing budgetary pressures, it's clear that enterprises are increasingly making strategic long-term decisions on how to support a hybrid workforce and digital processes, while maintaining a high level of security and compliance. The Box Content Cloud is in the best position to help customers reduce the cost and complexity of their traditional content stack, and we are continuing to double down on powering the full life cycle of content in a single platform and address major trends in the future of work. In Q3, we drove significant innovation across the platform, which we shared at BoxWorks in October. We unveiled several major enhancements to Box Shield and Box Governance, our flagship security and data governance solutions. In Box Shield, we've extended our malware deep scan capabilities by adding the ability to scan additional file types, including Microsoft Office, reinforcing Box's commitment to supporting third-party file types and helping admins apply critical protection to a wider variety of intellectual property. We also announced ethical wall capabilities in Box Shield, which creates reinforced information barriers within organizations to prevent communication or exchange of information that could lead to conflicts of interest between groups. This can be used to safeguard insider information, especially for our customers in financial and legal services. And finally, we advanced our Box Governance capabilities to support more flexible retention policies to serve a wide range of industry use cases, with future improvements to come around making it easier to export content under legal hold and providing better reporting and disposition insights and more. Across our collaboration and workflow efforts, we launched additional capabilities in Box Sign to help customers move more of their signature transactions to the cloud. These include the ability for users to publish documents online for signature, added signature requests in-flight, enjoy an improved signer experience and much more. We announced the general availability of the all-new Box notes for real-time content collaboration and project management, and we announced the beta launch of Box Canvas, our new visual collaboration and virtual whiteboarding tool, which will begin to roll out this quarter. And we enhanced content insights to ensure users and enterprises have rich insights into how their content is being accessed, consumed and leveraged for enhanced business intelligence. Finally, a critical part of our product strategy is our ability to integrate deeply across the SaaS landscape, and we are pleased that our interoperability has enabled us to build strong partnerships with leading technology companies. At BoxWorks, IBM's CEO, Arvind Krishna, discussed how Box and IBM have partnered to drive digital transformation for our customers. Kirk Koenigsbauer, CVP and COO of the Experiences & Devices Group at Microsoft spoke about the importance of openness and interoperability and Box's ongoing collaboration with Microsoft. Thomas Kurian, the CEO of Google Cloud, shared how Box and Google partnership enables secure modern collaboration in the enterprise. And finally, Jeetu Patel, Cisco's EVP of Security and Collaboration discussed how Box on Webex joint customers can now use Box and Webex better together. And more recently, we launched an enhanced Box app for Zoom that enables customers to automatically select Zoom recordings directly to Box. With this new feature, joint customers can manage their content in one place, while maintaining enterprise-grade security, compliance and governance, all within Zoom. Now more than ever, customers are looking to partner with platforms, not point tools to help them drive greater efficiency, user experience and security. As we head into Q4 and looking out into next year, we'll be doubling down across our three core pillars of innovation. Across security and compliance, we'll be delivering major enhancements to Box Shield and Governance to protect customers in a very dynamic threat landscape, extend our leadership in compliance and drive all new efforts on the most ambitious security and governance road map we've ever had. We will be driving major product improvements to Box Sign to support more advanced signature processes, adding richer features into Box Notes and Canvas, further building out relay and laying the groundwork for a major year of workflow innovation, enhancing core parts of our main web application user experience, deepening our development of content publishing and other advanced content management capabilities and much more. And within our platform, we'll continue to double down on our scalability and developer experience efforts like UI Elements, in addition to our integrations with other third-party applications like Teams, Slack, Zoom, Salesforce and more. As we've shared, Enterprise Plus, our multi-product Suites offering is a key strategy to increase the efficiency of our sales motion and to bring the full value of the Box Content Cloud to customers. Enterprise Plus brings the full suite of Box's advanced product capabilities into a simple product bundle. And we've seen tremendous uptake from our go-to-market teams and customers. We launched ePlus just over a year ago, and it has become our most successful suites launch to date. In Q3, Enterprise Plus comprised over 90% of our suite sales in our large deals. And suites represent 73% of our large deals, up from 63% just a year ago. And we are now seeing renewal rates of ePlus come in higher than our overall company renewal rates. Our Q3 customer expansions and new wins with Enterprise Plus include a sports marketing and talent management company, who has been a longtime Box customer, purchased an Enterprise Plus ELA in Q3 as Box has become a more strategic and integral part of their business. With the upgrade, they will now be replacing their current e-signature provider with Box Sign and will be using Box Shield to safeguard health records and PHI in Box as well as protect themselves from cyber attacks with threat and malware detection. A financial services company providing insurance to thousands of businesses purchased Box with a six-figure Enterprise Plus deal in Q3. Prior to Box, they have been running on legacy and on-premises systems for their claims agents. They recognize the need to replace this system. And after working on a proof of concept, proving out several use cases using Boxâs APIs, they selected Box as their back-end content layer for their entire organization to store and work on sensitive client information. We are pleased with our continued strong adoption of Enterprise Plus, as we know that when a customer adopts our multi-product offerings, we see greater total account value, higher net retention, higher gross margins and a more efficient sales process. In summary, we are pleased to have delivered a strong Q3. Since our last earnings call, the FX and macro environment headwinds have increased. However, our operational discipline that led to our Q3 record operating margins will continue. Operational discipline has been built into the core of the company, and we are proud of our demonstrated significant margin improvements, and we remain committed to our FY 2023 operating margin target. The confluence of remote work, digital transformation and cyber security challenges is causing enterprises to rethink how they work with their content. And these trends are only accelerating. We are confident Box is uniquely positioned to gain from this shift. Our record Q3 gross and operating margins in a very dynamic market, once again demonstrates our commitment to increasing profitability. We remain hyper focused on driving growth and profitability as we look to the next $1 billion of Box revenue. Thanks, Aaron. Good afternoon to everyone, and thank you for joining us. Q3 was another strong quarter for Box, with revenue in line with our guidance and operating margin and EPS above our guidance. Despite FX and macroeconomic challenges, we're on track to achieve the three key financial objectives for FY 2023 that we laid out at the beginning of this year; accelerating annual revenue growth on a constant currency basis, expanding operating margins and prudently allocating capital to optimize shareholder returns. We remain committed to delivering against our FY 2023 revenue growth plus free cash flow margin target of 37%, a 400 basis point improvement from last year's outcome of 33%. Our ability to expand our operating margins and free cash flow margins in this environment is a testament to our operational discipline and resilient financial model. In Q3, we delivered revenue of $250 million, up 12% year-over-year. This was in line with our guidance despite the 5 percentage points of FX headwind that we experienced in Q3, which was 1 point higher than we expected when we set guidance on our Q2 call. During Q3, we began to see an impact from additional customer scrutiny being placed on larger deals due to the macroeconomic environment. In Q3, we closed 77 deals worth more than $100,000 annually versus 97 in the year ago period. We now have 1,586 total customers paying more than $100,000 annually, representing a 19% year-over-year increase. It is worth noting that our win rates remain unchanged and our average price per seat continued to improve year-over-year in Q3. We also continue to drive a strong Suites attach rate of 73% of these large deals. Roughly 42% of our revenue is now attributable to customers who have purchased Suites, a significant 11 percentage point increase from 31% a year ago. Put simply, Box has continued to execute well, albeit in a dynamic environment. We ended Q3 with Remaining Performance Obligations, or RPO, of $1.1 billion, an 11% year-over-year increase or 20% growth on a constant currency basis. We expect to recognize more than 60% of our RPO over the next 12 months. Q3 billings of $258 million grew 12% year-over-year, well ahead of our guidance of a high single-digit growth rate. We drove this better-than-expected billings outcome despite an 8 percentage point headwind from FX, which was 3 points higher than our anticipated in our guidance. Our strong billings outcome in Q3 was due to increased early renewals and strong payment durations. Our net retention rate at the end of Q3 was 110%, up 100 basis points from the prior year. Our annualized full churn rate was 3% versus 5% in the prior year, demonstrating stronger product stickiness with our customers. In Q4, we expect full churn to remain at roughly 3% and our net retention rate to be approximately 108%. We expect net retention will be impacted by lower seat expansion rates, as we anticipate customers in certain segments will reduce headcount and budgets amidst macroeconomic uncertainties. Gross margin came in at 76.5%, up 180 basis points from 74.7% a year ago. This result reflects the efficiencies that we've been generating as we transition to running fully in the public cloud, as well as the impact of higher price per seat due to strong Suites adoption. Q3 gross profit of $191 million was up 14% year-over-year, exceeding our revenue growth rate by 200 basis points. Once again, we demonstrated the leverage in our business and our commitment to delivering higher profitability with a 29% increase in Q3 operating income to $60 million. Our record 24.0% operating margin was up 330 basis points from the 20.7% we delivered a year ago. We delivered $0.31 of diluted non-GAAP EPS in Q3, up 41% from $0.22 a year ago and above the high end of our guidance, despite a negative impact of $0.06 from currency headwinds. I'll now turn to our cash flow and balance sheet. In Q3, we generated free cash flow of $55 million, a significant improvement from $31 million in the year ago period. In Q3, we delivered cash flow from operations of $70 million versus $46 million in the year ago period. Capital lease payments, which we include in our free cash flow calculation, were $10 million, down from $12 million in Q3 of last year. Let's now turn to our total allocation strategy. We ended the quarter with $403 million in cash, cash equivalents, restricted cash and short-term investments. In Q3, we repurchased 1.1 million shares for approximately $29 million. As a result, we've been able to reduce weighted basic and diluted shares outstanding for six consecutive quarters. We remain committed to opportunistically returning capital to our shareholders. As such, our Board of Directors recently authorized a new $150 million common stock repurchase plan. In addition to our robust stock repurchase program, we will continue to leverage our strong balance sheet and increasing cash flow generation to invest in key growth initiatives and to fund strategic tuck-in M&A opportunities, which enhance and accelerate our product road map. With that, I would like to turn to our guidance for Q4 and fiscal 2023. The US dollar strengthened significantly versus the currencies in which we transact our international business, following our prior earnings announcement on August 25, 2022, resulting in a larger-than-expected FX headwind to both Q3 and the full year of FY 2023. As a reminder, approximately one-third of our revenue is generated outside of the US, primarily in Japanese yen. The following guidance includes the expected impact of FX headwinds, assuming present foreign currency exchange rates. While our strong business performance this year has largely offset these FX headwinds, we are seeing additional scrutiny in some of our larger deals, as companies contend with headcount reduction and budgetary constraints. As a result of these intensifying FX and macroeconomic pressures, we have prudently adjusted our FY 2023 revenue guidance to reflect these dynamics. For the fourth quarter of fiscal 2023, we anticipate revenue of $255 million to $257 million, representing 10% year-over-year growth at the high end of this range. This includes an expected FX impact of approximately 5 percentage points to our Q4 revenue growth rate. Based on the increasing FX impact and the volume of early renewals that contributed to our strong Q3 billings results, we now expect our Q4 billings growth rate to be roughly 10% on an as-reported basis, including an expected FX impact of approximately 5 percentage points. We expect our Q4 RPO growth to be slightly higher than our anticipated Q4 revenue and billings growth rates. We expect our non-GAAP operating margin to increase to approximately 24.5%, representing a 370 basis point improvement year-over-year. We expect our non-GAAP EPS to be in the range of $0.34 to $0.35, representing a 46% year-over-year increase at the high end of the range and GAAP EPS to be in the range of $0.06 to $0.07. Weighted average basic and diluted shares are expected to be approximately 144 million and 149 million, respectively. Our Q4 GAAP and non-GAAP EPS guidance includes an expected impact from FX of approximately $0.05. For the full fiscal year ending January 31, 2023, we now anticipate our FY 2023 revenue to be in the range of $990 million to $992 million, representing 13% year-over-year growth or 17% on a constant currency basis. We are reiterating our FY 2023 non-GAAP operating margin guidance of approximately 22.5%, representing a 270 basis point improvement from last year's result of 19.8%. We are raising our FY 2023 non-GAAP EPS to be in the range of $1.16 to $1.17, up from $0.85 in the prior year, and we expect to deliver our first full year of positive GAAP EPS in the range of $0.02 to $0.03. Weighted average basic and diluted shares are expected to be approximately $144 million and $150 million, respectively. Our FY 2023 GAAP and non-GAAP EPS guidance includes an expected annual impact from FX of approximately $0.18. For the full year of FY 2023, we now anticipate currency headwinds to impact our billings growth rate by approximately 6 percentage points or 2 percentage points more than the impact to our revenue growth rate. While we expect our FY 2023 billings growth rate to be roughly in line with revenue growth in constant currency, we expect it to lag slightly on an as-reported basis. While we are not yet providing formal guidance for FY 2024, we thought it would be helpful to provide color on two notable items for FY 2024 modeling purposes. As we've discussed previously, our public cloud migration strategy will unlock significant financial leverage and our long-term gross margin profile once we fully exit our existing co-located data centers. Our redundant public cloud and data center expenses will peak in the first half of FY 2024. During Q1 and Q2 of next year, we expect gross margins to dip by a couple of hundred basis points from the 76.5% we just reported. We expect to end FY 2024 with gross margins a few hundred basis points above the results we just reported. We expect this gross margin impact to flow through to operating margins next year with Q1 and Q2 experiencing a temporary headwind before rebounding, resulting in year-over-year operating margin expansion for the full year of FY 2024. As a result, Box will be better positioned to continue delivering profitable growth as we scale, exiting next year with an even stronger operating margin model after completing this important transition to the public cloud. Additionally, due to the material foreign exchange movements we've seen throughout FY 2023, we think it would be helpful to quantify the impact of FX on next year's revenue growth. At current spot rates, we expect a roughly 300 basis point headwind to revenue growth for the full year of FY 2024 on an as-reported basis with a more pronounced impact in the first half of the year. As is our custom, we will provide detailed FY 2024 guidance on our fiscal Q4 earnings call. I would like to close with how proud we are of our Boxers who have been focused on executing in its dynamic economic environment. We have created the leading content cloud platform that allows enterprises to manage the entire life cycle of their content while lowering costs and keeping their enterprises secure from threats. We are on track to achieve our three key financial objectives for FY 2023, as the strength and resiliency of our business model has allowed us to deliver revenue growth, while expanding operating and free cash flow margins. To sum it all up, we are well positioned to continue to deliver value to our customers and stakeholders in this uncertain macroeconomic environment as we scale toward generating the next $1 billion in revenue. The floor is now open for your questions. [Operator Instructions] Your first question comes from the line of Brian Peterson of Raymond James. Hi, gentlemen. Thanks for taking the question. So I wanted to start off on the comments you made about deal cycles maybe extending a little bit or increased scrutiny. I'd love to understand if there's any commonality in end markets or customers where you saw that? And was that more impacted on the net new? Or was that also maybe kind of an upsell or cross-sell dynamic as well? Sure. Yes. This is Aaron. We actually saw kind of healthy net new demand in the quarter, so not a pronounced impact one way or another on that front. We were pretty happy about some of the new logos that we brought on and some of the new customers. I think the callout that we made was -- in some cases, in the kind of higher and larger deal segments in some of our business segments, there was more maybe budget pressure, which could make a deal be smaller than we initially anticipated. In some cases, maybe get pushed out or kind of cycle lengthen, but these were still in more narrow segments in the business. Overall, I think, we're pretty happy about the healthy demand that we saw throughout the quarter. And in some customer sectors, you can see examples of companies not hiring as many people, which means that they're obviously not going to need as many seats of software kind of across the board. But, overall, we were pretty happy about what we're able to deliver for customers. And just to build on that a bit, Brian, we did see fairly similar performance across the two main segments of our business, enterprise and SMB. And then to quantify the question about the net new logo, those are pretty consistent, continue to contribute about 20% to 25% of our new bookings in Q3 with the balance of that being customer expansion. So pretty consistent with the relative contribution that we've seen in the past. No, that's looking pretty encouraging, considering everything that's going on in the macro. And maybe just a longer-term question. We heard about the next $1 billion in revenue a couple of times on your prepared remarks, but I'd just be curious, if you think about all the product innovation you've had over the last year or two, what gets you most excited about like really taking that step for the next billion? I just love to kind of get some of product thoughts and what's going to drive that growth. Thanks, guys. Yes. So we -- as you know, we're really excited about our road map. We have the most ambitious road map we've had as a company, while still delivering, I think, strong operating margin leverage in the business. Some of the areas that we called out in the call and that I would reinforce our doubling down in areas like security and compliance. Enterprises are dealing with an unbelievable amount of critical intellectual property in the form of their content. Mission-critical data that they have to work with, whether its customer data or critical information on projects and other pre-release content that they want to be able to protect. So all things, data security, data protection, threat detection and compliance and governance you're going to see a lot of nation around. We're also going to be doubling down in areas like workflow and our e-signature capabilities. So as more and more customers move to the cloud and they need to go digitize their business processes, we believe that they're going to be looking at how do they automate workflows around their content. And then, as you're seeing with a lot of our innovation around collaboration, we also see a major tailwind in, as companies get more and more distributed, even as they come back to offices, their organizations are more distributed than ever before, which means you need easier, more secure, more collaborative ways to work with content. So things like Canvas, Notes, our core web experience are just going to continue to improve on those dimensions. So next year, you're going to see a bunch of, I think, exciting announcements, and we have a multi-year product road map and strategy that we're very excited to deliver. This is George. I'm on for Steve. I wanted to ask about the renewal commentary that drove some of the billings upside. Maybe you could just talk a little bit about what drove that change in customer behavior? Sure. So in Q3, as is always the case, especially given the catalyst of being able to move into Suites, we saw a stronger than typical volume of early renewals. So customers that had been set to renew largely in Q4 and then in some cases in future periods, where often in conjunction with the upsell, to move into product capabilities they early renewed their contract in Q3, which pulled forward some of those billings and contributed to the strength that we saw in the quarter. Got it. That makes sense. And then one quick follow-up on the expansion. I think you mentioned you expect some segments to see some headcount reductions and some budgetary pressure. Maybe if you could just fill in a little bit on where you're expecting to see those impacts. Sure. So I wouldn't necessarily say a specific segment per se, but more down to specific customers, who had been more impacted by the economic environment and especially in those types of companies, where they're reducing headcount, more cyclical businesses, or seeing increased budget scrutiny. We just wanted to be prudent as we do expect that some of those certain types of customers will be seeing lower seat expansion as we go forward. But again, I would emphasize that, overall, the economics and momentum of the business are quite strong across the different segments that we serve, and our full churn rate, which is indicative of the kind of stickiness value that our customers are getting out of the platform has remained very strong at 3% on an annualized basis. Great. Thanks for the question. And congrats Aaron and Dylan on a nice quarter in a tough environment. I wanted to ask about that, the macro. If you look back to 2020, COVID, you saw real headwinds and decelerating growth. So far, it's been different with relatively stable net retention rates, and you just posted 20% constant currency billings and RPO growth. Obviously, the macro backdrops are very different, but I was hoping you could talk a little bit about the differences at Box. You're positioning today versus a couple of years ago and really wondering how the maturation of Suites and Enterprise Plus has really helped or if it's helped in this environment. Thanks. Yes. No, I appreciate it. Obviously, the company is just extremely different in the past couple of years and something that we're super proud of and happy about, both on the bottom line performance. But as you call out on the top line, the product portfolio and positioning we have. If I look back two or three years ago, which obviously kind of fed into the pipeline and deals that we would have been doing in 2020, we were a very advanced secure content management and collaboration technology and platform, but that was really just the foundation capabilities for what we now deliver today, which is powering increasingly the full life cycle of content. So getting into e-signature as an example, doubling down in areas like workflow automation, something like Box Shield was actually less than a year old when the kind of pandemic hit, which meant there was kind of less momentum on some of that security story and strategy. And so, today, Shield being a much more advanced data security platform capability for our customers, the advancements we've done in data governance. And so, when you kind of add up all of those capabilities and the value proposition, we just look like a very, very different platform to our customers. We can retire spend on other infrastructure that they might otherwise have to go spend on. We can go deeper in the business processes of the organization and then ultimately, obviously, keep our customers secure from very rampant and dynamic threats that are out there. So that's on the product kind of capabilities, and then our road map, I think, just continues to reflect that. And then conversely on the kind of pricing and packaging, we've made it just much more attractive and much easier for our customers to leverage those capabilities. So again, similarly, right when the pandemic hit in 2020, we had only the very initial couple of quarters of Suites. And so, that hadn't really been kind of baked into our sales and go-to-market motion. Enterprise Plus has really kind of turbocharged our Suites push. Obviously, you can see that's the majority of those large deal Suites that we're now doing already, and we continue to see that rolling out across the customer base. So the product road map, the pricing, the packaging and positioning for our customers and really just going after these high-value use cases that companies have around content management. I think that is what has put us in a very different position. And then taking a step back and just looking at the overall makeup of the business, we've obviously driven very significant operating leverage in the company. I think that has really allowed us to be much more focused, drive greater execution. And so that's also paying dividends as well. Yeah. And maybe just to build on that and compare it. Outside of the product, how that show has showed up in some of these customer conversations and impacts. In COVID, we did see a pretty pronounced impact in certain industries as well as the SMB space, where some companies are seeing a real step function change in their business. I would say this environment is very different. In addition to our having a much stronger product to address what customers are looking for, customers are still continuing to spend in IT just with more of a focus on lowering total cost of ownership, driving efficiencies and doing a lot of things that are very aligned with our -- especially newer product capabilities, which is why I think you've seen less of an impact to our business, even though we're certainly not immune in this type of environment. Hi. This is George Iwanyc. Thanks for taking my questions. So Aaron, maybe with the tighter scrutiny you're seeing. Can you maybe give us a bit of a update on Japan and Europe? How much of the demand environment there is FX related versus what you're seeing from a deal engagement perspective? Yeah. So I think we're seeing pretty consistent trends, fairly normalized trends across the geo's. There is there is that kind of macro overlay and dynamic that we face in -- for all of our customers where there's more budget scrutiny, they're looking to vendors that can help them reduce costs or really focus on their most mission critical areas of investment. And so some of that flows down into our deal cycles as well, certainly. I was just in Japan about three weeks ago, visiting customers, the demand environment there remains, I think, relatively healthy, and in Europe in the summer, visiting customers as well. So I would say, broad based generally still a healthy demand environment with that one overlay of everybody is dealing with the macro environment in different ways. You're going to see that budget scrutiny shows up in deals. Sometimes that might be the deal that we thought was bigger, might be a little bit smaller in some segments, that could mean that maybe there's fewer seats involved. But as you can tell with the numbers, we're continuing to mitigate that as much as possible and work through it. All right. And then maybe building out what you're seeing from a competitive standpoint, the churn and win rate commentary is pretty encouraging. Are you seeing price pressure in any markets deal pressure? And/or are you seeing share gains with some of the products? Yeah. I think as we've noted, pricing actually has strengthened. So we're pretty happy about the price per seat. Environment that we're seeing, and that's really a result of, again, enterprise plus adding more value within the platform. I really like our competitive position when we're working with customers being able to highlight the full value of our platform is really getting out of the conversation of one-to-one competition with any particular vendor because the full value of the platform, I think, is showing up in an increasing way. So that's all super exciting. And we're still even in advance of things like the launch and rollout of Canvas. So, I'm excited for adding even more differentiation and value that our customers are clamoring for. Yes, hey guys. Thanks for fitting me in. So, just, again, kind of digging in a little bit into the commentary around I think, selective large deal deals that were more scrutinized or seeing kind of lower seat count growth. I'm trying to understand kind of relative to what seems like pretty strong suite adoption. Enterprise Plus is obviously, I think, been more than well received by the base. And a billings growth rate that whether it's reported or constant currency actually kind of beat expectations, that kind of did beat expectations and kind of blew through a bigger FX headwind than you thought. And early renewals, which we're not hearing that at all. These days are I'm not -- and we're actually hearing the opposite. So, it is -- again, not to get too in the weeds, but just the large deal scrutiny, is that more of a post-quarter thing you're seeing? Or just kind of realizing kind of everything out there and what people are saying? Thanks. Yes. Thanks. I mean I think some of that is trends that we saw throughout the quarter from just, again, deal sizing some of the direct kind of interaction with customers, some of the reports that we run of trends in the business. Some of it is trying to anticipate continuation of certain trends in Q4 and beyond and being prudent with our expectations. So, it's kind of a mix of that. Again, it is this interesting environment where there's a lot of, I think, positive tailwinds with the space that we're in. the kind of value that we're delivering for customers. We can go into a customer, in many cases, help them save millions of dollars on spending on IT. When you look at their infrastructure cost, their content management systems, their security technology. It's a very, very potent value proposition right now. At the same time, in some specific sectors and environments, you could have customers not hiring as many people that might mean that maybe our proposal for an ELA or some of the seed expansion might be on hold, and we have seen that dynamic play out. So, I think when you kind of factor all that in, extrapolate out. And also, I think our interest in being prudent right now, that's sort of the numbers that we've kind of put out there. Okay. And then maybe one follow-up real quick. In the slide you put out a while ago, I think it was around an Analyst Day in terms of the lift you see when someone goes from core to suites and whether it's in terms of ARR or net retention and the price per seat being, I think, at least 2x. Is all that still valid and real today? That's exactly right. Yes. So, the relative impact that we do see of when customers move into suites comparing to the core we are seeing those same types of price proceed in overall economic trends, really stronger top to bottom from average deal size and price per seat to the net retention rates to gross margins being stronger and particularly with Enterprise Plus now making up 90% of the suite sales that we're making has further supported that trend. Wonderful. Thanks so much for taking my questions, and nice to see continued Brazilian in spite of the macro. I've got two questions, one for Aaron, one for Dylan. Aaron, I want to maybe drill a little bit down into Suites, right? So you've seen some pretty impressive attach rates. As you think about your attach rates, though for Suite, how has that been trending outside the US and particularly in Japan? Because I know you've talked about that in the past. Yeah. We did call it out a few quarters back in Japan in particular because of the channel environment. They were maybe slower to take up our Suites and Enterprise Plus strategy. That has all but kind of turned around and we're now seeing steady improvements on that front. So it's not something that we would call out as an impediment in the ePlus performance at this point. And now itâs just honestly, continue to drive this in every single customer conversation we're in and continue to drive it across the customer base. Yeah, got it. That's helpful. And then, Dylan, if we think about your NRR, it did tick down a little bit and then you're guiding to ticking down about another two points. Is that purely because of headcount? Or are there some other factors that might be at play there? And remind us, is there any FX impact that goes on in on that? Thanks. Sure. So Tier 1, it is primarily that headcount and lower seat expansion. As mentioned, the pricing side of the equation in terms of what impacts expansion has been quite strong as has our churn rate and our expectations there. So there's a little bit of a factor in -- that we're now facing tougher comps given the momentum that we've seen over the past year, but we really point primarily to headcount or seed expansion to your point. Thanks for taking the questions. First off, I just want to make sure how much of your business is sold, your international business is sold in local currencies. Is it predominantly sold in local currencies? And then I guess, I have a follow-up. Okay. Then on the Enterprise Plus, what would you guess that your penetration across your installed base is? And as you increase that penetration, what opportunity is there for additional price lifting once the customer -- is that Enterprise Plus? Because that's, it's been a driver of your growth? And is that going to slow if you start getting deeper penetration with Enterprise Plus? Sure. So I can take that, this is Dylan. I would say the Suites penetration broadly as you mentioned is now represents 42% of our total revenue, up pretty significantly from 31% a year ago. The majority of that is now ePlus, although because of the timing, and we rolled out Enterprise Plus, there's still a lot of Suite customers who are not Enterprise Plus, but expect over time the significant majority to move into Enterprise Plus, just we saw that 90-plus percent contribution to Suites larger deals this most recent quarter. And then in terms of the pricing, once a customer is already on Enterprise Plus, they do have the strongest relative net retention rates but that's less driven by price per seat improvements from there and more that those are the types of customers who see the greatest value out of box, the greatest stickiness so they see the strongest seat expansion options. So, over time, as we continue to build out our product portfolio, we could certainly introduce higher-tier suites beyond Enterprise Plus or change the pricing, which would be future price per seat upside, but in this -- in terms of what we've been seeing historically, the strong net retention from our Enterprise Plus customers is primarily driven by seat growth. Hey guys. Rich Hilliker from CS. Thanks for taking my question and congrats on the quarter. It was great to see the strong RPO and steady suite attach. I was wondering, given the greater scrutiny on large deals, how should we move into next year and relative to where it's come up from? Sure. So, internally, we really have not seen much of an impact on durations in this environment as customers are still increasingly viewing Box as a strategic long term partner. So, still continuing to sign longer term deals with us. And so from a contract durations point of view, those have been pretty stable and have actually been lengthening slightly over the past year, which has contributed to some of the strength in RPO growth and then payment durations have generally been pretty consistent as well. So, that's all kind of steady as she goes in terms of the duration contribution of those metrics. Excellent. Great to hear. And maybe, Aaron, one for you here. Just wondering in this environment, how your product conversations are changing. Given the solution selling approach, given the value you're pushing through sweet, I was wondering if you had any other conversations maybe around relay or ways to drive efficiencies given some of the scrutiny and then just the overall macro pressure? Thanks. Yes. So, on the efficiency side for customers, we are seeing a lot of conversations around can we help you migrate from a legacy network file share or document management system or maybe SharePoint that's on-prem. So, we're really kind of helping with those more immediate cost-cutting conversations on that front to help our customers on purely the expenditure side. Probably one of the biggest trends that has frankly been consistent in the past couple of years is just data security and compliance. I think the threat landscape is probably no surprise to everybody on this call. You have ransomware issues. We have a lot of different kind of cyber activity happening, and customers are really looking to make sure that they can protect their most important content and assets inside of these files are their critical contracts, financial information, movie scripts, pre-release product materials and so being able to protect that and keep it centralized in a secure platform is super important for our customers. And so getting off legacy systems they have very limited visibility into, being able to integrate a single platform across their applications, that's -- we're seeing that be of extreme value for customers in this environment. At this time, there are no further questions. I will now turn the floor back over to Cynthia Hiponia from Investor Relations for any closing remarks. Great. Thank you, everyone, for joining us this afternoon, and we look forward to updating you on our Q4 earnings call.
EarningCall_1847	Hi. Thank you, everybody for joining Tim Long here, Barclays analyst for comm equipment and IT hardware. Happy to have Ita Brennan with us, CFO of Arista, Chuck Elliott, up here as well to potentially help out if needed. But thank you for coming Ita. It's great to have you here. It's been an exciting few months for you guys with some really positive news. So that's great. So maybe we'll start off with that. I'm sure a lot of folks here were either at or listening to the Analyst Day, talking about 25% growth for next year. So maybe give us a little color on the strength coming off of 40% plus year. What gives you confidence in that? How do you feel about visibility? What are the pieces that are really contributing to that strong growth? Yes. I mean, obviously, our approach to guidance has always been to kind of look at multiple different scenarios of kind of getting to the number that you end up kind of settling on and making sure that you have multiple different paths to get there, right? Because obviously, there's things change over time, and that gives you some resilience to the number. We are obviously coming off of a period where we've seen good investment on the cloud side of the business. Again, coming off of a period where that spend had been lower, right? 2021 cloud was 30% of the business. So we expected cloud to recover. We expected to see that recovery kind of linked with some of the new products and some of the new products that we brought to market and it's great to see that happen, right? They would like to have gone faster even in 2022. I think it's been a constrained supply environment. We have extended lead times that's giving us a little bit more visibility to what's happening in that business. But there's underlying strength in that business, again, after a period of probably lower or under investment prior to that. So that's obviously one tailwind. If you look across the enterprise piece of the business, we are taking share on the enterprise. We're winning new logos, adding new logos. We're seeing very good acceptance of the overall enterprise solution now. It's no longer just data center. It's data center plus campus plus WiFi plus a lot of the management tools and visibility and security offerings that we've been doing. That complete package is being very well received in the enterprise, and we are seeing kind of good momentum in kind of the addition of new logos and then growth within those logos when we win. You look at specialty cloud service provider, I mean again, specialty cloud is also very interested in the new products, new technologies, again, are looking to invest around those products. So you have a pretty strong momentum across the board, and it's been pretty much constrained by what's been a very difficult supply environment, right? And that was the dynamic in 2022, and we think that continues to some degree, at least into 2023. So I think the combination of the momentum and the diversity plus kind of the visibility because of supply all gives you multiple different ways that you can think about that 25%. Okay. Great. And then the â probably similar answers, but a little bit longer term growth of 20%. How do we read into that? Just the durability of these share gains and strength in the end markets is longer lasting or anything else that pops up that helps you over the more long-term? Yes. And when you think about the longer term, I think what we tried to do at least is to, when you look back at the business, you see this very consistent kind of 20% plus five-year CAGR, right, from when we went public back in 2014. So again, we're looking at kind of that 2020 to 2025 period and thinking about that as a 20% CAGR. I mean, obviously, that does imply some slowing of growth off of the levels that we're seeing now in those outer years. It's not that we have perfect knowledge of what exactly those numbers will be in those outer years, but we do think that there's potentially some cyclicality to some of the kind of â particularly the cloud accelerated spending that we're seeing now. And that's kind of recognizing that without necessarily thinking you have the perfect number for what that will be. And of course, internally, we're obviously driving to grow all the other pieces of the business and drive that growth to offset that as much as we can, but we still think there is likely some deceleration in those outer years largely because of cloud. Okay. Yes, maybe we'll dig into cloud first as a vertical. Obviously, you guys get a lot of questions on that. You mentioned the 30% last year going to 45% this year, new products that maybe unpack that a little bit, what's really driving it? Because I think even Microsoft was kind of down a little bit for a few years there, and it seems like a big reversal year. So how much of this do you think is maybe a risk to taking some share or new workloads or new parts of the network, new products? What's really â what's underneath it, particularly for the big two? Yes. I mean I think there's â again, you had this lower investment and then COVID, which was largely a driver for a lot of these businesses, right, that COVID period and then a supply constrained kind of meshing in on top of that, right? So I think there is and now you have a new technology is again available to kind of help them grow their business and do some of the things that they want to do. So I think it's a combination of all of those things. You have 400-gig, which obviously is being deployed into whether it's AI use cases, data center interconnect some of the high-speed use cases. You have more efficient, power efficient, more denser 100-gig and 200-gig configuration products coming out of that silicon as well, right? So you've got a whole new slew of products that are more efficient, both power and cost and address more of the capability needs that you have to support AI, et cetera. So that's definitely a part of what's happening. And then I think you do have this dynamic of maybe underinvestment or lower investment plus more demand through COVID coming into kind of a supply environment, which is really almost helpful in that it's stretching out some of these deployments just because of the lead times that we're having to deal with. Right. Okay. And then thinking about maybe a third leg to this at some point, you're in another big cloud player. I think that business is growing pretty well. What can you say about kind of diversifying when you look at the Cloud Titan opportunity as you look out over the next few years here? Yes. I mean we do have, what would be sizable businesses except that they're dwarfed by the M&M customers and the role that they play. I think that there is announcements talk quite a bit about this make-and-buy model. And certainly, it's worked very well with kind of some of the existing customers. So there is interest in that model in terms of where can you â what can the brand is Arista solutions bring to somebody who's been traditionally more kind of white box and internal developments. That's something that we continue to propose technology there. I think it's a difficult change for anything to make. It takes a lot of time. It's not in our near-term kind of numbers and projections. It's more something that we will continue to kind of engage with and see if we can find the right model that works there. Right. And understanding you're the financial person, maybe Chuck wants to jump in. But is there a lot more development to scale Google or an Amazon or an Apple or one of the other big hyperscale players or is it kind of just evolutionary off the similar type of products that you have now. So in addition to like proving the use cases, you also need to put some real development and co-development in it with those players. I mean there'll be a lot of development in a situation like that just because you're starting from a very unique place, right? So yes, there's definitely a ton of work that will go into that. And there's just kind of the actual evolution how would that evolution ever happens. So again, I think it's obviously something that's very interesting on the one hand. But on the other hand, it's not something that we kind of think about in the near-term. Right. Okay. And understanding you don't talk orders or backlog, but maybe in terms of visibility, obviously, this customer base started giving you longer visibility. So where are we in that continuum? Do you think we're at the point where we're going to start to see maybe your visibility, maybe not go back to what it was pre-COVID, but lower than the year plus that you're getting from this customer base? I mean it's all linked to supply, right, into the lead times on the supply side. Jayshree had talked about six to 12 months and the last earnings call. I think we still see some supply issues to be resolved kind of well into next year. I mean if you fast forward to whenever you solve all the supply problems, I suspect you're going to see kind of lead times from customers come back in as well, it's not necessarily a bad thing, right, which is back to why we don't talk about orders and backlog too much is because lead times â if lead times are driving that, then that's â it's not really a leading indicator of the business, right? So I think first, it solves the supply issues and be able to kind of commit with confidence to some shorter lead times to customers, then I think you will see some of that visibility go away, but that's probably a good thing. I mean a year is a long time in tech, right, to be waiting for products to be deployed. Yes, and we'll start to do that anyway because you are seeing some lead times improve, right? It's just you need everything to improve to be able to solve the customer problem. But we will start to see improvements and there are improvements on some parts and lead times. So we will start to kind of focus on the purchase commitments and start to manage those. Right. Okay. You did mention 400-gig in one of your earlier answers. It seems some of your competitors who are lagging you on the technology front, tried to use that as an insertion point. It doesn't really seem like it's happened. So maybe kind of what's your view on and the team's view on where we are in the 400-gig transition? And do these transitions matter for market share gain or not? No. I think every product cycle is an opportunity for everybody, right? Yes, I think we're very happy with kind of how the products proved in and the acceptance of the products. There's always some new use cases that you get to play in. We've won some WAN opportunities, for example, to something new. The AI area and just kind of some of the technology discussions around that are very interesting. So it's always an opportunity to do new things and to look at new things for us as well as the competition is seeing it is something where they can come to take some share from us. But for us, it's more â you just get more capabilities to bring to these customers and figure out where can you expand kind of your share inside those accounts. And that's been the approach for a long time, and it's worked very well. Again, I think in this cycle where we've been able to kind of find places where we can really add value for these customers. Okay. And if you go underneath â if you go to the specialty cloud, are all the dynamics the same minus the white boxing as far as share opportunities, new use cases? I mean, are those still driving â being driven by that piece of the business? Yes, there's a lot of similarities, I think, from a technology and a needs perspective with that specialty cloud piece of the business as well, right? I think we saw good, strong kind of visibility from them as well. We'll probably solution more of that business as we head into next year. The hyperscale has kind of come first, right? Okay. Excellent. Maybe let's go over to the enterprise and campus part. So talk to us a little bit about the â you've gone from $100 to $200 to a little under $400, I guess, for campus this year, we'll see the final numbers, I guess, in a few months. What's driving that success? How much of this is strength that you maybe have in the data center side? And maybe just walk us through kind of what's helped those share gains? Yes. I mean I think just from the business perspective, we've seen a pretty balanced kind of data center first, campus first kind of wins in that space, which has been very gratifying wasn't necessarily how we thought it would have played out initially. So we are seeing good wins that are being campus-driven, if you like. Maybe Chuck can kind of talk a little bit just about why the solution is resonating so well with customers across those different pieces of the business. But we are seeing good traction on a campus first basis as well, which has been good to see. Yes. So I mean, I think at the end of the day, customers are increasingly buying into Arista because of the simplicity of what we offer and the fact that it works. So simple means that operationally, it's lower cost for them, guys get to â engineers get to go home Friday night instead of spending the weekend troubleshooting and the products just work. And that results in lower cost to their business. So especially cloud guy might be providing a service to their end customers. That service is up and running, their business works, business model works when it's down because there's an outage on the network. Somebody's geared it worked the way it was supposed to. That's bad. That hurts right. So what we hear from customers is, why did you buy Arista because it works. And now why are we able to deliver the quality that makes it work? It's because we have a single operating system, a single bit of software that runs on every platform that we sell. EOS is running everywhere. We don't have one operating system for the campus, one for the router, one for the data center, one for security, one for this, one for that. We have one operating system that runs everywhere. And we have one management platform, CloudVision, that runs everywhere. So you can be much more efficient and especially in this day and age where there's a tremendous â notwithstanding the layoffs that have been going on, there's still a tremendous shortage of technical talent out there. So if you can get by with fewer people and do a better job delivering what you're trying to deliver from an IT perspective, that's a big win. We give that to them. Excellent. One of the things that came out of the Analyst Day that I took from it was a little bit more optimism about wireless LAN. You've had Mojo for a while. So maybe talk to us about the importance of an integrated solution and having a stronger wireless LAN offering and how that helps you hit some of these targets in campus? Yes. I mean obviously, Mojo was a starting point for us on the wireless side of the business, right? It got us a team and some technology and then we've been working to integrate that with CloudVision, right, and to have â because again, on the wireless side, a lot of the benefit is coming from the management and the control of that WiFi and not necessarily kind of the box and the chip itself, right, which is pretty common, right? So the â I think what we've seen is good progress in the ability to integrate that with CloudVision managed that with CloudVision. And now it's kind of seen again as an extension of kind of the end-to-end solution that we're offering. That's resonated very well with customers, right? It took some work to get to the point where it's fully managed by CloudVision. But I think now that, that is â it's a very logical add-on to the networking piece of the offering. Right. Okay. Can you talk a little bit about kind of different go-to-market that's required for campus? I mean obviously, if you want to fully go over the full TAM, you need a lot more channel. So just talk to us about your approach there, probably more selective with where you're going to go out because Cisco, although you might have some technical issues at a pretty strong channel reach and presence. So how do you go about that? Yes. I think it's everything and it's in the right time approach pretty much how we approach a lot of things, right? But if you think about the campus market today, it's what a $12 billion kind of market and roughly half of it is in the hands of large enterprise, right? So that's kind of our â and is held pretty closely by one player. So that's an obvious starting point for us, right, that it would be that large enterprise customer. It's still mostly direct sales model, strong leverage across between the network and the data center piece and the campus. So that's kind of our starting point. That's what's driving kind of the growth that you see today. At the same time, you do need to start to build some channel capability because, obviously, you'll want to get out of that 50% at some point, right? So lots to do there. But there is the other half of the market, which is more mid-market. That's where the channel can be even more useful in terms of driving sales. So we are kind of driving a channel effort. It's targeted. It has to be targeted to your point because you need to find partners that can strategically kind of align with us, and they'll probably typically be more technical, and they'll kind of fit our overall kind of go-to-market and approach to the product. We are making some progress there. It's going to take time. It's not going to happen overnight. But the more pull that we create, the more except as there is a Arista across the board in the enterprise, the easier that's going to become, right? Because partners will see that demand from end users, and they will look to be part of kind of the Arista franchise as well, right? So I think that's something that we'll develop over time. It's not necessary to drive kind of our current momentum, but we do need to be making progress so that we're able to kind of address more of that TAM over time. Right. Also at the Analyst Day, you talked about whether it's the earnings call, I forget, orders being better than sales for this piece of the business. So just curious, your view as you've gone from the $100 million to $400 million-ish. Did COVID help this or hurt this piece of the business because there were times where probably you were going to be in a bake-off that didn't happen. So what do you think the net effect was on the slope of your market share move? Yes, it's interesting because it's obviously puts and takes. There was a while kind of in early COVID where we said, Wow, this could be bad for this business, right? The offices are closed, people are home, who's going to worry about the campus, right? But then over time, you start reading about the campus is a lot of things, right? And I think what the team has done a good job of is kind of expanding where we play, right? Whether now we see a lot more retail opportunities to see a lot more healthcare, education, there's more â I think COVID drove more pressure in some ways on campus networks and the management of campus network. So that's been positive, right? So I think we went from a place where initially, it seemed like it could be a problem, right, there actually be more complexity now around those campus footprints, and that's kind of an opportunity actually for us to insert. Okay. And how about some newer technologies like SD-WAN, you're starting to talk about we'll see something more on that next year. Is the campus an enterprise and environment that's ripe for you to just add new TAMs to? And how do you think SD-WAN plays into this, obviously, a pretty high growth end market right now, but very crowded. Yes. I think the approach at the end of the day is back to the simplicity that Chuck was talking about, right? I mean we tend to go into these markets and do these things when customers kind of want you to do that. So if you have a solution that's kind of EOS into end and then there's a piece kind of in that chain that's not, right? There is â there tends to be over time, a pull from customers to go solution to that, right? So I think that's what we're trying to do with that enterprise routing offering is really to say, okay, can we give customers the ability to have the U.S. end-to-end and to have all of the visibility and other benefits that they have where we solution that with a partner today, if we can get to an integrated, more integrated solution, that will be more powerful for customers. And customers are looking for that so that they can benefit from kind of that end-to-end solutions. Right. Now will you need to add more security capabilities and IP over time because it's obviously a meaningful piece of the SD-WAN architecture? You probably have a lot of the routing capabilities now. How about the security piece? Yes. I think our focus on the security side will be around kind of securing those network flows, right, and securing there's encryption, there's visibility monitoring. We've been doing some interesting stuff with Awake and with the capabilities that we acquired with Awake, putting those sensors in line into switches so that you can do a better job kind of looking for anomalies in the flows of the network. I think that's how we're thinking about security today. We'll see how that evolves over time. But it's really more focusing on using the advantages that we have with the U.S. and the visibility we have with the U.S. to better monitor and look for anomalies inside the network. Right. Okay. Maybe if we could touch a little bit on telco and service provider another big TAM. You guys have had this routing journey where you start with some basic use cases and move it up. So how are your views of disrupting the more traditional telco market where there's a few established players, but it tends to be pretty software-intensive margin-rich business. So I think it would fit very well into the model for Arista? Yes. I think the approach has been and kind of has to be at the end of the day, is not to try to go back and retrofit to the kind of the classic router, either products or honestly, software stack to some degree, right? I think that would â we always felt like that would have been a mistake to try to go backwards. When you think about the power and the cost improvements that you're getting with these new kind of switch router platforms, et cetera, I mean it's clear that that's kind of the direction that eventually a lot of this TAM will go, right? It's taken longer probably than we would have initially thought coming into this. We've done a ton of work on the routing stack for cloud, lots of new protocols. We've done work with service provider customers to kind of help bridge them to those new protocols. And I think that has to remain kind of the approach, right? That's the approach that ultimately we think will work, right? The more capable â those products become â the broader that gap becomes between kind of what's deployed traditionally and then what a telco cloud type network can bring you from cost, power, efficiency, everything else. We do believe that eventually you'll start to see more of those dollars get solved with that solution. And we'll have to be patient and continue to work on helping to bridge the gap for sure. We've kept all the sales resources in place to kind of support those customers, and we'll just have to be patient in terms of waiting for that transition to happen. Right. Okay. Yes, they tend to be a slow-moving bunch. So I'm assuming that there's got to be a long-term partnership, pretty risk-averse. So... And starting from a typical place. I mean, starting from with a lot of complexity. So it's not an easy transition, but I think the benefits are becoming more and more compelling all the time in terms of making that transition. Right. Okay. Maybe a little bit on the financial side. I mean you have a difficult job in that your revenue growth is really high and your operating margins are really high. So it sounds like the long-term model is kind of more or less status quo on the margin front. How do you not see more leverage? And I guess, what is that extra investment OpEx dollars? Is that just going to really help fuel that revenue growth line so that we can keep that growth at an elevated level? Is that how the model works over the next few years? Yes. I mean, part of the kind of expansion that we saw this year, et cetera, it's just coming from the sheer acceleration in the topline growth, right? And we're not going to spend to the peak of that, right? So some of the expansion that you've seen has come from that, right? I think when we think about the long-term model, hopefully, we'll get gross margins back to what we consider a more reasonable range. We'll see if we ever get back to exactly where we were before. It just kind of depends on what happens with the supply chain and just the complexity of supply chain and how much of that can you really peel back, but we'll certainly look to improve gross margins, and we'll look to continue to invest in development and sales and marketing, right? And I think we're reserving the right with the kind of the long-term model, the 38% kind of operating margin, we're reserving the right to be able to make some investments if we think they're truly beneficial to the future and maybe make some of those investments ahead of what we see on the topline and what we see on topline growth. Again, it will come, obviously, with some value that we'll articulate et cetera, if we were to do that. But I think we are reserving the right to do that. I think it would be foolish to miss opportunities if they present themselves where we could do something additive to kind of just the normal run of the business. So we're kind of reserving the right to do that with that 38% operating margin. Okay. And then from a capital return standpoint, you also have options there. So maybe walk us through kind of the framework and how does the company feel about M&A to supplement technology in areas where you see real revenue opportunities? Yes. I think you've seen us do M&A where we see technology or people, teams, smaller, but kind of, I think, well understood assets that we've acquired. I think we can absolutely continue to do that. When you think about bigger and larger M&A, I think with the scope of what we have in front of us that we can kind of solution internally with organic investments, et cetera, I think that just becomes harder for it to kind of meet the bar or exceed kind of what we feel like we can do with our own resources, at least for the foreseeable future. I think on the return of cash, we would offset dilution, and that's kind of a baseline. And then we've been somewhat opportunistic around returning more cash than that. This year has been a tough cash year in the sense that you've had a lot of working capital, supply chain investments, et cetera. But we have still been pretty active from a return perspective. So we'll continue. We'd like to start to make some improvements to working capital in 2023. I don't know if we'll get all of that done, depending on the supply chain. But certainly, we will start driving working capital metrics kind of back to something more favorable. Again, we may not get back to exactly where we were pre-COVID, but we'll certainly look to make improvements. And then we'll continue to kind of opportunistically return cash. Okay. Maybe one more quick one and maybe not that quick, but macro, we're hearing from everybody, but we haven't heard it as much from Arista. Do you think there's just such demand for the product category now that maybe there's a little buffer from a tougher macro environment or is it something that still keeps you up at night? Yes. I think we should think about it and try to understand what's happening from a macro perspective. I think there are investments that customers want to make. There's been kind of a protracted supply environment. I think customers can continue to make those investments, if they believe there is some manageable kind of disruption from a macro perspective. If it's more severe and longer term, I think then we'll have to be very careful about what customers decide to do. I'm just not sure we know which path we're on yet. Right. Okay. Ended with two seconds, you're professional. That is amazing. Very good. Thank you, everybody, for joining. Ita, Chuck, thank you so much. Appreciate it.
EarningCall_1848	Thank you very much for being here. I'm Francois Bourignies from the Tech Hardware team in Europe. And today, we're happy to have a Skip Miller Head of Investor Relations at ASML. You can scan in front of you, you have a paper where you can scan and ask questions. I will receive them in the second iPad have today, and I will be happy to pass that to Skip. We're going to talk about 2023 outlook first going through the different business units, and then we'll try to look a bit beyond 2023. If that's okay with you, as Skip can talk about the long-term, so thank you for being here. So maybe let's talk about 2023, as you know, '22 is already behind. Can you talk about the outlook you see for your different business units as you look at 2023 whether it's memory versus logic and maybe DUV versus EUV would be great to start with? All right. First off, thank you, Francois. Thank you, everyone. Yes. So 2023, we look at that, obviously, there's -- as we sit here today, there's a lot of macro uncertainties you say with respect to the inflation situation, what's going to happen around recessionary fears, geopolitics. So there's a lot of number of items there that creates some uncertainty. But if we look at our business and our backlog, especially we talked about October being around $38 billion, so a strong backlog covering us for next year, talk to our customers and looking where we're sitting today with demand still significantly exceeding what we can supply. We're looking at next year, increasing output, both EUV and DUV. And we've talked about shipping 375 or more DPV systems by next year. Within that, those DPV shipments, we talked roughly 25% of those systems would be immersion, the remaining being dry. And then on EUV, we talked about shipping 60 or more EUV systems by next year. So that's where we are with respect to our EUV and DUV business. We didn't break it out by memory and logic, maybe something we'll talk about more in January. And you have to keep in mind that other dynamic at play here is this whole revenue recognition with fast ship, which maybe we can talk about later on, but that's another piece of the revenue, which we currently have $2.2 billion coming out of 2022 into '23, and depending on how fast shipments evolve, we may have some coming out of Q4 next year unless we're able to result some of the accounting issues with respect to revenue recognition. Great. Good start. So you said summarize, you expect to grow next year. DUV, EUV. Now when we look at the market as a wafer fab equivalent, you had this question quite often have it as well. It's more looking like down 20% for many expectations out there. So, it looks like ASML is gaining a lot of market share out of this spending in terms of with the fab equipments. So can you explain maybe the drivers of how you are disconnected maybe from the general market, and what it means for beyond 2023 and kind of the fact that you can grow in a down market? Yes. So first off, I think the comments I'm making with respect to the 2023, taking -- looking at it from a backlog perspective of demand supply, I think that gives us some confidence that we really need to focus on the supply. Now of course, as I said, the things can happen depending on your view with respect to recession on will be a deep ugly recession, then obviously, it will be impacted if it's more moderate, then there's reasons why you can argue that litho may be slightly different in that respect. And I think it really has to do with the fact that the lead times are longest first off from the point where you place in order to actually receive a machine or the longest of the some of the other process equipment. And the second is the actual install qualification time for the time you actually ship it to actually it's running wafers are quite long. So you put those two together, our customers have to look at it from a perspective if I'm expecting a -- if they do first off view, there's a recession and they view there's a recovery by the back of the year, early 2024, then they need to have machines in place in 2023 ready to capture that increase in demand when it recovers, if and when, again, depending back to your recessionary comments. So, I think that's the fundamental difference, say, from some of the other process equipment. And also keep in mind that it's been over the past years, or at least a couple of years, it's been a bit of a challenge to get the machines that they want. So they've been looking to get these machines. So they haven't really received all the demand that the full demand that they have, we've limited in what we are able to actually book. And so that's actually restricted the amount of demand out there or the amount of supply that they have with respect to what they really like. And I think to those two factors, long lead times, longer lead times, both in the ship and the qualification, but also the restricted capability they've had to actually receive machines over the past year plus will likely push you in a way where they're going to take the machines, if they view the recession to be more of a moderate cycle going through here. And what meant you think that they don't pull in or they don't over order because, obviously, nobody knows what's going to happen in 2024, but we know there are a lot of little tools. So what makes you confident that you won't have like this big drop after big in 2023? Yes. So I think from a -- looking beyond, sorry, I didn't fully give you beyond '23, but I think we actually -- last month at our Investor Day, we talked about '25 and 2030, and if you look out, you see the continued growth in terms of demand. And we actually went into that not only in units, what we're seeing with respect to our units, but we also talked about the different markets. And we can talk about that in a bit more detail. But I think our view 2025 will continue showing strength in that respect. So then the question just becomes what happens if '23 delivered or respective then you have 2024. Obviously, we haven't guided anything out in '24. So I don't want to get too far in our cells, let's get to '23 first. But I think with the significant demand there, the fundamental secular drivers longer term, I think that gives us confidence that we see the trend heading to where we talked about last month in 2025 and beyond. Okay. That's clear. On China, it's also a very common question in this industry. Can you summarize what the impact of the new restriction is for your business and your backlog in the business? Just that would be great. Yes. So first off, maybe just to level set with respect to the facts of where we are with China. So China with respect to export controls, we're not able to ship EUV. That's been in place for a few years now, so nothing new there. And then the most recent communication from the U.S. government with respect to export controls did not change with respect to litho. So which is why we said that we have very limited impact with respect to our view because no change litho, meaning we'll continue to ship DUV systems into China. Now we did though quantify and said we had an indirect, potential indirect impact. By that, we mean that if these Chinese customers that are -- have a targeted technology are unable to secure non-litho equipment for these particular technologies, will they take litho? And that's a question mark. And so because of a question mark, we define quantified in our backlog, what would be in this category in the, particularly, in DUV. And we quantify that as 5% of our backlog. Our backlog being $38 billion so that quantify the number, but again, that depends on their decision and whether they'll take those litho tools in spite of the current new changes to some of the other non-litho areas as it relates to export controls. Okay. So since the new restriction has been in place, you don't see any impact on demand so far for your litho? Okay. So let's move on to the DUV, EUV and so base management for 2023. Just a quick zoom there. You said in the past, first with DUV that you were under shipping the demand by 40% in the last few quarters. How is it today with maybe the getting better demand may be falling in some areas, how it's comparing today that is maybe a few quarters ago? Yes. So I think just over the past -- like we talked about in October, there has been some communication around memory customers saying, hey, the 2023 CapEx, maybe some changes there. We've seen some adjustments in terms of timing from those customers. However, we've also seen other customers in move in to those changes in time. So, in other words, if some customers want to push their time later, we've had other customers backfill in terms of demand. So fundamentally, the demand any fundamental change. We still are operating with the DPV demand and around the 40% above what we're planning to ship next year. So still, again, very strong in that respect. And again, we'll have to EUV the same. We've talked about demand higher. We haven't put a percentage on it. It's also higher than we're planning from a demand perspective versus supply. Okay. So you don't see any cancellation. I guess, it's not something very common, the cancellation in your industry, small push out, right? So despite what we see from Micron publicly about this CapEx down, SK Hynix you still don't see an impact. Do you expect any impact from this? Or... Well, I think so it's -- again, primarily, we're talking about DPV because I think they were pretty clear not to get into customer-specific comments. But I think from a -- to your earlier discussion we had is that they're going to hold especially your strategic type investments that are going to be about future technology, which EUV falls into that category are not likely to touch those slots. DPV may be a bit different if you're going to look at capacity if they're changing -- planning to push capacity a bit to the right. But you have the ability with machines, customer A, going to customer B, we can reslot, reallocate to a different customer. And currently, the demand in some of these other areas are still quite strong. And so the desire to get a machine earlier versus later is still there. And so some of these movements in time are being quickly backfilled by other customers, that's the situation we're in today. Okay. Great. And when you look at the mix within DPV, as always the logic and memory, we started to talk about but logic has been outperforming meaningfully and even more in 2023 by the look of it. So how sustainable, what is driving this outperformance from a fundamental perspective of logic foundry. Is there any fundamental reason behind? Or is it just a cyclical element? So how can you justify because you are -- maybe you can remind us your exposure to logic versus memory that's why it's important? Yes. So, I think if you look at the past few years, and you look at our revenue, system revenue, you see our logic revenue logic versus memory split is around 70% or so plus or minus in the past few years. So, it's clearly a stronger percentage going towards logic versus memory. Combination there, I think first off, if you look at the number of layers, look at the mix of layers and therefore, the litho spend on a per wafer basis, it's the highest from a litho intensity perspective on logic compared to DRAM or NAND. I think that's one. The other is that, again, when you talk logic, there's a broader, we talked about these advanced and mature nodes. Mature falls a lot of that case into that category as well. So you're also not only talking about the advanced growing. If you looked at our Investor Day material, we talk about future nodes, node-on-node growth in logic around 30%, whereas memory, it's 10% to 20%, node-on-node. So, future nodes are growing not as aggressive in terms of spend per node as they are in logic and the absolute number is higher in logic. So that gives you a stronger demand or logic. The other piece, as I mentioned, being the mature versus advance, you only have this long tail of advance that goes into -- sorry, long tail mature that goes into the logic bucket, but also these new applications that we're talking about, secular ones around some of the service space today, but also the AI, the 5G that we've talked about. Those things are all going into the advanced logic. Yes, you need memory with it. But it's going to be a logic being a primary secular driver. And I think that combined -- those two combined are really what's fueling the strength in our logic space, and we expect that will continue going forward, as we talked about in our Investor Day material. Okay. Great. That's clear. Maybe moving on to EUV. So you mentioned 60 tools capacity, we can say shipments for next year probably versus 55 maybe in 2022. How is the demand capacity on the EUV part today versus maybe three months ago? Do you see any change? Because we saw some weakness in the smartphone area and maybe high compute side of things. So do you see any impact on your EUV business? We weren't so specific, so our 60 plan or more for 2023 is still the plan as we talked about earlier. But the -- we weren't so specific exactly where the demand -- how much higher. We said it was higher than what we could supply, but we didn't say how much higher. I think that's something that I talked to our earlier point that technology transitions are something that's quite strategic. So customers are not looking to move or change their view on the EUV machines because it is focused on new technology, but also the lead times being 12 to 18 months out. We're not going to move those and go to the back of the line. So I think that combination is keeping that demand pretty stable as it relates to EUV. And therefore, again, I think our focus is really going to be around next year as it is in DPV on how we can maintain, manage a higher number of units out really focused on the supply side. And you mentioned your backlog of $38 billion, I mean, how much is the EUV versus the DPV out of this backlog? EUV is roughly $20 billion of that of the $38 billion, so $17 billion of that is in the non-EUV piece of it. Okay. And deferred revenue is something that impacted your business and mainly EUV in 2022. How should think about deferred revenues and maybe you can do a quick summary of what it is? And how should we think about going forward, '23, are we going to see the end of it? Or is it like practice that will continue? Yes. So when we talk about delayed revenues, it's really tied to fast shipments. So maybe some of you have been involved with this and understand it, but others not familiar with it. So maybe I'll start with an explanation of what is a fast shipment versus a standard shipment. So standard shipment when we build our machines, you integrate, obviously, the hardware, you build up these machines. And then in our factory in Veldhoven we run a set a series of tests. And they set a test, we call it our factory called factory acceptance test, long list of tests. But once we complete those tests, that, in turn, we get sign off that triggers revenue and then we ship the machine or we ship the machine, then we trigger revenue. Then the machine goes to our customer site. It then gets resold, facilities qualified, so on and so forth. Then we rerun a set of tests at the site, we call site acceptance test. They're basically mirror the type of tests that we run in our factory and then we the machine to production. And so in fast ship scenario, first off, why are we going to do a fast ship. We're looking to save cycle time. Customers want the machine quicker. Obviously, we're in a supply-constrained environment. So we're looking at what we could do at our factory to try to save a couple of weeks. And so we said, okay, if we skip some of these tests on our factory, we looked at them to test, we looked at the test list and said, which one of these tests are reasonable to pass, meaning we're not expecting a problem and therefore, if we skip them, we will not be exporting problems in the field. So we identified a number of tests that we could -- that would save us you could say, two to three weeks, two to four weeks of cycle time in our factory. And then that would get to our customers sooner in production, and therefore, we get more machines out of our ship from our factory over the course of the year. Now we did this. The good news is that by the time you ship the machine to our customers qualify these under fast shipment, we found that the time from shipment to qualification was very similar, meaning we weren't exporting problems. But because you weren't recognized or completing all these tests, sorry, you were not recognizing revenue at shipment. The accountants want to see the full test run. So you had to wait for the site, which is roughly 12 to 14 weeks later. So, it's a whole another quarter. So therefore, you have this continual movement or delay of revenue until you receive site acceptance on these machines. Now as I said, the good news is that we are actually showing a consistent pattern from shipment to qualification, similar to our standard test. So we would like to go back to our accountants and say, "Hey, can we recognize revenue at shipment. By the way, both the standard and the fast have the same cash flow, but it's all about revenue". So the question here on revenue is, can we get revenue recognition match shipment even when we run the fast shipment because we've demonstrated through a number of months of data that we are delivering the same type of performance under a fast shipment versus a standard shipment. That involves customers. They have to say we're willing to sign off to do this. And the accountants have to say we're willing to do this as well. We're not there yet. We're still working on it. But we do have, again, a plan working through the customers and the accounts. And hopefully, we have something here in the not-too-distant future where we'll have revenue at shipment, on fast shipments because we're likely to continue to do these going forward. Why? Well, because we save a couple of weeks, customers get the machine earlier, and we're not exporting problems to the field. So that's our plan going forward, but we're not there today. Great. So one last question for '23 is in installed base management, something that we don't have that many questions, but it's a very strong business model as well in there. So can you talk about the drivers and outlook for 2023 on this part? Yes. So installed base is a combination of service revenue and upgrade revenue. That's what goes into our, what we call service -- or sorry, installed base business. The service piece grows in a pretty, call it, linear fashion as you ship machines, the more machines you have, you get service from those machines. Again, EUV is starting to contribute in a more meaningful way in time. So that's driving the service side of it. The upgrades business a bit more lumpy, and as you may recall, we talked about over 2022, we're running at very high utilization levels of business is very good. Demand is very strong from our customers with respect to their wafer output. And so to do some of these upgrades, you have to take, if it's hardware especially, you have to take the machine down. If it's a software upgrade, you also take a machine down, but you can recover it and say, hours as opposed to days. So in 2022, we did a lot of software upgrades same with 2021. Because they were -- did not want to take machine down for a day. Okay, maybe hours even there, they were hesitant to do, but they were able to take it down and do the upgrades. Now if we get some you can say, pressure off the utilization, if you will, or some utilization level reduction. Maybe they'll be more willing to take the machines down over the course of next year and do some of these upgrades. But that's still to be determined. So we'll have to wait and see how that upgrade business -- the upgrade business will evolve next year. There's opportunities -- there's plenty in the pipeline for our customers to upgrade, especially the hardware upgrades, but we do need to get the machines availability to machines to do those upgrades. So next year, I don't know if 10% or more. But we'll talk a bit about probably more of that detail in January. But it's really going to be the upgrade part that the part we'll have to assess better for the year as we get a little closer to 2023. Okay. So before moving to the long term, I have received two questions actually from the audience. So I will ask them before going to the beyond 2023. So I'm just going to read out loud, TSMC tripling spend in Arizona, does it mean some double ordering of equipment in both Taiwan and the U.S. in order to minimize potential yield issues in the U.S.? Yes. So I think the TSMC is just an example, but I think, again, you look at what's going on in Intel and Samsung and other customers, as it relates to spending in the U.S., and it's again, what we've put in this topic of technological sovereignty. By that, we mean that there's clearly a desire different governments across the globe to onshore, reshore some of the semiconductor manufacturing in their own countries. We see that Chips Act in the U.S., a similar type of act in the EU, where they're looking to bring the fabs being built back in this case in the U.S. in Arizona. And I think, yes, that will create some inefficiency in the most efficient scenario you can come up with is one customer in one fab building all wafers. Every time you move away from that, you create some inefficiency. And so this example building in Arizona, you can say, the technological sovereignty by design being a technological sovereignty initiative. Governments want the capacity on their shores that will create some inefficiency. I think that's, again, by design. However, I think our customers are going to be smart with how they do this and how they manage their demand and where they choose to build. So they'll look at what they need in terms of output, and they will look across the globe and where they have their different fabs and they'll decide accordingly. But I think, again, by design, these technological sovereignty initiatives will create some efficiency as we talked about last month at our Investor Day. The second question is. Intel has been investing a lot recently in next-generation nodes. How important is Intel for growth rates for ASML? Is there a risk that if Intel moderates its spending, it will have a significant impact on your growth rate? Yes, I think, well, Intel's clearly important customer of ASML. So I think it's -- we want to continue to see all of our customers succeed in too well. And I think continue to drive innovation. I think that's critical going forward. One thing always keep it in, as you always have -- when we talked about our scenarios, it's a demand-driven scenario. We didn't talk about a particular customer building certain wafers or certain regions or within the -- across the global building, but more about where the end market. So, the end markets are the driver where it's being built. Obviously, that's not as important. However, we do want to see all of our customers succeed, not only continue to drive the business but also innovation going forward. Okay. Great. So maybe moving on to the long-term, I mean, two CMDs in almost a six months' time, so which is not very common. 12 months. Yes, that's right. That's right, 12 months, exaggerating a bit. So you increased your targets, I mean, in a very short period of time, let's say, and $12 billion incremental revenues by 2023 and $8 billion 2025, if my math is correct, hopefully. Can you explain that as of this incremental revenue versus one year ago? And I think you mentioned that, for example, 42% of that -- of this EUR8 billion incremental is coming from mature nodes. So can you elaborate more what is going on there to justify such increase on the mature node first? Yes. So I think first, we talk about what were the fundamental end market drivers with respect to what we saw in Capital Markets Day '21 versus '22. And then secondly, anything additional, which is back to the sovereignty piece and foundry competition. So first, on the end markets. I think if you look at it, probably the biggest increase in terms of growth in terms of wafer demand came from the mature market segments, which for us is greater than 28-nanometer logic. And if you look at that, the primary market segments were around industrial and automotive. And we actually, in the Investor Day material, we went into that in a bit more detail and the automotive is a combination of electrification as well as the whole automation at us. That's evolving here in the automotive sector. We already had it in 2021 at a healthy growth rate, but not even -- again, we continue to underestimate I think that market segment. Industrial, it's a bit broader you had -- we not only have the whole automation, robotics, but also we even put a slide in around electrification, that whole grids, everything from moving from an ICE or say more of a not ICE but more of a coal-driven society to the renewables around solar and wind, but also taking all the way through a smart grid and eventually into the automotive. So, those two match up at the end there. But that was primarily driving, you could say, the more mature market segment. On the advanced and maybe put numbers on these. In Capital Markets Day 2021, we said that with -- if you roll up all these end market demand, it requires 505,000 wafer starts a month a year. In Capital Markets Day 2022, we saw that number is around 780,000 wafer a month a year. Of that, that incremental increase roughly 180 of that came from mature. The remainder of that came from advanced logic. In memory, we basically left unchanged. On the advanced side, there are really two primary drivers. First, on the end market segment, the end market segments that drove is primarily driven out of servers and AR/VR. Those were the two end market segments that the biggest impact will say, on the advanced logic demand. And then the other piece of it came from increasing die size. And increasing die size is due to, as you increase performance, but you want to do this at a lower power or manage power the segment per in general. You have to increase the die size to do that. And that's not in itself a new phenomenon, but it's been going on since 2005, which we showed last year in Capital Markets Day. Martin, our CTO, showed is in the Dennard scale up. But it's the number of applications that are adopting this and driving up the wafer demand there on that front. So those are two key drivers in the Advanced segment. So put those two together, you're at 780,000 wafer starts a month a year. And then we said on top of that, we said there's roughly another 150,000 wafer starts a month per year, what we call technological sovereignty piece, which we were just talking about earlier, which is government's desire to bring technology onshore as it relates to semiconductors. And then the other piece of that was foundry competition. And meaning you have now three foundry at the leading edge in is logic. There's three different customers that are driving the foundry logic demand there. That creates some additional efficiency as well. So you roll those all up. That obviously gave us a stronger demand than what we saw a year ago, and we talked about capacity. That means we have to drive our capacity in DPV up towards 600 by '25, '26 timeframe. And EUV, we talked a year ago about maybe you have 70 EUV units by 2025. We now need to have 90 million by 2025, '26 timeframe. And then on High-NA, we mentioned that we should be somewhere around 20 or more by '27, '28 timeframe. Great. I will talk about High-NA, but I just received a question from the audience. What are you thought on little share as a percentage of total with equipment for the next five years and why? Well, first off, we don't talk about WFE at ASML. Let me explain why? And I'll say then, but I think we've given you everything we're as you say percentage of WFE where does litho fall? Well, I think we've given you the numerator, and we haven't given you the denominator. Why we haven't given any denominator because we don't know the non-litho piece of it. So we've given you 20 basically 2023 this year, we've given '25 and give you 2030 data points. So from that respect, I think put in the -- you can put those in the numerator based on your assumptions on where you think the market will be. We've given you a range, a low market, a high market and where we see our revenue landing. We've given market shares that are assumed in that. So you can calculate litho. So I think with that data, you then need to see to figure out what the denominator is going to be. And I think you need more than just litho to do that. And so you'd have to get that data from others to determine. But you can create scenarios. We talked about litho as a percentage of semi revenue because that's something that we did talk about with semi revenue going from $1 trillion to $1.3 trillion by 2030. We gave you scenarios for '25 and '30 for our revenue. And it looks like if you just look at the third-party data, litho versus semi revenue that the assumed third-party number has it on the lower end of our scenarios based on the lines we put on that graph, which is there as a slide. If you haven't seen it, I encourage you to look at our website under Investor Relations, and you can see the Investor Day material and Roger Dassen's slide about litho intensity, you can see what I mean. And so if there's -- if we move to the mid to high end of our range, obviously, there's opportunity to show a trend continue to grow in litho-intensity. But we don't talk a lot internal with respect to WFE. But we will give you all a litho or what we know our numbers and you can do the math on the rest. Great. That's helpful. Then you have a good idea on the EUV demand and the ramp going forward. After EUV Low-NA you have the High-NA. Can you talk about the demand for High-NA and when are we going to see it? And also, what's going to be after High-NA? I mean, because one of the questions we have for many long-term investors is what's next. And I think one of the highlight of your Capital Day, you are more open to talk about the High-NA potentially, but maybe you can provide more details of what's the road map basically? So High-NA, so just to calibrate, today, we talk the machines we're shipping today, some may refer to them as Low-NA it's 0.33. That's the number of the America aperture. That's what NA means. And think of it as basically the size of the lens. When you go to High-NA, it's 0.55 NA. And those are the machines that will be shipping in volume in the '25, '26, I think we'll start towards the end of next year with our first machines, but in volume in '25, '26 looks to be when both logic, but also memory will be adopting High-NA in their production and their technology going forward. And again, I think you look at it why High-NA. Without High-NA, without High-NA, you would go to multi-pattern, low NA. And so it's all about High-NA reducing the process complexity, reducing cycle time improving yield by reducing the process complexity like Low-NA replaced for multi padding immersion. So that's the whole purpose timeframe. Again, '25 timeframe in real volume, '25, '26 timeframe in volume production. And you'll probably see some type of layer, we talked about layers in our Investor Day where they'll start any way where you'll start ramping in a similar way like we did with Low-NA, the most critical layers and continue to adopt layers going forward, such that you'll see as you go '25 to 2030, you'll see a mix of Low-NA and High-NA units in time. We're starting in the process of integrating a machine in the factory as we speak. Some of you were over in Veldhoven last month, I went and saw the machine and again, making progress, I think, on the program as planned. And again, that will take us out into 2030s. But then the next question comes, okay, what is beyond High-NA? Out in the 2030 timeframe. And I think if you look at it from a litho perspective, you say, what are your options? Well, the way you make smaller lines, either change the wavelength of light because the equation -- the Raleigh's equation is wavelength over the numerical aperture. So if you lower the wavelength, you get smaller lines or if you increase the numerical aperture, which is the dominator, you also can increase -- decrease the feature size. So having gone through a -- just recently a wavelength change, what you normally try to do is push the numerical aperture, like we have in other wavelengths from KrF to ArF and now EUV. So it would be logical to say, wouldn't you then expand your numerical aperture? I think that's a logical conclusion and why there's been a lot of speculation around Hyper-NA. But as Martin said, our CTO at Investor Day, we have a technology, but it's more about you need to make sure it's done in a very cost-effective way. And so that's where the real focus. We'll continue to research in High-NA and look for the right timing in the 2030s when we need to have the next numerical aperture. And then the focus will have to be on driving it in a cost-effective way, such that it brings value to our customers. Okay. Great. And last question because we're running out of time. Can you -- you mentioned the product roadmap. What does it mean for the ISP road map within this and ultimately your gross margin trajectory? Yes. So if you look at -- we roughly deliver products, our Low-NA products, for example, on EUV on a two-year cadence. And if you look at the EUV machines that we're shipping today, the 3600D, we're in the EUR160 million EUR165 million ASP in that range, which we've talked about for a number of quarters over the past few years. With the 3800E, we plan to start shipping that machine in the second half of next year. The productivity on that machine starts out around 195 and then goes to 220. When you compare that to 3600D, which is around 160 wafers an hour, that's what 35% or more in terms of a productivity gain. So it has a potential to have a healthy increase in ASP. We haven't specifically talked about the number, so I don't want to say anything yet there. But I think there's an opportunity there. And with those, when you see we do these model changes that usually also offers the opportunity to improve margins. So I think that's the next step. And again, if you then look out beyond 2023, you'll see in 2025 timeframe, on the road map that we communicated that we bring the next model out in time. So again, with higher performance, higher ASP opportunity to further drive the margins on Low-NA. And then High-NA, again, we'll start off, as I mentioned, towards the end of next year shipping the EXE:5000. We mentioned ASP around EUR270 million. That will then transition to EXE:5200 in the '25 timeframe that will be significantly above EUR300, which is what we said at our Investor Day. So and again, there will be models that will follow on in time, we'll offer opportunity for not only ASP but margin improvements.
EarningCall_1849	Good morning, and welcome to the Culp, Inc. Second Quarter Fiscal 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. Good morning, and welcome to the Culp conference call to review the company's results for the second quarter of fiscal 2023. As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition, and prospects of the company. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q. You are cautioned not to place undue reliance on forward-looking statements made today and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included in the tables to the press release included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at culp.com. A slide presentation with supporting summary financial information is also available on the company's website as part of the webcast of today's call. I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead, sir. Good morning, and thanks to everyone for joining us today. I would like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today are Ken Bowling, our Chief Financial Officer; and Boyd Chumbley, President of our upholstery fabrics business. I will begin todayâs call with some opening comments, and Ken will then review the financial results for the quarter. Following that, I will provide further updates on some strategic initiatives and opportunities specific to each of our operating segments. And Ken will then review the business outlook for the third and fourth quarter of this fiscal year. We would then be pleased to take your questions. Our sales and operating results for the second quarter reflected ongoing pressure from the continued slowdown in consumer demand in the domestic mattress industry and, to a lesser degree, in the residential home furnishings industry. As previously announced, our operating performance was significantly affected by inventory impariments and inventory closeout sales for our mattress fabrics division as well as higher than normal inventory markdowns and restructuring and related charges associated with our upholstery fabrics segment. The timing of this inventory impact was mostly driven by our customersâ focus on new products offerings to introduce at the retail level, as well as inflationary pressures, changes in consumer spending, and ongoing macro conditions. We expect to ultimately benefit from a focus on new products as we continue to win new placements in both divisions. But it is difficult to predict the timing of new product rollouts due to the ongoing excess of retail and manufacturer inventory. I am pleased with our continued focus on cash generation and working capital management, including inventory reductions, throughout the quarter. Maintaining a solid financial position has been our major priority through these challenging times, and I'm grateful to both of our segments for their excellent work in this regard. We ended the period with a higher cash position than the first quarter of fiscal 2023 with $19.1 million in cash and investments and no outstanding borrowings. We also generated cash flow from operations of $6.2 million and free cash flow of $4.8 million for the first six months of the fiscal year. Additionally, based on market dynamics for cut and sewn products and the strength of our Asian supply chain, we took action during the quarter to rationalize and adjust our model for this platform with a closure of our Shanghai cut and sew facility, resulting in certain restructuring and related expenses. We also began to implement a rationalization of our U.S.-based mattress fabrics cut and sew platform during the quarter, moving our R&D and prototyping capabilities from our High Point, North Carolina location to our Stokesdale, North Carolina facility, and initiating the closure of two U.S. facilities associated with this business, which is expected to be completed during the third quarter. We believe both of these moves will generate meaningful cost savings, estimated at approximately $3 million annually without sacrificing our ability to support our customers, grow our cut and sew business, and maintain our competitive advantages through our lower cost manufacturing and sourcing operations in Haiti and Asia. Importantly, we continue with a very robust platform for cut and sewn products driven both for market pricing and reactivity to customer demand for rapid prototyping, as well as ramp-ups. I remain encouraged by the market positions of both of our businesses and the actions our management teams are taking to improve performance in the face of extraordinarily difficult conditions. Later in these remarks, I will provide more color around specific strategies in each business with detail around Culp Home Fashions. I'm encouraged by our leadership transition which is -- within the Culp fashions business to generate improvement for the future. Across both segments, we are optimistic about new customer programs that are expected to launch in calendar 2023. As these programs will have the benefit of being priced in line with current market conditions as compared to the price cost lag weâve experienced for the last several quarters. Looking ahead, we will continue to diligently manage the aspects of our business that we can control, including execution of our product-driven strategy, ongoing cost reduction measures, and consideration of further adjustments to right-size and restructure our operations to align with current demand levels. We are pleased to have entered into a term sheet for a new credit facility that will give us more flexibility as we navigate this difficult environment. And we remain focused on taking the necessary steps to weather the current headwinds and meet the needs of our customers both now and as conditions normalize. I'll now turn the call over to Ken, who will review the financial results for the quarter. And then I'll talk more about some initiatives we have planned for both businesses as we move into the second half of the fiscal year. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website that cover key performance measures. We've also posted our capital allocation strategy. Here are the financial highlights for the second quarter. Net sales were $58.4 million, down 21.7% compared with the prior year period. The company reported a loss from operations of $11.9 million compared with income from operations of $1.6 million for the prior year period, and compared sequentially with a loss from operations of $4.7 million for the first quarter of this fiscal year. As Iv touched on, the loss from operations for the quarter includes $5 million in inventory impairment charges and loss on sale of raw material and finished goods inventory associated with our mattress fabric segment. It also includes approximately$1 million in higher-than-normal inventory markdowns associated with our upholstery fabrics business and $713,000 in restructuring expense related charges associated with the closure of the upholstery fabrics segmentâs cut and sew facility in Shanghai, China. I'll comment more detail on divisional sales and operating performance in a moment. Net loss for the second quarter was $12.2 million or $0.99 per diluted share, compared with net income of $851,000 or $0.07 per diluted share for the prior year period. Our overall operating performance for the second quarter was primarily affected by lower sales, impairment charges due to the write-down of inventory to its net realizable value, and inventory closeout sales for a mattress fabric segment, markdowns and inventory due to our age inventory policy for both segments, and restructuring-related charges associated with our upholstery fabric segment. Notably, we benefited from $829,000 in other income for the second quarter, as compared to $404,000 other expense during the prior year period. The change from other expense to other income is due mostly to more favorable foreign exchange rates applied against our balance sheet accounts denominated in Chinese renminbi to determine the corresponding U.S. dollar financial reporting amounts. During the second quarter of this fiscal year, we reported a foreign exchange gain associated with our China operations of $1 million, which is mostly non-cash compared with the foreign exchange loss of $151,000 during the second quarter of last fiscal year. The effective income tax rate for the second quarter of this fiscal year was a negative 10.4% compared with 34.3% for the same period a year ago. Our effective income tax rate for the second quarter of this fiscal year was affected by the company's mix of earnings between our U.S. and foreign subsidiaries. We incurred a significant pretax loss in our U.S. operations during the second quarter of this fiscal year, but we were unable to record an income tax benefit in connection with this loss due to the valuation allowance applied against our U.S. net deferred income tax assets. This [comes] (ph) with the fact that all of our taxable income for the second quarter was earned by our foreign operations in China and Canada, which have higher income tax rates in the U.S. resulted in the negative income tax rate for the quarter. Our cash income tax payments totaled $1.7 billion for the first six months of this fiscal year. And we currently expect cash income tax payments of approximately $3.2 million for the entire fiscal 2023 year. Importantly, our estimated cash income tax payments for this fiscal year are management's current projections only, and can be affected over the year by actual earnings from our foreign subsidiaries located in China and Canada versus annual projections, changes in the foreign exchange rates associated with our China operations, and other factors. For the mattress fabrics segment, sales for the second quarter were $26.2 million, down 35.8% compared with last yearâs second quarter and down 10.7% compared sequentially with the first quarter of this fiscal year. Sales for the quarter, which included pricing and surcharge actions that were in effect during the period, were significant pressured by the ongoing slowdown in consumer demand in the domestic mattress industry. The impact of this industry softness was heightened as mattress manufacturers and retailers continue to work through excess inventory, delaying the timing of shipments and new product rollouts. Operating loss for the quarter was $9 million compared with operating income of $3.1 million a year ago. Our operating performance for the second quarter of this year was significantly pressured primarily due to operating inefficiencies driven by lower sales volume and $5 million in inventory impairment charges and losses on the closeout sale of raw material and finished goods inventory. For the upholstery fabrics segment, sales for the second quarter were $32.2 million down 4.5% over the prior year, which was affected by COVID-related shutdowns in Vietnam. Sequentially, sales in upholstery fabrics segment were down 3.3% compared with the first quarter of this fiscal year. Sales for residential upholstery fabrics products were pressured during the quarter by reduced demand, driven by the slowdown in new retail business for the residential home furnishings industry. However, demand remains solid in our hospitality business with higher sales in both our hospitality/contract fabric business and our Read Windows business as compared to the prior-year period. Our operating performance for the second quarter of this fiscal year as compared to the prior year period was primarily pressured by lower residential sales and approximately $1 million of higher-than-normal inventory markdowns as well as operating inefficiencies in this segmentâs Haiti cut and sew facility. These pressures were partially offset by a significant more favorable foreign exchange rate associated with this segmentâs operations in China, as well as an improved contribution from our Read Windows business. Now turning to the balance sheet, we reported $19.1 million in cash and investments and no outstanding debt as of the end of the second quarter. This compares with $18.9 million in cash and investments and no debt as of the end of the first quarter this fiscal year and $14.6 million in cash and investments and no debt as of the end of last fiscal year. Cash flow from operations and free cash flow were $6.2 million and $4.8 million, respectively, for the first six months of this fiscal year as compared with cash flow from operations and free cash flow of negative $1.3 million and negative $5.8 million, respectively, for the first six months of last fiscal year. Our cash flow from operations and free cash flow during the six months of this fiscal year were favorably affected by working capital management, including higher accounts payable and lower inventory. Importantly, since the end of the third quarter of last fiscal year, inventory reduction has contributed approximately $13.7 million to the company's cash position. Consistent with our focus on inventory, we are tightly managing our capital spending with an emphasis on business critical only. Capital expenditures through the second quarter of this fiscal year were $1.1 million compared with $3.9 million for the same period of last year. For the full fiscal year, we expect capital expenditures to be in the range of $2.5 million to $3 million. We also executed a non-binding term sheet during the quarter for a new revolving credit facility of up to $40 million, secured by the company's assets. This proposed credit facility will replace our existing secured credit facility, and based on the information available at this time, is expected to provide improved borrowing availability with minimal financial covenants. While we do not currently foresee a need to borrow under this facility, we are pleased that it will give us more flexibility as we continue to navigate a difficult environment. The completion of the credit facility is subject to the parties entering into a definitive agreement, which may contain additional or different terms from those that I've just described. The company did not pay any dividends during the second quarter of this fiscal year following the suspension of our quarterly cash dividend on our common stock earlier in the year. The company also did not repurchase any shares during the second quarter of this fiscal year, leaving approximately $3.2 million available under our current share repurchase program. Despite the current share repurchase authorization, we do not expect any activity during the third quarter of this fiscal year, as we remain focused on preserving liquidity and being positioned to support future growth opportunities. I will now provide more comments about our strategic focus and initiative for each division as we look ahead, beginning with the mattress fabric segment, Culp Home Fashions. Despite the headwinds in this business, Culp Home Fashions has remained focused on inventory reduction and cash generation. This focus on inventory reduction will remain as we move into the third quarter as there are further reductions possible in both finished goods and raw materials. I am very pleased with the cooperation and support we have had in our transition of leadership within CHF. Sandy Brown and Tommy Bruno are working very well together. And Tommy is learning quickly and engaging the CHF team on a transformation plan in this business where every aspect of our operation has been reviewed, including the organizational structure, renewing the strength of our global platform with a continued and strong focus on North American supply opportunities, employee engagement and quality, design, sales and, of course, operational processes. In the short-term, the focus for CHF will be on free cash flow, turning our inventory into cash, controlling and reducing costs and working on overall improvement in every facet of the business. Innovation remains a hallmark for CHF, and customers continue to accept and prefer our design and product development. As mentioned earlier, we are optimistic that as new business placements move to retail floors, we will grow our sales commensurate with these market share gains. Additionally, these new sales opportunities are placed at current market cost and conditions, which will be better for our go-forward margins. We are also working to implement new order procedures to firm up customer commitments. We are focusing on SKU rationalization via an open express line that we will offer to various segments of the market. And we are revising minimum run sizes and implementing specialty raw material controls. We are also improving our cut and sew platform, so we can still meet customer needs for rapid prototyping in North Carolina and speed to market via our Haiti location, but saving $2 million annually with the closure of our two High Point facilities. And we will still have strong and competitive production and sourcing capabilities in both Haiti and Asia. Regarding operating costs, we are pleased that we are beginning to see raw material pricing relief and a stabilizing labor force. We still need to work through some long supply chains for raw materials, and we must continue training our newer associates. But it is positive to see trending towards a better, more normal condition. I do want to call out a bit more our stabilizing labor force. Over most of this calendar year, we have been faced with significant turnover, up to 40% of the total workforce in some North American locations and departments. The good news is that today we are much more stable and in a good position with jobs being filled by talented associate. But it's important to note this is inexperienced talent that is still learning, and as they grow, our efficiencies can improve. We also have a tailored focus for CapEx within CHF that will not involve any major platform expansion, but rather fine-tuning, updating and maintaining equipment to produce quality products at competitive prices. While we do expect the current economic environment will continue to affect the mattress fabric segment to at least the remainder of fiscal 2023, our market position in this business remains solid, and we believe we are well positioned for the long-term. We know that CHF is the business that we must quickly improve, and we are optimistic that we will do so. As mentioned, the business is undergoing a significant review and forecasts are being built from the bottom up, factoring in the baseline, closeout sales from impaired inventory, as well as the layering of the exciting new programs we've spoken of. We are confident that our new strategies along with our innovative products, creative designs and global manufacturing and sourcing platform will serve us well into the future in Culp Home Fashions. Now a few comments on the upholstery fabric segment. Despite changing consumer spending trends affecting the residential home furnishings industry, CUFâs business remains well positioned for the long-term with its scalable global platform and innovative product offerings. Through Q2, our upholstery business is performing better than CHF in these tough conditions, supported in part by our strong contract hospitality business. We remain excited about opportunities within contract hospitality, especially with fabric development. We also continue to pivot and diversify our sourcing strategies to develop additional geographic options to service customers. But we remain extremely proud of our associates in China and the great job they have done in difficult circumstances. We have maintained excellent customer service via our China platform, and we continue to develop products of great value in China. But we also understand the need to derisk our supply chain and we have options for supply around the world. We think a diversified strategy is critically important to our customer base. Innovation certainly continues within CUF as we see growing success with our portfolio performance products, including LiveSmart and LiveSmart Evolve, as well as our recent new introductions of [any space] (ph) and Culp powered by Nanobionic, a fabric featuring infrared technology that promotes recovery and wellness. Customers are reacting positively to our product lines as reflected at the recent interwoven market and we believe we will see overall residential business improvement as our customers clear inventories from their system and new products are delivered to retail. Ken will now discuss the general outlook for third and fourth quarters of fiscal 2023, and we'll be happy to take some questions. We continue to navigate a convergence of headwinds, including significant inflationary pressures impacting discretionary consumer spending, high inventory levels at manufacturers and retailers, a stabilizing but inexperienced labor force, and other macroeconomic uncertainties. Although we remain well positioned over the long-term with our product-driven strategy and flexible global platform, current conditions are likely to continue pressuring results through at least the remainder of fiscal 2023. Due to the continued volatility in the macro environment, we are providing only limited sequential financial guidance for the second half of this fiscal year. We expect net sales for the third quarter to be moderately lower as compared to the $58.4 million in net sales for the second quarter of this fiscal year, with sales for the third quarter affected by fewer billing days to the longer-than-normal holiday shutdowns, both internally and by customers and suppliers, as well as the timing of the Chinese New Year holiday, which falls primarily within the third quarter. We expect a consolidated operating loss for the third quarter this fiscal year that is meaningfully lower than the $11.9 million operating loss of the second quarter of this fiscal year, but that is higher than the $4.7 million operating loss for the first quarter of this fiscal year due primarily to expected lower sales. We also expect our cash position as of the end of the third quarter of this fiscal year to be lower than the $19.1 million at the end of the second quarter this fiscal year, but higher than the $14.6 million at the end of last fiscal year. Looking ahead to the fourth quarter of this fiscal year, we are cautiously optimistic for some improvement in business conditions with an expectation for a sequentially improved sales and reduced operating loss as compared to the third quarter of this fiscal year, and with a cash position that is expected to be comparable to slightly lower as compared to the $14.6 million at the end of this fiscal year. As we weather the current challenges, we will continue to be laser focused on prudent financial management with the goal of always maintaining a strong balance sheet, especially with regard to ensuring a strategic balance in our working capital. We are optimistic about Culpâs future, and we know that financial stability is paramount to our success. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Rex Henderson from Water Tower. You may now go ahead. Thanks for taking my call. And Iv and Ken, congratulations on really doing a great job of maintaining liquidity in a really difficult environment. So, with that, I wanted to ask a couple of questions about -- your guidance seems to imply you're not -- it doesn't seem that you're quite as bleak as you were in the pre-release a couple of weeks ago. And it seems like you're thinking that there's some stability and maybe a little bit of turn towards the end of the year. Can you give me some color on why you think that's possible? What you're seeing in inventories downstream from you? And also, can you give me a little bit of color on what impact the billing days and holiday shutdowns will have on the third quarter as a percentage of revenues or some metric that will help me understand what impact that's going to have? Yes, Rex, thank you. This is Iv. I really appreciate your kind comments about working capital management and just trying to maintain our balance sheet. It certainly is. Some numbers drilled into me from our Board and from our management here and from leaders before me and we definitely make it a paramount importance to us. So, it's one thing we can hang our head on and we're going to keep our focus there. So, thanks for mentioning that. To your questions, [donât know] (ph) if I wrap those in. Really good questions. And maybe I'll couch it as kind of you're asking are we seeing any improvement as we look ahead in the run rate. And we were trying to touch on that in the outlook. Certainly, there is some Q3 concern, and I think you mentioned there are some billing days out of the cycle in Q3. We have the normal holidays where we are hearing that some customers are taking one and maybe even two weeks out of their schedules. Chinese New Year is also a primary third quarter impact for us. So, we recognize that there will be considerably lower billing days in the third quarter than we might have in a normal quarter just from shutdowns. And that may be as many as four to five days that could impact us and billing. So, that's why we're being a little cautious about Q3. Overall, we probably feel more optimistic about Q4 sales lift, mostly driven by the focus we keep talking about on innovation. But if you have to also break it down, Rex, just as I'm thinking through this, you got to break it down by our segments, too. We said, or I said, Culp Upholstery Fabrics has been more stable. And we are seeing solid conditions in contract hospitality. So, our residential business does still remain pressure, but we're optimistic about new innovation that we have in that business. We have a great opportunity in performance fabrics and we feel certain we are positioned well. CHF, Culp Home Fashions, is a business where I really detailed, we have to see quicker improvement, and we are starting to see it. We've done a really detailed approach to the business. We built up the forecast really in depth in three buckets from a baseline of business, to closeouts that we're shipping, somewhat from our impairment of inventory and other things, and then new programs that we see, we're layer in those volume to get a forecast. We understand the baseline is pressured today. We know business is a little bit tight. But we're optimistic about reducing inventory further, and driving that cash, and we're really optimistic about new market share wins. We are certain, in both businesses, retailers seem excited to draft new products on their floors. And that's going to be a benefit to us. And we've been waiting for these rollouts for some time. And then lastly, I just I hate to not mention it, the good part about new products hitting the floor is that they are placed in line with market costs, which is -- I mean, it seems obvious, but that's a big deal for us, because we've been lagging on price increases most of the year, and to get new products to the market that accosted on in line with current market is going to be very helpful. So, yes, we're cautiously optimistic that we can begin to improve our run rate, especially as we think about in Q4. Thatâs a long answer. I hope I got all your questions. If I missed somethingâ¦ That's helpful. In your remarks about CHF and inventory rationalization there, I should be looking for Q3 inventories to be again lower than they are at the end of Q2. Is that -- more -- further cash generation from inventory reduction going in to the third and fourth quarters. Is that right? Yes. Rex, this is Ken. Yes, third quarter especially, fourth quarter may require a little bit of build when we come out of the -- with the projected sales growth that we're looking at. But right now, we're looking for further reductions in Q3. Okay. And then finally, one point of clarification on the credit agreement. If I recall correctly, you just executed a new credit agreement. I don't know, one or two quarters ago. And I'm wondering, what's the improvement here? What -- is it -- first of all, is this increment -- is this additional, or is it replacing the existing agreement? And, what's the benefit of the new agreement for you? Yes. Rex, this is Ken again. It is replacing the current agreement. It just -- it comes down to giving us more -- really a higher ability to borrow with the way it's structured, and also a lot more flexibility with minimal covenants. So, that -- those are the two main benefits of that. And so, with this new agreement, it really positions us well going into the future. And what's the -- is it out for a year or two years, five years, what's the limit on it again? Well, right now, we're looking at the current one is three, we're looking at three again. But we're still going through all the motions, but right now, we're looking at three years. Okay. And then, finally, one thing -- one question about China. We've been reading a lot about disruption of business in China due to the government's COVID restrictions. Have you experienced any of that? And what -- has it had any impact on you? Rex, this is Iv. Iâm going to let Boyd answer that. He is certainly very close to our China operations. I'll let him make some comments. Good question. Yes, Rex, thank you for that question. And in terms of from a business perspective, no, we have not been experiencing disruptions in China through this time period of the restrictions that have remained in place there. It has not had any effect or impacts to our managing our business or to our supply chain there. So, quite frankly, our China supply chain has been functioning and operating very well to support our business. So, no issues there. It is important to note, as we've noted before, we have pivoted some of our platform to other locations, just as a diversification strategy, which includes Vietnam and Haiti and Turkey -- more recently, Turkey. So, we have continued to diversify our global platform just to have options for our customer base. Okay. Well, thank you again. Good job in a difficult situation. And I'll let someone else got -- ask a question now. Thank you. Good morning, and thank you for taking the questions. And likewise, it's good to see that you guys are proactively managing your liquidity as well. So, I guess, just first just a quick housekeeping question. So, I think, Ken, you mentioned that there was some pricing and surcharge actions taken in the third quarter. Can you just share with us how much of that was impacted as far as the quarter here? Well, as you know, Anthony, we took, we started those pricing actions last year, and we really had him out all throughout last fiscal year. So, we're getting the benefit of having the -- when you compare it to last year, the benefit of having the third and fourth quarter increases in there. I don't -- I can't quantify exactly what those amounts are. But they're certainly helping. We're trying to navigate the pricing with all the different cost measures and efficiency projects that we've got going on. But as compared to last year, itâs definitely some tailwind there. But as we've said, in the past, especially on the CHF side, we did lag in our ability to keep up. So, that's one thing that -- as Iv said in his remarks, that with these new products, we're hoping to really get better pricing to reflect the current market. Anthony, this -- thank you for the question. Ken answered it well. But just a couple of â Iâll add a couple of things. As we've touched on a lot, we've been chasing price to cost in both businesses all year, and we passed on several price increases. And we have always lagged. It's never been enough. So, we're thankful that we're now seeing some relief in ocean freight, not inland yet, but in ocean, and in raw materials, which will be a big help going forward. Certainly, it takes a little time to work through the system. But seeing costs finally become -- I think we can see costs maybe become a tailwind for us in the medium term. And I just want to -- I want to call it, don't discount our labor stabilization that I touched on. Getting some stability with our associates and having them trained effectively will definitely be a cost control measure going forward. So, we have done some surcharges and increases, but we've lagged demand. I think that can turn for us in the back half of our year. Okay, that's good to hear. So, just a follow-up on the labor front. So, you mentioned today and your release last night about a stabilizing, but inexperienced labor force. So, in your experience, I mean, what's been a typical learning curve for new associates or -- like, when would be a reasonable timeframe as to when you expect your labor force to be as efficient as they should be? Yes, good question, Anthony. And I'm glad you picked up on that. I tried to call it out. Especially, for a while, labor has been a big challenge for us. And as I mentioned, our North American facilities, which is primarily impacted home fashions, some in upholstery business, too, we've had turnover of 35% to 40% in some locations. Now, we don't have that kind of issue in other parts of the world, but in the U.S., it's been challenging. Today, our turnover rate is very low. And we have a lot of talented people placed in roles but they're new. And we're not a major skilled labor operation, but we are skilled labor. And it does take some expertise to run equipment and to understand what's acceptable and to view it and inspect it properly. So, you know what, it just takes a little time. We typically will have -- we'd like to have a month type of training for any associate, and then we would say, well, it may take them two or three more months to get up to what's a normal cadence. So, it could easily take a quarter to get someone fully trained. Doesn't mean they can't be productive. But to get fully trained and really start to improve. And for many, many years, we had the benefit of a very stable, high retention labor force. And that just changed in the last year. And we're getting back to a place where we can build on some people in place, which should -- always has been a hallmark for Culp is our people. We value that as much as our balance sheet. People are so important. And we just -- we got to get the right folks in the right places and give them time to succeed. Well, that's great to hear. And then -- so you mentioned, obviously, ocean freight costs have come down. And you're expecting some labor stabilization. Any other costs tailwinds that you're seeing or you expect to see? I mean, I think when we think about costs, Anthony, outside of that, certainly we're starting to see some tailwind with raw materials. We know we got to work through supply chains, and in some cases, we have to work through some inventories we've already built. But we are seeing raw material tailwind. And that's the biggest portion of our cost on the CHF side. So, seeing raw materials turn in a positive direction for us is very helpful. Right. And as far as that -- just to follow up on that. So, will that be mostly SG&A and more of cost of goods as far as that $3 million number that you called out? See, it's a little bit of both. It's just now starting. So, we're seeing some impact in Q4 and then beyond. But it's really -- it's lease cost. That's a big piece of it. Labor cost is a big piece of it. Other fixed expense is down. So, there's just an array of different areas that incorporate that close to $3 million in savings. Got you. Okay. And then lastly, you talked about SKU rationalization and the better inventory management. Just wondering how quickly can you do that? And how should we think about the significance of this? Yes, good question, too, Anthony. That's specific to the CHF business. And we're just trying -- we have become, over time, a very custom-design business. And we don't want to say no to any customers. It's just not in our makeup. But what we can do a better job is of having a more rationalized product line with more rationalized raw materials to be able to develop still a lot of very fashionable and exciting looks for some segments of the market that we don't need to develop custom. And that just is the process of designing, and then selling, and marketing that project. So easy to do. Just takes a little time to flush through to the market. So, certainly, for our bigger customers, we are always going to do things they want to do and we'll do custom work. For some of the smaller opportunities, we need to make products of common raw material banks. We need to make them with efficient processes, and we need to have customer commitment to take the goods. And those are all pretty much blocking and tackling things that we just need to get better at. So, I'd say, I mean, it's going to take us -- you're going to see the fruits of that in FY â24 for sure. I'd like to have the goods go quicker. It depends on how quick we get these products released and placed. Thatâs so much of what's driving us, is when we get them placed into the market. Hope that helps. This concludes our question-and-answer session. I would like to turn the conference back over to Iv Culp for any closing remarks. Thank you so much operator. And again, thanks to everyone for your participation and your interest in Culp. And we look forward to updating you on our progress next quarter.
EarningCall_1850	Thank you for standing by, and welcome to the Kingsoft Cloud Holdings Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's third quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on GlobeNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and the CEO, Mr. Tao Zou; and the CFO, Mr. Haijian He. Mr. Zou will review our business strategies, operations and the company highlights, followed by Mr. He, who will discuss the financials and the guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretations. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management's statement in the original language will prevail. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. [Interpreted] Hello, everyone. Thank you all for joining Kingsoft Cloudâs third quarter 2022 earnings call. Since taking on the CEO role in August, I have been leading the company through a systematic review of our strategy, business, and financials. And during the quarter, we continued to implement various initiatives in a solid and down to earth manner. First, we continued to invest in technology, focus on our core businesses, and revise our original vision for cloud services. Second, we continued to review and evaluate our customer base and project portfolio, strengthen cost control, to achieve a better balance between revenue growth and profitability. At the same time, we continued to strengthen our ecosystem synergies explore high value business opportunities and pursue a path of high quality development. We achieved solid financial performance in the quarter. Our total revenues were RMB1.97 billion, in line with our guidance. Adjusted gross margin improved significantly to 6.3% from 3.6% in the second quarter. And our operating cash flow has been positive for two consecutive quarters, indicating that our business adjustment and cost control efforts are starting to yield initial results. In terms of business, we adhere to the conviction of building success based on technology, continued to focus on building key product capabilities on the IF and SaaS layers. These efforts were recognized by Frost & Sullivan Lead Leo Institute in China Data Management Solutions Market Report published in the third quarter this year, in which Kingsoft Cloudâs data management solutions ranks among the leaders of the market for innovation competency and growth performance. Meanwhile, IDC's latest addition of China's software defined storage tracker 2022 first half ranked our enterprise level storage solution, King storage, at top four in China's software defined object storage market. In terms of ecosystem collaboration, we stepped up our technological cooperation with Kingsoft Office to achieve enhanced cloud document processing, including authentication, encryption and proof-reading. Leveraging our cloud computing capabilities, we helped Kingsoft Office strengthen the business logic layer for cloud document processing, and thereby further improve their end user experience. In terms of different business scenarios, we continue to focus on our core industry verticals, replicating our successful lighthouse projects and apply to customers in their respective sectors. In public services space, we built a smart cloud solution for municipality leveraging our hybrid cloud and distributed cloud storage technology among others to enable and facilitate the management of economic affairs in a coordinated and integrated manner. In financial services sector, we validated our data governance services capabilities, particularly in data lake and metadata management in various projects for major commercial banks. We will continue to replicate such success with more clients in the industry. In the healthcare sector, we are about to complete the capacity expansion projects for the medical image clouds in regions, including Sichuan and Chongqing. A testament of our ongoing support and monetization to address our customers' needs to expand and upgrade their existing projects. Overall speaking, we will continue to invest in technology, focus on core businesses and enhance the foundation and the structure, which enables sustainable high quality development. Under the backdrop of the wave of digitalization, we aspire to penetrate deep in verticals of strategic choice and offer our customers safe, robust and efficient cloud computing services. I will now pass the call over to our CFO, Haijian, to go over our financials for the quarter. Thank you. Thank you, Tao Zou, and welcome, everyone for joining the call. Now I will walk you through the financial results for the third quarter 2022. We have actively taken measures to improve efficiency demonstrating our strong commitment to pave the path for profitability. This quarter, our adjusted gross margin has improved considerably and continuously from the lowest point of 1.2% in the fourth quarter of 2022, to 3.6% in the second quarter this year and further to 6.3% in the third quarter. Our operating cash flow has been positive for the past two quarters consecutively and we have achieved RMB100.9 million net operating cash flow this quarter. Our total revenue was nineteen RMB1,968.8 million in Q3. Within that, revenues from public cloud services was RMB1,349.0 million. While increased by 4.4% compared with Q2, it represents a 20.2% decrease compared to the same period in 2021. The change was primarily due to the company's proactive scaling down of CDN business, with its gross billing decreasing by about 28% on a Y-o-Y basis. Revenues from enterprise cloud services was RMB622.0 million, which is relatively stable compared with Q2 2022 as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China. While proactively applying more selective criteria to project screening to strive for better profitability and cash flow. Our cost saving measures are well on track within our plan. Total cost of revenues decreased by 20.6% year-over-year and remained stable quarter-to-quarter at RMB1,846.4 million. IDC costs decreased significantly by 23.6% year-over-year from RMB1,410.9 million, to RMB1,087.3 (ph) million this quarter. Depreciation and amortization costs increased by 26.9% from RMB200 million in the same period of last year to RMB253.7 million, while remained stable compared to last quarter. It is in line with our revenue mix adjustments as we moderated the procurement process of service of public cloud. Solution development and services costs increased from RMB160 million to RMB443.1 million this quarter. The increase was mainly due to the consolidation of Camelot since September last year. Fulfillment costs and other costs were RMB31.9 million and RMB39.3 million this quarter. The adjusted gross profit of this quarter was RMB124.7 million, representing adjusted gross margin of 6.3%. The significant gross margin improvement was mainly due to the effect of cost control measures and strategic adjustments of our revenue mix. In terms of expenses excluding share-based compensation, total adjusted operating expenses was RMB577 million. Within that, adjusted R&D expenses was RMB231.6 million increase from RMB190.8 million from last quarter as we remain focused on our technology development. Adjusted selling and marketing expenses was RMB125.5 million compared with RMB120.1 million last quarter. Adjusted G&A expenses increased slightly from RMB196.0 million last quarter to RMB219.9 million, which is partially due to the one-time of expenses of Hong Kong listing projects. Net loss margin was 40.7% this quarter and adjusted net loss margin was 24.8%. The adjustment was mainly due to the foreign exchange loss of RMB218.9 million, caused by the significant fluctuation of U.S. dollar RMB exchange rates, which is totally a non-cash item impact on the P&L items. As of September 30, 2022, our cash and cash equivalents and short-term investments amounted to RMB5.3 billion, providing us sufficient liquidity for operations. The capital expenditures for the quarter was RMB253.3 million, which primarily consists of payment for service, which we ordered previously. The decrease of CapEx was in line with our proactively scaling down CDN business. We expect to keep our total CapEx within RMB1.5 billion for the full year of 2022. In terms of share repurchase program, regarding our $100 million share repurchase program within a 12 month period as approved by the Board and announced in March this year. We have been duly executing since the release of our Q2 earnings results up to November 18, we bought a total of 10.41 million ADS shares for roughly about $23.92 million. Going forward, supported by our ample cash reserve of about RMB5.3 billion. We expect to continue to execute from time to time with way to mandated repurchase program. These efforts fully demonstrate our Board and management's strong commitment and the full confidence in the long term business prospects of the company. As we strive to reward our shareholders for their support and we believe our share price will eventually reflect company true value. Finally, we submitted the application for Hong Kong's due primary listing on July 27, 2022. As always, the listing and the potential timing is subject to regulatory approvals. Looking ahead, although, we are still implementing our strategy initiatives, including business repositioning and cost control efforts on an ongoing basis. Such adjustments have already yielded positive preliminary results as reflected in the clear improvement of the profit margin in Q3. We expect our total revenue to be between RMB2 billion and RMB2.2 billion for the fourth quarter of 2022, representing a quarter-over-quarter increase of 1.6% to 11.7%. While these forecasts and comments above are based on our current and preliminary views of the market and operational environment, which are subject to change. We firmly believe that given the time the effects of our ongoing strategic initiatives, we will continue to amplify and reflect our financials in the mid to long-term. Thank you. Thank you. This concludes our prepared remarks. Thanks for your attention. And we are now happy to take your questions. Please ask your questions in both Chinese Mandarin and English, if possible. Operator, please go ahead. Thank you. [Interpreted] Thanks, management for taking my questions. My first question is about the recent outbreak of COVID as well as the uncertainties of the macro environments. How should we think about the near term as well as 2023 outlook when we do the budgeting process? And number two is about the Q4 revenue guidance, can management comment about the trend for public and enterprise call during the quarter? Thank you. [Interpreted] Thank you, Thomas. So on your second question regarding the Q4, so as we mentioned, we do see a third point, we do see a relatively expected recovery curve on the top line right, starting from last quarter, and carry from this quarter and Q4 sequentially. So the total revenue will be improving trend in Q4. And in terms of the mix, given we have almost completed the initiatives on the CDN business adjustments on the priorities in terms of investments and the client mix. So I think that provides us with a relatively stable base to project the public cloud revenue in Q4. So because of that, I think in Q4, our public cloud -- as a total, we will see a sequential marginal improvement on the top line, but the profitability on the line of the public cloud will continue to see a positive contribution for the company's total gross margin in Q4. And on enterprise cloud side, as we mentioned, I think if you're really looking back from Q1, Q2 and this quarter, and as Tao Zou mentioned, part of the due to the COVID measures in Beijing City that preventing us some of the project bidding and the deployments and execution in Q2, which was around about April and May, and sometime in part of July -- June and July. We do actually tried our best in Q3 this time to accelerate the deployment execution. So hopefully, some of the flagship projects, including a few important projects that we discussed and disclosed earlier, for example, some of the provision-level healthcare cloud, hopefully, we can be deployed and fulfill the execution in Q4, and that will carry with the revenue booking in Q4. So with that, I think our enterprise cloud, you may see relatively a little step up of the revenue of enterprise cloud as part of the total revenue contribution. So overall, my feeling is right now, I think the sequential improvement on both top line and the gross margin will be two important priorities for management team, while we will need to continue to make sure that our cost control measures of expenses lines will carry forward. Hopefully, will be -- have some benefits in Q4 and Q1, starting from next year as well. So it will take some time, but I think some of the initiatives were already implemented in place, just we need to have the time clock and see the benefits going forward. Thank you, Thomas. Thank you. And I think it's just a quick translation of what Mr. Zou responded to the first question. So the COVID situation has been going on for years. And honestly speaking, it has been impacting the overall society significantly across all verticals, including us. And like you rightly pointed out, we are also observing and trying to see what the next step might be. As you might be aware, in recent days and weeks, the situation in Beijing is becoming more severe, to abide by the government rules. We have only 20% of the workforce currently working in the office. And as you know, there has been one situation like this back in April and May. So it's really difficult to predict or to comment the situation. What we can do is to abide by the rules promulgated by the government. However, I think from a strategy perspective, in light of the uncertainty and potential uncertainty in future years. From a strategy perspective, what we can do is to maintain a robust and relatively defensive approach. And what I mean by that is exactly what we commented in the prepared remarks, which is no longer blindly pursuing top line growth and but to switch to our pursuit of sustainability and path to profitability. And as you have seen, the gross margin in the third quarter has already improved quite a lot from 3.6% to 6.3%. So we believe that by abiding by that relatively conservative and robust strategy, we'll be able to navigate through the potential uncertainties in the years to come. As to your question of our budgeting, we are currently going through the process of making a comprehensive budgeting, currently going through the first round of review and compiling the numbers. We expect to have more clarity towards the end of December or the beginning of January. So unfortunately, we don't have much -- more data to share at this stage. Thank you. [Interpreted] So my first question is regarding our non-GAAP EBITDA margin, as which dropped slightly quarter-on-quarter in Q3. So I just wonder, do you expect a delay in terms of the timing for non-GAAP EBITDA margin breakeven. And secondly, what is our CapEx plan for the next two to three years? And are there any foreseeable plan to further extend the useful life service the some of the overseas peers have extended that from four to six years. Thank you. Thank you. This is Henry. Happy to take all those three questions on the financial related matters. The first question is regarding the EBITDA breakeven, yeah, we do acknowledge that the EBITDA on a sequential basis, we actually dropped a little bit marginally. We noted that there are a few things on the line. First of all, if you look at the total expenses on the dollar value, actually, our sales, marketing and R&D expenses actually was quite stable. So there's no major changes on that. However, the booking of certain G&A expenses due to, for example, the Hong Kong Dual Primary Listing projects that we actually need to pay certain fees, as you may understand, that actually also eating up the bills as well. And also given this year, we do have certain cost-cutting, for example, the optimization of human capitals of the company. We need to pay certain compensations for the people they may choose other credit tracks for things like that. We did a batch of that arrangement in Q3. So especially towards the end of Q3. So the savings on the salary has not been reflected on expenses in Q3, while we need to pay even more for the compensation for the people that they choose other credit tracks. So in and out, you see actually the fluctuation and even increasing on certain expenses items. But I think these are the right thing to do for the company and the benefits on the cost of savings and expenses will be gradually released in Q3, and I think for some time down from Q1 next year. So that's actually quite clear on online reasons. So we don't worry too much about that a little fluctuation, but the online -- or the normalized operational expenses in Q3 already kind of declined. So given that, as you probably know that, our priority at this moment is improving the gross margin. As we mentioned, the gross margin has been improving from almost only 1% last Q3 -- Q4 last year to about 6.3% this quarter. That's actually a meaningful improvement. And if you look at the growth profit on a dollar value, we almost doubled from Q2 to Q3 from about RMB50 million to about RMB120 million for this quarter. So we do believe the improvement on the gross margin will be a first level of the driver of improving EBITDA and even -- and breakeven of EBITDA timing. So given on that, we think sometime for next year, we do hope the EBITDA margin kind of improving at a little bit faster pace compared with the gross margin sometime point of next year. And on the other side, we do hope that after we complete all the necessary capital market transactions, our expenses ratio will further come down as well. So that's the first point. The second point regarding the CapEx plan. I think this year, we're running relatively well. It's towards the low end of the capital budget for 2022. While we print the same level of the revenue target, I think which is a good sign. For the next two to three years, I think we may keep relatively the same level at around about RMB1 billion each year. And you may remember, we discussed that we may need to hit a certain server replacement cycles, sometime around like '25, '26. But I think so far, we feel comfortable regarding about RMB1 billion on capital expenditures. But given we do have about RMB5 billion cash. And right now, we have multiple access to the capital, not only from the stock market, for example, the long-term financing and the cheap leasing arrangements, et cetera. So we do hope over 90% of the capital expenditures we may find other ways to fund those capital expenditures outlay rather than tapping to our own net cash balance. I think that's going to be a good point on the capital structure, and we don't need to burn too much cash on hand. And the third question regarding the service, I think you're right. We do notice that the major U.S. cloud company has revised the DNA policy from four years to five years, last year. And some of them are discussing the shifting to six years, which actually reflecting the nature of the technology as they evolve because most of the new servers starting from these two years, for example, some of the expensive ones, we actually -- the cost -- the price point is high, but they actually can use, for example, 2 times of the price point, but they can use like 3 times, 4 times of the life cycle. So I think it does make sense for the U.S. peers to extend that. But given we do adopt a very conservative financial policy, we do not have any plan at this moment to extend our DNA policy, even though we understand extending from four years to five or even six years, we will have a relatively good impact on the gross margin because we have a lower G&A expenses. But at this moment, we do not any plan to revise that policy. But we may reserve that if we see other Chinese players change the policy. It's going to be an uplift to our gross margin, and reduce the D&A expenses. Thank you. [Interpreted] Iâll transfer myself. So regarding the margin improvement, can management talk about situation, so where it comes from, public, cloud enterprise cloud and will it be sustainable into the first quarter and going forward? Thank you. Thank you, Joel. Yeah. On the GP (ph) margin, you touched upon a few things. The improvements, the breakdown, the root causes and the sustainability. It's a very broad scope actually. So I think I'll start with the reasons, first, so there are a few things we actually start to work on since Q4 last year. So it's not actually happening only this quarter. There are a few things involved. As you may remember, first of all, is we're kind of cutting some losses for certain loss making clients. Number two, we optimize the product mix, right? So try to make the computing, the storage, some of the big data solutions and certain more high value added products and more profitable products we invest a bit more, right? So I think these are the second reason. We start to do that from Q1 this year. And the third reason is, the improvement and the screening of the projects. So as Tao Zou mentioned in the CEO remarks, we actually starting from this quarter, have adopted a very comprehensive approach to analyze returns on each projects and different ratings internally for different clients, et cetera. So we can prioritize and select the right projects we're working on, and some of that has already yield a good for this quarter as well. And the last reason is actually, if you remember last year, we do kind of learn our experience and the lessons. We've bought -- a little bit (ph) too much of the service, and we ordered a bit too much of the bandwidth, and it cannot be returned. So the eating up on the gross margin last year, especially the second half. So this year, we have changed our process to evaluate the procurement process to make sure that we do not over order it, and we can use them wisely. So I think these are the kind of four different things that help the gross margin can improve for this quarter to see the results. So even though we did something last year, but it's going to be a good time to see the results. Speaking about the mix, I think that both public cloud and enterprise cloud has contributed to the incremental RMB60 million of the margin improvement. Because as you know, given the base of the public cloud and the enterprise cloud is actually quite balanced, and we cannot lose any of that. So it's both important. And on the sustainability, I think the first-three reasons, as I mentioned, we will carry a long way. So it's going to be -- you see -- hopefully, we can see a better margin in Q4, and some time in -- carry over to next year as well. And certain enterprise cloud projects, as you know, we're booking the revenue only at completion, but some of the costs we already booked. So hopefully, in Q4 as a peak time of enterprise cloud delivery, you will see additional step-up on enterprise cloud contribution. So if you want to break down the reason for Q4, let's say, going forward, I think enterprise cloud will be relatively more important private cloud in Q4 given the time delivery on that. Thank you, Joel. [Interpreted] Thank you, management for taking my question. My question will be about the outlook for 2023 as we understand this year is the transition year in terms of our business adjustment, and also there is impact from the macro environment as well as COVID. Could management share some thoughts on how we should look at the demand of overall cloud industry in China. And also for our revenue growth, when should we see an inflection point in terms of cloud revenue in your growth into 2023? Thank you. [Interpreted] Okay. Just very quickly responding to your question. The first point is, as I commented previously, we're currently undergoing the first round of budgeting for the next year and we currently do not have a comprehensive picture which we will be able to have towards the end of this year to share more color to the market, and to the investors. Now the second thing is, although that being said, I think I can share with you some of my thoughts towards the macro situation and our strategy in response to that. The first is, the -- given the dynamic situation and the control measures within China, we have been changing the guiding principle, as I commented, from revenue from the pursuit of revenue growth to profitability, which is also a change that we have been increasingly observing within the sectors. The second point being the -- there still remains significant uncertainty to the COVID control measures that will come. And also including the uncertainties of what the country's overall economic planning after the two sessions in 2023 is going to be. So we all generally adopt a conservative and defensive approach. And this approach, including some of the falling measures, number one, we will exit some of the projects and customers and transactions that have not been profitable for a long time -- for the long-term. And secondly, we will be looking at our customer base and adjust the customer base structure, in particular in the past that some of the largest customers have been commanding large share of revenue contribution, and has impacted to our financial performance. And we might decrease that revenue contribution and increase the revenue contribution coming from the waste and shoulder-level kind of customers. And thirdly, in terms of enterprise cloud services, we will continue to dig deeper into the strategically selected verticals as we have done in the past, but also cautiously explore new verticals that are highly beneficial for the cloud industry, for example, the electric vehicle industry. That's some of the thoughts that I can share with you at the macro level. Thank you. Yes. Thank you, Timothy. I also add one point as well, while we follow the market and client demands carefully, and while we are looking for -- as you do as well, for the next kind of acceleration or the v-shape acceleration of the demand from clients we have a capacity on the cash reserve as well. So as you can see that we already delivered a net positive on operating cash flow side this quarter. And hopefully, for next quarter and going forward, we can continue to do that. So we remain relatively robust on the cash balance. And while we're investing carefully on the potential new verticals that will carry relatively faster growth, as Tao Zou mentioned, for example, the new energy EV cars and other verticals as well. So I think we do not worry too much about the timing because we have enough cash, and we can wait for the market to come back and work with the right clients. So I think that's actually one more point I just want to say as well. Thank you. There are no further questions at this time. I will now hand the call back to Ms. Shan for any closing remarks. Thank you, operator. Thank you all once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Good-bye.
EarningCall_1851	Good day, ladies and gentlemen, thank you for standing by and welcome to Boqiiâs Fiscal 2023 First Half Earnings Conference Call. Currently all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Thank you, operator, and good morning, everyone. Before the conference starts, I need to explain that I am currently at home and my cat is sick. So there may be some voices and I hope you could understand it. Welcome to Boqiiâs fiscal 2023 first half earnings conference call. Joining us today are Ms. Lisa Tang, Co-CEO and CFO; Mr. [indiscernible] our Financial VP and Ms. [indiscernible], our Head of Investor Relations. We released results earlier today. The press release is available on the company's IR website at ir.boqii.com as well as from Newswire services. A replay of the call will be available on the site later today. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties as such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties are included in the company's public filings with the SEC. Please note that certain financial measures that we use on this call such as non-GAAP net loss, non-GAAP net loss margin EBITDA and EBITDA margin are expressed on non-GAAP basis. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. With that, let me now turn the call over to our Co-CEO and CFO Ms. Lisa Tang to go over our first half performance and highlights. Over to you Lisa? Thank you, Lou and many thanks to Lou's cat and we wish you, will recover soon. And many thanks to everyone for joining the call today. During the first half of typical [indiscernible], thanks to the efforts of our colleagues, and many thanks to the customers and the partners. Despite the uncertainties of the epidemic, we still achieved the main goals as before and continue in the past optimization from obtaining accurate traffic and integrating upstream and downstream and true for building the delivery. At the same time, we also rationally analysis the influence of the various environmental factors and actively faced challenges from raw materials manufacturing and logistics, which further improved the integration timeliness and assistance of our system. Due to the impact of the objective above market environment, leading to a year-over-year slight increase of 2.4% in revenue to RMB 589.6 million during the first half. In spite of this, we are still actively search market opportunities, adjusted appropriately our operating strategies and achieve satisfactory results in the first half. As we continue to integrate upstream and downstream of the industrial chain, optimize our product mix and adjust the product category. During the first half of fiscal year '23, our GMP recorded a notable increase to 240 basis points to 21.0% a margin that GMP of private labels increased from 27.4% to 33.0%. Our posted fulfillment margin also increased 170 basis points to 9.5%. On company management we also further optimized our cost structure and achieved remarkable macro success. Our operating expenses were able to report 21.0% year-over-year decreased in the first half in terms of revenue we also dropped from 32.2% of total revenue to 26.1% of total revenue, highlighting our effectiveness in cost control. That lays the foundation for narrowing loss from operation and the net loss, which equate to 15.42% to RMB 29.6 million from RMB 82.6 million and 52.0% to RMB 29.5 million from RMB 81.9 million respectively. All these have demonstrated our business resilience and improved profitability. Looking back to our journey Boqii has established its leading position go to pet platform in China by creating values for pet [indiscernible] and pet parents. We will continue to expand our ecosystem in the future and hope to become the preferred channel for our users as well as the leading market development as we further expand our production selection and the network reach. Now let me pass the time to [Al] [ph] again to further update you on the market insight and our operation in the first half. Despite uncertainties and challenges, we remain optimistic about the future of China's pet markets. According to the I research white paper; it is projected that the industry will reach RMB 445.6 billion in value which U.S. dollar 66.1 billion by 2023. With steady growth of the market and the possibility of continued growth in the future and we will continue to be committed to enabling the industry upstream and downstream precise products positioning and expand our online and offline reach so that we will further establish ourselves as the leading pet ecosystem in China and to become the go to platform for pet parents and brand partners. On traffic approaching, we put in notable efforts breaking circle linkage and user engagement during the first half. Our number of orders increased by 4.1% year-over-year to 5.03. We also delivered [Technical Difficulty] increasing 16.4% year-over-year to record high of about 3.81 million. Our CC also reported 54.1% year-over-year decreased to RMB 5.2 from RMB 11.3 in the same period last year, which is our record low all these pointed to the fact that online community remains vibrant with new traffic and high stickiness laying a solid foundation for future growth. And as one of the company's strategies, we also made great strides in our private labels business in the first half as a keyway to build close cooperation with upstream and tap into new product categories that will drive self-satisfaction and customer stickiness. Our private labels business reported an encouraging performance during the first half with revenue increasing 30.9% year-over-year to RMB 105.1 million and gross profit margin increasing by 560 basis points year-over-year to 33% from 27.44%. The revenue contribution of such high margin business has also increased from 13.3% of total revenue last year to 17.8% this year. In addition supported by our increasingly solid financial position and strong operating cash flow, we also believe we may need better infrastructure and support along the supply chain so that we can maintain our competitive needs and expand our ecosystem. Hence, we are actively exploring potential cooperation, investments or acquisition opportunities with other upstream and midstream players and we will be more than happy to update you in the future. With the improving financials should be translated to an increase in investment value, especially as we demonstrated our improving profitability for successive quarters. On the other hand, the increase in financial strength should also allow us to pursue more options in boosting shareholders return in the long-term future. Now I will turn the call over to our Financial VP [indiscernible] who will share more details on our financials. [Indiscernible]? Thank you, Al. Now please allow me to walk you through our financial highlights in the first half of our fiscal year 2023. Before I go into details, please note that all numbers presented are in RMB and are for the six months ended 30 September 2022 unless stated otherwise, all percentage changes are on a year-over-year basis unless otherwise specified. In this first half our total revenue decreased 2.4% to RMB 589.6 million, primarily due to the recurrence of COVID-19 which led to modest decrease in product sales revenue of 1.5% year-over-year to RMB 568.7 million. In terms of fulfillment we integrated our back-office service system and then completed the upgrade of our [indiscernible] fulfillment model such as intelligent sorting and cloud warehouses to further enhance our services capability and resistance as a response to the price increase and control restrictions faced by the logistics system in the post-COVID year resulting in increased the transportation and operation costs. In the first half of fiscal year 2023, our procurement expenses slightly decreased -- slightly increased from 10.4% of revenue last year to 11.6% of revenue this year, roughly maintained at RMB 68.2 million. Yet, our total fulfillment gross margins third party increased from 8.2% last year to 9.5% this year as a result of the gross profit margin increased by 240 basis points from 18.6% to 21%. Our total sales and marketing expenses were RMB 53.5 million down by 29% from RMB 89.7 million over the same period last year. Sales and marketing expenses as a percentage of total revenue was 10.8% down from 14.8% primarily due to the cost of savings generated from reducing advertisement expenses and increasing proportion of our revenue generated from more cost-efficient channels. General and administrative expenses in this period were RMB 22.1 million down by 48.4% from RMB 42.8 million in the same period of fiscal year 2022. General and administrative expenses as a percentage of total revenue was 3.7% from 7.1% primarily due to the decrease in share-based compensation expenses, staff costs and professional fees. That came down to net loss of RMB 29.5 million in the first half versus a net loss of RMB 81.9 million in the same period last year, representing a significant chunk of 64%. EBITDA wise it was so chopped from a loss of RMB 77.1 million last year net loss of RMB 22.9 million this year. We ended this period with cash, cash equivalents and the short-term investments are RMB 210.3 million. With our strong cash on hand [indiscernible] and improving profitability. We believe we are cash sufficient in our operation. Taking a broader view, we are cautiously optimistic about the market condition and remain fully confident with our strategy and execution supported by our expanding brand portfolio of 704 in the first half along with an 8% year-over-year increase in SKUs to 26,008 with that we are aware equipped to capture market opportunities. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And today's first question comes from [Jin Jing] [ph] with [Guosheng Securities] ph]. Please go ahead. Hello, Jin Jing, you are live. Let me translate. Jin Jing which from the Goshen Securities asked us about two questions, firstly, she congratulate us on our good performance in the first half of fiscal 2023. And her two questions is, first is which sector is the company's strategic focus in the future? And second question is, do you any expectations for the future revenue, proportion and gross margin and net margin of private labels? Let me translate. For the first question, Jin Jing asked us about the company's strategic focus in the future. And we answer that we will further optimize the operation of the supply chain. And we'll create a real mechanism supply chain with continuously feedback from the big data in the pet industry. And to make the supply chain to the best and innovation, we will invest more resources into the private labels and to further develop our private labels. Based on our platform dictate our capabilities and our rich years of profile, we adjusted product mix in the first half year. We added some new SKU such as snacks and healthcare products to satisfy the needs of pet parents in multiple dimensions. The revenue share or private label has increased from 13.9 in the first half of last year to 18.5 in this year and is expected to exceed 20% in the short-term future. And the gross margin of our private label has also increased a lot from 27.4% to 33%. And it had to increase continuously and [indiscernible] exceed 35% in the short-term future. Thatâs our response, Jin Jing. Thank you. Okay. Let me translate first. Matt Maa from China Securities asked us about how well the company consider buying back or increasing shares in the future. Okay. Let me translate. For the question about the buyback and increased shares we answer that we will evaluate market conditions to determine the timing and details of the buyback or increasing shares program. I finished my answer. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks. Do you have any closing remarks? And ladies and gentlemen, it appears that there are no closing remarks today. So this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
EarningCall_1852	Perfect. Thank you everybody for joining us this afternoon. I am Aaron Rakers. Iâm the semiconductor and hardware analyst here at Wells Fargo. And pleased to have with us Mark Murphy, the CFO of Micron. Mark, there is a few things going on in your market right now and you recently had an 8-K filing. So maybe why donât we just start there, just level set us, the audience, whatâs going on at the company, the context of that 8-K? Then we will roll from there. Sure. Is this working? Yes. Thanks, Aaron and appreciate being here and thank you all for joining us today. I will start with the Safe Harbor. Iâll make forward-looking statements. These statements have risks and uncertainties associated with them refer you to our risk factors disclosed in our public filings, the most recent which has been our 10-K in October. We did announce â had a press release on the 16th of November, where we announced a reduction in wafer starts, 20% off of our fourth quarter â22 levels and thatâs across both DRAM and NAND. It is a really tough environment. We still see customers doing inventory adjustments. That continues. And then in a number of markets, we see weak end market demand. So we are working through that, but itâs been very difficult. And again, thatâs why we chose to take the supply action. I will talk a bit more about that later. I am not going to provide a full update on the guidance today. But what I would say is that pricing has trended well below what we thought it would be when we had our earnings call. So the pricing environment has been difficult. And thatâs despite what we think have been very good and disciplined actions on our part around pricing. We have been walking away from deals where we think the market â or the price doesnât reflect market. So itâs been a difficult. If we look out to calendar â23 and based on our discussions with customers, our own industry analysis, our own market view, itâs become clear to us that customers are entering calendar â23 with high levels of inventory still. And so thatâs going to suppress their demand in calendar â23 and that we are incorporating that into our views. And again, that informed the supply decision that we announced on the 16th. In addition to our view on market, our customer discussions, industry analysis, there is, as you know, a poor macro backdrop. And we are seeing â and you see that manifest most strongly in the consumer market still and we are dealing with that. So based on that calendar â23 view, as we mentioned, we have taken aggressive supply actions, one of which is the 20% reduction relative to fourth quarter levels on wafer starts. Thatâs in addition to the 5 â thatâs â we had announced 5%. So this is bringing that up to 20%, an incremental 15% reduction. And in addition to the wafer starts reduction, we are also continuing to look at CapEx and seeing where we can reduce CapEx further we had announced in our earnings call that we would â that we were targeting approximately 8%, so we are targeting below 8% at this point. The net result of those supply actions, which we think are important to try and bring supply/demand in balance. The net result of that is that in calendar â23, we believe that our DRAM supply or production will contract in calendar â23. And as we will talk about here today, we have got ample inventories to meet the demand gap. And then on NAND, we expect calendar â23 supply or production to just increase slightly. Now in calendar â23, we do expect there to be bit growth, so a bit demand growth. And â but we do expect that to be lower than the long-term DRAM and NAND CAGRs that we have communicated before. And again, thatâs because of the demand outlook that I talked about earlier. As it relates to our fiscal year on the demand side, we do still believe the sort of near-term conditions are a bit worse than we expected on price. We do still believe that the second half of our fiscal year will still be higher volumes than the first half of the fiscal year. So we will see we began as customers deplete their inventories and begin to recover, demand will begin to recover and pickup, particularly in the May quarter and beyond. So I think Iâd just like to end opening comments with, we are in a cycle downturn, a cyclical downturn, we are managing it aggressively working to get supply/demand in balance. And â but as we look out longer term and we think through cycle, we are really excited about the market. Yes, the world is going to need more memory and storage. There is very strong secular growth drivers that we all know, data center, automotive, 5G, and so there is artificial intelligence, thatâs going to drive products and technology that the space will grow. And then Micron is in a great position. We have got a strong balance sheet to weather this downturn. We are leaders in technology. We have got the best set of products in this space and we are manufacturing just outstanding manufacturing excellence at this time. So Mark, you have left me with a tremendous amount to unpack. And I appreciate that kind of overview of whatâs kind of been going on. When we think about the production side of the equation and you think about particularly focusing on DRAM, can you help us unpack maybe a little bit of how much you can pull down supply side via CapEx reductions or you have already outlined a 50% plus cut to WFE into next year versus maybe slowing the progression of technology nodes. How do we think about those two when we think about that setup, what your plans are for â23 supply? Yes, they are related. And of course we will modulate it based on the market conditions. Itâs going to require all the levers that we can pull. And candidly, we canât do it alone. Itâs got to be an industry level. There is a gross oversupply in the space. So â and our share is such that we do our part. The â we have got â itâs bittersweet here in the sense that we have got outstanding technology in 1 beta and 232-layer on DRAM and NAND, respectively. And we are just not going to be able to do high volume manufacturing and invest in that at this time. Now we have invested in enough capacity in order to keep the engineering efforts going and product quals going so that when the market picks back up, we can move those to high volume, but the node transitions are going to be slower or slow down. And candidly, there is an opportunity cost and that we donât get the cost savings, but the more important item at this point is to get the market back into balance, which is what we are focused on. And we talked about the reduction in wafer starts, which we have thought very carefully about where and how we do that. And so the org is mobilized and has moved on that. And then we will continue to look at other CapEx reduction opportunities that make sense to minimize the long-term damage and yield a good near-term result, like use the expression of void reduced delay. I mean we are going through and seeing what we can avoid. If we have to spend something, can we spend less? And if we just have to spend that amount, can we spend it later? And weâre going through that exercise because at this point, the fundamental financial performance of the business is something we need to improve. So I guess with that, you mentioned at the beginning of the conversation, pricing has been more off more than what you thought this quarter. With the actions youâre taking, do I think about â23 as what you would have previously thought from a cost down perspective is kind of modulated lower as well, given these actions retain, thatâs fair? Thatâs fair. I mean, I think our â and we will go into this in more detail during the earnings call in December, but they are based on the actions that weâre taking, we would expect there to be less cost out than we originally. Yes. So the question I often get is Micronâs executed extremely well from a technology perspective. The balance sheet is in a much different place than what it was even 3, 4, 5 years ago. But the question I often get is your own owned inventory and how we think about the mechanics of â youâve talked about 150 plus days of inventory, where do you think that could potentially kind of go? When do you think we start to see that kind of begin to kind of compress? And the question that goes along with that is just remind us again of how â I often the â is there a risk of inventory write-down? How do we think about that in the context of the story with Micron with their inventory and the balance sheet in general? Yes. Itâs a good question. We, of course, manage inventory very carefully and spend a lot of time on it. I think it may be helpful just to set the stage as to what our inventory strategy, and Manish talked about this a bit at the Investor Day. But we build our inventories and tend to build them principally into whitform, and thatâs to reduce the risk of obsolescence on that inventory and to reduce the overall cost at various points in the build, right? So we keep in wafer form as long as we can. And then when we need to singulate the die and begin to move it into packages and we can build â add the other components. And then itâs the most costly inventory is held for the shortest amount of time and the obsolescence risk is lower. And so thatâs our general strategy. And youâll see â you can see from our results that most of the inventory sits in whit. So there is always some scrap and obsolescence that occurs normally in a given quarter. But the risk that you talk about is a net realizable value risk, which we watch very carefully. We have â we do forecast on pricing. We look at customer trends. We look at a number of other factors. And as disclosed in our K, and weâve done this for years. We look at inventory in a single pool. So where we will face any potential for write-down in inventories is when the profitability of the business goes negative and â a gross margin. And as of the last reported results and our outlook at that time, there was no need to write down. So we will we will continue to look at that and the course account for things correctly. And I guess, given itâs a pooling mechanism, itâs â like you could have a situation where DRAM terms â or NAND terms negative, and in aggregate, you wouldnât have to take currency write-downs. Thatâs the pooling mechanics of it. Okay. And when I think about just the balance sheet in general, maybe help us in the down cycle that weâre going through, how youâre modulating your views on capital return versus capital preservation on the balance sheet? Just any kind of thoughts and obviously, that coincides with free cash flow context of that as we look through this. Yes. So certainly, free cash flow focused and doing what we can to. We said weâre going to have negative free cash flow of $1.5 billion or more in this first quarter. We also said that the second quarter would be challenged. And then as I just mentioned, the actual conditions have gotten worse. So itâs a tough period, but the reason that the company has a lot of liquidity is for these cyclical periods that we can make the right decisions during these downturns. And you mentioned it earlier that the balance sheet is in the best shape itâs ever been, and thatâs true. And that is allowing us to make the right technology and other decisions that we need to make that on the other side of the cycle, we will maintain our technology leadership. We will maintain a good product portfolio we have, and that we will maintain our manufacturing expertise. The company really struggled, and a lot of companies did in the space a decade or more ago because youâd enter these downturns and youâd make a lot of bad decisions in order to salvage liquidity. And â but weâre fortunate and â but that comfort that we have good liquidity position, donât mistake that for any sort of not working aggressively to turn the situation around being very mindful of it. So you saw that we went out to the debt markets and raised some additional liquidity to kind of ride this out and continue to make the right decisions. And as it relates to capital return, through cycle, there is certainly no change. We expect this business to outpace broader semi growth. We expect EBITDA margins over 50%; operating margin, 30%. Weâve got free cash flow over 10% is what we expect to do through cycle. And that will then generate free cash flow to have the capital return that we want in the form of sustaining and raising the dividend and then share repurchase. As mentioned on the call, we did do some repurchase actually in this quarter. And â but certainly, as the conditions are what they are, weâre focused on liquidity and making sure the balance sheet maintains an investment-grade level. So a lot of what youâre doing, in my opinion, is very aggressive, unprecedented moves and the right moves to make to get to eventually the other side of this. The context of that also comes back to the industry as a whole. As you guys kind of assess whatâs going on from that perspective, and obviously, there is a big competitor of yours that was vocal in saying like, weâre not going to arbitrarily cut production, but how do you think about the discipline of the industry relative to what Micron is doing? Well, I mean we can only control our actions, which weâre doing. And yes, there have been some â yes, there is been some indication that you see through the toolmakers that they have had folks who have been cutting CapEx. And we will just have to see. All of us will want to improve the fundamentals of the business because itâs not â in the current state, itâs just not sustainable. So â and we all have dividends. We all â yes, there is an expectation that we all deploy capital wisely. And so we will just we will see. Weâre focused on controlling what we can control and weâve taken aggressive action on the supply side and are taking other actions just operationally around cost and other things. Yes. At the Analyst Day, I think it was back in May that you guys held Analyst Day and you mentioned earlier that the through-cycle earnings power, it sounds like youâre comfortable in that through-cycle model framework. At the event, it was also an interesting topic of the discussion around these long-term supply agreements and so I am curious of where we stand today on those? They were never kind of volume contractually committed agreements. But how have those maybe â are those still helping you shape a little bit of this kind of idea of getting inventories down at the customers and getting back to a point where you got supply-demand equilibrium, just any context around the LTA? Yes. The â and Iâm just going to talk about the conventional LTAs because itâs the bulk of our contractual structures. But I think itâs 70%, 75% of our business now is under LTA. And they are not take-or-pays, but they are very helpful. And they are especially helpful, even though they are not take-or-pay, they are especially helpful in periods like this because you get a dialogue with the customers that you wouldnât otherwise get. And we get a clear demand signal from customers when they know there is a commitment. We â when they are unable to meet their commitment, there is an escalation that occurs, that escalation occurs at the CEO level. So, we have CEO-to-CEO talking. That then enables an exchange of information around their inventory levels and what they see in the market and a richer discussion than we would have otherwise. So, I think there is a great benefit there. And there was also in these, I think important to note, technology relationship building and just deeper intimacy on making sure that we are working together on future products and technology. And so I think that they are an important part of our business for ourselves and our customers. A couple of other quick questions. I just want to maybe at the perspective of the production cuts and the changing dynamics in the market, maybe if we could talk a little bit about end market â end verticals, right? I mean is there â it seems like itâs broad-based. PCs are weak, smartphones are weak. But any kind of things that stand out from an end vertical perspective as we go through what we are going through, be it data center and automotive as wellâ¦? I am looking forward to which one turns around. There is a lot of questions today on that. I would say maybe I will start with the positive. Automotive, which we thought we saw in August, maybe some signs of automotive weakening has actually stayed pretty strong, so â which is good. And I think they had probably the most severe supply chain issues. So, I am sure that â in a way, thatâs offering them from some of the other issues that we are seeing. On the on the PC and smartphone side, still very weak, I think we are expecting PC to contract again this year and smartphone to be single â basically flattish in â23. So â and they were both off 15% versus earlier in â22 expectations. So, they â I think which was unprecedented in those spaces. So, itâs been very severe, and they remain weak. And I think thatâs probably also the macro backdrop in consumer getting more cautious in spending. Data center, as the end demand, we believe, is still strong, and you see that I was reading a report on a company today or said their growth in data center was 35% plus as I could see going out. So, I think the growth there is still good, but they are working inventory levels down and they â eventually, they will need to replenish those inventories. So, we do believe that kind of mid-next year, that be it data center or maybe some of these other consumer markets that eventually, they need to replenish inventories. And the world in the end, whatâs reassuring about our business is the world will need more memory and storage. There is no doubt about that. And so itâs just a case of, again, getting supply-demand imbalance and then the fundamentals of the business will improve. And I think it goes without saying like we are truly unprecedented times because we have never seen bit declines year-over-year like we are seeing right now. So, eventually, that does come back. I donât think anybody here believes that data doesnât grow over time. With that conceptâ¦? To your point, yes, there is â between the August quarter and the November quarter, we have never seen a sequential decrease in volume of that magnitude in the industry ever. So, I mean â and then on the revenue side, the decline we have seen really hasnât been seen since the dot-com period. So, it is a very severe and sharp downturn that, again, we are taking the actions we think we need. And I guess where I was going to go to is that for those of us that try to look through these cycles and subscribe to the through-cycle earnings power of the company, has there been anything thatâs changed your mind of, maybe remind us of the underpinnings of the bit demand longer term model expectations you have DRAM and NAND flash, mid-teens, what, high-20s? Yes. We see mid-teens DRAM, and we have not changed any view on NAND, which we said high-20s, where itâs alwaysâ¦ The final â looks like I have got a couple of minutes left. I would love to kind of talk about just the â some of the technology stuff. I know that you are the CFO, but maybe just remind us, and again, appreciating that things are kind of moving out to the right a little bit as far as you are modulating the bit demand side of the equation. But the progression of 1-beta DRAM, the transition to 232-layer 3D NAND, how do we think about the cadence of now those transitions looking forward? They are both great technologies. Thatâs a shame here, is they are both very good nodes, and so there is a lot of disappointment that we are not in a position to ramp those into high volume because we would have really been in a great spot. But the fact of the matter is that the market is such that we canât do that. So, again, we are slowing the node penetration, keeping enough volume to be able to do calls and things like that are on the balls of our feet right to go when the market recovers. And then decisions on next nodes, just we are still working that, right, as to, okay, does this mean these are shorter nodes or longer or do we delay the next nodes, we just â and we are still working through that, and thatâs going to be a function of the market conditions, supply-demand balance and other factors. In the perspective of NAND, I think Micron at least has been one of the more vocal about the role that QLC plays, quad level cell NAND. And the potential for demand elasticity to move more deeply maybe into competing against hard disk drives or displacing hard drives. So, where does that stand as far as the roadmap right now and the expectations you guys have with QLC? I mean we have got great expectations. We are in a leadership position there. And as you pointed out, there is a cost of ownership benefit that customers get with QLC. So, we see continued penetration there, and we are especially well positioned in it. We have not â due to the competitive reasons we have not in caveat that is, but we believe we are the leader. So, with the minute I got left, Mark, I am just going to leave it open ended. Is there anything that maybe I didnât ask, maybe that we didnât talk about? I know oftentimes this comes up is book value support, and thatâs back to the balance sheet discussion. But is there anything that you would leave us with in addition to what has been said as far as thinking about Micron right now? No, I just think â I think maybe the takeaway is the market conditions are a bit â well, they are softer than we expected at the â as it relates to price from our last earnings call, and we are managing that aggressively. And you see that in the supply actions that we have taken. But I think the long-term, we are in a great position on technology products, manufacturing and we will just continue to manage the business well. And then I think itâs important to keep in mind if we invest â if we manage the business the way that we are, that eventually that book value will continue to increase. And then itâs important to maybe keep in mind the replacement value of the assets that we have gotâ¦ $100 billion-ish number. Yes. And plus the patents and all that technology. So, there is a lot of embedded value in the company that we just need to have.
EarningCall_1853	Ladies and Gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet Third Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn today's call over to Mr. Aaron Turner, Head of Investor Relations. Sir, please go ahead. Thank you, Brent. Good afternoon, and welcome, everyone, to Smartsheet's Third Quarter of Fiscal Year 2023 Earnings Call. We will be discussing the results announced in our press release issued after the market closed today. Today's call is being webcast and will also be available for replay on our Investor Relations website at investors.smartsheet.com. There's a slide presentation that accompanies Pete's prepared remarks, which can be viewed in the Events section of our Investor Relations website. During this call, we will make forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends. These forward-looking statements are subject to a number of risks and other factors, including, but not limited to, those described in our SEC filings available on our Investor Relations website and on the SEC website at www.sec.gov. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results may differ materially and adversely. All forward-looking statements made during this call are based on information available to us as of today, and we do not assume any obligation to update these statements as a result of new information or future events, except as required by law. In addition to the U.S. GAAP financials, we will discuss certain non-GAAP financial measures. A reconciliation to the most directly comparable U.S. GAAP measures is available in the presentation that accompanies this call, which can also be found on our Investor Relations website. Thanks, Aaron. Hello, and welcome to our third quarter earnings call for fiscal year 2023. Today, I'd like to focus on 3 topics: our solid performance in the quarter, how we're improving our operational efficiency in the current macro environment; and how delivering measurable ROI for customers drives our durable long-term growth. While Pete will provide additional details, I want to call out some of our strong financials from the quarter. Revenue for the quarter was $199.6 million, up 38% year-over-year. We added $56 million in annual recurring revenue, bringing our total ARR to more than $792 million. We added many new customers in the quarter, such as recruiting software providers seek out, Monster Energy, the social good empowerment platform, Bonterra and Arizona Beverages. And we expanded Smartsheet's footprint significantly at Picasa, AGC Biologics and Seattle Children's Hospital, among others. Our strong expanded climb motion within our customer base continued with 235 customers expanding by $50,000 or more and 79 customers expanding by $100,000 or more. We also now have 40 customers with ARR over $1 million. And we ended the quarter with more than 11.7 million Smartsheet users. Last quarter, we discussed how our new sales reps were ramping more slowly than sales reps from previous years. This quarter, we saw improvements in quota attainment and pipeline generation from our newest reps. We exited the quarter with a record pipeline, improved after macro-related softening in Q2. We also made significant improvements to our profitability in Q3. Our Q3 non-GAAP operating loss was negative $4.3 million significantly better than our guidance and a 7 percentage point sequential margin improvement from Q2. This improvement is a function of the adjustments we've made to our hiring plan for the year, a heightened focus on operational rigor and financial policies and inherent economies of scale in our business model. We expect these margin benefits to persist, allowing us to improve our non-GAAP operating income and free cash flow guidance for the year and beyond. The growth we experienced in the quarter came in large part from Smartsheet's ability to provide measurable ROI for customers as they navigate the macro backdrop. For example, in Q3, a Fortune 50 healthcare company expanded its Smartsheet investment by over $0.5 million, bringing their total Smartsheet ARR to nearly $2 million. Since moving to Advance Gold a year ago, they've seen a 56% increase in license growth as more teams across the organization leverage advanced capabilities to manage programs and processes at scale. Their Data Shuttle usage has increased almost 300% over the past year, and they now have 85 workflows powered by our Bridge integration product. One of the biggest benefits this customer is seeing from Smartsheet is improved efficiency, leading to a measurable ROI. For example, one team used a workflow powered by Bridge to automate a complex manual process for managing staff changes and application requests, decreasing the amount of time spent on it by more than 50%. We also saw a leading provider of customs brokerage and logistics upgrade to Smartsheet's enterprise licensing and Advance Gold platform after determining that Advance would save them nearly 3,000 hours of labor each year. Those hours saved are delivering more than $300,000 in ROI for the company while giving it the ability to handle a larger volume of quick win transactions and improve employee engagement. In another Q3 advanced deal, the leading integrated reporting platform provider, Workiva moved up to advance, so the professional services group could leverage Control Center and the Smartsheet Salesforce connector to implement a new project and portfolio management solution. They chose Smartsheet as their PPM platform because it offers both introductory and professional-grade tools for project management that can scale to enterprise levels. This solution also gives project managers insight into project risks and time lines and makes it easy for them to see all assignments in one view, helping reduce project cost overruns. They estimate that in over 3 years, they will earn a 340% return on their Smartsheet investment. On the innovation front, we launched several Smartsheet capabilities and experiences at our September ENGAGE conference where we welcomed thousands of Smartsheet customers and partners in person for the first time in 3 years. It was incredibly energizing and gratifying to connect with customers face-to-face and hear their Smartsheet stories. HP, Webex, AbbVie and many more presented during breakout sessions and shared how Smartsheet is empowering them to solve tough problems, deliver on promises and drive tangible results. At Engage, we launched portfolio WorkApps, which combines the power of control center for managing large portfolios with the end user simplicity of WorkApps. A global food services company recently chose portfolio WorkApps as the PPM solution for its global transformation initiatives. The company has a complex global operating model and portfolio WorkApps gives its portfolio managers the ability to create portfolio views tailored to specific organizational roles that span multiple regions, countries and segments. By leveraging portfolio WorkApps, the company now has a clear line of sight into any given initiative across a global matrix environment, allowing leadership to drive a strategic road map and achieve KPI targets. We're also deepening our investment in the PPM space by launching new resource management capabilities such as capacity view that gives resource managers increased visibility of their capacity for planning and deploying talent. We're continually refining our governance and security controls to meet customers' current and future needs. At ENGAGE, we shared details on data egress, a new layer of control over how Smartsheet data can be exported outside of an organization. Such robust security and governance capabilities, which protect confidential information via granular control are a key reason many companies choose our platform. For example, in Q3, a large mortgage lender chose Smartsheet over another CWM solution when the competitor's solution was unable to comply with certain mandatory requirements. This customer was impressed with Smartsheet's enterprise-grade security and like how easy it was for teams across various lines of business to start using the platform. Ultimately, they felt Smartsheet was the best platform to help them meet their COO's goals for managing the business more securely and efficiently. We also announced our new desktop application, which was enthusiastically received by people. As worth of new ML-powered home and reimagined search functions. These investments streamline the daily Smartsheet experience for all users by enabling them to find and act on their work quickly. On last quarter's earnings call, I mentioned our acquisition of the Outfit brand management templating and creative automation platform, which we have integrated with Brandfolder. The synergy of the Brandfolder Outfit solution is already providing its value for customers in a meaningful way. In Q3, we landed a $300,000 plus deal with a major appliance manufacturer that will be using Brandfolder plus outfit as their single source of truth for digital asset management and production. Each brand within the company will use Brandfolder to track and manage assets, helping reduce assets for all. Outfit will provide a self-service model for building automated asset templates that they can distribute to wholesalers and retailers to ensure consistent brand marketing. This Outfit powered content automation solution will help the company reduce a 14- to 16-week creative and distribution process to 4 weeks, driving a 400% faster time to market for their marketing campaigns. By providing transparent and efficient content creation distribution and tracking capabilities. The new system allows the company to utilize its existing in-house creative team while eliminating significant outside agency-related costs. As you've heard today, despite the current macro environment, we had a strong quarter and remain well positioned for continued growth. Just last month, in their Q4 2022 report, Smartsheet was named a leader in the Forrester Wave for collaborative work management tools. The report recognized that Smartsheet continues to provide an extremely broad set of use cases among the leaders in this Forrester Wave. And that Smartsheet strengths are the extensive availability of work types, flexible use case creation and end user automation capabilities. With people under greater pressure to choose the right CWM solution for their needs, reports like this are important in helping guide their decision-making. In closing, Q3 was another solid quarter for our company, especially considering the global macro headwinds. With our performance in the quarter, a continued focus on operational efficiency and the way we're delivering ROI for customers, I remain confident in our ability to deliver long-term durable growth with improving profitability. Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q3 was a strong quarter that reflected durable growth and improving profitability. We exceeded our guidance on both the top and bottom line as customers continue to turn to Smartsheet for their diverse set of mission-critical work management needs, and we benefit from improving economies of scale and an intense focus on operational efficiency. We saw particular strength among our enterprise customers as these customers continue to deploy our capability-based products to streamline their most mission-critical workflows. Capabilities grew to 29% of subscription revenue in Q3, aided by strong growth in our advanced offering and Brandfolder. I will now go through our financial results for the third quarter. Unless otherwise stated, all references to our expenses and operating results on a non-GAAP basis and are reconciled to our GAAP results in the earnings release and presentation that was posted before the call. Third quarter revenue came in at $199.6 million, up 38% year-over-year. Turning to billings. Third quarter billings came in at $219.6 million, representing year-over-year growth of 36%, approximately 92% of our subscription billings were annual with 4% monthly. Quarterly and semiannual represented approximately 3% of the total. Multiyear billings represented less than 1% of total billings. Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 43% year-over-year to 2,962 and the number of customers with ARR over $100,000, grew 55% year-over-year to 1,346. These customer segments now represent 60% and 46%, respectively, of total ARR. The percentage of our ARR coming from customers with ARR over $5,000 is now 89%. Next, our domain average ACV grew 25% year-over-year to $7,951. We ended the quarter with a dollar-based net retention rate of 129%. The full churn rate remains below 4% given the current macro environment, we expect our overall dollar-based net retention rate to be in the mid-120s by the end of the year. Now turning back to the financials. Our total gross margin was 81%. Our Q3 subscription gross margin was 87%. We continue to expect our gross margin for FY '23 to remain above 80%. Overall, operating loss in the quarter was negative $4.3 million or negative 2% of revenue, which represents a 7 percentage point sequential margin improvement. The margin improvement was the result of cost-saving initiatives we discussed in previous quarters, which included moderation of our hiring plan and cost rationalization. Additionally, we led portion of our revenue outperformance dropped to the bottom line, demonstrating the operating leverage inherent in our business model. Based on our improved gross retention, we also moved to our 4-year amortization period for our commission base -- commission expense from a 3-year amortization period. This accounting change contributed about 3 points of margin improvement in Q3. Free cash flow in the quarter was negative $4.6 million. Now let me move on to guidance. Before I go into the details, a few comments on our approach to guidance. The macro environment dynamic, which impacts near-term visibility. We are, therefore, electing to remain appropriately prudent as it relates to our top line performance. For the fourth quarter of FY '23, we expect revenue to be in the range of $205 million to $207 million and non-GAAP operating loss to be in the range of negative $2 to $0. We expect non-GAAP net loss per share to be negative $0.02 to $0.00 based on weighted average shares outstanding of 131.5 million. For the full fiscal year '23, we are raising our billings guidance to $878 million to $885 million, representing growth of 33% to 34%. We are also raising our revenue guidance to $760 million to $762 million, representing growth of 38%. We expect services to be 7% of total revenue. We are improving our non-GAAP operating loss to be in the range of $45 million to $43 million and non-GAAP net loss per share to be $0.31 to $0.30 for the year based on approximately 130 million weighted average shares outstanding. We are raising our free cash flow guidance for the year to $5 million. To conclude, Q3 was another strong quarter. We continue to demonstrate our ability to drive durable growth with improving profitability as the most demanding businesses in the world turn to Smartsheet for their mission-critical and data-intensive work management needs. Now let me turn it back to the operator for questions. Operator? I wanted to dig in on your comment about improved pipeline conversion given the softening macro backdrop. You raised billings guidance for the year modestly, which is certainly positive. As we think about next year, are you assuming that pipeline conversion stays at current levels or improves throughout the year? And how should we think about pipeline conversion relative to workforce productivity, some of the investments you've made on the front and the sales force continues to ramp. Sorry for the long question. That's my bad habit. John, this is Pete. I'll take your question in parts. The first part of your question was pipeline conversion essentially, what I talked about last time was ramping our new reps, we saw our pipeline conversions related to rep productivity improve from that sense. And what we saw in terms of the physical view closing and pipeline, October was a strong month for us as it relates to pipeline closing. So those are the 2 elements of dimension on sort of how pipeline conversion looked. One, from a rep standpoint, and the other from the business deals and how they closed. Can you repeat the second part of your question you asked about, so I just want to take them in sequence. As we think about next year, should we assume that pipeline conversion stays at the current levels, or should we assume it gets better or who knows macro backdrop, maybe that changes for the worst, too. How should we think about it? How do you think about it as it relates to guidance? So we haven't come up with guidance for next year. But what I would tell you is two things, it's going to be a function of sort of what the macro is because that's going to decide sort of the number of deals and how those are progressing. We will go into the year with a sales team that's very ramped, and that's going to be positive to conversion. Congrats on the nice set of numbers here. Mark, one for you. I'm curious how, if at all, you've evolved the go-to-market messaging in the current environment? I mean, obviously, ROI is important in any sale. You mentioned it several times in your prepared remarks. I'm wondering if there are certain products or use cases that get more emphasis in a tougher environment? I think when you break it down in its most simplest terms, we're helping companies drive revenue or achieve cost savings. And when you can apply a program or process, something is scaled to one of the things that they're trying to achieve and using plans speak like that, you typically have an opportunity to have a conversation. So when we think about things like control center, Data Shuttle moving information more quickly and efficiently across systems. We think about having fewer hands on things so you can get shorter cycle times. These are all very hard ROI calculations you can make. So I think the shift, the continued shift from the soft benefits in terms of employee engagement, which is super important, but harder to calculate a benefit from. Customers are responding to how we've oriented ourselves into such discussions. And I think that goes across not only selling seats to somebody, but also introducing our capabilities, which are really the underpinning for a lot of those calculations. Yes. That's helpful. And then as a follow-up, look, I mean, a strong quarter improving conversion rates, record pipeline. Does it at all make you kind of rethink the moderation in hiring plans that we've talked about? And I realize this stuff doesn't whip around in 90-day cycles. But I guess I'm getting kind of the commitment to longer-term margin expansion based on what you're seeing? I think we had a really robust start to the year. We brought on a healthy number of team members. And we have not gone through a massive layoff in our company. So we have retained really good strength. We've invested in ramping those individuals. And as Pete just said, I think going into the end of the year with a ramp team, a larger ramp team than we had a year ago, that actually gives us quite a bit of confidence to out and execute. So I think it would be in a different position had we finished the year with a very [indiscernible] all of that great talent we brought on the beginning of the year. So I feel like we're still the beneficiaries of some of those earlier in the year moves. Mark, you were in the CRO last time we went through the recession. Obviously, you're in a completely different position. But any learnings parallels that you're seeing in KPIs you're monitoring going into calendar '23? Yes. I think one of the big lessons, Brent, is just being quick, and the another sole notion survival of the quickest. I think you have to pair that, though, would be thoughtful. And it's like we're not just solving for Q3, we're not just solving for Q4. FY '24 is right around the corner. Pete and I are started talking about FY '25. So it's like these are all important dimensions. And I think one of the learnings is not to get too over-rotated on that next 90-day window. And I think Pete has been a good partner to me in helping manage some of that balance. So I think that's probably the largest takeaway. Yes. I mean, Pete, just as a quick follow-up on the rep productivity. I mean, it's kind of counter to what we're hearing at other companies. What do you think inverted the quota attainment for you, what changed there? Was it something that happened in the demand environment? Was it one particular geography? What -- was there anything you can put your pulse on because that's kind of counter to what we're hearing in other companies right now? Yes, the rep productivity that I was describing was for our newer reps. We had a series of what I call well-timed and absolutely meticulously defined initiatives of how we would ramp the newer reps into territories they had never managed accounts, they had never managed. And I think we're seeing the dividends of that play. So we've seen the productivity of those reps client. Now remember, we had a significant class that we ramped in. So when you're looking at the weighted average of the impact of that many people getting ramped up with a systematic set of plays, that's what we're seeing. I think it's also an important, Brent, to recognize that we're making a relative statement. We were not pleased with where we were last quarter in terms of rep productivity on certain cohorts. We're seeing improvement there. So heading in the right direction. I think that is a statement though against what we saw last quarter as opposed to we are exceeding at all levels on all fronts. I think we still have a good room to go to continue to improve. Congrats on the quarter. Mark, I just wanted to understand a little bit. I guess it's a great quarter. It seems like numbers are great, but we are hearing a lot of consternation from other companies as well, right? Last quarter was you had faced some difficulties. So I'm trying to understand how does the macro feel for you? Is it the improvement that you did within some of these messaging plays that helped you this quarter versus the normal discussions on a macro front. Is that kind of similar to last quarter? Or is it -- does it feel a little bit better or worse? I think it feels quite similar. I think the way we're engaging in those conversations are starting to produce yield for us. But I would say that the tenor within the customer environment is quite similar. I would say how we're responding to that has proven to be positive. And I think that is a function of reps feeling more confident, thus being able to present these solutions in ways that resonate with them. But I would say it is as much getting yourself higher in that priority list for customer consideration as opposed to the amount of budget customers have starting to swell again. So I think it's really our placement in that stack rank, that's helping us. Yes. Got it. One follow-up. I wanted to ask you about WorkApps. We have some -- we have had some conversations with some of your customers who are talking about consolidation, not just around work management applications, but consolidation of other third-party apps, in-house apps, scheduling app or something else, right, which are being built on top of WorkApps. Are you seeing that? Is that kind of a driver for the enterprise plan at this point where people are trying to save money to more with less? Yes. I think any time you have a -- the beautiful thing about the platform as opposed to a point tool is that it can be utilized in a multitude of ways. And I think any time someone sees a set of technologies that they can utilize across multiple use cases and drive a higher yield for an amount of spending. That's a good thing. So I think WorkApps is a contributing for us there. I wouldn't say WorkApps is the tip of the spear. It's one of a whole multitude of things that we're presenting to clients. I think in the coming years, I think WorkApps will continue to gain steam, the release we had an ENGAGE by connecting it to control center, which has been a really successful offering for us. Customers are really happy to see that. Congrats on a strong quarter. I wanted to ask one on macro and sort of in relation to guidance. We can see the deceleration in the implied Q4 billings guidance and the commentary just around the decline in the net retention rate. So I was hoping you could talk about some of the macro assumptions that's embedded in that guidance? And when you talk about prudence, what does that mean if you could add some details there? Absolutely. So Josh, the growth decel implied in our billings guidance is a function of the strong comp from Q4 from a year ago. And we've combined that with sort of a prudent outlook given the macro environment, which includes an expectation of lower customer budget spending sort of compared to prior periods. And that's what substantiates the macro in your question, which is we're seeing a macro that's worsening. But the good news is when I gave you guidance a quarter ago, I gave you a composite guide of Q3 and Q4 and we had projected that Q4 would be softer given a worsening macro that was built in. So that's the basis of the assumption. Okay. Great. That makes a lot of sense. And then if you could just add any commentary on the linearity of sort of demand trends month-to-month throughout the quarter and into November. Have you been seeing things get worse over the last months leading into Q4? So the -- October was a strong month for us relative to the, what I call the close rates and the pipeline close rates we saw. November turned out steady to our expectations. We expected the macro cycle to be in play, and it produced results that are very consistent with our expectations. So remember, in Q4, there is a great deal of business to be booked in December and January. So that's what's built into our assumption as we've guided to the quarter. Congrats on good quarter and I guess that two questions here. First of all, Pete, you talked about capabilities where I think it was 29% of revenues in the quarter. As the company continues to move upmarket more, what does that mix look like at kind of, I don't know, peak levels? And then how should we think about the ARPU lift that you're gaining from those customers that are adding on some of these capabilities today? Still the, I think, a statement of sort of where we see capabilities. And I think when you talk about a percentage of capabilities of total, it sort of implies that there isn't going to be as much growth on the user license part of it. We see both as really solid drivers. We see the width of our use case, if you remember the information Mark provided on the latest reports, we have a wide variety of use cases that drive what I call our expand motion. Think of capabilities as the client piece of it. We think of that number as being -- as growing over time because they are fast growing relative to our core license business. And we gave some guidance during our last Analyst Day on how big they could be but we're stretching the surface on that part of it. So I do feel like as customers start to unlock the scale that they need after they've deployed the solution, you're going to see more and more customers small and large start to use them in the most demanding way. Got it. That's helpful. And then from a follow-up perspective, maybe this is for Mark. I wanted to see if you can talk about the competitive environment a little bit. And I asked the question in the framework. You had a competitor report their results tonight that were not nearly as strong as yours we'll go with that. Are you seeing anything different out there that might be driving the strength of your business versus others maybe not continuing as well. It's harder for me to make a relative statement, Scott. I think as I said earlier, I can share what customers appear to be responding well to in our offering. And I think the capabilities alongside the core licenses, that is a composite that people are responding to, and it manifests itself not only in growth but also retention. If you have multiple value points that you can deliver to somebody, I think you have a healthier relationship. And I think that's helping drive our business. Also my congratulations. Mark, maybe could you give us a bit of perspective on the desktop app and what kind of feedback you're getting from this launch at this point? Yes, George, I think one of the things that's always I find funny over the many years we've been doing this is somehow software companies get so excited about the next most extremely high-value obscure feature than someone says, but I really want the easy thing. And I think the desktop app is just such a beautiful example of that where people want to see it in the tray on their machine. They want to be able to get quick access to it. They don't want the tabs that represent all their work in Smartsheet co-mingled with a bunch of other tabs in their Chrome or Safari browsers or Microsoft browser. So these are very simple things that people respond to. And I think when someone is living in your app and you can make their life easier, either through better design, or more quicker access, they're thankful for it. I think some of our team members were surprised at ENGAGE. And this is something which you just can't substitute with the digital conference. When you look at the number of people queued up at a booth, wanting to learn about this thing versus many other things, you really get that topical sense for this matters. And the desktop app is one of those. It's been something we've been working on for some time. Thousands of people, many thousands of people are using it today. I think it's still an EAP. It will be released shortly, broadly. So we'll continue to invest behind that. And with that, maybe could you give some perspective on when people are in the app, are you seeing them engage with multiple products in a more broad way with the overall platform? Yes. And I think as we dovetail things like Brandfolder into the experience and our resource management more into our core experience, by lowering that hurdle height for people to easily traverse, yes, we are seeing that happen. The one thing that I'm quite looking forward to and I shared this on a prior call, as we remove -- further remove the friction from people being able to explore our entire portfolio. As Pete said a second ago, today a lot of those capabilities are really consultative sale. And what Praerit and the engineering team are working on continue to let people discover, explore, realize the value and then ultimately buy those in a self-directed manner. So I think in the coming 2 years, you're going to see a much greater diversity in people using more things in our products because we're lowering that friction. This is Ethan Brook on for Alex Zukin. Congrats on the quarter. I wanted to ask, I appreciate the color for where NRR will go next quarter. But as you think about looking to next year, is like mid-120 the right way we should think about I guess where NRR would stabilize, and if you look to next year, it's high 20s growth the right way we should be thinking about it. Ethan, we're not talking about next year because that's a part of the whole construct of how we see next year. It's related to what we see bookings, billings, all those elements. So it's a little premature to talk about sort of where that number will be. I think longer term, we see great capability for that number to grow just based on our history and sort of the products we've got in the pipeline. So that's the way I'll leave it. Great. And then congrats also on showing the great improvement in incremental margins improved from like negative 20 to negative 3%. I guess is this the kind of the pace and rate we should think about margin improvement going forward? And I guess how are you thinking about balancing, I guess, improving this margin, [indiscernible] a little bit more? Can we expect a little bit more on the margin side? And also, I just want to ask, is the 10% free cash flow margin for calendar '24 still on the table? So Ethan, I appreciate the question. We've made significant strides by really focusing on operational improvements and moderating hiring. So we've seen that play out in the margins you've just seen. What I would tell you is we're going to continue that effort by trying to go after efficient growth, and that's going to be something we'll continue for several years as we go through it. That being said, we're not going through specific callouts of how much margin improvement there is and what rate it clips at. There's a little bit of work to be done before we get to that point. This is Richard Poland on for Rishi Jaluria. I guess just in terms of the macro environment versus what you saw 90 days ago, is there any way to kind of bifurcate what you're seeing between SMB and enterprise and just kind of -- are there any pockets of either demand improvement or demand softening that you'd call out within that? So Richard, this is Pete. What we've seen is we've seen, if you would parse the segments of the market differently. I would say in the U.S. mid-market, we've seen sort of global impacts more broadly so. I would say we've had strength in the enterprise based on just the number of transactions we've been able to book with these enterprises. So those would be like the texture on it. I think you're looking for that level. I think in terms of verticals, we've seen strength in manufacturing, global energy architecture, construction, if you will, and some of the weaker verticals for us have been technology, probably consumer good, and media, if you will. Great. That's very helpful. And then just as I think about SBC, I mean, stock-based compensation came down nicely in the quarter. Should we expect that to continue to trend down. Just kind of any update on your thoughts around how you think about stock-based comp? Yes. Stock-based comp is really important to us because it's a key element of how we look at the business. I think you should expect a few things to happen. I'll answer your question right at the outset, do we expect stock-based compensation in the future to decline as a percent of revenue? Yes, it should decline. That's the way the results will come out. Now when you think of stock-based compensation, think of it as a number of people times the how much you offer them being the driver. We've essentially, going forward, moderated our hiring plan because we don't need to hire the same pace. We're doing this very differently. So what you're going to see is a positive impact on the number of people we're bringing in and the impact it has on stock comp. That being said, stock comp is dictated by the history of what you've done in the past. So when you look at it, you say large part of it is already set by the prior hires that we've put in place. But -- so those are the 2 effects that play into the total stock comp that gets created, and we're focused on making sure that it goes down year-over-year as a percent of revenue. This is Robert G. on for Terry. Curious to get an update on the newer onboarding experience and some of the other recent initiatives around helping users start quickly. Have you all started to see greater usage and penetration with newer customers today versus newer customers from say a year ago, what have been the specific drivers of that, if so? Yes. We have a number of measures there, Robert. And one of the things that we've seen a nice uptick in is the percentage of new participants who are successful in creating their first solution, the first thing that they're starting to try and work with. We saw really nice improvements in that. That was one of the early success factors that we were trying to solve for. There are a number of other designs and elements that are being rolled in later this quarter targeted for Q1 and Q2, which I think will also have beneficial results in terms of conversion rate. But really pleased with what the team has put out there in terms of improving that experience. One other really nice benefit from what the team put in, we have greater visibility into what somebody's intent is and that can come on a few fronts. The more we understand someone's intent, the better we can serve them, both in terms of consulting, advising templates to them, how we support them. So overall, it helps us serve better, help someone get navigated and started better. So pleased with the improvements. That's great. And just one quick follow-up. Hoping to dive a little deeper on Brandfolder, how attach rates and penetration for the solution been performing relative to expectations? And what trends are you seeing in the overall digital asset management market from a demand perspective? So Robert, we were pretty pleased with our performance with Brandfolder. We're seeing broad resonance as people look at the combined Brandfolder Smartsheet solution together. I think what's really helped is, one, the customers' impact which comes from both those solutions together. And this year, we launched a model where we basically turned on our core Smartsheet sellers to help in selling Brandfolder, that's paid pretty good dividends for us as well. As far as the digital market and Brandfolder, I'll let Mark speak to that a little bit. I think there's still a huge opportunity for us to educate our customers and prospects about what's available to them and I think, well we have examples that we can point to like this big appliance manufacturer who's doing pretty impressive stuff in terms of content automation. A lot of times when we share those stories with people, they're unfamiliar that, that's even possible. So I think while digital asset management has been around and sort of many -- some customers are fluent in it, the majority are not, and it's still in an education phase. I think with our -- as we talked about ramp up reps, we talk often about our newest cohort. I also think about ramping in productivity with our existing reps on new lines of business like Brandfolder and Outfit. And I think, I would say with the median rep on our team who's experienced is much better suited today to speak to that value proposition. So again, I think it's a very different phase in terms of stage, in terms of market understanding, and we're leaning into it. Congrats on the great results. Pete, you've talked a lot about cost rationalization and moderation of your hiring plan helping on the margin front. Given you beat by over $16 million on the operating margin front, could you dig a little more into the areas you're finding leverage in the model. And then when we think about moderation in hiring, do you expect that to continue into next year when comparing it to this year's hiring plan? So the $16 million beat you're referencing is for the quarter, right? So I just want to make sure I answer your question. Great. So I'd say the two elements of that beat are coming from -- I'll lay it out for you, probably half the beat is coming from the revenue leverage that we've had as we've moderated and controlled costs. So revenues have grown up. We've moderated our hiring and people-related costs that go with it. that's produced sort of more than half the effect. About 3 points or 3 percentage points of it have come from -- we've looked at the customer duration that's associated with a greater gross retention rate, and that's meant a lower commission expense, that's accounted for about 3% of it. So that gives you some texture. And the rest of it is just hard core operational cost containment. Looking at every dollar that you're spending and asking whether it has value in terms of the priorities you've set up. That's the first part of it. And the second part of your question was on hiring in the future. We don't expect to have a similar sized hiring class coming on board and hiring expectations in the future will be significantly smaller. So we're going to see the benefit that we've created this year in a continued manner next year as we think of the operating leverage. That's really helpful context. And then some of your peers have called out some headwinds from a user perspective, given slower hiring rates and some layoffs at tech companies. Have you seen any large customers reduce headcount as a result of those headwinds, or just given your enterprise customer base and that focus, are you more immune to those issues than some other peers? I think for the last 5 years, our whole mindset about penetrating the enterprise has been what we call the earned enterprise. So what we don't do is we don't go in and sell what we think at the time is a big air or a deal and go wall to wall. We say, how can we mobilize, how can we deliver value and then we grow over time with them because very few of our large customers are full wall to wall where your dollar retention is reliant on the next person they hire. We're actually somewhat insulated from that. The other piece that's helpful to us is because some of our ARR is grounded in value components that we call capabilities, it's actually not tied out to a user license. And if you want to keep benefiting from that, you will keep subscribing to it. But it is not hinged on that next hire. And I think that's where our mixed model or hybrid model is turning out to be quite helpful. This is George on for Steve. Just want to congrats on great execution in a difficult environment. I wanted to circle back on the discussion earlier about rep productivity. I think when you were talking last quarter, you were talking about expected improvement over the forward 3 to 6 month time frame. But I am just curious, obviously we have seen improvements over these first 3 months. What are you thinking about -- how are you viewing improvement potential in Q4? And is there any of that baked into the guidance? George, this is Pete. I just wanted to quickly say, we are really pleased with how the field teams have sort of gone about improving productivity of newer reps who have started. We've seen the benefits of it as they've become productive. Our expectation is we will continue to see productivity improvements in those reps because our plans involve multi-quarter changes and how we get them productive. That's baked into our guidance. So you should think of our guidance as an overlay of improving new rep productivity, combined with the macro that we have thoughtfully and prudently considered. Got it. That makes sense. And then just 1 quick follow-up on the billings upside came in quite ahead of -- Are we still remodelling. I was wondering if you could just dig into kind of what drove that upside and if there's anything unusual or onetime in nature that we should be aware of? This is Michael Bird on for Michael Turrin. I wanted to dive into expansion rates again quickly, they have been pretty nicely in the quarter. And I know the exit rate expectations are still the same. Maybe with a discussion on potential seat expansion issue, you can walk us through the mix of seats versus capabilities on driving that expansion rate number and if that's changed meaningfully over the past quarter or 2? I'll start with the question. And then from a meta standpoint, Mark will chime in, in terms of how that's operating. We're not seeing a big difference between the seats and the, what I call, capabilities. Obviously, capabilities are still growing faster than the sear part of it, that is factored into the expansion rates we see. We gave you some stats on capabilities. We said that they're 29% of revenue. And if you looked at them sort of a year ago, they were 24%. So clearly, people are expanding with capabilities. but you're seeing a healthy mix of people with seats as well in that mix. So that's kind of a meta point of like how expansion rates are moving. This is Kyle Bule on for Jackson Ader. Just to dig a little bit deeper onto that expansion kind of the time line that you guys are seeing. Is the time line for expansion slowing at all? Or do you kind of see that slowing in the near term future here? Or has that kind of remaining constant as to what you've seen historically? So the -- if you think of expansions and you convert them into its core fundamental, you're talking about bookings and how quickly they materialize. Obviously, expansions are a key part of bookings and billings. So you should think of it as being -- we've seen an elongation in sales cycles and we've seen deal compression. So let's talk about how that actually plays itself out. The way we've seen elongations, people just stay longer with a number of potential reviews that take place for any purchase, those are happening. The second part of it is the deal compression. The way that would happen with these capabilities and expansion is you can either buy a package, which is likely packaged up value in advance or you can still buy pieces of it, we don't tell customers how they should buy it, but they buy a la carte capabilities that hit a specific need, those represent if you buy the a la carte capabilities, you're getting a smaller bite in bookings. Obviously, over time, you're going to get all the bookings, but it means a different size. So that's how expansions play out. Okay. Great. That's helpful. And then I guess just in terms of next year's IT budgets, historically are you able to attribute a decent or a majority of revenue growth to IT budget expansion? How do you see it playing out if IT budgets kind of come down next year. Do you see that as having a meaningful impact on the top line growth? So I would say that the budgets for our funding. Remember if you're dealing with -- this isn't one purchaser and 1 department. There are hundreds and thousands of people in enterprise who are buying it. See you have as much of people with line of business budgets that are buying it as they are IT folks in there. So I think it is fairly broad based in terms of budget. Very nice quarter, particularly in this environment. I was wondering if you were seeing any change in behavior from your competitions, specifically privately held companies that might be slowing their investment in market expense and then a quick follow-up after that. No. Even given the thousands of transactions we do in the quarter, the median transaction is still really helping if someone progressed from their status quo, which isn't grounded in a CWM player and getting into CWM for the first time. So it's difficult for us to speak. It will not be really well grounded for us to speak to these huge patterns that we see. We have seen -- you do see it manifest itself in some other ways in terms of you definitely get a sense that those companies are hiring less. I think some of the people who joined companies, would have now been let go, obviously talk to people in the community, and I think there's less chatter around people considering going to such companies. I think that's one of the things that more established companies will benefit from in the coming quarters. In terms of what we're seeing in market, nothing that we've really heard from customers on that front. And just a quick follow-up on the net retention metric eventually in the 20s by the end of the year, I was wondering if you could drill down a little bit on what's contributing to the sequential decline in the metric? So Fred, the net dollar retention rate metric is a full year look back. So we look at what happened over the full year, if you will. So when you think of what comes into the calculation when we report out at the end of Q4, is you're going to be replacing a very strong quarter with a macro that was very different, expansion need that was very different without something that's in a different macro phase. So you're just swapping out one quarter for the other, and that's where you see look back of a full year in expansion rates dropping to where we've guided.
EarningCall_1854	Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company, Inc. First Quarter 2023 Earnings 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] Good morning. Thank you for joining Donaldson's first quarter fiscal 2023 earnings conference call. With me today are Tod Carpenter, Chairman, CEO and President; and Scott Robinson, Chief Financial Officer. This morning, Tod and Scott will provide a summary of our first quarter performance and an update on our outlook for fiscal 2023. As a reminder, we have posted a supplemental quarterly earnings presentation summarizing our results and our outlook on our Investor Relations website at ir.donaldson.com. During today's call, we will discuss non-GAAP or adjusted results. For fiscal 2023, non-GAAP results exclude $7.6 million in pretax restructuring and related charges stemming from our previously announced organizational redesign. It is important to note that the redesign is ongoing, and there will be additional charges forthcoming. For fiscal 2022, non-GAAP results exclude $3.4 million in pretax charges related to the termination of our operations in Russia. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release. Additionally, please keep in mind that any forward-looking statements made during the call are subject to risks and uncertainties, which are described in our press release and SEC filings. Thanks, Sarika. Good morning, everyone. I am pleased to report a strong start to fiscal 2023 as we build upon momentum we had in the fourth quarter. Once again, we delivered double-digit top and bottom line growth. Our margins improved, gross margin increased both sequentially and year-over-year and operating margin of 15% reached a six year quarterly high. This improvement resulted in solid incremental margins and contributed to strong free cash flow conversion. Before diving deeper into sales, I will address the organizational redesign we announced in October. This company wide redesign is aimed at better positioning us to serve our end market customers. One of the key value propositions of Donaldson is our deep, long-standing customer relationships. Once completed, this redesign will allow us to more efficiently direct resources to strengthen commercial execution across our entire customer base. We have moved away from our previous matrix organization structure, which included a regional focus towards a more comprehensive end-market customer focused model. That said, due to our global presence, all of our employees play an important role in our growth. With the new model, our three focus areas now include: one, end market customers, we're aligning resources and cost structures to meet the specific needs of each end market in which we operate. This will enable expedited decision making and allow us to serve customers in a more efficient and effective manner. Two, employee development. This simplified structure reduces our organizational complexity and enables clear advancement paths for our employees. Three, profitable growth. Our business units will now have full P&L responsibility as opposed to that previously shared with the regions. This creates greater internal ownership and accountability for short and long-term performance. It also provides strong alignment with respect to strategic capital allocations. With these changes and as of the beginning of second quarter, we have three new reportable segments, Mobile Solutions, Industrial Solutions and Life Sciences. We expect to provide new financial segment information to help with modeling under the new construct during the second quarter. Now I will cover some highlights from our first quarter. Sales were up 11% year-over-year, driven by the combination of pricing of 11% and volume growth of 8%, partially offset by a currency translation headwind of approximately 8%. Adjusted EPS of $0.75 was up 23% versus the prior year. As expected, pricing implemented to offset inflationary pressures drove much of the sales growth and is a reflection of the hard work that Donaldson team put forth over the last year. From a cost perspective, inflation continues to be at high levels. However, we've been encouraged by the moderation of input costs throughout the first quarter and expect to be price cost positive for the balance of the year when comparing to the prior year. On the demand side, overall end market conditions remained favorable. Further, with the stabilization of global supply chain pressures, we have worked down some of our late backlogs and are seeing improved fill rates. And once again, our region for region strategy is paying dividends as the relocalization of our manufacturing is enabling a return towards more normal on-time delivery rates. Customer service is always our focus and our investments in the first quarter, such as those for capacity expansion are aimed at continuous improvement in this regard. This quarter, we also reinvested back into our business through R&D and the scaling of our acquisitions. We are strengthening our organic growth capabilities through R&D, which is forecasted to be up approximately 10% for the full year. We are also expanding upon our inorganic growth, leveraging our recent acquisitions to further diversify the company. First, we announced that Solaris Biotech, the first Life Sciences acquisition we completed in fiscal 2022, entered into a new agreement with San Francisco based Wild Type, a company focused on creating cultivated seafood. We will collectively collaborate to develop and design a next generation family of bioreactor systems to help meet the growing demand for seafood. When we acquired Solaris, we knew the company was uniquely positioned for growth in the food and beverage industry through its product portfolio, and this is the first step in expanding into the rapidly growing market of alternative proteins. Second, following the acquisition of PA Industrial Services, we further expanded our service capabilities through our IQ monitoring service, which offers remote monitoring of industrial dust collection equipment by Donaldson product specialists. This accelerates response time and service levels. IQ provides operational insights to customers via a web based stachboard. In conclusion, from an operational and strategic standpoint, we are pleased with what we accomplished this quarter. Now I'll provide some segment detail on first quarter sales. Total company sales were $847 million, up 11% compared with 2022. In Engine, total sales were $605 million, up about 15%. Pricing added 13% and FX was an approximate 7% headwind. Sales in Off-Road of $108 million were up 15% with growth in all major regions, except APAC and were driven by continued high levels of equipment production and growth in our Exhaust and Emissions business in Europe. On-Road sales of $36 million were up 14% from prior year supported by an increase in medium and heavy duty truck builds, particularly in North America. Supply chain conditions are improving but are still limiting growth in this business. Excluding currency, sales in both Off-Road and On-Road were up in all major regions. In Engine Aftermarket, sales were $427 million, an increase of 14% with both the OE and independent channels up double digits. As always, proprietary product performance is an important driver and PowerCore sales were up over 20% in the quarter. On the independent side of engine aftermarket, we continue to focus on expanding share in underpenetrated markets such as Mexico and Brazil, where we're seeing encouraging growth rates. In Aerospace and Defense, sales of $34 million were up 22% year-over-year, with strength in new equipment and replacement parts as the commercial aerospace industry continues to recover from pandemic related softness. Now I will touch specifically on our China engine business given the importance of the geography for us over the long term. Sales were down 6% versus the prior year, but up 1% on a constant currency basis. The overall market continues to be challenging and is further negatively impacted by ongoing COVID-19 lock downs. That said, our strategy has not changed as we see opportunities to grow our share through our technology and the best-in-class quality of our offerings. We look forward to reporting on our progress in China in the quarters to come. Now I'll turn to the Industrial segment. Industrial sales increased 4% to $243 million. Pricing added 7% and FX was an 8% headwind. Industrial Filtration Solutions, or IFS, was the largest contributor, growing 9% to $181 million, mainly due to industrial dust collection new equipment and replacement part sales. Our Process Filtration business continues to exhibit strong growth and growth potential. Excluding currency, this business grew greater than 20% over prior year. Sales of Gas Turbine Systems, or GTS were approximately $26 million, reflecting a 53% increase. Timing of orders is a big factor in the cadence of GTS sales. And last year, we had an unseasonably soft first quarter due to order timing. Sales of special applications were $36 million down 29% and the story centers largely around our disk drive business. Last year, our disk drive customers pulled forward orders in an effort to mitigate global supply chain issues and are now destocking. This and an overall reduction in disk drive market demand has caused the sales degradation larger than expected. Although disk drive performance has driven an overall decline in special applications, one bright spot continues to be sales of our high tech venting products for batteries and powertrains in the auto industry. This remains a key strategic area for Donaldson given how well our venting technology can serve this rapidly expanding market. To summarize, we feel good about the way we started the year. We are reiterating our full year guidance, which reflects record sales and record earnings results, gross margin expansion and operating margins at a multi decade tie. Now I will turn it over to Scott for more details on the financials and an update on our outlook for fiscal '23. Scott? Thanks, Tod. Good morning, everyone. I would like to start by saying how pleased I am for the employees around the globe who are able to see the results from their hard work and dedication over the last several quarters. It was undoubtedly an unprecedented and challenging operating environment. I will provide some additional color on our outlook for the balance of the year. But first, we'll give more details on first quarter results. To summarize, sales grew 11%. Operating income was up approximately 18%, and EPS of $0.75 increased 23% year-over-year. Gross margin of 33.9% improved 10 basis points versus 2022 and 100 basis points sequentially. As our pricing actions from last year continue to work through our financials and given the expectation for ongoing input cost stabilization, we anticipate continued year-over-year gross margin improvement through the balance of the year. Operating expenses as a percentage of sales were 18.9%, favorable by 80 basis points over prior year driven primarily by leverage on higher sales. Operating margin of 15.0% was up 90 basis points versus prior year largely due to operating expense leverage. I'll now touch on segment profitability. On the Engine side, pretax profit margin of 15.0% was up 130 basis points year-over-year as our pricing efforts more than offset inflationary pressures. On the Industrial side, pretax profit margin was 15.6%, down 80 basis points versus prior year. As a reminder, our three fiscal 2022 acquisitions, Solaris, PAIS and Purilogics fall into the segment. Excluding these acquisitions, pretax profit margin would have been up 50 basis points versus prior year. As Tod discussed earlier, we remain focused on growing these businesses. We are pleased with the integration progress and look forward to seeing them scale. Now turning to a few balance sheet and cash flow statement highlights. First quarter capital expenditures were $28 million, mainly driven by capacity expansion investments in North America. Cash conversion in the quarter was just shy of 100% versus about 30% in 2022. We're now back to more normalized levels of conversion following the negative inventory related working capital impacts in the prior year. In terms of capital deployment, we returned $74 million to shareholders with $28 million in the form of dividends and $46 million in share repurchases. Our balance sheet remains a great asset for the company, and we ended the quarter with a net debt-to-EBITDA ratio of 0.8 times. Now I'll walk through our fiscal '23 outlook, beginning with sales. We expect fiscal 2023 sales to increase between 1% and 5%, consistent with our previous guidance. This includes a negative impact from currency translation of about 5%, which is 100 basis points higher than we expected at the beginning of the year. Pricing should contribute about 6% of sales. To help with modeling, we detailed pricing a bit more as the cadence of our pricing actions in fiscal 2022 create more difficult comparisons as we progress through this fiscal year. Last year, price in the second half of the year was twice what it was in the first half. Consequently, 2023 pricing benefits will decrease as we begin to lap the prior year's actions resulting in stronger sales growth earlier in the year. For engine, we expect a revenue increase of between 1% and 5%, slightly stronger than our previous guidance driven in part by an improvement in our Off-Road and On-Road projections. Off-Road and On-Road sales are expected to be flat versus 2022, which is up from our previous negative low single-digit outlook. In both of these business units, we are seeing somewhat improved end market conditions. For example, the chip shortage, which has impacted On-Road sales appears to be improving slowly, allowing us to meet pent up demand. As mentioned last quarter, our focus is on higher margin opportunities in these businesses, and we are intent on ensuring alignment of the value we deliver with the margin profile of our programs. With respect to aftermarket and aerospace and defense, we continue to forecast mid-single digit growth despite strong prior results, reflecting ongoing favorable end market conditions. In Engine aftermarket, high levels of vehicle utilization in most major regions and market share gains in underpenetrated regions are the drivers. Aerospace and Defense sales are expected to continue to benefit from the stronger commercial aerospace industry, which remains below pre-pandemic levels. Now I'll discuss our outlook for the Industrial segment. We expect sales growth of between 1% to 5%, down about 200 basis points from our previous guidance. The reduction in guidance is driven by weakness in our disk drive business, which falls within special applications. We had previously forecasted this drive to be pressured during the first half of fiscal 2023 based on trends we were starting to see late in fiscal 2022. This is our most consumer facing business and has been impacted by weaker demand from PC markets and cloud providers. End market behavior has caused the client to be steeper than and likely to persist longer than originally expected, driven by customer inventory destocking and softer market demand. As such, we now anticipate special application sales to be down mid-teens versus our previous guidance of flat year-over-year. Now moving to IFS sales, which make up the majority of our Industrial segment. We continue to project a high-single digit increase as the performance of our dust collection and process filtration businesses remained strong. Further, sales from our recent acquisitions fall into this business unit. Lastly, within Industrial, our GTS sales outlook of low-single digit increase is unchanged. Now I will discuss our margin outlook. Consistent with previous guidance, we expect to deliver an operating margin within a range of 14.5% and 15.1%, up from 13.5% in the prior year due to gross margin expansion and operating expense leverage. Expense discipline is always a focus for the company and becomes increasingly important as we face a potential recessionary environment, while maintaining our commitment to strategic investments. With respect to EPS, we are reiterating our previous range of between $2.91 and $3.07, which at the midpoint represents an approximate 11% increase from a record fiscal 2022. Now on to our balance sheet and cash flow outlook. We expect cash conversion in the range of 110% and 125% in line with our previous guidance, driven by benefits from improved inventory efficiency. Notably, this implies a higher than historical average year. Our capital expenditures forecast remains between $115 million and $135 million. This includes investments in tooling and equipment for new products and technology, maintenance and infrastructure investments, capacity expansion and continuous improvement projects. With respect to capital allocation for the balance of the year, we remain committed to M&A to further our presence in life science markets and to consistently return capital to shareholders through dividends and share repurchases. Thanks, Scott. I would like to thank the Donaldson team for the tremendous work they continue to do every day. I view our results this quarter as a testament to their strength, agility and talent. We are well positioned for a successful fiscal 2023. Our job now is to not only deliver for our customers and shareholders this year, but to lay the groundwork for the future. A major component of this groundwork is the organizational redesign we have embarked upon, and I look forward to reporting on our progress in this regard as we move throughout the year. While the potential for a recessionary environment looms, we can and will build upon our position as the leader in technology led filtration. Our free cash flow generation and balance sheet strength put us in a position to continue our company's evolution irrespective of macroeconomic fluctuations through the following. One, our Advance and Accelerate solutions, our more resilient existing businesses such as replacement parts, process filtration and Venting Solutions remain priority areas of investment as we build out our capabilities and work to drive increased market share gains. Two, R&D investments. At the core, we are technology led, and our commitment to R&D is steadfast. We are very excited about the work that is taking place in areas such as our Materials Research Center, which was built to further the development of our polymer based chemistry solutions. Three, M&A. Last year, we acquired three companies, two in the life sciences space and one in services, all in sectors with structurally higher margin profiles than our company average. While we are thoughtful about our acquisition strategy, we are committed to deploying capital in this regard. Finally, our outlook for the remainder of the year reflects some caution. However, I am excited about our future growth prospects. Aided by the new organizational structure and our strong leadership team, Donaldson is poised to execute and invest faster, delivering for our customers and shareholders, and continuing on our mission of advancing filtration for a cleaner world. Tod, good morning. Tod, you just mentioned that the prospects of a recession loom. But like many other industrial companies, you're not seeing it right now, at least not outside of special apps. Your large customers like CAT and Deere reported strong results recently and don't appear to be seeing a recession. I'm just wondering, if you could talk a little bit more about what you're seeing, what you're hearing from your customers about what they're expecting for the operating environment in calendar '23? That's correct, Brian. We're really not seeing the oncoming recession at this point in time. Order intake is kind of about what we would have expected. We do have slight destocking on some of the OES channels. And so therefore, a little bit of a softness just as we would have expected to have happened that we've talked about in the past. But right now, across all end markets, all geographies, our backlog remains strong and the end market remains strong across the full portfolio with the noted exception of our disk drive business. So I guess is it fair to say -- when you say a recession might be looming, it's more the headlines what the autonomous are saying. But if you were operating Donaldson without seeing all these headlines, you would be expecting a recession at this point. Is that correct? We're just trying to be balanced, Brian. As we take a look at our company, as we consider all the potential factors going forward in the next fiscal year, we are looking to give a balanced outlook based upon all the economical factors as well as all the facts and data that we have when we do a hard internal look into our corporation, and we believe that we've achieved that with this guide and so that's where we're coming from. Yeah. Got it. Okay. And then the $7.6 million associated with the redesign, what was that spent on? Is that -- was there severance involved there? I'm just curious how that breaks down. Hey, Brian. This is Scott. So yeah, it's both severance and then some costs associated with execution of the redesign. We're working through the redesign. And we still have a bit of a ways to go. So we'll have more to say about that at the end of next quarter, but those were the costs that were incurred in the first quarter. Yeah. Well, like I said, we're partway through that. So when we get -- we'll be done by the end of next quarter, and we'll have an update on total expenses and any associated savings at the end of the next quarter. Okay. And then just what was organic volume growth in Engine and organic volume growth -- revenue growth in Industrial in the first quarter? We had total -- in terms of total impact for the quarter, we had 11% price, 8% volume and then a minus 8% in terms of FX. So our FX impact will be greatest. Presuming rates stay where they are, the FX impact will be the greatest this quarter. We bumped up the FX impact by 1% for the year, up to 5% now. So we kept the overall revenue guidance the same at 3% and even with an increase in the FX headwind from 4% to 5%. Hi. This is actually Dan Rizzo on for Laurence. You mentioned the pricing flowing through as costs decreased, I was wondering if historically speaking price concessions or is it something you guys do or something that your clients look for -- customers look for? Yeah. So I mean it's different across the various components of the business. The largest piece would always be the OE piece, right? And we've been working with those customers for a couple of years now as costs started increasing to make sure the relationship was reasonable. And I think we've made good progress there. There's still a few actions left to complete to catch all the lay (ph) up on costs, you can see that in our gross margin improvement over the last several quarters sequentially. It's slowly layering in. We were happy with the gross margin performance this quarter. And so we're expecting cost to be hopefully flat when we're all said and done with this year. And if costs suddenly went down, I'm sure our OE friends would be knocking on our door, and we would have those conversations with them just as they were willing to have a conversation with us as costs are going up. And the other businesses, if it's a business where we're providing a bid, we adjust based on current costs to stay competitive in the market. And then the independent aftermarket, we certainly have more latitude for pricing there. And we just want to make sure we stay competitive in the markets that we operate in. Thanks. And then I don't know if I missed this or not, but the COVID lockdowns in China or just everything that's going on there, is that having an effect on your -- I guess, your growth or your just demand within the region? So clearly, it's having an effect on the demand within the region. Also the uncertainty looking forward within the region However, it's not having an effect on our ability to win new projects with Chinese based national companies. and we continue to do so. So we look forward to when China opens up, their economy gets back to normal, and we would expect that to be a tailwind. We're just not sure when that is going to take place given the fits and starts relative to COVID within the country. All right. And then finally, is there a target that I may have forgotten about for operating margin? I mean, is it like 15% or is it higher? I don't know if you've said this before. No. Just long term outlook. In terms of this is what we think we can achieve, given what's going on, and this is what we hope to achieve. That type of thing. Not for this year. Yeah. So I mean, we gave a prior target at our last Investor Day, April 9, 2019. We have another Investor Day April 2023, where we'll be glad to host you in Bloomington here, and we'll be providing longer-term targets at that point in time. Great. Good morning. Thanks for the question. I just wanted to ask kind of on the flurry (ph) sales outlook again, maybe framing this up a bit differently, but you mentioned you were starting to work down some of the late backlog in the quarter. When you look at your level of backlog coverage for the full year, kind of current levels of backlog versus implied, full year sales, would you say that coverage is maybe higher than normal or kind of in line with normal seasonality. It's kind of like a flavor of how you're framing the full year sales guide relative to that backlog level? Yeah. Thanks, Dillon. So we'd say it's in line with the guide. We baked that in. We haven't seen an appreciable change since we gave full year guidance. Surely, we're really very, very proud of the quarter that we just turned in. But we also believe that we have really given a balanced approach to how we expect the year to play out. Okay. Got it. Thanks. And then maybe just one last one on Life Sciences. I know you mentioned you're going to release some intra-quarter data maybe to help frame up the modeling side of it, but just wanted to see if you can give us a flavor ahead of time around what the kind of revenue margin profile that Life Sciences business might look like when those numbers do come out. Yeah. So like we said, we're going to -- our new organizational structure was effective the 1st of November. So we're completing our updated segment analysis as we speak, but we expect to have three segments going forward and moving into more of a focus on the Life Sciences business. We would expect that business to have higher margins in our traditional businesses, which is where we've been investing in good solid growth rates. But before we issue the second quarter's results, we'll give you an 8-K with updated historicals for the new segments going forward. So people can see how those businesses performed and that will help our great analyst group with their modeling. Yes. Good morning. I had a question just around your margin guidance. It did not change for the full year, and you certainly can appreciate we're only one quarter into the year, but you did get off to a very good start, particularly on the gross margin line. And Scott, I thought you mentioned operating margin this year would benefit from both gross margin expansion as well, operating expense leverage. So I guess, thinking literally, it kind of suggests that -- yes, I'm not sure how much gross margin opportunity we still have for the balance of the year versus, again, the first quarter start. And again, understand the seasonality potentially in the second quarter is typically a seasonally lower quarter. But I'm just curious, was there anything unusual in the first quarter gross margin that benefited there or how we should think about gross margin for the year relative to the first quarter? Yeah. So I mean we expect the majority of the operating income improvement to come from gross margin improvement. You had it right. Our second quarter is always our seasonally weakest gross margin quarter mainly due to all the holidays that fall in that hurts production, and that brings our margin down. So we're expecting, I would say, relatively traditional seasonality for the company this year. And you can see we layered in this quarter, pretty significant pricing. So that will benefit the second quarter and the quarters going in. We are lapping pricing from last quarter. But we do expect year-over-year margin improvement for the rest of the year, which is what really drives that operating margin improvement, with the second quarter being the weakest. Okay. Maybe just a follow-up. Tod, you kind of touched on a balanced outlook for the year within your guidance. When we established the guidance, it portended a fairly strong confidence level around the first half and wider range of outcomes, potentially around the second half. Has your second half visibility improved any at all since September or degraded? I'm just curious, based on your order rates, fill rates, how you're maybe thinking about the second half now? Overall, our visibility in the second half really hasn't changed from the beginning of the fiscal year. We would say that the visibility that we do have supports the guidance that we have. We would tell you that we see typical structure first half, second half. Within this guidance, more like our typical behavior is 48% or 49% in the first half, 51% or 52% in the second half. We would expect that to really lay in that way for our company. We do believe the first half is a bit stronger on the comps in our balance guide than the second half. So for example, we just did $847 million and grew 11% in Q1, but keep in mind, in Q4 of last year, our number was $890 million. And so when you really take a look at all of that and really kind of layer that in, we really believe that we have a properly balanced approach to first half, second half, and we're returning back to a more normal type of a cadence that we've seen in previous years. We have no further questions at this time. With that, I'll turn the conference back over to management for any closing remarks. That concludes the call today. Thanks to everyone who participated. I look forward to reporting our second quarter results in early March. Have a great holiday season, everyone. Bye.
EarningCall_1855	Okay. Thanks, everyone, for joining us this morning. A pleasure to have with us Danaher this morning. We have CEO, Rainer Blair. I think in the background, we have CFO, Matt McGrew; and from Investor Relations, John Bedford. Before we get started, Rainer, if you had some opening remarks, just on what you're seeing in the business year-to-date results, I think that would be a helpful starting point? Thanks, Vijay. And listen, thank you for having us today. Really appreciate it. And I look forward to sharing our perspective here and answering all the questions that you have teed-up for the fire chat. But maybe before we get started, we should level-set here on what it's been like. And as we look to close out the fourth quarter here, Danaher is going to have another really strong year. And you saw that in the prints of the previous quarters and we expect that also to be the case for the full year. Our teams have leveraged the Danaher business system to execute in what's been a really tough operating environment, protecting our customers, the supply chains, delivering market share gains also with exceptional price execution in what's been an inflationary environment with some pretty strong foreign exchange headwinds. So the teams have done exceptionally well here delivering these results. Now as we look forward here to sort of 2023 and beyond, our portfolio and our DBS base ability to out execute is unique. And when you couple that with our 75% recurring revenue that's supported by attractive really low cyclical end markets, I think that speaks really well for what's to come. Now our decision that we announced at the Investor Day to separate the Environmental & Applied Solutions business by the end of 2023 brought together with our strong balance sheet, really further support our re-rated higher growth and earnings profile for 2024 and beyond. So we feel good about our positioning here. We feel good about the future and our ability to execute through what comes next. So with that, Vijay, happy to get started with the Q&A. Thanks for those comments, Rainer. And that sort of segues nicely into bioprocessing, which has been so key. It really has been transformational post-op in the [indiscernible]. When I look at the numbers, right, it's the overall portfolio. I think the guidance is up high single-digits year-to-date. But I think in that high single-digits, which perhaps missed it, like the base is up like 25% to 30%, I think. So maybe just talk about bioprocessing here, guidance, I know was changed from low double-digit to high singles. Did anything change in the base or was this all vaccine-related interment change? No. I mean it really was related to the vaccine and therapeutic related changes, and obviously, in the bioprocessing business, where we've taken down that guide for 2022 to $800 million COVID vaccine and therapeutics revenue. But if we back up for a second, and let me frame this up because there's been so much talk about bookings and book-to-bill ratios and so forth. And frankly, in aggregate, they can be very misleading and actually don't reflect the true underlying demand of the business. So if I'll just take a minute here. If we think about our bioprocessing business, it's a $7.8 billion business for 2022, $7.8 billion. Now COVID represents $800 million of that. And so that leaves you with a $7 billion non-COVID business. Now as we look forward to 2023, the question is what's going on in the non-COVID business? And we've seen, based on changes in lead time, the constraints of the pandemic, the lumpiness of extraordinarily large projects that the bookings number in any one quarter or even in any one year actually doesn't tell the true story. In fact, it's the three-year CAGR that really brings back and normalizes what's going on in the market from a true demand perspective. So if we look at the three-year CAGR, through 2022 in bookings for that $7 billion non-COVID business, we're talking about a mid-teens growth CAGR. Now if you do the same calculation for revenue, you end up with a mid to high-teens growth CAGR, and we believe that, that is really what the demand pattern in the marketplace, of course, with our unique positioning looks like. Now as we think about that then looking forward, well, what does that mean for 2023? We think about it this way. Well, we're really looking right now at a range of potential outcomes, and we're validating where we fall within that range in the context of the exit rates of the fourth quarter, the standard discussions that we have with our customers, and those are intimate discussions about their inventory levels production schedules and so â and other needs they might have, that all happens, and it does every year in the fourth quarter. So we'll update then where we dial-in more precisely in 2023 in January. But as we think about looking forward, the range of outcomes looks something like this. The revenue for 2023 non-COVID could be in the mid-teens. That's representative of what the three-year CAGR has been. It's been mid to high-teens, so it could be mid- to high-teens. It could also be what it's been sort of the last year, which is well over 25%, as you suggested in your question, certainly, that could be one outcome, or perhaps it just settles back into the high single-digit, low double-digit longer-term growth rate that we've spoken about. Now I think our view is that while that's the total range, it's probably more likely that it is between the high-single digit and mid-teen range, but there is that number out there of well over 20%. But somewhere in between that range is how we see 2023 playing out. And as I said, we'll look at the exit rates here and then give more precise guidance on that in 2023. That's extremely helpful context and perspective, Rainer. I think a couple of questions related to that. Some of your peers have spoken about stocking dynamics, and I think that's one which is really â it's been a new factor, at least when it comes to the larger cap names. What is stocking? And does that have any bearing here as you look at Q4 into next year? It does, but to a limited degree. So as we've said pretty consistently that as you look at the broader marketplace, we really don't see an enormous amount of stocking going on. In fact, it wasn't in until very recently that we got out of the hand-to-mouth sort of supply situation with the constraints that occurred in the supply chain through the pandemic-related demands. Now having said that, and I think I've been clear here that there are pockets where there has been some inventory build-up and they tend to be related to customers who have larger COVID-related programs, whether that's a vaccine or whether that's a therapeutic, they've either not had the kind of demand drawdown that they expected because the vaccination rate is lower or the variance made a particular therapeutic no longer relevant or because they've cancelled the program entirely. So you have sort of the full gamut of potential there. But those are really just pockets with larger players who are quite well positioned to draw that down. And so how does that make us think about 2023? Well, we've already said, look, for 2023, we think our COVID demand goes from the $800 million I just spoke of to the $500 million, right? So you see the manifestation of what I just spoke of sort of these pockets in that change there, and thatâs what weâre currently expecting for COVID in 2023. Thatâs helpful perspective. And this â maybe just diving a little bit into your bioprocessing, upstream versus downstream rate. When you look at these areas that Danaher plays in, are these products interchangeable as and if a customer build up inventory? Can they repurpose those products into other areas? So itâs one of those dissatisfying answer is that it depends a little bit. But I would say, generally speaking, if we start at the high level and Iâll get more specific, these are products that can be interchanged between at least the same class of drugs, right? So yes, that can happen and does happen on a pretty regular basis. Having said that, and we have a really good view to this, Vijay, because the combination of Cytiva and Pall Life Sciences, and you saw this at the Investor Day, itâs just unique in the world in terms of its breadth. Weâve got the entire gamut horizontally. And then as you think about this in terms of its depth, the different modalities, monoclonal antibodies, mRNA, cell and gene therapy. So it goes â we have really a unique view to this. There, I would tell you that in certain upstream applications, for instance, think of cell culture media where we have gained significant share, invested significantly and are leading player in cell culture media, certain single-use technology applications such as in bioreactors and such are specific to a given modality or drug. But generally speaking, as you continue to downstream, they tend to get less teed into any given drug. So weâre strong across the entire gamut of these products and feel like we have a unique value proposition there across the board. Understood. And then maybe one more bioprocessing-related question. This is on the base business, the $7 billion that you referred to, Rainer. The range of outcomes, perhaps in the high singles to mid-teens. So as you go through the planning process, right, what determines those ranges, right, between now and as we go through the guidance process? Is that more... Thatâs exactly right. Itâs that very intimate customer communication that we have where we literally work through what their inventory situation is, what kind of safety stocks they want to maintain, what they believe their production schedule is, so that all happens and it regularly happens in the fourth quarter as everybody starts dialing in their plans for the next year. And so weâre currently in that process. And then, of course, that will be brought together to provide our view here in January. Understood. Thanks for all of the details in bioprocessing. I know itâs been tough though for investors. A lot of people got confused by the book-to-bill commentary. I think this helps us level-set on how to think about the range of outcomes and the drivers here. One maybe on vaccine. And I know this year in fiscal 2022 weâve had a series of revisions. $800 million going down to $500 million, Rainer, does it seem aggressive or do you have visibility in that order book for the $500 million? Thatâs currently the status that we have with our customers, the $500 million. And I think our customers regularly review vaccination rates, new approvals that they get around the world in various countries. And so thatâs what we think thatâs our expectation for 2023. Understood. Understood. And I donât know if you can give any more granularity on is that different types of modalities, mRNA versus non-mRNA on the book of business or those customer orders, which give you visibility to $500 million? There are a number of successful vaccines. I think the ones that are most successful, everybody is familiar with, they tend to be in the mRNA space, and of course, weâre well represented on those. But having said that, weâre represented on all the vaccines in the world and to the extent theyâre in use Danaher participates in that. Understood. And given what we started with mRNA here on the class point, I want to switch on and move to maybe Aldevron and IDT, which has been â itâs amazing. Itâs a $1 billion business, growing strong double digits. Aldevron, itâs well above deal model rate. And when I think about the 30-plus percent â I mean, well above 30%, frankly, in 2022, is 30% sustainable here into 2023-2024? Look, weâve had, as you say, a great start here with Aldevron with a growth rate of over 30%. And we think the $500 million number that weâve talked about for the revenue is still a good number. Our order book remains strong. We see the business growing, and we believe that itâs going to be a double-digit plus, if I can say it that way, grower here for the long-term without pegging a specific guide on that, weâll talk more in January here. But we couldnât be pleased â more pleased with Aldevron. And sort of in the same vein as we talk about genomic medicines, IDT itâs been 11 straight quarters of double-digit-plus kind of growth. And theyâve really just â the team has just executed so well. So we couldnât be more pleased with both the business, the end markets and the teamâs execution. Understood. Understood. And maybe just one question on Aldevron and one on IDT. What is â when you think about Aldevron, what is driving the growth, the underlying fundamentals here, Rainer? Is that cell and gene therapy? Or â who is using? Is this early-stage biotech, well-established biopharma? So Vijay, well said. I mean the primary drivers here are cell and gene therapy and mRNA, okay? And so as we think about â let we start with mRNA, Aldevron produces mRNA for manufacturers that youâre familiar with. Two, they, of course, make plasmid DNA with very high fidelity at GMP levels of volumes and they do that for the gamut of the various levels of projects, whether that should be Phase 1 all the way through Phase 3 and even for those that are thinking about going for their BLA approval here. So they are really well represented from the plasmid perspective as well. And then I think itâs also worth calling out the protein business, which is nascent but growing at very high rates, itâs small. And here, youâre talking about enzymes that are used in genomic editing in the various types of genomic editing which, of course, are still early stage, both as therapeutics or as tools in order to build therapeutics, but thatâs also a part of the business that we shouldnât overlook. Understood. And sorry, just on â when you say Aldevron produce mRNA, this is not a vaccine, right? This is outside of vaccine or is this related to vaccines? Got you. And then on the IDT side here, Rainer, thereâs been some chatter in the market about competitive dynamics and pricing in that market. Maybe talk about why IDT has grown double digits. Has IDT gained share, Rainer? How do you see the pricing environment within the oligo market? Yes. I mean we do think that IDT has absolutely gained share. And thatâs related to a number of factors. Itâs hard to overstate the importance of quality and oligonucleotides. One base being incorrect or not having the binding capability thatâs required for the experiment shows your entire experiment off or doesnât allow you ultimately to build the gene that youâre looking to build. So, we have a process that is unique and is proprietary that allows us with very high fidelity to produce oligonucleotides and the other downstream products such as primers and probes and so forth that allow you to do NGS experiments. So thatâs really important. Also, the fast turnaround time. So, we are unique in the industry in terms of how quickly weâre able to turn this around, and thatâs incredibly important for scientists who are trying to advance their research. So they want their experiment to work, because you have the quality. And two, they want to be able to continue on to the next design of experiments quickly because you have the turnaround time. And then lastly, I think itâs also important to mention IDTâs innovation. So they continue to launch new gene editing products, which are high fidelity products that are incredibly sought after. And weâve also made some small acquisitions that have helped us build out, Swift Bio being an example, helped us build out our NGS library prep portfolio, and thatâs also helped us. Now as it relates to pricing, these are, of course, competitive markets, but people recognize that having the high quality and the fast turnaround is worth of premium, and thatâs what we see with IDT. IDT has recognized for the position that it has. And while you might find somebody who is less expensive, it may not be something that you always appreciate for the long-term. Fantastic. I did have one question on instruments before we move to diagnostics. How large is instrument portfolio for Danaher? I think that segment has been growing double digits. And I think thereâs been some questions in the market about is, I wouldnât call it stocking, but perhaps maybe supply chain-driven fears and maybe customers pre-bought systems. Is that possible? And whatâs driving this instrument strength? So Iâll start with that. I think itâs unlikely that you buy these, and Iâm sure youâre speaking of life science research instruments here, not diagnostic. Okay. So life science research, I just donât think you buy those on stock, if I can say it that way. These are high fidelity valuable instruments that researchers are looking to deploy and to use. So I donât see the topic of an inventory buildup as being relevant here. I think what we have seen with the very strong growth of this business, which if we look at the entirety of that business is over a $5 billion business for us, round numbers. Is that â we are in an exceptionally strong funding environment. Life science research has attracted so much capital and cash in order to further whatâs possible in health care generally, but also specifically to the biologics marketplace. And so thereâs a huge demand, broad-based, that I think the industry is benefiting from. On top of that, I think you see that Danaher is coming out of the pandemic or at least the heights of the pandemic stronger than it entered, because weâve upped our research and development investment and are now launching new products, one after another, really pushing the limits of science forward. And so we have on top of the strong funding environment, a new product introduction cycle, which is also providing us with tailwinds. The â when you think about that capital environment, obviously, macros [ph] and some headlines, do you expect any customer behavior pattern to change here on the capital front as you look at 2023? So once again, if weâre talking about research instruments, in particular, here, which, of course, is a capital expenditure, I do think that we were likely to come off the heights of this life science renaissance and investment that weâve seen. But itâs not to say that we will necessarily go back to historical rates. I think itâs useful to think about three-year CAGRs here as well in order to take out some of the anomalies, right? And so I think youâre looking at a market that is probably going to end up growing mid to very low double-digits, and then you see different players playing in that market, probably closer to the mid- to high-singles and then individual players depending on their innovation cycle growing either below or above that. Thatâs helpful perspective, Rainer. And then switching over to COVID diagnostics here. I think âjust on your fourth quarter guidance here, it seems a little light. Third quarter did over $850 million of revenues, fourth quarter just given some of the spikes weâre seeing $400 million seems light. Maybe talk about what youâre seeing from a flu combo testing perspective? Yes. I mean we definitely saw the respiratory season start in the Southern Hemisphere and the medical community watches these things very closely in order to be able to anticipate what kind of respiratory season will we have in the Northern Hemisphere and of course, specifically in the U.S. and Western Europe. And so what we saw in the third quarter, and you recall, we increased â preannounced and then subsequently increased again with the print on our sales of tests. And what we saw there is really a stocking behavior to try and get ahead of what was expected to be a strong respiratory season. And I think we see the indications of that occurring here. Now our fourth quarter guide there is related to the fact that we have seen strong starts to respiratory seasons, which ultimately dropped off quite precipitously. And â so with the stock that was built there, I think weâre being prudent in understanding, does that ultimately play out here in the fourth quarter? What weâre seeing so far is that, in fact, the respiratory season is strong. Will it be prolonged? That remains to be seen. And of course, weâll have another shot at that by analyzing the fourth quarter data here and then updating in January. Understood. And then on fiscal 2023, I think Danaher said 30 million tests, in COVID-related test, is a reasonable number for fiscal 2023. And what gives Danaher the confidence, Rainer? Is this hospital testing for symptomatic respiratory cases? And have hospitals indicated any change in their â how they go about testing these patients? So thereâs a couple of factors there, Vijay. First of all, I think it has to be said that the value proposition that Cepheid delivers to the hospitals at the point-of-care, itâs differentiated and itâs unique. And what weâre observing is a consolidation of the bench top, if you will, as the degree of COVID testing starts to wane, customers are looking to consolidate and simplify their workflows and we would say that Cepheid is gaining share on that basis, not only because of our respiratory testing menu, but because we have the broadest menu, we have invested significantly in capacity and are able to supply our customersâ needs. So now they feel less of a need to diversify what they do on the bench top, because theyâre comfortable that theyâre going to get what they need. So, I think thatâs an important point here. Secondly, we have seen, in different hospital systems, decisions that are to ensure that patients who end up in the hospital or in an ICU are COVID-free or prior to going into the operating theater are COVID free. And thatâs done soon just before the procedure or before going into ICU. You can imagine those poor patients do not need to be grappling with a surgery and then at the same time with pretty virulent respiratory infection nor spreading it to others in the ICU. So we do see that kind of testing. And with that, we think the 30 million tests that weâve talked about roughly $1.2 billion of revenue there for COVID is a reasonable way to think about 2023. Is that â so that ASP is I think itâs around $40 just given you a current mix of combo or sustained loan. It seems like, do you expect any change in that combo or sustained loan for fiscal 2023? I mean, thatâs what the history shows. Once again, it depends on how severe the flu season is estimated to be. Generally speaking as we get into flu seasons, we see hospital systems and physicians wanting to understand, am I looking at a patient whoâs presenting with flu symptoms or is it COVID? And so itâs natural that we see a bit of a skew here during the flu seasons towards the 4-in-1 versus the COVID only. But we try to take all of those machinations out of it. I think 30 million tests at $1.2 billion kind of sets the frame for how weâre thinking about that. Understood. Is that an endemic level for Danaher, Rainer, or should we expect a step down from the 30 million tests for true endemic state? So, based on our customers conversations that epidemiologists and so forth, we think this is a good base level to be thinking about 30 million tests a year. And another point that you mentioned was customers looking to consolidate testing on Cepheid platform, right? What proof points or maybe not proof points, what data points can you share? What kind of tests are customers using these systems for other kinds of testing beyond COVID? Sure. We see hospital acquired infections being a big aspect at the point of care. Virology is a big point of care. Strep is another test thatâs becoming more relevant. And then we have of course, sexually acquired diseases as another test. Now, this is â these are sort of the larger groupings that weâre seeing in application first. Any one hospital system will use all of them in different locations. So â but weâre certainly seeing the early days of that broader menu coming into testing as people leverage that anchor assay of COVID and flu testing to now bring in other services in their hospital. Understood. And just that related to that, the â when I look at pre pandemic, I think Cepheid was about $1 billion business, and that install base doubled up. Should I think about that $1 billion as doubling up because theyâre now using all these other tests or perhaps utilization is lower, and maybe I should be looking at a different number? Well, as we think of the non-COVID testing itâs â the way to think about that is in 2021 that was as you suggested $1 billion dollar business round numbers. And that continues to grow at an attractive double digit rate. And thatâs how I would think about that going forward. And the reason is simply you donât just start ordering in a hospital a couple new tests, right? You have to â thereâs an entire system and workflow associated with that starting with ordering it and the physicians knowing itâs available to the billing procedures associated with it, and getting them that data into the electronic health records. So when you bring in the new test, thatâs a little bit more than just ordering it from Danaher takes a little bit. Understood. And the â when I look at on the Beckman side, do you feel like Beckman clinical has been growing in line with the market? I know some of your competitors talk about new system launches and share gains howâs that market trending? For us, Beckman has performed very well. We saw in the third quarter here, great mid-single digit growth. And thatâs despite these lockdowns in China, which to some degree affect patient volumes. Now certainly the market has been helpful here because we have seen that patient volumes outside of China are really at or above the pre pandemic levels. So thatâs sort of one thing the market is quite strong. Secondly, we look at innovation here as being a key point as well. Weâve launched the DxH 900, which is a hematology testing device, or the DxA Fit, which is automation for smaller and mid-sized labs, as well as some novel assays such as early sepsis detection, which you can imagine is a very important test. And then lastly, we have significantly improved over the years in execution, and we see that in improved win rates. So we like the way Beckman has continued to accelerate here and looking ahead, we really see them as a solid mid-single digit grower at scale. Understood. And as you â when I sum up all of these, right, when I look at the clinical piece, Cepheid in a bioprocessing, rolling all of these together, there is a range of outcome on bioprocessing [indiscernible] but the macro seems fairly in a stable for next year. Would that be a fair comment or given China, Europe, or there are some factors that we need to be sensitive to? Yeah, I mean, Iâll like to piece that apart a little bit if I could. So Iâm having trouble saying that the macro is going to be stable when I think about it more generally. Of course, our end markets tend to be quite a bit less cyclical and in some cases not cyclical at all. And of course that differentiates us. But I do think as you think about 2023, weâre thinking about that base business being the mid-single digit plus kind of growth. Weâve talked about how we think about COVID testing here with the 30 million tests. And I think the other point to think about is foreign exchange, it doesnât affect our core growth rate, of course, right? But FX just in 2022 was a $1.4 billion revenue headwind. And different to other times when weâve experienced this, this is really a global currency phenomenon against the dollar with maybe one or two exceptions around the world. So literally everywhere we sell with the exception of course of the U.S., the currency has devalued. And so the fall through on that, we usually say 35% to 40%, and I think that holds, but probably skewed a little bit more towards the higher end of that range. So if you apply that thinking now to 2023, and if exchange rates remain as they are today, then weâre looking at $800 million of currency headwind on the top line. And once again, Iâd say that 35% to 40% holds because we just donât have costs in all these countries, nor do we want to. So skewed a little bit more towards the higher end of the 35, 40 in terms of the fall through. So those are the factors I think to think about here looking at 2023. Yeah, thatâs extremely helpful. And just maybe near term, since you brought up China, think on the diagnostic side, Rainer, as some of your peers have spoken about maybe China localizations as an issue, and itâs not been consistent and some companies havenât seen it, others are speaking about it. And thereâs been some headlines about China lockdowns or unrest if you will, maybe talk about China and what youâre seeing in China? Sure. So letâs start, I mean, thereâs a lot to unpack there. First of all, letâs start with China as a market, which we continue to see as a very attractive market. This is a population, an economy, and a society that wants to invest in the future to grow, increase its standard of living and have set as a priority for its economic development, precisely the areas that we in our portfolio applied to. So if you think about healthcare and building your own pharmaceutical industry, developing your own drugs, if you think about diagnostics and having a higher standard of care with more hospitals that are able to deliver the highest technology assays or if you think of water quality and food testing, all of these things have fly nicely. So we believe in China for the long-term, and thatâs how weâve positioned ourselves here for years, and itâs how we continue to invest in China, and we expect China to be an above fleet average, if you will, grower for the long-term. Now as we think about competition in the near term here, we continue on a steady course of localization. And we do that for a number of reasons. One, we want to ensure that we shorten our supply chains so that we are as nimble as we can be for our customers. Secondly, we are localizing in local R&D, product management and manufacturing to ensure that weâre able to meet the needs of our customers in China, which at times differ and sometimes significantly from the needs that you would find in other markets around the world. So thatâs very important to us. And then lastly, we are bringing in a great deal more autonomy for our colleagues in China to maintain their degree of nimbleness versus local competition, which has always existed and which, as in every region, sometimes becomes stronger, sometimes less so. So we continue to invest in that. Lastly, if you look at the current environment, look the shutdowns continue. They have been going on for some time. The severity of those shutdowns has increased here as the variants have become more virulent. We donât know how this plays out in the short-term, but do have the belief that in the long-term, ultimately, the population in China will have to increase its antibody titer in order to be able to live more freely, of course, and pursue economic and social interest. So we think this is a matter of time, but no doubt in the short-term, there are some challenges to be overcome. Got you. Thatâs helpful. And then back to your comment on the business being mid-single-digit-plus, what does that assume for pricing? I know this year pricing year-to-date has been strong, north of 3%. Is that sustainable for next year or perhaps something in the low single-digit range? Yes. I mean we believe that the inflationary environment will continue perhaps not to the same degree that we have seen it here. Perhaps it has peaked. Weâll see. But we do believe that it continues into 2023. And the way we run our businesses is we always look at the price cost equation to ensure that whatever is occurring there, weâre ahead of it, and thatâs how we drive each and every one of our businesses from the bottoms up. And so we believe that weâre going to continue to take price in 2023. And I think 300 basis points is a good working number to go with. Weâve had 400 basis points here in 2022, and so we think 300 basis points is probably a good number to work with. Yes, thatâs extremely helpful, Rainer. I know in the margins, you gave a lot of color on the FX drop-down. Anything on the COVID side between vaccine and diagnostics? I know in the past, youâve said the fall-through should be in line with corporate with any other variables we should be thinking about on the margin front? I donât think so. I mean just to reiterate, our products that were destined towards COVID, whether thatâs vaccines or therapeutics or testing are essentially at the same margin level for all kinds of reasons that then, letâs call it, that fleet average. So I donât really think thatâs it. Iâve talked about the variables that I think are â that need to be considered for 2023 as we finalize our own thinking here in Q4. And I would just add to the summary that you made that FX, I called that out, and thatâs something that we have to consider, of course. Understood. And I know at the Analyst Day, Rainer, there was some chatter about M&A. You made some interesting comments or at least the Street perceived it as interesting which given the current environment and the interest rate environment how should we think about deals and deal sizes? And we know we do have [indiscernible] been coming up. And usually, Danaher is pretty good at marrying the divestitures with welcoming new members to the family, so talk about M&A environment? Well, this timing between separation of an entity and then acquiring one is not one that we design with any specific time in mind. So â but that has been the case, as you suggest here. Historically, I would say the interest rate environment, of course, is relevant in a number of ways. First of all, weâve seen how the interest rates have affected equity valuations, as point one. Second point is Iâve talked about regularly that we always look at the end market in relation to our strategy, then we look at the company and then we look at the valuation and the business model, right to ensure that all of that makes sense. And when all of those three things are green is when we execute. And I would tell you that, one our capital allocation bias remains towards M&A; two, we are looking at alternatives from large to small at all times, and that is unchanged. And when those three lights are green, thatâs when we execute. And the environment that weâre in with the strong balance sheet that we have, 1.5 turns here, is an environment in which weâve historically done quite well. And we view this environment as one of opportunity. And of course, for us opportunity requires not just strategic or tactical success, but also a financial win as well. Absolutely. And then maybe one last question here in the last minute. Free cash conversion, thatâs the only thing. Year-to-date, itâs been below trend. I know thereâs been some strategic investments in the inventory â balance sheet inventory, working cap metrics, can that get back to north of 100% in fiscal 2023? So weâve had, Iâll call it, incrementally lower free cash flow because weâve invested in the growth of the business, right, whether that is through capacity expansion in order to take advantage of the moment and ensure that we take â come out of the pandemic stronger than we entered or whether itâs positioning inventory to ensure that we protect â as I said in my opening comments, protect our customers, gain share right, and then of course, ensure our supply chain remain robust. So I would see that in the context of investing for growth. And we expect for 2022, our free cash flow to net â GAAP net income to be greater than 100% as itâs been for a very, very long time as well. Fantastic. I think with that, weâre at the end of time. Rainer, Matt and John, thank you so much for spending the time with us this morning, and it was a helpful conversation.
EarningCall_1856	Ladies and gentlemen, thank you for standing by, and welcome to the JOYY Incorporated Third Quarter 2022 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your host today, Jane Xie, the company's Senior Manager of Investor Relations. Please go ahead, Jane. Thank you, operator. Hello, everyone. Welcome to JOYY's third quarter 2022 earnings conference call. Joining us today are Mr. David Xueling Li, Chairman and CEO of JOYY; Ms. Ting Li, our COO; and Mr. Alex Liu, the General Manager of Finance. For today's call, management will first provide a review of the quarter and then we will conduct a Q&A session. The financial results and webcast of this conference call are available at ir.joyy.com. A replay of this call will also be available on our website in a few hours. Before we continue, I like to remind you that we may make forward-looking statements, which are inherently subject to risks and uncertainties that may cause actual results to differ from our current expectations. For detailed discussions of the risks and uncertainties, please refer to our latest annual report on Form 20F and other documents filed with the SEC. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in USD. Hello, everyone. Welcome to our third quarter 2022 earnings call. Let me start with an overview of our quarterly results. Despite global macroeconomic uncertainties, we recorded $586.7 million in revenues, including $483.3 million of revenues from BIGO, in line with our previous guidance. Our decisive and proactive optimization measures to improve our operational efficiency have been proven effective. During the third quarter, we generated a non-GAAP net profit of $76.9 million at the Group level, with a non-GAAP net margin of 13.1% when excluding YY Live. The BIGO segment recorded $84.1 million in non-GAAP net profit, with a non-GAAP net margin of 17.4%. More importantly, our operating cash inflow remained strong, reaching $117.1 million for the quarter. At present, increasing global macro uncertainty continues to impact our short-term monetization growth. Ongoing inflation and unfavorable exchange rates are adversely affecting users' purchasing power and discretionary spending. Meanwhile, as international travel restrictions in some regions are lifted and reopening trends continue, users' time and spending are being further diverted to offline activities. Since the first half of 2021, we have been comprehensively and consistently reviewing the cost structures and management processes of our core businesses. At the same time, we undertook a series of operational adjustments to enhance product synergies, improve operational efficiency, and ultimately ensure the health and sustainability of our business. Our forward-looking strategic planning and effective execution of our optimization measures to the above stated goals have equipped us to better navigate through the current macro challenges. As a result, we achieved full-year profitability in 2021, and further expanded our profits and improved our operational cash inflow during 2022, even as global macro conditions deteriorated. During the first three quarters of 2022, our BIGO segment expanded its non-GAAP net profit to $230.4 million, up 193.3% year-over-year. Given the current macro environment, we will continue to prioritize sustainable, high-quality growth while further enhancing our operational efficiencies. Going forward, we are confident that our increasing business resilience will position us to better capture long-term growth opportunities. Despite near-term macro headwinds, we remain focused on our long-term product strategy of delivering value to our users and creators. Our efforts have yielded positive results. Bigo Live's MAUs increased by 13.2% year-over-year in the quarter, reaching a new historic high of 35.4 million. Sequentially, growth was also encouraging, with the scale of growth comparable to that we witnessed during the pandemic period. This is particularly impressive considering such growth was achieved in a period of disciplined marketing spending, demonstrating the increasing efficiency and effectiveness of our user acquisition strategy. Looking ahead, we will continue to cultivate diverse premium content, innovate interactive product features, and organize activities tailored to local markets. These initiatives will further improve our user experience and ultimately, facilitate the growth of our user community and monetization, 2 factors that correlate positively with user satisfaction over time. In addition, our diversified operations across a number of regions, including North America, Europe, the Middle East, and Southeast Asia, have given us greater overall flexibility and allowed us to mitigate the risks that arise from relying on any single market. As markets and governments employ differing measures to contain the pandemic and tackle current macro challenges, we will closely monitor shifting market conditions and devote more resources towards outperforming markets. Compared with a single-market-focus, this refined strategy of dynamic adjustments will enable us to generate a higher ROI against the backdrop of macro volatilities. Going forward, we remain committed to our globalization strategy. We will continue to enhance our international and localized operational capabilities by further strengthening our local talented teams' technological experience, global vision, and local knowledge. Now let's take a closer look at the developments in each of our product lines. We will start with Bigo Live. Despite the macro headwinds and monetization challenges, Bigo Live maintained its user growth trajectory thanks to effective local operations and product feature upgrades. During the third quarter, Bigo Live's MAUs increased 14.2% year-over-year to 45.4 million. Notably, MAUs in Europe and in the Middle East increased by 9.8% and 7.8%, respectively, while MAUs in Southeast Asia and other emerging markets increased by 19.2% year-over-year. We also observed a recovery trend in Bigo Live's number of paying users across various regions, as the number of paying users in Europe, North America, the Middle East and Southeast Asia resumed sequential growth this quarter. During the quarter, Bigo Live further cultivated its content ecosystem by emphasizing localized operations and developing diverse, premium content. For example, in Malaysia, Bigo Live launched BIGO Gagaga, an all-new online variety show, featuring entertainment content including gaming and standup comedy. The show starred Bigo Live's most popular streamers and some of Malaysia's top radio broadcasters and combined elements of livestreaming with pre-existing forms of mainstream media to create a fresh and unique viewing experience. In the Middle East, Bigo Live once again collaborated with Mobile Legends: Bang Bang to stream one of the largest fall professional tournaments in the Middle East and North Africa region. Bigo Live also held a world tour for its mascot, Dino. The 16-foot high, 8-foot wide mascot visited landmarks in dozens of countries across the globe, including Singapore, Thailand, the UK, Italy, Germany, France, and the U.S., appearing at a series of on-site events to interact with local users. During the tour, Bigo Live invited popular local streamers to host a number of performances for local audiences. This helped stimulate interest in our product and promoted brand awareness among local communities. At the same time, Bigo Live launched a number of tour-related videos and online challenges, encouraging local users to join the festivities and meet their friends at these events. These efforts combined to create a unique, memorable experience for Bigo Live users, bridging online and offline interaction. Our iteration of the community feature and localized creator support continued to contribute to content diversification and user engagement improvements in the BAR channel. Sequentially, the volume of BAR's video content increased by 14.5%, and its average views per user increased by 16.4%. Next, let's turn to Likee. As mentioned in the previous quarter, for products that are currently still loss-making, such as Likee and Hago, we continue to focus on the steady improvement of their respective monetization capabilities and organic growth. We aim to stick to a disciplined sales and marketing strategy, and to optimize their cost structures in order to steadily narrow their respective operating losses and ultimately achieve self-sufficiency. In the third quarter, in line with our expectations, we made further progress in narrowing Likee's operating loss. Likee's operating loss in the first three quarters this year was reduced by 86% compared to the same period last year. On the product update front, following the trial launch of the Loop feature in the U.S. and Europe in the second quarter, Likee officially introduced Loop to other regions around the world. This feature has helped users with similar interests better connected to share content and has further improved the quality of Likee's user interactions. As a result, the number of videos shared per user per day in the anime community increased by 379% sequentially, while in-app instant messaging users grew by 7.1% in the same period. Overall, average user time spent on Likee increased by 21.5% sequentially. In addition to its regular localized activities, Likee expanded its operational efforts to include activities that have a positive impact on local communities. For example, after flooding in some Southeast Asian countries, Likee launched dedicated pages for local users to share information on government relief, emergency response, and other breaking details of the disaster in real time. Separately, as a number of Likee's users are currently facing an energy crisis, Likee partnered with 10 Minute School to launch a campaign aiming to raise public awareness of energy conservation. During the campaign, teachers from 10 Minute School and other creators posted videos about power-saving tips and the importance of conserving electricity, providing users with convenient access to important and useful information. The campaign attracted the participation of more than 1 million users. Next, we can turn to Hago. During the third quarter, Hago's livestreaming revenue and number of paying users both increased year-over-year, while its operating loss further narrowed substantially over the previous quarter thanks to enhanced monetization and disciplined spending. Hago launched a one-on-one voice chat feature and upgraded its user loyalty benefits, which promoted user interaction and improved the loyalty of its paying users. Both initiatives drove growth in long tail users' spending. Hago also introduced further updates to its new feature Hago Space. Users were granted greater freedom in designing the appearance and costumes of their 3D avatars, and given the opportunity to engage and interact in new 3D virtual scenes such as karaoke. Both updates contributed to an increasingly innovative, immersive, and interactive experience. Thanks to these upgrades, Hago Space's penetration rate and average user time spent both improved significantly over the previous quarter. More importantly, revenues from Hago Space increased by 409% sequentially. Although, Hago Space's revenue contribution is still relatively small, we seeking to bring more innovations to the feature to further improve its user experience and further diversify Hago's monetization streams. Finally, some updates on capital return. During the third quarter, we bought back an additional $14.1 million of our shares. As of September 30, we have repurchased a total of $342 million of our shares, out of the previously announced repurchase program of $1.2 billion. Our Board has extended the expiry date of the program, under which we may repurchase up to $800 million until November, 2023. We will continue to actively utilize our share repurchase program in order to reward the long-term support of our shareholders. To conclude, the combination of our forward-looking strategic planning and effective execution of our optimization measures drove a further improvement in our profitability during the third quarter, in spite of the volatile macro environment. By adhering to our long-term growth strategy, focusing on product upgrades, and emphasizing localized, diverse content offerings, we achieved steady, efficient growth of Bigo Live's user community. We will remain flexible and adaptive to the macro environment, continue to invest in building our long-term capabilities and focus on delivering value to users and creators via our products. We are confident that as we become increasingly efficient and resilient, we will be better positioned to capture long-term growth opportunities and generate sustainable shareholders' value. This concludes my prepared remarks. I will now turn the call to our General Manager of Finance, Alex Liu, for financial updates. Thanks, David. Hello, everyone. Now let me go through the details of our financial results. Please note that the financial information and non-GAAP financial information disclosed in our earnings press release is presented on a continuing operations basis, unless otherwise specifically stated. As the sale of YY Live was substantially completed on February 8, 2021 with certain customary matters to be completed in the future, we have ceased consolidation of YY Live business since February, 2021. Our total net revenues for the third quarter was $586.7 million compared to $650.5 million in the same period of 2021, primarily due to macroeconomic uncertainties and unfavorable exchange rates which negatively affect paying user sentiment. As we continue to execute a sustainable growth strategy and proactively implemented a series of cost optimization measures, we maintained a healthy growth trajectory in our gross and operating profitability. Cost of revenues for the third quarter decreased by 16.7% year-over-year to $366.5 million. Revenue-sharing fees and content costs was $245.8 million in the third quarter compared with $290.1 million in the same period of 2021, primarily due to optimization of revenue sharing cost. Other operational costs, such as bandwidth costs also decreased year-over-year, as a result of our continued optimization of operational efficiency. Gross profit increased to $220.2 million in the third quarter, with our gross margin improved to 37.5% from 32.4% in the same period of 2021. Our operating expenses for the third quarter decreased by 3.1% to $202.2 million from $208.7 million in the same period of 2021. Among the operating expenses, sales and marketing expenses decreased to $96.8 million from $106.3 million due to disciplined and efficient spending on user acquisition. Our GAAP operating income for the third quarter was $19.8 million compared to $6.9 million in the same period of 2021. Operating income margin for the third quarter was 3.4% compared to 1.1% in the same period of 2021. Our non-GAAP operating income for the third quarter, which excludes share-based compensation expenses, amortization of intangible assets from business acquisitions, as well as impairment of goodwill and investments and gain on disposal of subsidiaries and business, was $43.1 million in this quarter compared to $31.3 million in the same period of 2021. Our non-GAAP operating income margin for the third quarter was 7.4% compared to 4.8% in the prior year period. GAAP net income from continuing operations attributable to controlling interest of JOYY in the third quarter of 2022 was $515.3 million compared to net income of $7.5 million in the same period of 2021, mainly due to the one-off remeasurement gain of an equity investment recorded upon the company's consolidation of investees as announced on August 22, 2022. Net income margin was 87.8% in the third quarter of 2022 compared to net income margin of 1.2% in the corresponding period of 2021. Non-GAAP net income from continuing operations attributable to controlling interest of JOYY in the third quarter was $76.9 million compared to $35.1 million in the same period of 2021. The Group's non-GAAP net income margin was 13.1% in the third quarter of 2022 compared to 5.4% in the same period of 2021. Notably, BIGO's non-GAAP net income expanded to $84.1 million in the third quarter, with its non-GAAP net income margin improved to 17.4% from 8.7% in the prior year period. It means that for the first three quarters of 2022, BIGO segment accumulated non-GAAP net profit has reached $230.4 million, up by 193.3% year-over-year. Together with our improving profitability, we have maintained a strong operating cash flow as well. For the third quarter of 2022, we booked net cash inflows from operating activities of $117.1 million. We remain a healthy balance sheet with a strong cash position of $4.28 billion as of September 30 of 2022. Importantly, we have continued to enhance returns to shareholders through dividends and share repurchases. In accordance with our previously announced quarterly dividend plans approved in August and November, 2020, we will be distributing a dividend of $0.51 per ADS for the third quarter of 2022, to shareholders of record as of the close of business on December 23, 2022. Additionally, we have repurchased $14.1 million of our shares under our previously announced share repurchase programs during the third quarter. As of September 30, 2022, we have in total repurchased approximately $342 million of our $1.2 billion share repurchase programs. Given our current cash position, we should be able to balance between keeping sufficient cash to invest in building our long-term capabilities and enhancing return for our shareholders. We will continue to actively utilize share repurchase to create value for our shareholders under the current market condition. Going forward, we remain committed to delivering value to our users and creators. We will remain adaptive to the macro environment, continue to prioritize investment into building our long-term capabilities, and drive effective and high-quality growth of our user community and global business. For our business outlook, we expect our net revenues for the fourth quarter of 2022 to be between 594 and $619 million. We currently have limited visibility surrounding the macroeconomic uncertainties on our business and the markets in which we operate. Therefore, this forecast only reflects our current and preliminary views on the market and operational conditions, which are subject to change. Thanks management for taking my questions. My question is about the Q4 revenue guidance. Can management provide a breakdown among BIGO and other business trends? And also, if we look into the current macro environment as well as the reopening, how should we think about the trend across different geographies? Thank you, Thomas. This is David. I will take your first question. From our latest observation, we can see the macro uncertainties such as inflation, aggressive appreciation of the U.S. dollar against local currencies and reopening trends post lifting of travel restrictions are still negatively affecting usersâ paying sentiment. The lower end of our current Q4 guidance reflects part of the negative macro impact. Yet in Q4, as our tradition, BIGO will host its Annual Gala and together with an increased number of operational activities in various regions around the world to promote user and create activity, so we expect that to offset some of the negative macro impacts. And if we are to take a closer look at the respective regions, we can see that each market is currently facing different levels of the macro challenges. But at the same time, we could also see that in the first 3 quarters of 2022, Bigo Live still managed to achieve positive year-over-year growth in some countries, like some countries in Asia Pacific regions such as Australia and New Zealand and also Philippines and also some Western European countries, such as the U.K. and Italy. So that might sometimes be related to their respective macro environment, the tools that the government has been employing to contain the pandemic and their fiscal policies and also it could be related to the level of development of our business in those markets. But ultimately, we believe that it improves that itâs meaningful to remain diversified across different markets. We will continue to closely monitor the shifting market conditions and devote more resources towards those markets that outperform as compared to others in order to generate a higher ROI. Thank you. My question is related to margins. Can management share with us the progress on cost discipline? And how should we look at margin in 2023? Thank you, Alex, for the question. This is Alex Liu. I will take your question. Our profits were better than expected in the third quarter with BIGO segment achieved a non-GAAP net margin of 17.4% and the Group achieved a non-GAAP net margin of 13.1%. And if we take a closer look at the BIGO segment, you can see that BIGO segmentâs gross margin was improved year-over-year from 34.5% in last year in the third quarter to 39.4% in this quarter, up by 5%. And that was mainly due to our continued optimization of content costs, lower payment channel expenses as well as lowering operational personnel costs. And also, you can see that even when we stick to a disciplined marketing spending in the quarter, we still managed to achieve effective and efficient growth of Bigo Live MAU. For the fourth quarter, considering the impact, the seasonality impact of our Annual Gala, we expect our gross margin and non-GAAP net margin for the BIGO segment to decrease over the previous quarter. Still, if you look at the first 3 quarters, the accumulated non-GAAP net margin for BIGO segment has already reached 15.1%, up from 7.8% for the full year of 2021. So, the improvement was quite significant and has profoundly outdone our original expectations. So, for the coming year in 2023, we will still remain flexible and adaptive to the global macro environment. Weâll continue to prioritize high-quality growth and optimize our costs and expenses to further improve our operational efficiency. We believe that as an increasing number of our products are turning self-sufficient, we will be able to steadily improve our non-GAAP profitability on a constant currency basis. Thank you. Thanks management for taking my question. My question is on the user side. So, what is the user growth outlook for next year and beyond? And what are the drivers? Thank you for your question. This is David. I will take your question. Firstly, we can look at Bigo Live, we can see that in the third quarter, Bigo Live's MAU increased by 14.2% with a Q-on-Q increase of 8.4%, achieved without meaningful increase of marketing spending in the products in the quarter. It means that a large proportion of its growth was organic and that our user acquisition strategy has become more effective. And that was mainly contributed to our continued cultivation of Bigo Live's diverse and premium content offerings and our continuous efforts to innovate our localized operational activities. For example, as I just highlighted in my prepared remarks in the quarter, we organized a world tour for Bigo Live with our local teams and live streamers visiting dozens of cities in various countries around the world interacting with users offline and promoting our brand awareness among the local communities in a cause effective manner. We will continue to explore innovation in our localized operational activities, both offline and online, together with innovation in our product features and content in order to help Bigo Live sustain its high quality and efficient user growth. For Likee and Hago, our current priority of these products is still to enhance their monetization capability and to achieve self-sufficiency. At the same time, we'll continue to focus on the fundamentals of these products and improve their organic growth. If we look at the operating loss of these 2 products in the recent quarter, we can see that both products' operating loss have narrowed and are one step further to breakeven at quarter level and their user retention rates were also improved on a sequential basis. So, we believe that with both Likee and Hago approaching self-sufficiency, they would be in a better position to revisit user base expansion after the adjustment. Thank you. Thanks for taking my question. My question is regarding the World Cup. This year it was hosted in Middle East, which as well is our important market. Can management comment the impact on our operation, including the user engagement and also, user spending? Thank you. This is David. I will answer your question. I believe that the World Cup both have positive and negative impacts on our business. During the World Cup, we expect users to spend more time watching the games through traditional media such as TV or engaged in an increased number of off-line entertainment activities, which will divert some of our usersâ time spent from mobile products such as our social entertainment products such as live streaming and short videos. Therefore, there might be some negative impact on our DAUsâ user time spent, especially in the Middle East, where the event is held and possibly in countries with a participating team. However, this also could be an opportunity for us to bring in a special content activity for our users. For example, to help our users better enjoy the World Cup, we have launched a series of special activities related to the theme, such as inviting football KOLs to host World Cup commentary sessions on Bigo Live and also Likee and also launching World Cup team-specific and event-specific live streaming rooms, et cetera. So, considering that in Q4 Bigo Live will host its Annual Gala, together with an increased number of operational activities to promote user and creator activity, we expect the impact from World Cup on user activity and monetization should be neutralized. Thank you. I will translate myself. How does management view the geopolitical risks to our business and what is the regulatory trend in different overseas markets? And also can management update any plan on usage of our strong cash on hand? Thank you, Brian, for your question. This is David. I will answer your questions. For your first question on geopolitical risk, I'd say that global geopolitical risk does not just emerge today, but there are always long-lasting risk for a global company. And we would like to say that it's a normal operational risk factor for a global company with global exposure. But we would say that it's also created a positive impact for global players as compared to a single market player because of the fact that we have operations in various regions. And usually, it means that for some reason, there would be growth opportunities, but for some reasons and some time, such geopolitical risk might emerge. And then when you look at the global level, it's actually neutralized and better. When it comes to risk diversification, we are in a better position as compared to a single market player in the industry. With regards to our cash usage, given the current macro uncertainties, we have been reviewing and sharpening our focus on a clear set of business priorities and become more selective in our expenditure. We have prioritized investments in our core businesses and also businesses that we believe that will be crucial for our mid- to long-term growth. So, it's a matter of balancing, balancing between making sure that we ensure sufficient capital for our own organic growth of our core businesses and also making sure that we have enough capital to return to our holders. You can see that from our operating cash flow, we have been very healthily improving our operating cash flow and have a very strong cash position. As a company that is still seeking growth, we have been very generous in enhancing shareholder returns. If you look at the first 3 quarters, we have already distributed in total $216.7 million via dividends and share repurchases, which is equivalent to 145% of our non-GAAP net profit in the first 3 quarters. And as of today, we still have the remaining share repurchase program of up to $800 million and dividend program of approximately $150 million, which is very sizable, especially when you compare it to our market cap. So to sum up, we will continue to remain financially flexible and strike a balance between keeping sufficient cash to invest in our business and enhancing return for our shareholders. So, I believe that we have already taken all of the questions and thank you very much for joining our call. We look forward to speaking with everyone next quarter. Thank you.
EarningCall_1857	Ladies and gentlemen, thank you for standing by and welcome to the Credo Semiconductor Second Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Good afternoon. Thank you for joining us today on our earnings call for our fiscal 2023 second quarter. Joining me today from Credo are Bill Brennan, our Chief Executive Officer; and Dan Fleming, our Chief Financial Officer. I'd like to remind everyone that certain comments made on this call today may include forward-looking statements regarding expected future financial results, strategies and plans, future operations, the markets in which we operate and other areas of discussion. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. It's not possible for the company's management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform these statements to actual results or to changes in the company's expectations except as required by law. Also during this call, we will refer to certain non-GAAP financial measures, which we consider to be an important measure of the company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with U.S. GAAP. A discussion of why we use non-GAAP financial measures and reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release we issued today, which can be accessed using the Investor Relations portion of our website. Thank you, Dan. Good afternoon and thank you to everybody for joining the call. During this call, I'll review Credo's fiscal Q2 results and share why we remain excited about our future prospects. After I conclude, Dan Fleming, our Chief Financial Officer will provide a detailed review of our financial results and expectations moving forward. Credo is a pure play high speed connectivity company. We built our first solutions for the ethernet market and are extending into other standards based markets as the need for higher speed connectivity increases exponentially. Today, our product families include integrated circuits or ICs, active electrical cables or AECs and service chiplets. Our intellectual property or IP solutions consist primarily as SerDes licensing. Our connectivity solutions address both electrical and optical applications at port speeds currently ranging from 50 gigabits per second, up to 1.6 terabits per second. All our product and IP solutions leverage our unique application specific SerDes portfolio, enabling us to deliver optimized, secure and high speed solutions with better power efficiency and cost. This has led to high growth rates with hyperscale customers and the ecosystem of suppliers that provide the infrastructure to these data centers. Credo continues to be one of the fastest growing companies in the semiconductor industry, and I'm pleased to report that we achieved record revenue of $51.4 million in the October quarter, an increase of 94% year-over-year and 11% sequentially. I'll now give a brief update on our progress across our various solutions, starting with AECs. For AECs, we continued to deliver strong execution as the pioneer of this product category. In-rack, low speed cable connections have historically been made with passive copper DACs, as single lane speeds increased 100 gigabits per second, DACs become obsolete due to signal integrity and physical size constraints. The industry assumption has been that when DACs are dead, optical cables or AOCs would take their place. Credo saw an opportunity to develop a broad product family of AECs that deliver half the power, half the cost and with 10 times better reliability than AOCs. We also saw the opportunity to offer compelling functionality that enables our customers to innovate on server rack and switch rack architectures. Industry analysts are now forecasting AECs to grow to a multi-billion dollar market in the next four to five years. We continue to ramp volumes with our first customer as they broaden deployments of the new dual tour architecture enabled by the Credo AEC. We expect the ramp to continue in the calendar â23 and we're developing multiple AEC solutions to solve for their future roadmap of higher speed deployments. I'm happy to report that Credo has completed the stringent qualification with our second hyperscale customer. We expect to begin our revenue ramp near the end of this fiscal year and expect meaningful contribution in fiscal â24. In addition, we are engaged in developing advanced AEC solutions with this customer for their next generation server rack and switch rack applications, as they move to 100 gig single lane speeds. We have also further broadened our traction in the market, we're currently in qualification with a third hyperscale customer for a 400 gig port switch rack application and yet with another hyperscale customer we're engaged in developing AECs for two future architectural deployments. Although hyperscalers are clearly our primary focus we've sold our AECs to dozens of customers, including data centers, 5G carriers, networking OEMs and ODMs, as well as others in the ethernet ecosystem. Finally, Credo is very proud to have introduced the industry's first 1.6 terabit per second connectivity solution at OCP, which will be a critical enabler for the 51 terabit per second switch generation. This reinforces Credo as the leader in the AEC market. Now moving to our optical solutions category, as we do across all our product solutions, Credo focuses on delivering disruptive solutions that are optimized for speed, reach, power and cost. Our optical solutions include DSPs, laser drivers and TIAs found in both optical modules and AOCs, and span the breadth of applications with 50 gigabits and 100 gigabits per second single lane speeds, including 50 gig, 64 gig, 100 gig, 200 gig and 400 gig modules. In the October quarter, we announced several new 100 gig per lane products, including our [DOV] (ph) 800 and 400 optical DSPs with integrated drivers and they've been met with great customer enthusiasm. In addition to engaging the optimal module customer base directly, our go-to-market strategy has grown to include the joint development model or JDM that is focusing on the end customers of our optical module manufacturing partners. These include data center, 5G, PON and fiber channel end customers as a means to have the end customer pull Credoâs through to design wins by specifying our solution. To-date, we've been successful with JDM engagements with two hyperscalers and a Tier 1 OEM. We are now actively engaging all data center customers directly and teaming with optical module partners to jointly pursue our end customers. I'm pleased with our progress as we now have line of sight on new engagements with several data center and 5G customers across a wide range of applications including 200 gig, 400 gig, 800 gig and 50 gig solutions. I'll note that we see the process from initial win to qualification to volume ramp as taking longer in the current environment than we had anticipated a year ago. With that, our rent material revenue shifted somewhat, but our opportunity remains the same. We continue to play the role of the structure in the optical market and we will gain share over time given the distinct efficiencies we deliver in the combination of performance, power and cost. Based on our increasing customer traction, we look forward to announcing meaningful customer wins and growth in our optical business. Regarding our Line Card PHY solutions, Credo has established leadership for ethernet Line Card PHY solutions at 50 gig and 100 gig per lane speeds. This includes MACsec PHYs for high security applications needing encryption, as well as retimer and gearbox solutions. Our customers again include leading hyperscalers and networking OEMs and ODMs. As single lane speeds increased to 100 gig, the demand for Line Card PHYs increases due to the signaling integrity challenges that come with higher speed copper connections. We also see a trend toward greater demand for encryption driving increased demand for MACsec PHYs. A highlight from the OCP show in October was meta showing the use of our Osprey 800 MACsec PHY in one of their critical deployments. Also in October, we announced our screaming Eagle 100 gig per lane solution, a long reach DSP retimer device with 1.6 terabits per second of bandwidth. This product has received great market reception, due to its combination of performance and power efficiency. We have sampled it to many leading OEMs and ODMs and are already kicking off design engagements. Based on our current market position, product positioning and customer engagements, we expect solid growth and continued share gain in the market. And finally, I'd like to give an update on our SerDes IP licensing and SerDes Chiplet business. We've received very positive feedback from customers on our five nanometer and four nanometer 112 gig IP SerDes announcement and it confirms that Credo solution offers a 40% to 50% power advantage over our competition depending on the reach required in the application. This highlights the Credo has extended what we refer to as our N minus one process advantage, which means to compete with the power efficiency of Credoâs five nanometer and four nanometer solutions, our competitors will need to move to three nanometer. As every industry seeks to lower its carbon footprint, Credoâs Core SerDes technology is delivering on the need to lower electricity use. We're also an early leader in the chiplet market and are in production with multiple customers. Notably, Tesla selected Credo certified the N chiplets for their Dojo supercomputer program. Going forward, we're excited about the prospects for chiplets in light of the UCIE consortium. This Intel led consortium where we're a contributing member is coalescing to standardize the broad use of chiplets inside servers. In summary, we remain highly encouraged about Credoâs prospects due to our current solutions and production near and mid-term opportunities we're deeply engaged in and longer term opportunities in emerging markets. Today, we remain focused on delivering strong accretion in our fiscal â23 and we continue to expect to achieve at least $200 million in revenue, representing more than 88% growth, compared to fiscal â22. I'll now turn the call over to our CFO, Dan Fleming, to provide more details on our second quarter and give guidance on Q3. Thank you, Bill, and good afternoon. I will first review our Q2 fiscal â23 results and then discuss our outlook for Q3 of fiscal â23. As a reminder, the following financials will be discussed on a non-GAAP basis unless otherwise noted. I'm pleased to share with you that in Q2, we achieved another quarter of record revenue at $51.4 million, up 11% sequentially and up 94% year-over-year. Sequential growth was driven by strong revenue growth of our products, which also reached a record of $48.1 million for the quarter, up 33% sequentially and up 143% year-over-year. This growth in product revenue was led by a continued wave of AEC adoption. The fundamental driver of our product growth a strong HSBC expansion outlook at the highest speeds remains in place in the face of an uncertain economic and geopolitical landscape. Our IP business generated $3.3 million of revenue in Q2. IP remains a strategic part of our business, but as a reminder, our IP results may vary from quarter-to-quarter, driven largely by specific deliverables to pre-existing contracts. While the mix of IP and product revenue will vary in any given quarter over time, our revenue mix in Q2 was 6% IP well below our long-term expectation for IP, which is 10% to 15% of revenue as the timing of IP deliverables and therefore IP revenue recognition shifted during the quarter. We continue to expect IP as a percentage of revenue to come in above our long-term expectations for the fiscal year. Due to the revenue mix between product and IP this quarter, our gross margin came in at 54.9% below our guidance range. However, more importantly, our product gross margin was 52.6% in the quarter, up 80 basis points sequentially and up 4.8 percentage points year-over-year. This product margin expansion is principally due to leverage from our strong product growth. Total operating expenses in the second quarter were $25 million within our guidance range and up 37% year-over-year, as we scaled the organization for growth. I think it's important to note that this is considerably below our 94% year-over-year revenue growth. We generally expect that our top line will grow at least twice as fast as our OpEx for the foreseeable future. With this, we expect to continue to deliver considerable leverage in the business. Our OpEx increase was driven by a 38% year-over-year increase in R&D. As we continue to invest in the resources, to deliver innovative solutions. Our SG&A was up 34% year-over-year, as we continue to build out public company infrastructure. We delivered operating income of $3.4 million in Q2, an improvement of $5.6 million year-over-year, but down 41% sequentially. Our operating margin was 6.6% in the quarter, an improvement of 15.1 percentage points year-over-year, but down 561 basis points sequentially, due to revenue mix that resulted in lower gross profit. We delivered net income of $2.4 million in Q2, an increase of $5.7 million year-over-year, and down 55% sequentially. Cash flow from operations in the second quarter was $1.8 million, an increase of $27.7 million year-over-year and an increase of $14 million sequentially. CapEx was $5.7 million in the quarter, driven by production mask spending. And free cash flow was negative $3.9 million, an increase of $25.7 million year-over-year and an increase of $13.6 million sequentially. We ended the quarter with cash and equivalents of $240.5 million, a decrease of $3.2 million from the first quarter. This decrease in cash was a result of continued working capital investments to support our top line revenue growth. Our accounts receivable balance decreased to 5.5% sequentially to $51.8 million, while days sales outstanding decreased to 92-days, down from 107-days in Q1. Our Q2 ending inventory was $47.8 million, up $10.8 million, sequentially as we continue our product ramp. Now turning to our guidance for the third quarter, we currently expect revenue in Q3 fiscal â23 to be between $54 million and $56 million, up 7% sequentially at the midpoint and 73% year-over-year. We expect Q3 gross margin to be within a range of 59% to 61%. We expect Q3 operating expenses to be between $25 million and $27 million. And finally, we expect Q3 weighted average diluted share count to be approximately 160 shares. Hey, guys. Congratulations on the strong product results. Bill, I guess, I wanted to start on the AEC business. Several questions, it sounds like you continue to expand your hyperscale relationships, but wondering if you can sort of talk about the growth in the -- I think you mentioned a couple of these guys looking at switch applications rather than server applications and was hoping you could expand on that thought? Is this the distributed to segregated switch chassis applications for the third and the fourth hyperscaler, as well as I think you mentioned the switch application for your second hyperscaler? Yes. Let me say that we really have two opportunities for AECs within the switching hierarchy and the server racks as well. So the largest opportunity that we see are server racks and the market forecasters show that, that market in comparison to the disaggregated chassis or what we call switch racks market, it's probably a five to one. Now in the switching architecture, it's really a big choice between sticking with what has traditionally been most popular, which is a big chassis filled with switches connected internally over a backplane. To the segregation, which means pulling those switches out of the chassis and basically stacking them vertically in a rack, those backplane connections become connections between the switches within the rack, 2.5 meters or less. And so we fully expect that over time each data center customer is going to make their own decision about the architecture that they pursue, but it's good. We're encouraged with the fact that as switching lane speeds increase to 50 gig and 100 gig that for those customers that are moving or have been using switch racks, compared to chassis that our solution is naturally getting picked up. Understood. Second question just on the competitive landscape for the NIC to ToR application, I know the first couple of hyperscale you're working with, I believe you're using proprietary or non-standard cables? Are you seeing any evidence that those customers are looking to second source those designs? Or do you feel pretty comfortable that Credo remains the sole source of those cables for the foreseeable future, which hopefully would extend that at least a few quarters? So I think that there's still question that the data center customers generally speaking want multiple sources. So that's absolutely part of the world that we live in. My feeling is that more and more as the data center customers recognize that they can add functionality to an AEC that they haven't even been able to think about with racks or optical solutions. The idea of having this fabric become more intelligent, it's natural that the team that we've built, which is a large team of engineers and different functions to be able to entertain specific requests for added functionality to the AEC. So we're open for business. If the engineers within the data centers that we're working with have ideas, we'll entertain those ideas as a way to make their jobs easier, make the innovations better from their end from a server rack or switch rack perspective. Now competitively, we've talked about the competitive moat that we've established and the fact that I've got the team that's doing the full system integration. It's not as if selling a chip to a copper cable manufacturer really opens that door for this kind of innovation. So I think that, yes, we naturally see competitors, we naturally see our customers wanting to secondsource. And I think that we still haven't seen competitors in the wild in the labs of our customers. We've heard about competitors' attention to enter the market. We've seen static demos where they'll have a cable that's not hooked up to anything and they will describe what the cable does. And we've seen demos with eval boards that are connected to passive copper cables. So these are far from actual qualification at a hyperscaler. And I think that, I think when we look at the OCP Conference in October, it was a really great measure of our leadership, especially in contrast to the other competitors. I think that anybody that attended the conference could not avoid seeing purple, which is the color of our cables. We were the purple AECs were ubiquitous from end-to-end on the show floor. And to note the progress that we've made year-over-year, last year we showed the world's largest router to-date, a three rack deployment that made up of 350 terabits per second router. This is built with 400 gig ports, each with eight lanes of 56 gig or 50 gig. This year, we showed the clear benefit of going faster from the lane speed and wider with the number of lanes. And so we introduced our 1.6 terabits per second AEC at this show, 16 lanes of 100 gig and we demonstrated that same capacity or that same bandwidth, the 350 terabits per second in a single rack deployment. And so this was one of many, many demonstrations that we gave and it was just clear anybody to show that just physically if you can see it, we're far ahead of our competition. Good afternoon. Thanks so much for taking my questions. First one for you Bill, based on the fact that you're reiterating the full-year guide, you guys are clearly doing really well. But curious if you've sensed any change in customer behavior, whether itâd be the large hyperscalers or some of the enterprise OEMs across your business? Have you seen any projects get pushed out or downsized? Or is the adoption of AEC for instance too strategic and too important for your customers to really tweak projects even going into fiscal year â24? Thanks. Yes, I think that what we see in our customer base is really two different threads. We have seen a reduction in CapEx and a delay within our Chinese hyperscale customers. There's no question about that over the past quarter. We've seen kind of a shift in the ramp to high volume on the next generation optical. And that's I think everybody is well aware of the macro situation in China. And these hyperscalers don't necessarily serve a wide customer base globally. And so the second part is really the U.S. hyperscalers, and although we've heard that there may be a slight bending of the curve. We haven't heard that anyone is going to decrease spending year-over-year. And these are with the customers that we're engaged with that we've ramped production and we will ramp production with, so it might be a slowing of the growth, but the growth still is very significant. I will reiterate that for us, it looks a little bit different, because we haven't reached the point of saturation and so every new product ramp that we see is next generation better than the current generation technology. And so if anything, there's still a fierce competition amongst data centers to deliver better services to their customer base in order to win market share. And so we see that there is a very, very consistent pull for next generation better than technology to get better productivity, to get better performance. And even an environment like this at a macro level, that becomes critical to be able to differentiate. So we still remain quite bullish on the customers that we're ramping. We haven't seen any major shifts. That's great. Thank you. And then as my follow-up, on the second customer in your AEC business, you talked about revenue recognition toward the end of this fiscal year and then a meaningful ramp in fiscal year â24. I understand you can't give too specific with these customers, but I was hoping you could compare and contrast the ramp that you're expecting in fiscal year â24 with the second customer vis a vis what you've experienced so far with the first customer. I think you've talked about a potential uplift in pricing just given the complexity. But if you can kind of level set us on your thoughts there into fiscal year â24 twenty that would be super helpful? Thank you. As a contrast, I think we've been relatively pleased with what we've been seeing from the second customer in a sense that over a year ago, we engaged with them. We delivered samples -- for samples of this unique cable that we've built in December of last year. And we've now finished a very stringent qualification. And so it's a full green light on ramping as soon as they're ready. Their schedule has been really consistent over the past several quarters, and the contrast there is that with our first customer, our solution was enabling a new architecture, but it wasn't necessarily that the servers were changing. So they had a high volume stream of deployments and what they were trying to do is shift to an architecture that gave them much, much better utilization of floor space and much better utilization of equipment. But it wasn't like it was the next generation server, and so we kind of naturally saw the customer kind of dual passing it and trying to cut it over in an orderly fashion. And so it was a little bit delayed, compared to what their first objectives were. So that's kind of the big contrast is that the second customer, this is a brand new generation. And so there's extremely small -- extremely strong pull to deploy and deploy on time, so that's something that we're pretty encouraged about. Thanks for taking my question. I actually had two for the first one, Bill you mentioned the engagements for the third and fourth hyperscaler also that seems like a positive. I'm curious, the adoption of AEC seems like a no brainer on surface? What is the main pushback that you get? Is it just a matter of time? Is it the ramp of a certain speed? Is it 400 gig or 800 gig? What do you think drives that sharp inflection upwards with multiple customers? I think there's really two catalysts to cause people to think about the AEC solution. One catalyst that we've seen first is added functionality, and that's a real differentiation and that's why you've seen our first customer ramp with 25 big lanes, which clearly if you were doing something special, you could get the job done with DACs. Our second customer is a combination of functionality as well as speed. And so as the world goes to 50 gig lanes for a large number of customers that we're talking to, they don't want to fight the signal integrity and form factor challenges of staying with the DAC. And so speed is the other catalyst. And so where we see the 50 gig per lane market being, kind of, a crossover generation where some will battle the deployment with that. Others becomes a very -- almost a default decision at this point. Because they see a solution that's half the power, half the cost, way more reliable, way more rugged than in AOC, and so for short in-rack connections, we don't really see a big decision making that has to occur. If they're not going to fight the challenges of DACs, they're going to use AECs and we've seen it across the board. As we progress towards 100 gig, which is -- it's just a function of time. For sure, there is no DACs and now it becomes just a question about AECs versus AECs, and I think we've established that, that game is over. People will choose AECs just because of the huge CapEx and OpEx advantage, right? If you look at the total cost of ownership, it hands down a better idea. And with the fact that you throw the fact that the installers aren't going to break the cables routing a huge number of them in a very tight space. So it's a much more rugged design. Got it. And for my follow-up, maybe once you've done in your Q2, it seems like IP sales were $5 million to $7 million, kind of, below expectations, but you're more than made up for it, because of the upside on the product side. I'm curious what is the expectation for this IP in Q3? And do you expect to make up for that $5 million to $7 million shortfalls that you had in Q2, because I think you mentioned something about a shift. So is the Q3 just that the missing part of the IP revenue from Q2 that comes into Q3? Or just how should we look at Q3 and what happened to that missing IP revenue from Q2? Thank you. Yes, thanks. So the important thing to note here is that there is no change in our expectation for IP revenue for the full-year. So in other words, our revenue mix for fiscal year â23 is exactly what we have expected it to be for the year plus that we've been talking. And also bear in mind that for the full-year, we expect IP revenue to be above our long-term target, which is 10% to 15% of the overall revenue mix. But we've talked a lot about historically about the quarter-to-quarter variability in revenue when it comes to IP. And this is largely driven by ASC 606 and the way the revenue recognition rules work around license revenue where we recognize the lion's share of the contract value on most of our contracts at the point of delivery of that IP database. So the last two quarters, Q4 of fiscal â22 and Q1 of fiscal â23 we happen to be on the higher end of revenue contribution from IP, but that of course swings both ways. One of the things that we track critically from a gross margin perspective of course is our product gross margin and that has continued to expand as we've increased our product shipment volumes. In fact, it was up 80 basis points the product gross margin. So we're quite pleased with our margins for the quarter and we're exactly where we expect to be for the full-year. Hopefully, that helps. Hi, guys. Thanks for taking my questions. Dan, I guess, I want to follow-up on the topic of product gross margins. If I'm running my numbers right here and if I exclude the product NRE from the calculation, it looks like our product margins were actually down very slightly. Am I calculating this right? And if so, can you help us understand the dynamics that took that down slightly? Yes. I wouldn't read too much into that. We look at product gross margin a little bit more holistically. And if you look at the elements that come into the other cost of goods sold bucket, that similar to our IP revenue can vary quite a bit quarter-over-quarter. So the way our view is that from an overall product gross margin perspective as our volume continues to increase at this stage, where we are as a company, we should have that a slight uptick in our product gross margin. But you're right, that excluding NRE in this particular quarter, it did tick down a little bit if you just look at the product margin. Okay. And then as we go forward especially if I think most people are assuming that your AEC mix is going to increase here, we should expect those product gross margins excluding NRE again to grow if very slightly, is that fair? Yes, that's fair. Our long-term model remains the same, so -- and just to reiterate what that is 10% to 15% of our overall revenue mix will be IP, the remainder being product. And from a gross margin perspective, 63% to 65% gross margin in that long-term model. So what is long-term? We really view that as a three-plus-year model. And we've stated in the past that this fiscal year we expect the gross margins to expand purely out of increasing scale. There are subsequent factors in FY â24 and â25 that will increase the product margin as well. One notable difference if you kind of read into some of Bill's comments for the year AEC has been ramping faster than we initially expected. So if you look out a year from now in our FY â24 that has an implicit margin impact. And with optical taking a little bit longer to ramp than we initially expected again somewhat of an impact in FY â24. So overall, our corporate gross margin in FY â24 is probably going to be similar to what it is for the full-year of fiscal â23. Okay, perfect. Thanks for that detail, Dan. Bill, maybe a big picture question for you. Obviously, Ethernet is your dominant protocol standard you're supporting and obviously a lot of growth opportunities there. But you've talked about USB and PCIexpress in the past and I think you've even alluded here recently to cable opportunities, AEC opportunities that exist with one or both of those. Maybe you can just kind of give us a big picture on your thought process on when those technologies and products start contributing more meaningfully to your outlook? For PCIe, our intent is to really enter the market in a big way when the market moves to Gen 6. Of course, we'll build a product that is compatible with earlier generations and we expect to get traction earlier to get cycles prior to Gen 6. But that's really what we expect is the point when we're going to enter the market in a big way. And so we see that being in the â25, â26 timeframe. And it's really dependent on the schedules, the servers decibels and hopefully things get back on track and the world goes faster. So I'll say that our view of the overall market opportunity for PCIe and it can be measured from a PCIe retimer within the server and also within the UCI equipment. We view this as a very large market opportunity. On the USB front, it's probably the same kind of timeframe that we see the [CIO] (ph) 80 or 80 gigaâs per second or two lanes of 40 gig PAM 3. It's probably the same timeframe that we see that opportunity. Now as it relates to the AEC opportunity, we definitely see opportunity within both segments or both standards and it's a very natural extension for us to look at that opportunity, the same way that we look at AECs for Ethernet. Now for USB, I'll tell you that the consumer market will probably not be the one -- the company building cables will probably go straight to a reference design model. Hi, Bill. Hi, Dan. So question specifically on the revenue breakout perhaps for Dan. The product engineering services would -- I know it's a smaller part of the revenue, but would growth in that revenue be a lead indicator of activity you have with hyperscalers where you see are those, kind of, indicators as you go from one to two to three or four hyperscalers, would that grow? Is that the way to read that line? I would not read it that way, itâs weâve -- from day one as a company, we've been able to capture some NRE dollars from customers as we've developed chips and solutions for them. It really speaks to the innovative nature of our solutions. And longer term, we don't expect that to grow necessarily in absolute dollars. And just like our IP revenue, it can vary quite a bit quarter-over-quarter. So it's not -- I wouldn't really read it as a lead indicator for anything such as that. Okay. Thanks Dan. And then the second question perhaps for Bill. You talked about the TAM for AEC being to $4 billion to $5 billion, I think, I heard the number correct -- I heard it correctly. Is that the vast majority of that hyperscaler or is there a meaningful non-hyperscale part that could kick in as you kind of evolve your offering beyond these initial customers? Yes. Just to clarify, I referenced a multi-billion dollar market that the market forecasts are forecasting and it's really in the four to five year timeframe. Yes, I definitely see the hyperscaler market as the market that's going to drive the near-term growth. But I can say that as the enterprise moves higher speed, there's going to be an opportunity there. I would say that even markets that are outside of what we consider hyperscalers, I think, there can be significant contribution from a revenue standpoint. We're already engaged with the first 5G carriers and that's about the same order of magnitude as hyperscalers. But if we look at the different engagements that we've kind of quickly converted into customers, I think collectively, they can look like one of the major hyperscalers in the total size of revenue for us. So I don't think there is -- in the near-term, I guess, our very, very primary focus is on the hyperscalers to drive the revenue quickly. But we are engaging across the board with many others that again collectively can add significant revenue for us. Yes. Hi, Bill and Dan. Just a quick question on the quarter, I know, the IP came in light, but it looks like you made it up well with the product side. Just wondering where the strength was, was it in cable or optical, if you can give us some color? And was it specific to some customers or markets? So it was a strength in AEC as you would expect. And that has been with our lead customer that we've discussed in the past. Got it. And then on the JDM side, the joint development program, do you expect that to become a bigger mix of your distribution as you look at the calender â23 or fiscal â24, would those have similar margins to your direct sales? Definitely, when we talk about a joint development model, what we're really referring to is that the hyperscaler would be involved in the selection of the DSP or other components. Typically even under a JDM model, we would be selling to the optical module manufacturer. And so I do expect that this JDM model or if we kind of back up and we say the model where the hyperscaler gets involved in the decision making, I expect that to be more and more popular as we go forward for Credo. If we kind of look at it from a Credo development perspective in the market, how we've been progressing. Really, our view is that, first, we succeeded engaging three JDM customers, where the end customer selected the DSP component from Credo. Now the ramp to high volume looks delayed, due to the first two hyperscalers being in China, but kind of in the second phase here, we've gained traction among Tier 1s. We're talking with all of them directly on high volume deployments. And so we see multiple programs in sight on 200 to 400 the major benefit that we give is a refresh that got a better combination of performance, power and cost. And it's becoming more important to the hyperscalers and the optical companies running high volumes. CapEx and OpEx are more and more can focus recently, and so if there's low hanging fruit, it seems like it makes sense. And I might have mentioned in the last call, but I feel even more confident that we're going to officially engage with a Tier 1 hyperscaler in the U.S. on a 400 gig optical solution and it will include the DSP with an integrated driver, as well as the TIA. And so that's more than kind of line of sight. That's basically a few stages left to entering a contract with them. And then I would say that kind of the third phase of this is for the next generation or 800 gig, and now that we've opened up conversations, about their existing high volume deployments. The same kind of compelling performance power and cost benefit that we offer additive to that will be the fact that we're on time. Our time to market is good for the 800 gig devices and for the 800 gig market. And so the first testing that's been done by the customer base has been very well received. So they see very clearly the performance is clearly good enough. The power is clearly good enough and the cost is compelling in a sense, because we're building in 12 nanometer versus a more advanced process like seven or five. And so given the fact that we've established market credibility through our first three engagements and the engagements that we're pursuing on existing programs, I expect the wins for 800 gig to come as the market takes off. Got it. And just a quick question. I know China is again going back into COVID restrictions and all that. And looks like you have been -- you have actually resolved many of your supply constraints, it feels like because it didn't really come up on the commentary. So can you talk to what you're doing in terms of might be diversifying your supply chain, I think, talk about Vietnam or Philippines, or what you're doing there in terms of getting around this whole restriction? So I feel good about where we are today. Even if we face disruptions in China, we've signaled that we're going to build inventory. That's a surefire way of making sure that we've got the product that our customers need as they ramp. We're going to continue to be in that mode until we can land ourselves in something in a location that's not dependent on China. We've made progress in the last 90-days and my expectation is that will be in production in less than a year in alternative locations for our current supply chain. And I think that, that kind of matches with what the customer base is looking for as well. Yes. Thank you, Bill. Thank you, Dan. Congrats on the record results, I have a non-AEC related question. You talked about the UCIexpress opportunity. And I do recognize that this is kind of further out, but as we think about chiplets and licensing, how should we think about this playing out for you over the next few years? Well, I think thatâs we -- first of all, we kind of classified chiplets as a product, because we're building and selling those. And so as it relates to the IP, I think our long-term guidance, kind of, fits in the 10% to 15% range that Dan has articulated. For the UCIe chiplets, we see this -- I mean, we were very early on in chiplets. We're by far ahead of the rest of the competition. Given that we kind of saw this move towards disaggregation early. It didn't really play out, but now that we see USIe on the horizon, we're very big believers. If you look at the consortium that Intel has really driven and you look at what they're doing today, chiplets are going to be popular in high volume in -- I think they are relatively near-term. So as speeds move to 32 gig to 64 gig, this can become more and more popular. And I think that if you look within a server, you can see eight to 16 chiplets per server in the future. And so with that kind of volume, it becomes -- you can do the math. It's going to be a very large revenue opportunity. That's very exciting. And then to follow-up on AEC and the sort of the second hyperscalers that's expected to launch, sounds like you have a lot of confidence in the timing there. I was just hoping you could give us a little bit more background information, I mean, obviously when we think about the hyperscalers cutting CapEx, I'm sure there's some priority CapEx and some not the priority CapEx? So I mean would this fall into like the really highest end priority for that particular customer? Is that how we should think about it? That's the way that I think about it. For sure, I view this program as something that is a strategic imperative as they talk about it within the supply chain, as well as within our customer base. So I feel pretty confident that this is going to be mainstream. And although they have been pretty consistent with their schedule, of course, things can happen that might cause a delay. We're not seeing any signs of that and the closer we get, obviously, the more confidence we have in the ramp. But it's not as if I can make a firm commitment on exactly when they're going to go to production. But it feels like no change from our end. That's very fair. Last question for Dan. Dan, you said in the last quarter you would build inventory, you did that inventory days now just over 100. based on Bill's comment about sort of keep building inventory until you feel better about the whole China lockdown situation, how high should we expect inventory days to potentially get to before you feel like you got the situation under control? Well, I don't expect that the days will increase from where they are right now or if they do it would be a very small increase. We were essentially flat quarter-over-quarter. Even though it looked like a significant increase in inventory, itâs actually kind of in line with our product growth quarter-over-quarter. So bearing that in mind, we're comfortable with where we are, we continue to build an excess amount of days of inventory, of cable inventory to ensure that we don't run into in a situation that we had back in Q4, when that COVID lockdown kind of interrupted our fulfillment of demand. So we're comfortable with where we are right now and I wouldn't expect any major deviation from a days of inventory perspective. Longer term, of course, that will settle down to maybe 100 days of inventory, but that's off in the future. Hi. This is Lannie on for Matt Ramsay, I wanted to extend my congratulations for the quarter as well. Going back to the optical solutions, could you confirm that the push out was mostly due to your first two customers being Chinese hyperscalers? And is there any line of sight as to how long that program is where you are in terms of the qualification to product volume reps? Yes, I will confirm that the first two hyperscaler customers are Chinese data centers. And during the last quarter, we were told that there is going to be a shift in the timing of the deployment. I haven't got clarity on specifics on when that's going to ramp. And when it's -- I mean, from my perspective, it's really when it goes to high volume. And so we might be doing small volume, but our focus is really on how long is the shift to high volume. I will say in the efforts that we're making with the U.S. hyperscalers, we continue to make progress. And if anything, I think, that that's -- we've got more clarity on that even though it might be a bit further and I think that's going to drive higher volume as well. Understood. That's helpful. Thank you. And I know in past earnings calls, you've mentioned a consumer customer for USB, PCIe, I believe for licensing. Any updates there that we should know about in terms of progress? Yes. We're hip-deep in executing on that IP license, we were selected by this large consumer company as the partner for this really important next generation USB standard, which is 80 gigabits per bandwidth two lanes of 40 gig and PAM modulation. I think it's reflective of the fact that our architecture is unique. We delivered lower power than anybody in the industry. So it's really a great confirmation that they would select us as their partner. And this goes back to even four years ago that they were doing due diligence and we signed the contract finally a little more than a year ago. But yes, we're hip-deep on execution and we expect to be wrapping up the technical part of the work really within the next six months and then we'll absolutely be there as they move from their own samples to production. Hi, thanks for taking it. A quick couple of follow-ups first. Dan, could you give us a sense your lead customer, what percent of revenue was in the quarter? I know they've been above 10% for the past several quarters? And then a follow-up for Bill, as you look to the PCIe market, wondering if that also includes opportunities is CXLs, since CXL does run on the PCIe electricals? Thanks. Yes. So, Quinn, so what you'll see in our Q as we file it in a day or two is that we had three 10% customers in the quarter, the largest of which was 44% then there was a 19% and 16% customer. So you can kind of fill in the blanks from there, we don't disclose the specifics of who those customers are. But in the 44% case, it's pretty obvious. I'd like to thank everybody for joining the call. I appreciate all the thoughtful questions and with that, we will end the call. Thank you very much.
EarningCall_1858	Good day, and welcome to the NetApp Second Quarter Fiscal Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After todayâs presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Hi, everyone, thanks for joining us. With me today are our CEO, George Kurian, and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at netapp.com. During todayâs call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, such as our guidance for third quarter and fiscal year 2023, our expectations regarding future revenue, profitability, and shareholder returns, our alignment with industry megatrends and expectations regarding the future growth in the number of cloud customers and their usage of cloud services, our ability to deliver innovation and focus on our strategic growth opportunities while optimizing our operating costs, and our ability to drive sustained growth in both our Hybrid Cloud and Public Cloud segments in a turbulent macroeconomic environment, all of which involve risk and uncertainty. We disclaim any obligation to update our forward-looking statements and projections. Actual results may differ materially for a variety of reasons, including macroeconomic and market conditions such as inflation, rising interest rates and foreign exchange volatility, the continuing impact and uneven recovery of the COVID-19 pandemic, including the resulting supply chain disruptions, and the IT capital spending environment, including the focus on optimization of cloud spending, as well as our ability to keep pace with the rapid industry, technological and market trends and changes in the markets in which we operate, execute our evolved cloud strategy and introduce and gain market acceptance for our products and services, and manage our gross profit margins and generate greater cash flow. Please also refer to the documents we file from time to time with the SEC, and available on our website, specifically our most recent Form 10-K and Form 10-Q including in the Managementâs Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections. During the call, all financial measures presented will be non-GAAP unless otherwise indicated. Reconciliations of GAAP to non-GAAP estimates are posted on our website. Thanks, Kris and welcome everyone to our Q2 FY 2023 earnings call. Coming off a strong Q1, our team delivered a solid quarter, with all-time highs for Q2 billings, revenue, gross profit dollars, operating income, and EPS. We remain focused on disciplined operational management and the execution of our strategy, which is tightly aligned with customer priorities. On todayâs call, I will walk through four topics; one, we delivered a good quarter in a dynamic environment. However, we are disappointed with the deceleration of growth in our cloud services. Our conviction in the cloud opportunity and our ability to execute against it is unwavering. Two, we are aligned with the durable, megatrends of data-driven digital and cloud transformations. We continue to deliver innovation that furthers our already strong position. Three, we believe strongly in the opportunity ahead, but have slightly tempered our revenue outlook for the remainder of the fiscal year, due to near-term macro headwinds. Four, we understand the imperative to deliver shareholder value in a slowing environment and will focus on our strategic growth opportunities, while continually optimizing our operating costs. Let's start with the first point, our performance in the quarter. Q2 public cloud segment revenue increased 63% year-over-year to $142 million and dollar-based net revenue retention rate remained healthy at 140%. However, Public Cloud ARR of $603 million fell short of our expectations. As our cloud partners discussed on their earnings calls, growth has slowed as customers look to optimize cloud spending. This macro-related optimization caused some slowing of growth in our cloud storage services as well. Additionally, we had a few customers with very large project-based workloads like chip design, that came to their natural conclusion, resulting in capacity reductions in those environments. We expect these customers to kick off new projects early next calendar year, as the number of cloud customers and their usage of our cloud services grows, the impact of this type of workload will be smoothed over a much broader customer base. In our cloud operations portfolio, Spot is benefiting from the same desire to optimize cloud spending that was a headwind to our cloud storage services. Spot's value proposition is a strong engine for new logo acquisition and Q2 saw an acceleration of new Spot customer additions from Q1. As we've discussed on past calls, we continue to refine our approach to cloud insights and are seeing early positive signs, with the growth of new Cloud Insights customers in Q2. We continue to see healthy growth of new-to-NetApp customers and of existing NetApp enterprise customers adopting our cloud services and those customers are growing in scale as well. The number of customers with greater than $1 million in ARR has more than doubled from Q1 last year. Our public cloud services are highly differentiated and create customer preference for NetApp. We have a multiyear advantage over our traditional competitors in this critical market, positioning us well to deliver sustained growth. Compared to Q2 a year ago, Hybrid Cloud revenue grew 3% and our all-flash array business increased 2% to an annualized revenue run rate of $3.1 billion. Adjusting for the significant FX headwinds, Hybrid Cloud grew 8% and all-flash grew 7% in constant currency. All flash penetration of our installed base grew to 33% of installed systems. Our lower cost, capacity-oriented all-flash arrays and FAS hybrid flash arrays, both performed well. Onto the second point, our alignment to the industry megatrends and our continued innovation. The world is moving faster than ever, raising data-driven digital and cloud transformations to business necessities. NetApp helps meet these objectives with a modern approach to hybrid multi-cloud infrastructure and data management that we term the evolved cloud. We provide customers the ability to leverage data across their entire estate with simplicity, security, and sustainability, which increases our relevance and value to our customers. We believe strongly in the sizeable, durable, and growing opportunity created by these megatrends. As many of you know, we bring significant value to customers running VMware environments on-premises. With a series of announcements made in conjunction with VMware, we are now able to bring that same value to customers in the cloud. Our native cloud storage service integrated with VMware, helps customers quickly, easily, and cost effectively migrate enterprise workloads to the cloud and accelerate modern application development using Kubernetes. We are the only certified and supported third-party cloud storage solution for VMware Cloud, which creates significant new opportunity for us. As those VMware environments move to the cloud, we can capture the data that resides on competitorsâ on-premises systems. At the start of November, we introduced BlueXP, the next big step in fulfilling our vision to give customers the simplicity, security, savings, and sustainability needed for an evolved cloud. It delivers true hybrid, multi-cloud operations by bringing storage and data services together in a single, unified control plane. BlueXP is a highly differentiated solution that enables customers to deploy, discover, manage, and optimize not only infrastructure and data, but supporting business processes across multiple clouds and on-premises environments. In addition to bringing forward technical capabilities, we are helping customers achieve their environmental goals by creating energy efficient products. We have added power and temperature reporting in Cloud Insights to give customers a real-time view into energy expenditure and our carbon footprint reports provide a reasonable estimate for the carbon impact of their NetApp systems. We enhanced our storage efficiency with a 4:1 efficiency guarantee for SAN workloads to help customers minimize their storage footprint and lower energy usage. We not only help customers practice sound environmental stewardship, we practice it ourselves. I am proud to announce that EcoVadis, the leading evidence-based ESG rating agency, awarded NetApp a gold ranking, placing us within the top 7% of evaluated companies. Now the third point, the macro environment and our business outlook. As we moved through the quarter, we saw increased budget scrutiny, requiring higher level approvals, which resulted in smaller deal sizes, longer selling cycles, and some deals moving out of the quarter. In Q2, we felt this most acutely in the Americas hi-tech and service provider sectors. We see no change to our underlying opportunity and are confident in our position. However, current economic realities and unprecedented FX headwinds are and will continue to impact IT spending, causing us to temper our revenue expectations for the second half. And finally, point four, driving shareholder value. In response to the slowing top line, we are being agile and taking action to lower operating expenses. Already, we have implemented a broad-based hiring freeze, and are reducing discretionary spending, as well as further optimizing our real estate footprint. We will remain disciplined as we continue to shift resources away from lower yield activities to our biggest opportunities. In closing, we are clearly aligned with our customers' strategic priorities and remain confident in our long-term opportunity, despite the current external headwinds. By focusing on what we can control, we will aggressively seek to maximize the near-term return on our product and services portfolio, while leveraging our leadership position in all-flash, cloud storage, and cloud infrastructure optimization. I would like to thank the entire NetApp team for delivering a strong first half. In a challenging environment, we remain focused on innovation, execution, and operational discipline. Thank you, George. Good afternoon everyone, and thank you for joining us. Before we go through the financial details, I think it would be valuable to walk you through the key themes for todayâs discussion. Number one, as George highlighted, we delivered a strong Q2 in a dynamic environment, with all-time Q2 company highs for billings, revenue, gross profit dollars, operating income and EPS. Number two, we have adjusted our outlook for the second half of the fiscal year due to an increasingly challenging macroeconomic environment and unprecedented FX headwinds. Number three, as we navigate through the current macro environment, we are laser focused on driving operating margins and free cash flow generation. As George noted, we have taken actions to reduce our full year expense envelope and will remain fluid in assessing further opportunities to take costs out of the business. Number four, as a result of these cost savings measures, the entirety of the Op margin and EPS guidance revision for the full year is being driven by the incremental one to two points from the deepening currency costs we have seen, since our Q1 call; and number five, we continue to expect to generate greater than $1.4 billion in operating cash flow and $1.1 billion in free cash flow for the full year. From a capital allocation perspective, we will continue to pause Cloud Operations acquisitions for the remainder of fiscal '23. We now plan to return more than 100% of fiscal '23 Free Cash Flow to investors through dividends and incremental share repurchases. Now to the details. As a reminder, Iâll be referring to non-GAAP numbers unless otherwise noted. Q2 billings were $1.6 billion, up 3% year-over-year. Revenue came in at $1.66 billion, up 6% year-over-year. Adjusting for the 540 basis point headwind from FX, billings and revenue would have been up 9% and 12% year-over-year, respectively. Even with the challenging Q2, our cloud portfolio continues to positively impact the overall growth profile of NetApp, delivering 3.5 of the six points in revenue growth. Hybrid Cloud segment revenue of $1.52 billion was up 3% year-over-year. Product revenue of $837 million increased 3% year-over-year. Total Q2 recurring support revenue of $607 million increased 3% year-over-year, highlighting the health of our installed base. Public Cloud ARR exited Q2 at $603 million, up 55% year-over-year. Public Cloud revenue recognized in the quarter was $142 million, up 63% year-over-year and 8% sequentially. Recurring support and Public Cloud revenue of $749 million was up 11% year-over-year, or 16% in constant currency, constituting 45% of total revenue. We ended Q2 with $4.1 billion in deferred revenue, an increase of 5% year-over-year, or 10% in constant currency. Q2 marks the 19th consecutive quarter of year-over-year deferred revenue growth, which is the best leading indicator for recurring revenue growth. Total gross margin was 66.3%, in line with our guidance. Total Hybrid Cloud gross margin was 66% in Q2, including a two-point year-over-year headwind from FX. Within our Hybrid Cloud segment, product gross margin was 50%, including a three-point year-over-year headwind from FX. Our growing recurring support business continues to be very profitable, with gross margin of 93%. Public Cloud gross margin of 68% was accretive to the corporate average for the eighth consecutive quarter. We remain confident in our long-term Public Cloud gross margin goal of 75% to 80%, as the business scales and an increasing percentage of our Public Cloud revenue is driven by cloud and software solutions. Q2 highlighted the strong leverage in our business model, with operating margin of 24%, including two-points of FX headwinds. EPS of $1.48 came in nicely ahead of guidance and included a $0.21 year-over-year FX headwind. Cash flow from operations was $214 million and free cash flow was $137 million. Q2 included our annual repatriation tax payment and continued cash outflows for certain inventory and premiums for constrained trailing edge analog parts. Additionally, collections were lower than expected due to a backend loaded quarter for invoicing linearity that you see in the higher accounts receivable balance. Our component purchasing strategy allows us to meet as much customer demand as possible, but remains a clear headwind to cash flow and gross margins. We are seeing signs of relief in supply availability. The timing of a full supply recovery remains uncertain, however, as our inventory levels start to normalize, it will be a tailwind to free cash flow as we go through the second half of fiscal '23. During Q2, we repurchased $150 million in stock and paid out $108 million in cash dividends. In total, we returned $258 million to shareholders, representing 188% of free cash flow. Share count of 220 million was down 4% year-over-year. We closed Q2 with $3 billion in cash and short-term investments. Now to guidance. As George discussed, we have seen softening in the macro backdrop, with customers taking a decidedly cautious approach to spending. Additionally, currency headwinds have only continued to increase. We now expect fiscal '23 revenue to grow 2% to 4% year-over-year, which includes five points of FX headwind versus the four-point headwind assumed in our prior guidance. We now expect to exit fiscal '23 with Public Cloud ARR of approximately $700 million, which equates to our Public Cloud segment driving three-points of total company revenue growth for the full year. Three drivers are impacting the near-term growth rate of Cloud ARR. Number one, in this macro environment, we project continued optimization of storage services, as we help our customers manage their spending, which benefits Spot, but will offset some incremental near-term storage services ARR. Number two, we expect that project-based workloads will grow in both number and scale, but as they ramp, it will take some time to materialize into sizable ARR; and number three, we continue to tighten up the Cloud Insights sales motion, but we donât expect this meaningful cross-sell opportunity to materialize until we head into fiscal '24. In fiscal '23, we continue to expect gross margin to range between 66% and 67%, as elevated component costs and FX headwinds weigh on product margins. As you know, the vast majority of our bill of materials is procured in US dollars. We are optimistic that supply constraints will ease further in the second half of our fiscal year, reducing our dependence on procuring cost at significant premiums. We should also see a benefit from declining NAND prices in Q4. While the timing is uncertain, we remain confident that our structural product margins will normalize back to the mid-50s in the fullness of time. For the full year, we expect operating margin of approximately 23%, which now includes approximately two points of FX headwind and EPS of $5.30 to $5.50, which now includes more than $0.70 of currency impacts. Itâs important to reiterate that we are offsetting the full year revenue adjustment with an extremely disciplined approach to our spending envelope. As a result, the entirety of the Op margin and EPS guidance revision for the full year is being driven by the incremental one to two points from the deepening currency costs we have seen since our Q1 call. We continue to expect to generate greater than $1.4 billion in operating cash flow and $1.1 billion in free cash flow for the full year. From a capital allocation perspective, we will continue to pause cloud operations acquisitions for the remainder of Fiscal 2023, as we sharpen our portfolio focus by refining the Cloud Insight value proposition and sales motion, accelerating the integration of Spot and CloudCheckr into a single FinOps suite, and driving the successful integration of Instaclustr. As I said earlier, we now plan to return more than 100% of fiscal 2023 free cash flow to investors through dividends and incremental share repurchases. Now on to Q3 guidance. We expect Q3 net revenues to range between $1.525 billion and $1.675 billion, which at the midpoint implies a 1% decrease year-over-year, or 4% growth in constant currency. We expect consolidated gross margin to be approximately 67% and operating margin to range between 22% and 23%. We anticipate our tax rate to be between 21% to 22%. And we expect earnings per share for Q3 to range between $1.25 and $1.35 per share. Assumed in our Q3 guidance is net interest income of $5 million and a share count of approximately 220 million. In closing, I want to thank the entire NetApp team for their continued commitment in such a dynamic environment. Iâll now hand it back to Kris to open the call for Q&A. Kris? Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Amit Daryani with Evercore. Please go ahead. Pardon, Amit, your line might be muted. Okay. So this is Abdulla [ph] speaking in for Amit. So I think your guys' cloud ARR expectation is coming down by $100 million versus prior expectations. And I just wanted to ask whether you guys could perhaps touch on the softness there? Is this more on compute, storage or analytics? And maybe if there's one cloud provider where the ramps are more challenged versus not? I would appreciate any details here. Thank you. I think we expect to see the continuation of some of the trends that we saw in Q2, which is the consumption oriented cloud offerings in our portfolio, which are cloud storage services were most impacted by customers wanting to reduce their spending. It could involve either them reducing the amount of capacity they use on our offerings or us proactively helping them migrate some of their workloads from a high-performance tier to a more cost-effective tier, so that they will continue to see value and benefit with us. That's one. Second, we saw in Q2 some project-based workloads, for example, large-scale semiconductor design that came to its natural conclusion. We anticipate some of those workloads coming back in the early part of next calendar year, but we are being cautious about that. And then finally, with our Cloud Insights product, we have continued to work to sharpen the focus on the use case of the products. We saw some early success in terms of new customer wins -- new to Cloud Insights customer wins. But we're being cautious about the future growth rate of that product until we see further evidence of success. So I think those were the three. I did not see anything materially different between the different cloud providers. Clearly, our relationship with Microsoft is the largest of the three, given that we've worked with them for the longest, and so they saw the biggest impact this quarter. Yes. Thanks for taking my question. Two follow-ups. George, if I just take your guidance commentary, you suggest that all-flash array revenues should show Q-over-Q and year-over-year decline in January quarter? We don't -- we didn't guide anything specific in terms of all-flash array revenue. We have guided at the total company level. We're being cautious about our outlook given what we saw in the quarter and the continued macroeconomic environment. We are not guiding any specific product category maybe. Yeah. That's fine. At least I tried. Just -- and then a follow-up to your comment about the chip design. There's obviously product migration. They are expected to introduce new products for AI application. You also suggested that, that should help you with a rebound in the cloud data services. And I want to better understand whether your underlying assumption, do you think that product transition is going to ramp in early calendar year. Is it -- is your guide on cloud data services completely derisked given this transition. Sometimes these transitions take longer. And I'm just wondering what are the key assumptions there? I think with our cloud outlook, we've been cautious to address three topics, right? One is consumption services on the cloud are being impacted by customers reducing spend either by optimizing the performance level that they use or the total capacity they use in our cloud storage services. That will happen for a period of time and then we will see build back. We don't see that yet in the outlook. I think with regard to project-based workloads, listen, there are lots of different customers with different projects. I think in this case; we saw a few large projects come off our environment. And we've been cautious about how many of those come back in terms of our outlook. It will take time for them to come back as new projects and new chip designs. We are the only option in the public cloud for semiconductor chip design technologies to be verified as a cloud service. So, we expect, over time, more and more customers will use our cloud services but that will take time. And then I think in our CloudOps portfolio, as I said, we are pleased with the work that we've done so far. There's still more work to be done. And so we're being appropriately cautious about how fast that product portfolio, especially Cloud Insights grows in the second half of this year. Great. Thanks guys for taking my question. Hi George, hi Mike. Maybe just a big picture question on macro and linearity and how you thought about the quarter as it progressed because obviously, you did a good job of cutting costs, managing the business to the economic backdrop. But all-flash arrays were relatively weaker in the quarter, suggesting that obviously, you probably knew early in the quarter that customers were looking for more maybe cost conscious or cost-effective solutions. And you mentioned a lot of decisions were picked up to the CTO level or the CFO level. So, can you, kind of, discuss what you saw as the quarter progressed from a demand perspective? Was there a pivot point or was it just sort of a gradual bleed as we walk through each of the months? And how did it relate to, let's say, 90 days ago when we had this conversation? Thanks. I think it got progressively worse through the quarter. I think you see us being appropriately cautious in our guide as a result as well. I think that the rate increases getting compounded at a very fast clip certainly impacted customers' business confidence, and that got the range of customers that were affected with their business confidence grew through the quarter and the depth of the impact on spending grew. I don't think we saw any particularly meaningful shifts between product mix in the quarter. Hybrid flash has performed well for a few quarters now and all-flash has been -- as a percentage of our total mix has been more steady than as a growing percentage of our mix. So, I think -- I don't think that our view of the product portfolio affected as much as the view of the total business opportunity available in customers. I'll let Mike add any color. Yes. Thanks, George. So David. Per George's comments, when we saw linearity in the quarter, month one was relatively consistent with what we've seen in, I'll call it, non-Q4 quarters. What we really saw was month two push into month three. And typically, we will see, call it, mid 40% of transactions and invoices in month three. That pushed to almost 60% this quarter. So, what you saw was in the second month of the quarter really started to push into the third month. And that's what we saw that really back-end linearity that I spoke about in my prepared remarks. Got it. And maybe just a quick follow-up for you, Mike. Just maybe on the currency headwinds, that incremental point or two. I know your business is primarily denominated in dollars. But can you kind of help us understand that transition from negative three to negative four to negative five, the US dollar has weakened a bit as of late. Just kind of want to get a better understanding kind of what's under the surface there and what's kind of driving that incremental headwind from an FX perspective? Thanks. Yes. Sure, David, happy to. So, the significant foreign currencies we have like most international companies, it's euro, GBP, yen and Aussie dollar. And what we saw, again, across most of those is August and September was when the dollar was the strongest. So, that's when the most significant impact hit. That stayed largely through October. Now, what we saw after our quarter ended, is, hey, it got a little bit better in November, the dollar weakened a little bit. Yes, we'll see if that holds. Everything we've put in front of you, we have used FX rates as of the end of October. So, it says a little bit better, that will be good. But making our living betting on FX rates, we're not going to try that. So we use October rates for the rest of the year. Hi. This is Angela Jin on for Samik Chatterjee. And my first question. So, I think in your prepared remarks, you mentioned that, customer weakness was concentrated in Americas hi-tech and service provider sectors. Can we just dive more into the dynamics of each of your customer vertical/segments. Were there certain ones that held up better, enterprise versus SMB, for example? And what types of specific behaviors or patterns that you see in each vertical? We don't have any specific vertical that is a material contribution to our revenue. Let me start there. I think the -- what we saw through the quarter was, public sector did well, both in the Americas and internationally. I thought that our European team performed exceptionally well to deliver a strong result in the face of increasing headwinds. And in our outlook for the international markets, we are appropriately cautious about Germany, where our team did phenomenally well in Q2, but there's just growing pressure economically. I think with regard to the North American market, the midsized enterprise segment team did a good job. We saw good results there. We're cautious about the potential in that segment, given their historic vulnerability to recession and macro exposure, but our team did well in Q2. I think the larger enterprise in those specific verticals were the ones where we saw the most substantive change in spending, and we expect them to be cautious go forward. Last year, from a year-on-year compare, last year public -- the high tech and service provider and the large enterprise segment did well for us. So this is a year-on-year compare, as well that we are working through. Got it. And then for my follow-up, with the cloud ARR target lowered to $700 million, looking ahead to the out year, I'm not asking for you to predict how deep or long a potential downturn could be. But how are you thinking about risk to that $2 billion cloud ARR target by fiscal year '26. And what gives you confidence that you can accelerate ARR in those out years? Hey Angela, it's Mike. So, as we both talked about, look, we still feel really good about the cloud business, both Cloud Storage and CloudOps. We have some things to work through this year. So even though Q2 was not where we would like, we still feel really good about the future. We will update our views of fiscal 2024 and the $2 billion when we give you guidance for next year. So we'll ask you to wait until we update our fiscal 2024 numbers in a couple of quarters. I think where we are focused on at the moment with our cloud business is to make sure that we are a good partner to our customers so that we can optimize their spend where they need help doing that. We are going to be continuing to accelerate our focus on selling more of our cloud products to our installed base where today it's about 15% of our Hybrid Cloud customers have our cloud products. And we have grown the number of cloud customers and the number of them that are buying more than one cloud service. So there's lots of opportunity ahead. We're focused on blocking and tackling and executing on the opportunities in front of us. Yeah, hi. Thanks for taking my question. I have two of them. I'll ask both of them upfront to either George or Mike. Thanks for the color on the cloud customer scenario. I'm kind of curious like one of your competitors just two weeks ago mentioned the storage demand is still pretty strong from cloud customers. I'm kind of curious, is the weakness you're seeing NetApp customer specific, or is there any share loss due to competitive threats? That's the first question. And then the follow-up is on the cloud ARR from $800 million to $700 million, yet we spoke about a high retention rate. So is the challenge now signing new customers with ANF? This is the ramp of AWS FSx? Any color there would be helpful on the ARR cut? Thank you. I think with regard to what we saw in the quarter was really we have unique cloud services, which are native, first party cloud services. Those are consumption offerings that we give customers. They were the ones most impacted. None of our competitors have native first-party consumption cloud services. They offer it through the marketplace. The marketplace business for us stayed relatively consistent. And so that is what you would expect. The subscription business is less susceptible to near-term changes in usage than the consumption business. And so the benefits of consumption being you can turn it on and off also shows up when customers want to optimize spend. We want to be a good partner to the customers that want to do that. And so we are working with our hyperscaler partners to give them access to more options to be more cost effective with their spend. Spot, which is the compute optimization platform actually did well in the quarter. So while the storage consumption was impacted by spend, as I noted in my remarks, Spot was a -- which is a vehicle to optimize computing spend did very well in the quarter. And so we continue to help our customers through that journey. With regard to growth opportunities, listen, as I said, we felt very good about the number of customer adds. We felt very good about the amount of cross-selling we are starting to see dollar-based net retention rate has been strong, and so several good things in our cloud business. So on the ARR point, so there's been a couple of questions about the $800 million down to the $700 million. So when we looked at that, originally, when we had given the $800 million, we expect it to be, call it, somewhere around $650 million as of the end of Q2. Taking a look at the second half now, we expect to grow about $100 million. That's all organic because we don't have any acquisitions baked in. And we expect that to continue to grow across cloud storage, specifically ANF, FSx and GCP, we all expect to see some good growth. We have tried to be conservative or cautious, I will say, around the consumption business because we do expect that to come back in the second half. We're just not really sure if it's going to be Q3 or Q4. So we feel really good about the $700 million, still a significant growth in that business. But stepping it down a little bit based on the Q2 results and also take a step back a little bit on Cloud Insights. So that's the -- I'll call it, Krish, the product view of the rest of the year. Thanks for taking my question. Maybe a couple more on the public cloud side. So on the reported quarter, your public cloud revenue on an annualized basis was lower than your ARR exiting last quarter. Is it fair to say that there were some cancellations and maybe some restructuring of some of the deals based on the three dynamics that you guys talked about earlier. And if so, how do you feel comfortable about the future ARR would not be reduced from the churn level? And maybe I'll just throw in the next question here. If you look at your revised ARR for the $700 million, if I exclude the inorganic growth and then make some certain assumptions about dollar-based net retention, you still need quite a bit of ARR coming from new customers. So in terms of new customers, which offerings are you seeing the most traction at this point? Thank you. Hey, Sidney, it's Mike. So let me do the first one. So great question. So we finished Q1 at $584 million in ARR. If you simply take -- divide that by four, you get about $146 million that you'd expect to recognize in revenue. The revenue recognized in the quarter was $142 million. And the nuance here is that typically, you can make -- you can do that calculation, it's going to flow very nicely because of the things that we talked about in terms of some of the consumption being reduced during the quarter, some of the project-based initiatives, especially the larger chip design wins. Those happened during the quarter. Thus, we did lose some revenue that was in the ARR as of the beginning of the quarter. So that's the nuance. We don't expect to see that happen in the future. It's a great question, but it was largely due to that. The third part is the back-ended linearity on some of the subscription business that follows the NetApp, I'll call it, core business as well. So it's really those three things attributed to that revenue coming in lower than simply taking the ARR divided by four. Listen, we had a good quarter in terms of new customer additions. We have two major vehicles for new customer additions. The first being the native cloud services that we help our cloud provider partners, Amazon, Microsoft and Google sell for us. Those continue to be good vehicles for new customer additions. And then Spark has continued to be a strong vehicle for new customer additions. So I feel good about the pace of net new customers. This is Victor Chiu in for Simon Leopold. You noted several customers that concluded several large projects and then drove capacity reductions. Can you help clarify what changed versus your expectations exactly because the way that you kind of described at the conclusions were kind of natural and then so we assumed it would have been somewhat expected. So, either did they conclude earlier? I think you mentioned there was some chip design kind of timing-related issues. Can you just help us clarify why this dynamic was not expected? Listen, I think we have seen in the past projects get concluded in a quarter and other projects get started up within the same quarter or by other customers within the quarter. This time, we saw some particularly large projects that concluded in the quarter where the start of the next project is beyond the finish of the quarter and further out than we would like. So, I think that was the nature of what happened in the quarter. I think the -- would honestly want to get better visibility. We are working on that. I think this is when we have another partner selling the service to the end customer. Our sales teams are working to get better visibility into the end customers kind of priorities and spending time lines. So that's on us. We can do better on that, and I promise that. Okay. And then just quickly, regarding your commentary on macro headwinds, are you observing explicit behavioral trends or having explicit discussions with customers that makes you confident that the slowing is specific to the macro environment versus a more secular shift like accelerating workload migrations to the public cloud? I think we are closely engaged with a large number of the enterprise customers through our direct sales force in the midsized enterprise market, as you know, we go to market with the channel providers. In terms of the customer behavior we saw in the quarter, it is very reflective of a typical macro cycle, more approvals for deals, smaller deal sizes, projects being broken up into phases rather than one large purchase and some deals moving out of the quarter. That did not mean that other customers did not start projects with us and move them forward. We know that those projects are -- that we did not lose share to somebody else because we are in ongoing dialogue around the other phases of the projects that are yet to come online. Great. Thanks. I just wanted to get a sense of whether we could get what the size of Hi-tech and service provider is as a percentage of the cloud revenue or just kind of any vertical concentration that we should be mindful of? And then maybe last quarter, you had given kind of the storage services as a percentage of cloud ARR. If we could just have an update there, that would be helpful as well. Thanks, Yes. Listen, Meta, we're not going to break out specific verticals. I would just say that we saw a broad-based -- hi-tech is quite a broad segment, and we saw a fairly conservative posture across that segment. Service provider could -- is also broadly defined. It could be telco. It could be hosting provider. It could be some form of cloud providers. So, these are broader categories than a very specific definition. And we saw a fairly conservative postures across most of those customers. Amy [ph], it's Mike. On your second question, so two data points for you. Cloud storage continues to be almost exactly 60% of the total and that includes, as of the end of Q2, Instaclustr and CloudCheckr which are in CloudOps. So there you see the great growth we've seen in cloud storage because overall, as a total number has stayed right around 60%. The other important number is we've talked about consumption versus subscription. As of the end of Q2, it's pretty close to 50-50, a little bit a couple of percentage points higher for consumption. We do expect by the end of the year with that $700 million for that to get much closer to 60%, because that's where we expect the growth across ANF, GCP and FSx, those products as well. So those are the two data points we gave you that break down that cloud ARR number. Hi, thanks guys for taking the question. Actually two clarifications, if I could. Mike, just the remarks you made a couple of times in the prepared comments about and this is really the clarification. FX driving sort of some portion of the guide down or whatever that context was. Could you clarify that that? And then I have a quick follow-up clarification as well. Sure, Ananda. Happy to. So that was in reference to on the Q1 call, we had given -- this is directly related to EPS. We've given $5.50 as the midpoint. Since that time, because of the continued strengthening of the dollar and the weakening of the FX situation, the $5.40 is actually above what that number would have been on an FX-adjusted basis, that's about $5.37. The point there being, hey, we're seeing even in the second half with the lower outlook around revenue, we're doing all we can around costs and other efficiencies to ensure that we continue to still drive that EPS number consistent with the number we gave you last time on the call. I got it. That's super helpful. And then, the second clarification is, to one of the questions, you mentioned, you gave some context around timing of pickup and something along -- well, it was sort of -- that was sort of the gist of it. But I think, Mike, the comments you made, where you expect demand to come back in the second half, though you weren't sure it was Q3 or Q4. Could you clarify that? And is it -- is it fiscal Q3, Q4, or is it calendar '23 Q3, Q4 in addition to the clarification. Thanks. Sure. So I've been trained and I only talk about fiscal year, calendar years. So this was second half fiscal, and that was directly related to the cloud ARR growth. So we finished at $603 million. We've guided end of year to $700 million. We are not going to guide Q3. We feel good about the second half because again, these are some of those -- these large project-based as well as consumption. When does that flow in? Is it in our fiscal Q3 or Q4? We feel confident about the second half. There's a little bit of nuance around whether it's three or four, hence, we're only doing the end of the year. That's super helpful. And so, was that the same, like, that anecdotally, you guys are experiencing, and George, feel free to jump in on this too, anecdotally, you guys are -- you're experiencing a little bit of a sideways here, call it, a pause. You anticipate that it's going to last, I guess, like in period of max six months, eight months, let's say starts slowing mid-quarter, could last an additional six months But you do expect then pickup in some context after that. Anecdotally, is that the gist of what you guys are communicating? Well, keep in mind, Ananda, all this is related to the cloud ARR. This is not the Hybrid Cloud. And this is more of just us talking about when we expect it to come back in the second half. And again, because of the large project base, that's really the nuance on this more than anything versus us calling, hey, we expect to see things pick up after April. Thank you. Good afternoon. George, on your outlook and Mike, on your outlook, you mentioned about slowing economic comments, which is understood. Any thoughts around inventory digestion, is there a sense that there's inventory digestion out there. And if so, how long or any double ordering, or is it just purely economic pausing and elongation of cycles? We did not see any order cancellations or any of those things. As we have mentioned repeatedly, we have good line of sight into our customerâs spending priorities and behaviors and are directly engaged with the largest of them. I think as we saw in this quarter, and we continue to be cautious about looking at the second half of the year. These are clearly related to IT budget revisions, right, where they are reducing deal sizes or scrutinizing projects and things, we'll defer a portion of that project to a subsequent quarter or a subsequent part of the calendar year. So we have good visibility into the activities in our customers, and we did not see cancellations of orders because of prior orders or double ordering. Great. Thanks. But on the inventory digestion, any thoughts of -- were there any inventory that's still being digested that may allow corporate or service providers to prolong these revisions, or is any concern about inventory out there? Typically, during macro situations like these, we have seen customers sweat their assets. And so what we mean by that is they will drive a system to a higher level of utilization and so that they can defer either capacity augmentation or system upgrades for a period of time. Now that's not forever, right? Storage is consumed because data keeps growing. And so there's always that trade-off. We certainly see some of that behavior going on. Jim, I think, certainly in our service provider segment, we see that. And in some of the hi-tech verticals, we saw that as well. It's actually George Wang on for Tim Long. I have two questions. Firstly, George, maybe you can elaborate on the current state of deal integration in terms of Spot, Instaclustr. And any thought process behind the following deal until FY 2024? Listen, we have a good portfolio of technologies already. And what we are really focused on is sharpening the use cases that are best suited to the current macro environment and making those use cases easy for the customers to adopt, expand and renew, right? And that operational focus is our highest priority. There are some -- there's work to be done to integrate the CloudCheckr capabilities into the Spot suite so that it becomes one broader offering rather than two parallel offerings. We have made good progress along the way, but there's more work to be done. In Instaclustr, there are two unique value adds that we bring. One is the integration of our cloud storage services and Spot services into Instaclustr. And the second is the fact that it is a truly open-source data services platform. We have the first of those two being worked. And so we feel like there's a lot of value we already have in our portfolio. There's work to be completed, and we want to keep our teams focused on that work on the technology side. On the go-to-market side, we also have more broad enablement and training for our sales teams to be able to position Spot and Instaclustr and CloudCheckr into the account. So we feel good about the work we're doing. We got to finish it before we look at other things. Okay. Cool. Yeah, a quick follow-up is on the cost cuts. Maybe you can elaborate on the kind of disaggregate just components for the cost cuts, whether that's sales and marketing, the SG&A or kind of some of the R&D? Any color would be appreciated. Hey, George, it's Mike. And just I want to make sure your question was the -- what are we looking at for cost reductions in the second half? Was that the question? Perfect. Thank you. So there's several that I think you're going to see flow through the P&L. I'm going to start all the way at the top, which is we do expect to finally see some relief from our significant expenditures related to premiums. The supply chain is getting a little bit better. It gets better every day. So that's going to help the second half. In addition, NAND pricing will help us as well. Now we do have a little bit of inventory to work through. And you'll see that still in Q3, but we expect by Q4, you'll see that as well. On the OpEx side, we're -- George talked about and we've already done a headcount freeze. We're taking a look at all discretionary spending, including travel, programs, outside services, just like everybody else who has embraced the hybrid work environment. We'll take a hard look at our facilities costs as well. So we've already started down the path on several of those as I talked about, hey, we'll continue to look at those as we go into the second half. So there's numerous areas for us to focus on. In addition, keep in mind, too, that in OpEx, there's a good bit of that cost structure related to incentive comp and commissions. And certainly, those will come down in the second half as well. Yeah. Thanks. So -- the total revenue guidance is lowered by 400 basis points that characterizes 100 basis points due to incremental FX, another 100 basis points due to lower PCS ARR target. And then the remaining 200 basis points either due to weaker billings results on a constant currency basis during the quarter, or is it a weaker billings result that has started to transpire during the third quarter, again, on a constant currency basis? So for the second half, Nehal, that is mostly related to product revenue, which would be largely booked and recognized in the quarter. So it's -- there's -- backlog is largely at the normal rates, the seasonal normal rates that we would expect. So that is going to be systems in the second half, I think, is the third part of your question. Excellent. Okay. And then dollar-based net revenue retention rate declined quite significantly, 192 to 140. Is this largely because of the project-related stuff? Dollar-based net revenue retention was 150 last quarter, and it's now 140. So, step down as the base of customers expand, and we did see some churn in our consumption business, as we noted on our call, so we don't see that as materially different than what we would expect. And to George's point, Nehal, we've been calling that for several quarters, which is add that ARR number gets bigger, that dollar-based net retention percentage will come down. We like to call it the 120, 130, where we think it will land, but we have been calling that percentage to continue to decline as that number increases. That you have. Okay. And then just finally, Mike, the PCS GM did come down both Q-on-Q and year-over-year. Why is that? The PCS gross margin came down because of the revenue scale relative to the infrastructure that we have deployed. Note that the consumption business, some elements of those are based on our deployed systems, right, in the cloud provider environments. And when they have less scale, you see less utilization, you see less gross margin. It came down from 69.7% to 68.3%, so down slightly. And to George's point, that's largely due to scale. We continue to feel good, as I mentioned in my notes about the 75% to 80% as we drive that scale. Yes. Thank you. I appreciate the fiscal year guide. But George, you were talking earlier about IT budgets and some caution around that. I was wondering if you could share some color on what you're hearing from customers more around calendar 2023 IT budgets? And what's your view on how you expect the storage market to grow in 2023 and your growth relative to that? And I have a follow-up. I think with regard to 2023, we're being cautious we arenât guiding next fiscal year, but we are being cautious about the start to calendar year 2023. We have seen typically in these macro situations that new budget outlays to start a calendar year probably take longer than typical. So, we've been cautious about the start of the new calendar year. With regard to the storage market overall, I think it's going to be paced by new workload deployments. I think there will be customers that will be forced to upgrade systems because their existing systems are coming to either end of useful life or end of they're just out of capacity or performance. But I think the majority will prioritize new workload deployments and/or system consolidation for cost and energy benefit use cases. We continue to see -- while the cloud migrations are slowing down a bit, we continue to see that as a long-term trend that customers are going to take on for a whole bunch of reasons. And so I think cloud will outpace on-prem in the broader market. And in the on-prem world, we see NAND helping flash be a bigger part of the mix going forward. Our capacity flash products had a good quarter, our hybrid flash products had a good quarter, they are typical about where customers are cost conscious. Okay. That's helpful, George. And just a follow-up on your last comment about the NAND market. Every few years, you see the significant dislocation in pricing and this one is quite severe. You guys noted the benefit that you will recognize in gross margin terms. But can you just remind us on how you're thinking about the impact to revenues based on the NAND price decline? Are you expecting a deceleration in AFA revenues, or are you expecting elasticity of demand to offset that? Thank you. Customers' budget in dollars, the current macro environment has been spending less dollars, but they'll probably shift the mix to AFAs, if there's more value in the offering, right? So we see them budget in dollars, Wamsi. Okay. But in aggregate terms, would you say that the customer budgets would be up or down like in full in aggregate, whether it's cloud on-prem, all put together? I think overall, year-on-year, I think '23, we expect to be moderated and down relative to '22, certainly at the start of the year. '22 had a good start to the year. And so our start of the new calendar year, which is baked into our outlook for the second half of fiscal year, we think people are going to be more cautious overall, Wamsi. Thank you very much for taking my question. I was just wondering what you're hearing from customers on your Keystone offering. I think, as a service offerings, they are becoming a bit more attractive in an economic downturn. So I'm wondering what kind of traction you're seeing there? It's early, but good traction. We are focused with a few channel partners who are enabled on selling Keystone. We've had good customer wins, good momentum in terms of our offerings. We brought new innovation to market in the last quarter, both a unified control plane so that you can use either a Keystone-based consumption offering in your environment or our public cloud offerings, and you can move workloads and licenses across those. So a good amount of innovation. And you're correct, we'll continue to see opportunities to help customers around whatever their kind of buying model is in this environment. Hey good afternoon. Thanks very much for the question. You touched on this a bit earlier, but not directly. But does the budget scrutiny that you're seeing right now from some subset of customers' impact their decisions for provisioning the mix that they're provisioning of all-flash versus hybrid arrays at least for new projects. And I know you mentioned that our all-flash portfolio has leading cost efficiency, but do you expect the mindset to change on how much customers are willing to embrace more all-flash? Will the pockets of slowdown that you're seeing potentially pull everything back and the mix stays relatively on the same trajectory? Thanks. I think -- thank you for the question. We didn't see customerâs sort of reevaluating technical decisions about what type of infrastructure to buy. I think that allowed the technical team to choose what was the most value, and they make decisions based on the relative cost effectiveness of disk versus flash. I think what we saw was an approval level going up for the same deal what would have been approved by a director, now got taken up to VP what was approved by VP, probably goes up to a CTO. That is what elongated deal cycles in the quarter and/or people shrinking how much they wanted to buy at one time and phasing projects into multiple phases. While there are near-term economic challenges for every company, we know that our opportunity ahead is substantial, durable and growing. The fundamentals of our business are strong and the value we bring customers is undeniable. Our strategic growth opportunities all-flash arrays, cloud storage and cloud infrastructure optimization are tightly aligned to customers' top priority and represent the potential for long-term sustained and profitable growth. We will continue to be disciplined stewards of the business, focusing on our strategic growth opportunities while continually optimizing our operating costs to drive shareholder value. Thank you.
EarningCall_1859	Good morning. My name is Rock and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson Companies Second Quarter Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] Thank you. Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies fiscal 2023 second quarter conference call. Joining me today are President and Chief Executive Officer, Don Zurbay; and Interim Chief Financial Officer, Kevin Barry. After a review of the fiscal 2023 second quarter results and outlook by management, we will open the call to your questions. Before we begin, let me remind you that certain comments made during this conference call are forward-looking in nature and subject to certain risks and uncertainties. These factors, which could cause actual results to materially differ from those indicated in such forward-looking statements, are discussed in detail in our Form 10-K and our other filings with the Securities and Exchange Commission. We encourage you to review this material. In addition, comments about the markets we serve, including growth rates and market shares, are based upon the company's internal analysis and estimates. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, December 1, 2022. Patterson undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Also, a financial slide presentation can be found in the Investor Relations section of our Web site at pattersoncompanies.com. Please note that, in this morning's conference call, we will reference our adjusted results for the second quarter of fiscal '23. The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, other income and expense, net income before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc., and diluted earnings per share attributable to Patterson Companies, Inc., for the impact of deal amortization, integration and business restructuring expenses, legal reserves inventory donation charges, and gains on investments, along with the related tax effects of these items. We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency and the extra week of selling results in the first quarter of fiscal 2022. These non-GAAP measures are not intended to be a substitute for our GAAP results. This call is being recorded and will be available for replay starting today at 11:00 a.m. Central Time for a period of one week. Thanks, John, and good morning, everyone. Iâm excited to be speaking with you for the first time as Patterson's CEO. I'm honored to be leading the outstanding Patterson team, whose commitment to our strategy, customer, vision and values has enabled a track record of strong financial performance. I'm pleased with our performance during our fiscal '23 second quarter. As we navigated ongoing macroeconomic challenges during the quarter, we remain focused on driving sales execution and profitability. Overall, for the quarter, we achieved $1.6 billion in consolidated revenue representing year over internal sales growth of nearly 1%. Year-over-year operating margin expansion in both our Dental and Animal Health segments, and adjusted earnings per diluted share of $0.63, an increase of 9% year-over-year. Given our results through the first half and our forecast for the remainder of the year, we are reaffirming our full year EPS guidance range and remain committed to delivering internal sales growth and operating margin expansion for fiscal '23. Now, before walking through the details of our quarter, I want to take this opportunity to share my perspective on the key elements of Paterson success; our culture, strategy and our people. Patterson's purpose, vision and values is foundational to our success. And like our employees across Patterson, I am committed to ensuring that they are followed. We are passionate and people first. Doing the right thing and being good to each other are my own beliefs that I will use to continue to guide Patterson moving forward. In my previous role of Patterson Company CFO, I worked closely with the rest of our executive leadership team to develop the strategy that has enabled us to accelerate business performance and drive long-term value for our customers as well as our shareholders. Looking ahead, we will continue to execute that strategy, which is focused on three foundational pillars. First, continuously deepening the value proposition we offer our customers in both the Dental and Animal Health segments. Patterson is so much more than a distributor. We are an indispensable partner to our customers and play a critical role in their success. We believe that expanding our capabilities for customers will continue to drive sales growth and strengthen these relationships. Second, enhancing our margin performance to fully capture the value we create in the market with a focus on operational excellence, improved mix and thoughtful coordination with our strategic manufacturing partners. And third, managing the organization with a keen focus on cost discipline. As you would imagine developing a rigorous process for cost discipline and return on our investments has been a key focus for me throughout my tenure with Patterson, and will continue to be in my new role. Patterson's balanced capital allocation approach supports our strategy with three priorities. First is investing with discipline in the core areas of our business, including our people and the support organizations to drive ongoing improvements in our field sales and service execution. These functions enable Paterson to deliver the high-level of service that our customers reward us for as they navigate markets in good times and more challenging ones. Prioritizing investment ensures we don't take our foot off the gas. Second, our dividend remains an effective means of returning cash to our shareholders. As a reminder, in fiscal '22, we returned approximately $100 million to shareholders through our dividend. Third, we regularly evaluate opportunities to leverage our strong balance sheet and make strategic investments. As we've said before, we will be thoughtful and selective on opportunities that will further enhance our strategies, meet our financial criteria and drive improved returns for our shareholders. For example, in the second quarter, Patterson announced acquisitions of Dairy Tech, and RSVP and ACT. These are examples of our business units identifying areas where they want to focus and using M&A to help them execute. Our strong financial position and balance sheet provide us with flexibility to continue to pursue these opportunities to accelerate future growth and profitability. Taken together, we have a great foundation to build from through the continued execution of our proven strategy I am confident in our future. Ultimately, is our people who execute on that strategy. Our people are a key differentiator for Patterson and I'm so proud of the way our team supports each other and the dedication they have to serving our customers. Across our organization we are fortunate to have a talented and driven team that is resilient and knows the power of working together to support each other. Over the past several years, Patterson has cultivated a deep bench of highly capable executive leaders who have all been instrumental in developing and implementing Patterson's strategy. We expect continued benefit from the expertise, teamwork and continuity of our existing leadership team. I'm also pleased to keep working closely with Kevin Barry in his new capacity. As our former Vice President of Finance and Corporate Controller, Kevin has been an integral member of the executive leadership team in the finance organization. Internal promotions and succession demonstrate the depth of Patterson's talent, and Kevin is certainly a part of that. I have complete confidence in his ability to take on this important responsibility. You'll have an opportunity to hear from Kevin in his remarks to walk through the details of our second quarter performance shortly. I believe our executive leadership team and strategy will enable us to maintain our strong performance. Patterson has all the elements to create value for our customers and shareholders alike, a strong position and too attractive and healthy end markets, entrenched relationships with customers that view Patterson as an indispensable partner, a clear and focused strategy to drive profitable growth and the financial foundation to ensure we can invest to position this company for long-term success. With that overview, I'll turn to a discussion of our segments financial performance starting with Dental. Our Dental segment grew internal sales nearly 2% year-over-year, primarily driven by strong performance in our equipment and value added service categories. Outstanding execution by our teams enabled our Dental segment to reach double-digit operating margins and year-over-year operating margin expansion, as we continue to deliver a strong mix favoring the higher margin areas of our business. We remain focused on advancing and strengthening key margin enhancement initiatives by mitigating the impact of an inflationary environment, strengthening our mutually beneficial vendor relationships and focusing on operational efficiencies including mix management, and logistics productivity. For consumables, our internal sales in the first quarter declined mid-single-digits year-over-year, primarily due to the persistent deflationary impact of certain infection control products. We continue to provide a broad range of infection control products because they are foundational to the practice of dentistry. And while the demand for these offerings is lower than the peak levels of the pandemic, we remain strong in comparison to pre-COVID levels, as dentists have adapted to meet a higher standard of care. As we have previously discussed, improvements in the supply chain for infection control products have resulted in considerable pricing declines from the pandemic highs for certain products in this category. We expect this deflationary pressure in the infection control category to persist at least through the remainder of the fiscal year. Notably, Patterson achieved year-over-year internal sales growth in our non-infection control portfolio in the fiscal second quarter. We continue to leverage our broad consumables offering including private label products to deepen our relationships with customers across the spectrum from independent private practices to regional and national DSOs. We expect the overall consumables market to normalize to a low-single-digit percentage growth rate over the long-term. Dental financial performance in the equipment category reflects what makes Patterson Patterson. Our customers recognize Patterson's expertise in supporting the full purchase, training and maintenance cycle of the latest technology and equipment. They feel confident investing in their practices with Patterson as their partner, knowing they have access to hands on support from the Patterson Technology Center and the deep knowledge and service our local branch teams provide. Internal sales in Dental equipment in the second quarter were up double digits year-over-year, benefiting from improved demand for digital equipment portfolio and continued momentum in the core equipment category. As we previously discussed, equipment sales can fluctuate quarter-to-quarter. But Patterson has delivered year-over-year equipment sales growth averaging nearly 14% for the last eight quarters. We continue to see that dentists are making equipment investments to keep their practices running well and maintaining their planned upgrade or replacement schedules. During the second quarter, our value added services category delivered solid high-single-digit growth driven by our field technical service offering. We're proud that our customers turn to and trust Patterson to ensure their equipment is delivering for their practice. This category also benefited from growth in the sales of our practice management software products, which our customers see as the foundation of their practice operations. The Dental business is supported by resilient long-term trends including an ageing population, practice modernization and a growing appreciation for oral health as a key link to overall health. We are confident in our ability to continue to effectively manage through the current macroeconomic environment to achieve our goals in fiscal '23 and beyond. Let's now turn to the Animal Health segment. During the second quarter of our fiscal '23, we leveraged the depth of our offering and breadth of our channel presence to deliver solid performance in the face of more challenging external market conditions. Patterson has an omni-channel presence that spans a wide range of animal species and offers a comprehensive solution for diverse customers, ranging from large producer operations with onsite veterinarians to independent vet clinics to individuals shopping at their local veterinary supply retailer. Our Animal Health segment achieved internal sales growth of nearly 1% year-over-year, driven by mid-single-digit growth in companion animal and a low-single-digit decline in production animal. Despite some softness on the top line, which we attributed primarily to external factors, including staffing shortages and veterinary clinics, weather conditions impacting producers and the impact of a widely used product in the production animal market that has recently gone off patent, Patterson was still able to expand its operating margins in the Animal Health segment. Our success expanding margins was the result of our team's laser focus on mix, including the growth of our accretive private label and e-services offerings and continuing to enhance our relationships with strategic manufacturing partners who reward us for our performance. In our companion business, I'm particularly proud of our growth this quarter when you put our performance in context. First, the broader market growth has continued to moderate in line with our expectations. Second, our results are compared to the extraordinary 21% sales growth Patterson achieved in the prior year period. We attribute this sustained outperformance of the market to our ability to serve more and more veterinary practices as they recognize the value we offer in a dynamic market environment as well as the deep relationships Paterson has with our preferred manufacturing partners, and the growth of our private label portfolio. We're continuing to invest in the companion animal business in ways that deepen our value proposition and address critical customer needs. Last month, we announced an agreement to acquire RSVP and ACT, which stands for Relief Services for Veterinary Practitioners and Animal Care Technologies, respectively. These are entities that provide innovative solutions to veterinary practices through data extraction and conversion, staffing and video-based training services. We believe this proposed acquisition will expand our companion animal capabilities in three key areas. First, ACT provides an in-house platform for data extraction and conversion capabilities, which will enhance our software offerings and provide better insights both for our business and our vet customers. Second, as RSVP is a staffing business that connects short staffed clinics to the resources they need, this acquisition will help resolve a critical pain point for clinics and address a growing trend in part time vet and technician work. This is particularly compelling given the staffing challenges our customers are facing today. Finally, ACT will help Patterson expand its educational offerings, including the addition of a state recognized certification program for vet assistants. As we've previously discussed, our established education platform, Patterson Veterinary University, is a key component of our value proposition for companion animal customers. Working alongside customers to help them establish and enhance their practices lays the foundation for a meaningful long-term partnership. Importantly, we remain confident in the long-term growth opportunity of the companion animal market. Data shows that today's pet parents are increasingly dedicated to the health and well-being of their pets and willing to invest in the care that veterinarians provide. We believe that over the long-term people who own pets will continue to invest in their care throughout the pets lifetime and own more pets during their life. On the production animal side, our internal sales performance was challenged by the impact of pricing pressures on a broadly used product Draxxin that now faces generic competition. While this pricing pressure was not unexpected in the market, it still had an effect on our internal sales. Excluding the deflationary impact of this product, our production animal sales were up about 1%, reflecting positive fundamental growth over the extraordinarily strong 11% growth in the prior year comparative period. We attribute our positive financial performance in the production business to Patterson service model in a market where we believe customers generally prefer to develop a long-term relationship with a single supply partner. We provide producers with a customized combination of hands on service and delivery options, and a comprehensive product and service portfolio which they increasingly demand. Our differentiated model has continued to enable us to win new customers and outperform the broader production animal market. And we are focused on continuing to differentiate Paterson with the addition of new critical capabilities. A recently announced agreement to acquire Dairy Tech is expected to expand our value added platform within our production animal business. Dairy Tech provides pasteurizing equipment and single use bags to safely produce, store and feed colostrum, a necessary nutrient for newborn calves. This is a critical capability for our cattle producer customers, and we expect our acquisition of Dairy Tech to efficiently and effectively support the health of the producers herd. We believe this acquisition will align well with several key trends we're observing in the market, including producers looking for more efficient ways to manage costs and improve profitability, a continued market emphasis on biosecurity and herd health and strong global demand for protein and dairy. As we look ahead to the rest of fiscal '23, our Animal Health business will continue to focus on accelerating our momentum of strong sales execution, operational excellence and deepening our value proposition to better serve our customers. And now we will turn the call over to Kevin to discuss our fiscal '23 second quarter financial performance in more detail. Thank you, Don, and good morning, everyone. Let me begin with a sincere thank you to Don and our Board for the opportunity to serve in this new role. I'm also grateful for the increasing levels of responsibility and formal mentoring Don has given me over the past several years. And it's a privilege to be a part of the very talented and committed leadership team here at Patterson. In my prepared remarks this morning, I will cover the financial results for our second quarter of fiscal '23, which ended October 29, 2022, and then conclude with a few comments on our outlook for the remainder of the fiscal year. So let's begin by covering the results for our second quarter of fiscal '23. Consolidated reported sales for Patterson Companies in our fiscal '23 second quarter were $1.63 billion, a decrease of 1.4% versus the second quarter one year ago. Internal sales, which are adjusted for the effects of currency translation increased 0.7% compared to the same period last year. Our second quarter fiscal '23 gross margin was 20.2%, an increase of 40 basis points compared to the prior year. Our gross margin was negatively impacted by 60 basis points this quarter by the mark-to-market accounting adjustment from rising interest rates on our equipment financing portfolio. However, this negative impact was nearly offset by the gain in our corresponding hedging instrument, which is reflected in the interest and other expense line on our P&L. So the net result has a minimal impact on our adjusted earnings per share. This dynamic also occurred in the second fiscal quarter of last year, when the negative impact of the mark-to-market accounting calculation was 20 basis points. We're normalizing for the negative impact in both periods for an alternative view of how our business is operating. Our gross margin is up 80 basis points compared to the prior year. This increase in gross margin reflects our continued focus on pricing and cost execution and driving an improved mix with higher gross margin accretive product categories. Adjusted operating expenses as a percentage of net sales for the second quarter of fiscal '23 were 15.9%, and unfavorable by 60 basis points compared to one year ago. In the fiscal '23 second quarter, our consolidated adjusted operating margin was 4.3%, a decline of 20 basis points compared to the second quarter of last year. Again normalizing for the negative impact from the mark-to-market valuation of our equipment financing portfolio, our consolidated adjusted operating margins for the fiscal second quarter improved by 30 basis points compared to the prior year. We remain focused on driving continued operating margin expansion through our efforts to improve gross margin with pricing and cost execution, working more closely with strategic vendors to reward us for our sales performance, driving improved mix as well as exercising expense discipline and leveraging our cost structure as we grow the top line. With these collective efforts, we intend to deliver operating margin expansion in both of our business segments and our total business for fiscal '23. Our adjusted tax rate for the second quarter of fiscal '23 was 24.2%, a decrease of 80 basis points compared to the prior year. For the full year, we expect our tax rate to be in line with prior year. Reported net income attributable to Patterson companies. Inc., for the second quarter of fiscal '23 was $54.1 million or $0.55 per diluted share. This compares to reported net income in the second quarter of last year of $48.3 million or $0.49 per diluted share. Adjusted net income attributable to Patterson Companies, Inc., in the second quarter of fiscal '23 was $61.2 million or $0.63 per diluted share. This compares to $57.1 million or $0.58 per diluted share in the second quarter of fiscal '22. This increase is primarily due to the operating margin expansion in both of our business segments. Now let's turn to our business segments, starting with our Dental business. In the second quarter of fiscal '23, internal sales for our Dental business increased 1.6% compared to the second quarter of fiscal '22. Internal sales of dental consumables declined 4.9% compared to one year ago. As Don mentioned earlier, we continue to experience the deflationary impact of infection control products compared to the prior year. Internal sales of non-infection control products increased 1.0% in the fiscal second quarter compared to the year ago period. We expect the deflationary impact of infection control products to continue for the remainder of fiscal '23. Internal sales of dental equipment and software increased 11.1% compared to one year ago. In core equipment, our double-digit sales increase in the quarter reflects our continued efforts to manage the supply chain as category to deliver and install the equipment our dental customers have ordered to update their practices or open new dental offices. Sales of digital equipment products were also up double digits, and sales of CAD/CAM products declined mid single digits in the quarter. Internal sales of value added services in the second quarter of fiscal '23 increased 7.8% over the prior year period, led by the strong year-over-year performance of our technical service team and double-digit growth of our software business. Value added services represent the entire suite of offerings we provide to our customers that help make us an indispensable partner to their practice, and these valuable offerings are also mix favorable to our P&L. Adjusted operating margins in Dental were 10.2% in the fiscal second quarter and a 90 basis point improvement over the prior year period. This strong performance reflects the efforts of our dental team to improve gross margins and exercise continued expense discipline compared to the prior year period. Now let's move on to our Animal Health segment. In the second quarter of fiscal '23, internal sales for our Animal Health business increased 0.7% compared to the second quarter of fiscal '22. Internal sales for our companion animal business increased 3.5% with the U.S companion animal business growing by 4.5% in the quarter. Internal sales for our production animal business decreased 2.3% in the quarter compared to the prior year as the production animal market has been affected by the deflationary impact of the key branded product that recently came off patent. And as Don mentioned, it's now experiencing generic competition. Excluding this deflationary impact, internal sales for our production animal business increased by 0.7%, and industry data would indicate that our sales team and production continues to outperform the overall market during the fiscal second quarter. Adjusted operating margins in our Animal Health segment were 3.8% in the fiscal second quarter, an increase of 40 basis points from the prior year. Our Animal Health team continues to drive business with strategic manufacturer partners who value our ability to move market share while also exercising expense discipline. Now let me cover cash flow and balance sheet items. During the first 6 months of fiscal '23, our free cash flow declined by $88.4 million compared to the same period one year ago. This was primarily due to an increased level of working capital in the first 6 months of fiscal '23, driven by strategic inventory purchases and timing of accounts payable. Now turning to capital allocation. We continue to execute on our strategy to return cash to shareholders. In the second quarter of fiscal '23, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid in the third quarter of fiscal '23. On a year-to-date basis, Patterson has returned $65.7 million to shareholders through dividends and share repurchases. Also during the second fiscal quarter, as previously disclosed, we successfully amended and extended our credit facility. Even in this challenging credit environment, we achieved favorable terms, while maintaining our existing lending group, demonstrating the confidence our lenders have and the ongoing strength of our business. This new facility provides the capacity and flexibility to continue investing in our core business and to execute on strategic transactions. Let me conclude with some comments on our outlook for fiscal '23. Today, we are reaffirming our fiscal '23 GAAP earnings guidance of $1.96 to $2.06 per diluted share, and our adjusted earnings guidance of $2.25 to $2.35 per diluted share. We intend to deliver internal sales growth and operating margin expansion for fiscal '23 and remain committed to achieving our guidance for the fiscal year. Thanks, Kevin. A few final comments before we open it up for Q&A. First, I want to again thank the entire Patterson team. I'm proud of their work in delivering another strong quarter and their dedicated focus on supporting our customers. Second, despite macroeconomic challenges, the performance of this quarter demonstrates the strength of our strategy, discipline and execution of our talented team and continued momentum within our end markets. With this winning combination, I am confident in Patterson's ability to succeed in any environment and look forward to what we can accomplish together. That concludes our prepared remarks. Kevin and I will be glad to take questions. Operator, please open the line. Thanks. Good morning. Thanks for taking the questions here. Don, and Kevin, two part question here upfront. I want to make sure we all understand the accounting mechanics of how rising rates influence the mark-to-market dynamics with respect to your equipment financing portfolio. You mentioned, I think, a 60 basis point headwind. It looks like most of this reversing the other income line, but wanting to confirm there's nothing else that layering into that line as a one-time item. And then the second part of the question is whether you're reaffirming your view for operating margin expansion for the total company in spite of the mark-to-market headwinds that hit the number here in FQ2. I'm sorry, if I missed that, but just wanted to confirm that. Yes, Jason, thanks. This is Don. You're right, we did have another quarter and we've had this for several quarters now in a row with the rising interest rate environment. What happens is our equipment portfolio gets mark-to-market and that happens above the operating profit line in the gross margin. And so you saw that in the -- you saw that impact, so we had a 40 basis point increase in gross margin, but without the mark-to-market adjustment it was 80 basis points. And then that comes in the other income expense line down below. And that's almost a perfect offset to that impact. So at the bottom line, it's negative or it's neutral. So you're right on that. And then in terms of reaffirming our guidance, when we talk about operating margin expansion year-over-year, I would look at it as ex the impact of the mark-to-market. We probably will do it anyway, but just going to depend on the interest rate movements for the rest of the year and how that impacts the mark -- the equipment portfolio. I don't know, Kevin, if you have anything you want to add to that. Just the one point I'd add, Jason, is that this dynamic is fully held within our corporate segment. And so when you heard us say that both business segments Dental and Animal Health expanded their margins this quarter, that doesn't have any of the impact from this mark-to-market dynamics. So both of them had very strong gross margin and operating margin performance this quarter. All right, yes. Understood. Very, very helpful there. Okay. On the two acquisitions, you announced recently, it looks somewhat small but strategic, not terribly risky or splashy. Don, is this the right way to think about the M&A strategy you have in mind? And I can't help but look at sequencing of events here, but these acquisitions came shortly after you took over as CEO. And do you see yourself as being generally more aggressive than your predecessor in bringing external assets in-house? I wouldn't say that. I think we've been -- we have a robust process for identifying acquisition candidates. And that's really been in place, I think, for the last 2 years. Once I got here, we were not really prepared with our balance sheet, or frankly internally to take on acquisitions, particularly multiple acquisitions. But over the last 2 years, we've been pretty aggressive in trying to identify the right candidates. And so that's just more of a timing thing, frankly. In terms of how these fit into the strategy, I think they fit in really well for us. Our main thing is deepening our value proposition with our customers. These are right in the middle of the fairway for that kind of thing. And so, size may differ, but I think you can look at these as a great example of the kind of acquisitions that can help us going forward. Good morning. Thanks for the questions. I guess, looking at the dental consumables growth of 1%, excluding PPE, can you maybe talk about how that breaks down between volume and price? And then, Don, I think last quarter, you'd pointed to slowing traffic and spend per visit as a risk to the dental end market. Just curious to get your updated thoughts on how that progress are played out during the quarter? Yes. Yes, I think on your last quarterly call, you had talked about the potential for slowing traffic and spend per visit at the dental practice. Just curious to get your updated thoughts there? Well, maybe we'll start there, and then see if Kevin has some [indiscernible] if he wants to give on PP. I think, right now we're viewing patient traffic in the Dental business as steady or stable. I mean, that's the way I would look at it. And in terms of spend per visit, I'd probably say the same thing. I think we're really just seeing a pretty stable environment right now in that part of the business. Yes, and to your question about price and mix, we have had some inflation in the -- our [indiscernible] cost that in the non-PPE area, I wouldn't describe it as significant, certainly not as high as what you see in some of the headline inflation numbers, but it's there. So that certainly is built into our sales growth this quarter. But like Don said, when we look at the end markets and what our customers are seeing in their practices, we see a pretty stable market for demand in the Dental business. Okay, great. And then if I could just ask on the dental equipment side. I think in the prepared remarks, you talked about improved demand for digital equipment. Could you maybe dig into a little bit more detail there? And I guess I was maybe -- does that mean, I guess digital equipment kind of outpaced that 11% overall dental equipment growth? I guess, I'd be a little bit surprised if given some of the commentary around pricing pressure we've seen in that category. So could you maybe just unpack that a little bit further for us? Yes, I mean, it's a 3-month period. So, we try to look at this over a longer period of time, but we had a -- we feel like that was an excellent part of the print here for us today. And so, it did outpace the rest of the equipment growth. I think, CAD/CAM was down as we mentioned. Digital was up. I think what it really points to is just the resiliency of our full equipment portfolio. I think we feel like we have a competitive advantage here. We have a particular skill in this area. And this is what we've seen really several times here is, some categories are up, some are down each quarter. It just kind of depends on timing. I think the main data point from my perspective is when you look at the last eight quarters, we're up 14%. And, again, that's a time period that we can get our arms around and say we think that we're executing in this area at a really high-level. Thank you. Good morning, guys. I missed the first part of the call. So I don't want to ask anything you might have already covered. But let me just ask, I guess one higher level question and, Don, met on the makeup of the business, you've had some changes at the dental leadership level recently, I think at least one outsider who had probably advocated for some bigger changes recently left. So we know the Board has long been a pretty conservative Board. So I guess, Don, now that you're in the CEO chair, where do you sit between maybe that conservative Board and maybe tacking the things like private label self manufacturing of dental products, dental outside of North America, just kind of those bigger picture issues that could maybe move the sales force away from kind of that transactional approach that's long been there, and more maybe do a consultative approach and into some of these kinds of newer areas of dental? Thanks. Yes, Jeff, I won't comment on the Board. But I mean, we -- I think if you look at our strategy that we've had for the last couple of years, obviously, I was a big part of that along with the rest of the leadership team. So I don't expect that to change significantly. I think that even though it may have not have shown up yet, as I mentioned, we've been I think aggressive in terms of looking at the other kinds of opportunities, the M&A opportunities, other ways to enhance our strategy. And my view, and I don't think this is different than where we've been, but I want to be aggressive in both the Dental and Animal Health space in really deepening our value proposition. We know how to pick pack and ship. But we're on the search and continuing journey to continue to deepen that. And I think that's our focus. And I think if you got into our -- into our meetings, and some of the things we're doing, you'd find it to be a more aggressive discussion, and then it may come across. Do you feel gone at all like, you are even more supportive of kind of that evolution of Patterson and where kind of dental distribution probably needs to go over the next 5 or 10 years, that maybe past leadership, is there any change that we should expect in your mentality or supportive kind of that? Again, what I think is needed evolution versus maybe past leadership? Yes, I don't -- I wouldn't want to stack myself up exactly. But I think when we look at our strategy, there's a -- we're fully bought into the idea of we're not just a distributor. I mean, when we talk about being an indispensable partner to our customers, that really is where we're at and the best way to do that, and I think, is to really, how do you deepen the value proposition and I think we're you can kind of see it's starting to take hold and continue is on our margin performance, and how it's impacting our margins. We're really being diligent about how we look at each customer and kind of the holistic view of that, and those efforts are paying off quarter-after-quarter now on the margin expansion side. Thanks. Hi, everyone. Just first question around the comments around PPE. It sounds like from here through the rest of the fiscal year, you're thinking, you've also experienced inflationary pressure, but the order -- the volumes are stabilized. Is that the right takeaway? And then on that deflationary aspect is that year-over-year, but sequentially pricing is stabilizing? Or is pricing on a sequential quarterly basis still coming down? Yes, what we're seeing is pricing is, is coming down sequentially. I think when we look at the volume implications, we think when all is said and done here, that volumes are going to be above pre-pandemic levels, but the pricing continues to moderate. And as we go -- and we think that that should hopefully abate at the end of this fiscal year. The impact going forward is going to be that on a year-over-year compared -- comparison, that'll move into next year just because of the dynamics of how it's declined this year. I don't know, Kevin, if you want to add anything to that. Yes, that's right. It's primarily a [indiscernible] issue for us. And then like Don said, what we've seen is the pricing on those products has started to stabilize a bit. But because they are lower than they were a year ago, we're going to have a comparison issue for the next couple of quarters here as we kind of work through that dynamic. Okay. Maybe just the other follow-up question would be when you guys talk about the sort of macro challenges of inflation, interest rate rising, and then sort of the uncertainty about the economy generally, I understand the issues you have on inflation and understand the issues you had the interest rates rising [indiscernible] with financing and so forth. But what about the slowdown in the economy? It's hard for me to look at your numbers, and see that you're seeing any impact there. Consumables, you're describing steady, and your equipment orders are strong. So is there any place today that you feel the economic uncertainty is impacting the business? Or is it more of we're just mindful of this and we're keeping an eye on it? I would characterize it more as the latter. Obviously, when we talk about impacts on our market and the macroeconomic conditions relative to the markets we're in, I mean, I think it's kind of on the margin. The thing we like about our portfolio, the thing we like about being in both the Dental and Animal Health business, and frankly, all three businesses, if you really break Animal Health down into companion and production, these are resilient markets. They proven that in the past. I think and thatâs proving out here now. So, that's how we would look at it. I mean compared to a lot of industries, like I said, when we talk about move -- moves, they're small moves. They're things that we're monitoring, but we don't expect a significant impact. I mean, in terms of the rest of the impacts of the economy, I mean, you mentioned interest rates, I think interest rates really affect the equipment portfolio, as we mentioned, to some extent, but the real impact for interest rates on us is on our debt. We have a responsible debt structure where we have roughly 50% of our debt fixed, 50% variable, but the interest rate increases that we've been seeing have had an impact on the variable side. And I would estimate those at maybe $0.05 of EPS that we're dealing with, but that we're overcoming as we talked about reaffirming our guidance, we're really looking at other parts of the business to cover that. Thanks, guys. Good morning. Maybe I'll just start on the Animal Health side of the business. The overall AH's weren't too far from our expectations, but production animal, Don, as you mentioned at low single digits. I know you have the 11% year ago comp, but why the drags in headwinds now? I believe that when off patent, call it well over a year ago, and so your first feeling that now why? And if so, should we expect that to sort of last for the next two or three quarters until arguably, you lap that? Yes, hey, Jon, it's Kevin, I can jump in and Don can add. The Draxxin issue, you're right, it came off patent last year. I think the impact sort of builds over time, right. I think as those products come off patents, it's not a quick switch. And I think our production animal team, who -- that the team that executes very well out in the market has done a good job of managing that transition over the past 9 months here. And so, the impacts are accumulated for us over the fiscal year and I think this is the first quarter where we really saw real sizable impact on that category from the generic -- generics coming in. So I think we will see this dynamic in the next couple of quarters as we comp over the prior periods. But it's obviously built into our guidance and that team is executing really well to keep the -- keep our customers operating well and helping them understand what's going to be best for their operations. Got it. I'll jump to my second question and that was helpful. So on dental consumables ex infection prevention, roughly the past five quarters, the growth has been plus three plus three plus three plus two, and now plus one. And arguably, the price contributions probably improved along the way. So maybe a couple questions here. When you see the low-single-digit long-term for dental consumables, is that inclusive of infection prevention or exclusive? And then also, is that long-term of fiscal '24 timeframe? And if so, how do you get there, considering price may play less of a role next year relative to fiscal '23? Thanks, guys. Yes, we would consider it over the long-term inclusive of the PPE dynamic. As we mentioned, that's kind of moderate as we move forward. And when you're talking about the long-term, I'd say that's how you'd look at that. Sorry, Jon, what was the second part of that question? Well, just maybe you can just speak to sort of like the reacceleration, right. If you've had the [indiscernible] and I'm sort of going because there's two different dynamics, right. One is, as you mentioned, the deflationary environment on gloves, and that should normalize per your comments on [indiscernible]. But, Don, if we look at the [indiscernible] and it's been subtle to be clear, but the plus three to plus 1 ex infection prevention with price playing a bigger role. And you guys want to get back to low single digits implying a little bit of an acceleration [ph]. How do you get there, arguably if price may play less of a role next year versus this year? Yes, well, I think we're going to continue to execute on our strategy. I think when we break down the consumables, one thing, I would say is that in the categories we compete in, we believe we're maintaining or taking share. We think we do pretty well in those categories. Sometimes it's hard to stack up everything just given the way that we're in certain categories, competitors are in certain categories, what does the market exactly look like. But I think we're well-positioned to get back to taking share, which would probably put our companion sales, ex PPE in the short-term, but overall in the long-term above the market growth. Hi, this is Charlotte [ph] on for Mike. Thanks for taking my question. Could you just provide some more color on the trends that you're seeing in your [indiscernible] customers, particularly as it relates to utilization and volumes? And then just an update around spend per visit as well? Yes, I think the industry data would talk about in the companion business vet visits being down, roughly 2%, but vet spend per visit is up 5%. So we think that's a growing market with that dynamic. So that's really the breakdown that I think and we would be -- we would look at our data and say that we think that seems reasonable, and that that's consistent with what we're seeing as well. Especially within the context of the comparisons we have a year ago, where you had a very high growth rate on visits in particular. So we've expected this sort of moderation in our results and our forecast. Got it. And then could you just discuss more on your strategy, particularly around organic investments that you're making in the core business? Well, we have a lot of different things we're investing in, in our core business. I think we've talked about them before. I mean, obviously, we strive for continued improvement in our efficiency just in our distribution operation itself. Our private label program is a very important part of our margin enhancement initiatives. And then just investing in the infrastructure we need to really drive the margin improvement. And margin improvement is paramount and I think you can see it in these results. And if you look back, we're starting to -- in my view, we have a track record here of doing what we said we were going to do, which is improve the margins, and a lot of that has to do with all the various investments were making to help drive that. Hi, good morning, everyone. Thanks for taking the question. I just wanted to focus a little bit on the macro comments that were being made earlier. And maybe you can talk a little bit, there's been some noise just around, potentially like a deterioration of the consumer, as we go into the final month here of the year. So kind of curious, maybe if you think about, like, on a month-to-month basis and even a month, what you've seen since the close of the second quarter. It sounded like things had been stable, have you been? Just wanted to confirm that's been the case, especially as we go beyond the second quarter. And you haven't really seen maybe a worsening macro environment compared to the beginning of the quarter? Well, we wouldn't be -- we wouldnât really comment too much on intra quarter trends or month-to-month trends. I mean, I think I would say that just at a macro level, we kind of view our markets as I mentioned, as particularly in the dental side as stable. The companion side, like I said, we were seeing vet visits down, but spend per visit up. And we're dealing with the Draxxin impact on production, but that's a resilient stable market where we have the benefit of having a diversified portfolio that has really served us well over time. Okay. And then on similar -- on the macro headwinds, but maybe a different angle kind of looking geographically, are you guys seeing any notable differences in kind of end market strength? I know there's -- there seems to be a lot of concerns, especially around like Europe that maybe higher energy prices there might lead to a more difficult kind of end market for a lot of names. So anything like that you guys would call out are factoring into guidance that we should be keeping in mind? Thanks. This is Kevin. Yes, our international footprint is relatively small compared to North American footprint. We have a really nice business in the U.K that performed well this quarter. Obviously, there's an FX headwind on the sales line, but constant currency basis is showing good growth. And so we feel like our position there is pretty strong. We're obviously watching it closely for those dynamics you said. But within our portfolio in North America as the majority of our business and like Don said, we feel good about the stability of the markets here and how we're executing them. Hi, this is [indiscernible] on for Elizabeth. So something we've been trying to sort through on the equipment side is that we're hearing about weakness in the category from some of the factors right now. But both you and some of your peers are characterizing strength in the segment. Can you just help us sort through that? Are there any channel dynamics you might be neglecting to consider or what is driving that disconnect between dental equipment commentary between the distributors and the manufacturers? Thanks. Yes, I think, honestly, what we're seeing is just what we said, which is we're -- we had a strong equipment quarter. There's continued solid, good demand. The pipeline continues to be replenished. And it's -- I think it's always been a little hard to sort out and reconcile the timing of things that happen at the manufacturers versus the distributors, just given when shipments take place, how the supply chain works. What we're seeing and it's hard to really argue given our results is that equipments strong, the demand strong and that's our -- that's kind of our world and what we're seeing. Okay. Thank you for your time today and your interest in Patterson Companies. We wish you and your families a wonderful holiday season. Happy New Year and we'll talk to you next quarter. Thanks.
EarningCall_1860	Greetings, and welcome to the American Eagle Outfitters Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan, Senior Vice President, Corporate Communications and IR. Thank you, Judy. You may begin. Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for AE and Aerie; Michael Rempell, Chief Operating Officer; and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the Company's current expectations or beliefs. Results actually realized may differ materially based on risk factors included in our SEC filings. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both the GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find the third quarter investor presentation. Good morning. Thank you for joining us today. I'm pleased that we delivered third quarter results well above our expectations despite current macro conditions and tough comparisons as we lap significant pent-up demand and stimulus. While down to last year's record performance, revenue of $1.2 billion was our second highest third quarter in history and our operating profit of $118 million exceeded the third quarter of 2019. I'm also pleased that our profit margins reflected a material improvement compared to the first half of the year. Our aggressive actions to reset inventory and reduce expenses are paying off. We continue to make progress and entered the fourth quarter very well positioned. Our brands are strong and customer engagement continues at a healthy pace. Aerie remains a standout in the industry, and I'm very proud of the multiyear growth we've achieved. I'm also encouraged with performance of our new Aerie and OFFLINE stores, which demonstrate strong acceptance by our customers. AE profits and margins improved compared to the third quarter of 2019, reflecting strong product assortment as well as the team's focus on rationalizing unpredictive SKUs and closing unprofitable stores. Comp sales relative to 2019 were flat and as Jen will review, we have plans in place to improve the trend. Quiet Platforms is providing significant operational efficiencies and needed capacity for our brands, as Michael will review. The third-party customer base is ramping up as other brands look to upgrade their supply chain operations and drive efficiencies to better compete in the current retail environment. I remain also excited about the potential for Quiet. As we evaluate go-forward plans, we are exploring different options to support future growth. Overall, our third quarter was a strong step in the right direction, yet we remain highly focused on driving further improvement. In an uncertain macro environment, we are leveraging the strength of our operations to control what we can and best position ourselves to respond effectively to changing macro conditions. As the supply chain environment continues to normalize, we are using this to our advantage. We are planning inventories tightly and exercising our capabilities to chase into demand. At the same time, we are also reducing expenses and capital expenditures with a firm focus on improving the bottom line and driving stronger free cash flow. As we navigate the near term, we will cautiously invest across key strategic initiatives that provide a competitive advantage and allow our business to emerge from the current environment even stronger. I want to thank our teams for their hard work and dedication over the past several months. We were swift and took decisive actions across the business, and this is now showing up in our results. Looking ahead, we will remain focused and disciplined. Our brands remain incredibly strong. I am confident we will continue to make great progress. Now, I'll turn it to Jen. Thanks, Jay, and good morning, everyone. Although we faced difficult comparisons to a stellar year in 2021, we made good progress across our brands. During the third quarter, demand levels improved from August as we cycled past peak weeks of our record back-to-school season last year. Despite a less robust macro, I'm pleased that we delivered results ahead of our expectations. We also saw meaningful recovery in profit margins compared to the first half for both, AE and Aerie. Earlier this year, we took very deliberate steps to adjust forward receipts and clear through spring and summer goods. As a result, inventory is in much better shape, which enabled us to control promotional levels in a highly competitive environment. In fact, we achieved our second best third quarter AUR down just 5% to last year's record high and up nicely across brands to 2019. As I step back and look at the business, our brands are very healthy. Given the current environment, there are clearly different dynamics at play by brands. Aerie remains on a strong multiyear growth path. Since the third quarter of 2019, revenues have nearly doubled, growing roughly $170 million. Record profits have more than tripled since 2019 and also increased to last year. New store expansion and great brand affinity are fueling increased awareness, and I'm excited to note that Aerie crossed two new milestones this quarter, hitting 10 million customers for the first time and achieving an all-time high AUR. Compared to last year, core intimates, fleece and apparel showed up well. I continue to be extremely pleased with our -- with the expansion of OFFLINE where new stores are performing very well. Aerie's cult like following in leggings is driving momentum and has given us the ability to expand into adjacent categories like sports bras and active tops, all are seeing great results. We expanded our winning Real Me leggings franchise, introducing a new holdup technology to our waistband. We incorporate this fabrication into our sports bras and have seen amazing results for matching sets, which are big trends. For the holiday season, I'm really excited for the new campaign, I want Aerie, our broadest campaign positioning Aerie as the gift destination. Turning to American Eagle. Pressure was anticipated as we cycled last year's record results, yet we did better than expected. Our actions to intentionally reduce inventory contributed to a nice profit improvement from the first half. As noted at last year's analyst meeting, we've been focused on resetting the brand, reducing SKU counts and promotions and selectively closing unproductive stores. As a result of these efforts, we are seeing profits improve with operating income up 14% to 2019 and better margins across channels. Rationalizing excess SKUs is providing greater focus. We are making adjustments to address emerging fashion trends and feel really good about the newness we're bringing into the customer. For example, the Strigid denim collection launched last quarter and is doing very well. We've also shifted our assortment to emphasize new trends in woven bottoms such as cords, cargoes and wider silhouettes, all of which are seeing nice demand. As the supply chain environment continues to improve, we are becoming more nimble. We are getting back into a test and chase rhythm, which is a meaningful positive as we plan ahead. With new fashions, fabrics and silhouettes all emerging on the horizon and our renewed agility to respond to near-term shifts in consumer demand, we should have a great setup going into 2023. We are also excited to launch a new sub-brand in menâs, bringing innovation and newness to our men's business. Prelaunch tests have been very encouraging. We continue to leverage social and commerce to explore new ways to engage with our customers. Our efforts across TikTok and the Metaverse continue to drive strong engagement. Additionally, this quarter, we became the first major fashion brand to launch on BeReal. While the macro is certainly not easy, my confidence in our brands and overall consumer affinity for great casual wear is stronger than ever. We remain intensely focused on innovation and seeking opportunities to drive profitable growth across our businesses. A big thank you, as always, to the Aerie and AE teams for staying focused and forging ahead. I'm incredibly excited for our holiday collections, and I look forward to updating you on our performance next quarter. Thank you and wishing everyone a safe and healthy holiday. Overall, I'm pleased with how we managed the business in the third quarter, particularly as we navigated through an unpredictable environment. Let me start with a review of our channel performance. This year, we faced a more constrained macro environment than amplified pressure from tough compares. Store revenue declined 4% to last year, while digital revenue declined 5%. However, compared to 2019 pre-pandemic levels, I'm really pleased with what we're seeing in the business. For example, brand revenue was up 14% with growth across both, store and digital channels. Our digital business, in particular, has grown 35% over this period, with digital penetration expanding to 33% from 28%. We continue to invest in the speed and functionality of our digital platforms. Our mobile app business continues to be a powerhouse, driving strong engagement for both brands and approximately 40% of total digital spend. Investments in digital capabilities is going to remain a strategic focus. As we noted last quarter, we have brought together store and digital operations, creating greater efficiencies and better integration of the customer experience. I see incredible opportunities as we ensure our go-to-market strategy is best aligned with how customers are shopping. Lifestyles have changed dramatically over the past several years and shopping behaviors continue to evolve, including the dramatic shift to digital, the need for speed and how, where and when customers are visiting stores. Connecting the experience across all channels and creating a more seamless view of customers are top priorities. Our new mobile point-of-sale system is a great example of innovative technologies that we're leveraging to further elevate the customer experience. All U.S. stores have now upgraded to the new system, and they're seeing improved transaction speeds and shorter checkout lines. This is going to be especially beneficial as we come up on the holiday rush. The new system is flexible. It provides a compelling mobile checkout experience and it incorporates several new capabilities including a much more seamless integration of our loyalty program. We have an exciting road map to build out the customer engagement capabilities in 2023. This holiday, AE and Aerie will be offering virtual shopping sessions through Shop Live, a new platform connecting customers to our talented store associates for one-on-one style advice from the comfort of their homes and other one-to-many live stream shopping experiences that we're testing with Aerie. We are also focused on updating and modernizing our most productive stores, relocating in some markets to ensure we're in the best locations, leveraging data to customize our assortments and inventory levels by market, continuing to close our least productive stores where we can confidently consolidate sales to other stores or transition to e-commerce and investing in new technology and leveraging artificial intelligence to improve inventory visibility, placement and ultimately, productivity across channels. There is significant value to be unlocked by all these focus areas. By approaching our physical store footprint from a variety of angles, we believe we can truly maximize our brands, elevate the customer experience and operate with a more efficient cost structure. Turning to supply chain. The environment has continued to improve. Although some volatility still remains, lead times have normalized and factory capacity has freed up. This presents a dramatically different planning environment compared to the constraints we were operating under, this time last year. We have far greater agility in our operations, which is giving us the option to buy lean, lean more open and chase into demand. On the sourcing side, costs continue to stabilize. Cotton pricing has eased and freight costs are down significantly from levels seen over the past 12 months, which is going to provide a significant tailwind in 2023. On the outbound side, our investment in quiet platforms continues to fuel efficiencies and cost savings. I really want to underscore that the Quiet new network provided much needed capacity to AE and Aerie over the past several months, enabling us to seamlessly handle higher inventory levels. Digital delivery costs in the third quarter were down to last year as we fulfilled orders more cost effectively and with fewer shipments. We're also leveraging Quiet advanced fulfillment capabilities located near customers to further reduce delivery times with approximately 80% of online orders, reaching our customers within three business days following checkout. Our third-party customer base, service with the Quiet nodes continues to expand. Interest from prospective customers remains strong, as awareness of the business continues to grow. We are also signing new transportation, fulfillment and technology partners onto the platform, which is further expanding our capabilities. As Jay mentioned, we believe Quiet is a very exciting business that's early in its growth curve and has the potential to transform our industry. Thanks. And with that, I'm going to turn the call over to Mike. The third quarter results exceeded our expectations across both, revenue and profitability. As the team noted, actions to reduce inventory levels cleared through excess spring goods in the second quarter and lower expenses resulted in a profit recovery from the first half of the year. As we continue to manage through the current environment, we remain focused on improving profitability, cash generation and the health of our balance sheet. Third quarter consolidated revenue was $1.2 billion, down 3% to last year, including 2 points of growth from Quiet Platforms. Brand revenue declined 5%. The gross margin rate of 38.7% was ahead of our expectations of mid-30s due to better demand and lower than anticipated markdowns. As noted last quarter, we ended the third quarter in a better inventory position with fresh fall goods. As a result of our inventory actions, we were able to control our promotional activity while successfully moving through units. We ended the quarter with more progress on inventories, as I'll review in a moment. Compared to last year, the gross profit dollar declined 15%, with a gross margin rate down 560 basis points against a very strong rate last year. Higher markdowns and increased product costs drove approximately 400 basis points of the decline. The integration of Quiet Platforms drove approximately 70 basis points of incremental deleverage. Rent and warehousing also increased as a rate to sales, offset by lower compensation costs. SG&A dollars declined $3 million compared to last year due to lower incentive accruals and expense actions announced earlier this year. We continue to make progress in resetting our expense base. As noted last quarter, these actions should result in over $100 million in annualized expense reductions from our original plan. We expect SG&A to be approximately flat in the fourth quarter. Although operating profit was below third quarter 2021, it was up to 2019. Operating profit of $118 million reflect a 9.5% margin. This included a $10 million loss from Quiet Platforms. As volumes ramp up into the holiday selling season, we expect Quiet's bottom line to improve sequentially. Now, I'll provide some color by brand. Aerie revenue increased 11%, driven by new stores. Comparable sales declined 3%, following an 18% increase last year. Aerie achieved an operating margin of 16.2%, marking a solid recovery back into the double digits, as planned. Compared to 2019, total revenue nearly doubled with operating income more than tripling to $56 million. Continued strong growth, combined with higher merchandise margins are driving improved profitability for Aerie. This combination creates a durable path of profitable growth for the brand. Additionally, as new stores continue to ramp up, we're seeing improved productivity. American Eagle comps declined 10% following a 21% increase last year, fueled by an exceptionally strong back-to-school season. AE achieved an operating margin of 21%, also showing improved profit flow-through relative to the second quarter. Markdowns were more controlled, reflecting more appropriate inventory levels. As Jen mentioned, our continued focus on initiatives to improve profitability is driving results. While revenue was down 4% compared to third quarter 2019, I'm pleased to note that operating profit was up 14% over the same period, and brand operating margin expanded 330 basis points to 20.8%. Consolidated ending inventory at cost was up 8% compared to last year with units up 7%. This reflects a meaningful improvement from last quarter's increase of 36% as we work to bring receipts more in line with demand. Inventory is current for the holiday season. We continue to expect sequential improvement with fourth quarter ending inventory plan down to last year. We ended the quarter with $82 million in cash and total liquidity of $423 million. Capital expenditures totaled $71 million in the quarter and $199 million year-to-date. For the full year, we continue to expect capital expenditures of approximately $250 million. As mentioned last quarter, we made significant strategic investments to support the future growth of our business. This includes 85 new Aerie and OFFLINE stores over the past year, which should provide comp benefits and fuel profit expansion in Aerie in the coming years. As we focus on absorbing and growing into these investments, we expect annual CapEx to be significantly lower in 2023. Before I move on to our outlook, I want to highlight that our third quarter operating margins for both, American Eagle and Aerie surpassed pre-pandemic rates achieved in the third quarter of 2019. As we think about the opportunity for margin expansion in the long run, this is a notable point. The quarter we just completed was far from perfect. Product and freight costs, while easing were still elevated compared to third quarter 2019. We have a significant number of new Aerie and OFFLINE stores that are still in the process of ramping up to reach average fleet profitability. We're operating in an intense promotional environment as the industry works through historical levels of excess inventory. Additionally, we still see significant opportunities to improve inventory productivity. Assessing these factors, I'm confident that our third quarter margin performance, while reflecting a nice improvement from the first half of the year, is not our ceiling. Now on to our outlook. With key holiday selling weeks still ahead, the bulk of the quarter is yet to play out. With what is likely to be a highly promotional season in the broader market, we're guiding fourth quarter brand revenue down mid-single digits. This implies brand comps trending similar to the third quarter. We expect fourth quarter gross margins to be between 32% and 33%, on the higher end of our prior outlook of low-30s. While we made significant progress in rightsizing our inventory position, we're taking a cautious view, given the factors I just discussed. We've made significant progress over the last two quarters in resetting our business, and we'll continue to prioritize profitability and cash flow improvement moving forward. Additionally, as the team noted, we've regained the agility in our supply chain, and we intend to use this to our advantage. For 2023, we're planning expenses and inventory tightly, knowing we have the ability to read and react to the demand signals as they evolve. Great. Thanks. And congrats on a nice quarter. So, maybe one for Jen. Could you just elaborate on the bold inventory actions that you took in the third quarter across both brands? And maybe any early read on holiday trend? And just how do you feel your assortments are positioned into the fourth quarter and holiday to potentially take market share in this competitive backdrop? Of course. Thank you, Matt. Look, we really did move swiftly as we mentioned in the commentary, starting back in -- actually even back as far as Q1. And as a reminder, in the AE brand, just remember what we've been up to, we've been rationalizing SKUs for over two years right now to ensure that we are just very highly focused on what the items are and what we want to stand for. Certainly, denim and bottoms at the helm of everything we do there. But back for both brands, we just -- we knew what was coming, and we certainly took serious action on getting our inventories in shape. I like what I'm seeing in holiday. It's still early. Mike mentioned it. It's a little early right now. We have a big week ahead of us. But I -- we just went to all the malls, we saw our competition and we are certainly playing in our own terms. I'd like to say it that way. While we want to be competitive, as you can see by our earnings performance, we are certainly ensuring that our promotions are strong. But like I said on our terms, we don't -- we want to stand, and this is the long-term strategy. Mike mentioned it. And I think we're really living up to what we told the analysts a few years back -- a couple of years back, I should say, on what our strategy is, and that is to deliver bottom line results. I feel good about our inventory positioning, Matt, because at the end of the day, I think we're going to be cleaner coming into January, less clearance inventory, and that should really help us position our earnings again where -- and we feel confident about that. And then maybe just a follow-up for Mike. So with your fourth quarter gross margin guidance more or less flat to a year ago, could you just elaborate maybe on the puts and takes if we're thinking about markdowns versus freight versus Quiet Logistics? And I guess, even more so, if we think into next year, is there any reason why you couldn't see merchandise margin expansion as we lap these inventory actions? Thanks, Matt. Yes. For the fourth quarter, it's a continuation with our revenue guide of the brands being down 5. As Jen just mentioned, we're being strategic and competitive with our promotions, but not being overly promotional, but we're ready to be competitive where we need to be. And then on that revenue guide and with negative comps implied. We've got BOW deleverage that we'd expect again in the quarter. And then Quiet will have a similar drain on gross margin as well. So if you piece those different aspects together, that's -- we're on the higher end of our previous low-30s guide, but feel good about that cautious stance at the moment. And then for next year, I mean, something Michael and I can both maybe tag team here, I think we actually see some tailwind going into next year as just to recap where we've been for the last 4 or 5 quarters. We know last year was -- the fourth quarter was the start of the significant impact of product costs, both in ocean freight and air freight rates, incurring that air freight in the fourth quarter to get our goods here, everything we've talked about for a year now. As we look forward now, it's with our case capabilities back in place, I think freight costs look like they could be a tailwind into next year. Product costs in general, looking beneficial. We think we can get back to almost pre-pandemic types of IMUs, which would be a benefit to gross margin next year. No, you said it well. I think merch margin should be better next year. We have IMU benefit. Supply chains are much tighter, so we could run the business leaner and chase into demand. And we're up against a year, Matt, that was really unprecedented. It had very long lead times. We are going against stimulus fueled demand. And next year, we're up against a much more normalized environment. So between IMU benefits and ending this quarter in a very good inventory position and being able to react to the business next year, which is something we couldn't do this year, I absolutely believe that we're going to have higher merch margins next year. I have two questions. Jen, my first question is that you made some comments about Aerie in the opening prepared remarks. It sounded really bullish. Just talk about what gives you conviction behind that bullishness given the comp was negative in the quarter. And then secondly, for Michael, can you talk about the logistics platform a little bit? And maybe give us an idea what has developed over the last 90 days and kind of the path to profitability as you see it if it's next year or beyond. Thank you. Yes. And Mike said it well, Jay, I think we believe that when we start to anniversary these new store openings, we're going to gain market share in those particular markets. And then, we're just -- we believe that that's going to be something that we're going to annualize next year, and we really feel good about that. Second of all, there's been a lot of commentary about slowdown on casual wear, but we're definitely not seeing it in Aerie. Look, we have this OFFLINE brand that is really it's amazing. The early-on results here for a business that we launched during COVID, I've never seen anything like it, to be perfectly honest. I feel really good about that product offering, our leggings. It is a cult following. I said that in my opening remarks. I mean, it's true. These leggings are best in show. And that team is innovating year-over-year. I feel so good about the innovation there. And it's something new to talk about to our Aerie customer. So, we feel strong about these categories. We're not seeing a softness in some of these more casual type businesses. And I think Aerie really has a cornerstone there. So, not only a cult like following on our leggings, but just the brand and what we stand for. So, we're just going to continue to deliver and innovate and we're doing that in both brands, honestly, Jay. Some of the newness in AE, I'm so proud about. We're pivoting into the right new bottoms categories. And just some of those qualities and new ideas, I think are like no other. And I also feel really good about a new launch that we're going to have early spring, spring one. I can't say what it is, but pretty excited around that as well, so. Yes. And Jay, just for Aerie, building on what Jen was saying, I just want to make sure it's totally clear that -- we've opened a ton of new stores in the last year or so. I think Mike said in his prepared remarks. That -- all of those openings were a headwind for comp over the early part of this year and even through third quarter. Starting in the fourth quarter, that becomes a tailwind. So, as these stores anniversary themselves, they become more mature, those stores should provide -- actually those new stores, if history repeats itself, and we believe it will, based on what we're seeing. Those new stores should provide a multiyear comp tailwind for Aerie, starting in the fourth quarter. And as it relates to Quiet, yes, we continue to be really excited about Quiet. Its third-party customer revenue is planned to be up significantly. I think it's up in the neighborhood of 60%, 70%, 80% this year. And when you look at our results, if you look at the American Eagle results, for the quarter, we had a lower cost per order, okay, and fewer split shipments in our results. Again, those results in retail, I think, are incredibly unusual. They might be unprecedented. And as we're talking to other brands, other retailers, other people in the industry, everyone wants this kind of benefit in their business. We've proven the business case for it. And the pipeline for new customers for Quiet is extremely healthy. So, we'll have more new customers that we'll talk about at the end of the fourth quarter. But again, it's a business that's delivering results for American Eagle and providing very unique benefits in the industry that we're confident that other brands and retailers are going to want to take advantage of. Just want to follow up on the response to the last question about Aerie being a drag, all those openings being a drag through the first three quarters of this year. I guess, curious what the plan is in terms of openings for next year and if you would expect a similar drag from a new class of openings. Also, would love to hear if you can give any detail about standalone performance of Aerie versus the side by sides. And then I think you mentioned product costs were going to be a tailwind. Curious how that looks first half, first -- second half of '23. Thanks, Paul. I'll start and Michael can maybe add on to your -- or answer your product cost question. But for the Aerie stores, Michael just said a few things, let me add on to what we said about prepared -- in my prepared remarks. We have 85 stores over the last year. But if you actually look back across all of '21 and all of '22, it'll be over 130 stores. So, as we've talked about for quite some time, our digital halo effect and what happens within the brand as we invest that aggressively, you typically see a digital impact with all that new store growth and in cases where we're adding stores to existing markets, you see an impact to the stores that were already there. So over a 6- to 12-month period, then we see a bit of a comp -- a negative comp impact sometimes in markets. And then, as we're describing, after that 6- to 12-month period, you start to see the total market lift. So, we play that out over these past two years. As Michael said, as we head into the fourth quarter, we actually believe that the comp performance in Aerie could improve. We talked about guiding to similar comps, but depending on the mix of business within Aerie, we could actually see a positive comp or a better result in the fourth quarter. And then, as you play this forward into '23, we're only contemplating opening maybe 30 locations next year. So you won't have any -- really any significant comp impact from that growth, many of these 130-plus stores coming around in '23 and ramping up their maturity. So, that's what we're talking about in terms of the tailwind in the next year and beyond is some really aggressive openings, really aggressive investment in the brand, and that's next year, we're excited about what that means to overall growth and comp growth. Standalone and side-by-side performance, I think you asked about. I don't think we're seeing a significant difference between formats right now. So I think you can assume that. And then Michael, on product costs into next year, you can take that. Yes. Paul, the question was what are we seeing first half, second half? We really haven't -- it's too early to comment on the second half of next year. In the first half, we certainly see markup being better than it was this year. And actually, we're seeing a lot of -- we're just seeing a lot of benefit in the business. I think the fact that we're ending the fourth quarter with inventories still clear, we're getting the full benefit of a weaker demand environment as we're sourcing spring and summer products. So I see markup better than 2022 in the first half. And [Technical Difficulty] for spring and summer, in any way, we're seeing markup better than pre-pandemic 2019. Hi, everybody. And congrats on the improved results. Jen, can you just talk a little bit about what kind of levels of promotional activity we should see in the fourth quarter on a year-over-year basis? Inventories are in great shape and you're excited about the product. And as a comparison itâs relatively easy. So, I'm wondering what we should be watching for in the fourth quarter. And on SG&A, as we look out to next year, are there any investments that were put off for this year that we should consider for next year. And just lastly, Jay, if you could enlighten us on your thoughts about consumer spending next year and how that may impact your business, it would be terrific. Look, I think what you're going to see is we're going to remain competitive through these next couple of weeks. They're big weeks for us, and we want to step up our game for sure. So, we will be competitive. But then what I -- hopefully, through my crystal ball, I do believe that we have opportunity in December to run better businesses. If you recall last year, Aerie definitely had opportunity on the margin side in Q4. So, we're definitely going to step that up and make sure that we're protecting that. And December, we believe, that's our opportunity, including January, like I mentioned, where we don't have the inventory levels that some of our competition has, and it will allow us to really pull back on promotion in January when it's a highly liquidation period, as you know, and set us up for success for early spring. I just approved the spring store set. They look phenomenal. That's when you'll see our new surprise in men's. And -- yes, we're just going to keep on trying to deliver our newness, Janice -- again, Janet, and so we can compete on our terms. Yes, we're very pleased with our progress to date. It's been a focus since the beginning of the year. I thank the teams cross-functionally for all their efforts. We achieved flat or slightly down in Q3. We believe will be flat again for the fourth quarter. But the work is not done. It's still work in progress. We're working through plans for next year. We -- I think the other fact is that we're not -- it's not just an SG&A focus even though it's what we tend to talk about the most. And you ask -- you guys asked the most questions about SG&A, but it's really only half our expense base. So, as we look at plans for next year and on a sort of longer-term basis, even for the next few years, we're looking across every category in every area that impacts gross margin down through SG&A and even depreciation impacts. So, work in progress. We'll talk more on the next quarter about expectations for 2023 and beyond. And just now, we're not done. In this business, you have to be an optimist, otherwise, you can't be in the retail business. And I'm excited about a lot of things. I think some of these new product launches that Jen was talking about that it's going to be very exciting for the Company. We have the ability, as Michael was saying earlier, we see our costs coming down. We see the cost of freight going down back to the 2019 levels. So, there's reason for optimism. We see we have the ability to work closer to need and be able to chase the merchandise. So, everything is pretty positive. And we can only control what we can control. But I'm optimistic. I think that there's a lot of good signs. I was reading that the mortgage rates start coming down. Hopefully, interest will follow that. And I think it's going to be better than people expect. Nice to see the progress. As you think about the tailwinds of some of the freight expenses with cotton costs and what you're seeing, how do you see that unfolding in the margins? And then, on the Aerie business, Jen very exciting about the new spring launch. Anything we should be watching for as we go through the holiday season besides the leggings that could indicate even a further pickup in sales go forward in terms of levels of demand? And then just on the core American Eagle business, denim trends, in particular for men and women, any differentiation that you're seeing? Thank you. Okay, Dana. On the trends with freight going down, cotton going down, it's all positive. That's good news. The last two years, it was the opposite. I remember eight months ago, everybody was forecasting freight to keep going up, cotton to keep going up, commodity keep going up and everybody was positive, eight months ago, prices were going to go -- keep going higher and higher and still in the opposite way. So I think things are positive. I think also we just don't compete against stores like in the United States, it's a world market. And I think that a lot of the factories that we deal with sell other countries, other continents, softer in Europe, softer around the world. And that gives us advantage of buying our products at better cost. So that's a positive sign to be able to offer. And one thing I'm proud is that we give the customer a great selection. I think we have the -- one of the best lineups in retail. Our quality is a number 1 and our value is a number 1. So, we're very excited. We think the designers and the buyers and our team have done a great job. I know that as far as was planned for next year, it's very exciting. And I think Jen will talk about that later. So, I think it's all positive. Yes. And I agree, Jay. And Dan, as far as how it unfolds, I see it getting better throughout the spring season, so. The reason I keep saying ending -- our ending inventory is clean is so important is, I think if you're a retailer and you're carrying over inventory from this year into next year, you're going to be carrying that -- the higher transportation costs and cotton cost with it as it flows through the P&L. For us, we'll have very little of that. So, we have some fabric platforms that we'll work through. But in general, we're seeing obviously, huge benefit in transportation costs. Nice benefit, as Jay was saying, in product costs. And as the spring season builds, we're going to start spring season with a markup benefit and as it builds, that markup benefit should grow throughout the season. Hey Michael, I just want to add one thing. You talk about cotton. We play by the rules. We're very careful what cotton we use, we're very careful where we manufacture our goods. And we expect our competition to follow the same way, too. And I think in fairness to the retailers in America, it should be a level playing field. And I think that certain retailers who are not based there who get advantages of not paying tariffs, shipping their goods in, not being responsible where they're doing their sourcing and not following by the rules, should be punished for it. And I think it's wrong, what's going on. I think the Congress should wake up and make a level playing to offer American companies, period. And I think the U.S. analysts who follow should be writing that itâs not fair for American companies to play by the rules and other companies that come in this country, violate the rules and get away with it. Well, that was well said, Jay. That's a tough, I have to follow there. Yes. Dana, just let's start with American Eagle. I do want to be -- make sure that I was clear on my prior answer. We have a new launch in the American Eagle brand, specifically in men's for the spring one delivery. So we're pretty excited about it. We've had early reads on what we're about to launch, and the early results have been great. And certainly, we're going to do it with integrity and caution to ensure that we're not going to overdrive a new business. But we're pretty excited about what we're seeing. Regarding denim, look, denim is the heritage of our brand, but so is bottoms. And we're definitely seeing a shift into new bottom silhouettes, cargo, cords, and some wider silhouettes. And with what we've been up to, as far as rationalizing our denim SKUs, it's allowing us to be more flexible, and getting into those businesses as we ride out a slightly softer trend that we're seeing, but we strongly believe in denim, it's here to stay. As Jay mentioned, we're an American brand and certainly denim will always be, at the helm of everything we do in American Eagle, and we're really proud of that category. And we have newness there as well, Dana, that we're excited about. You'll see that in early spring. For Aerie, we're just getting going with OFFLINE. It is, as you know, it's a fairly new business for us. It's a couple years old. We're just -- I mean, our legging innovation is like no other and we're focused on that in offline. But we also have incredible other categories, our fleece categories. They're like no other out there. I'm so proud of that price value equation that we offer in Aerie, and we're certainly not seeing any softness there. So, excited about that category and newness. Again, it's a constant evolution. We're looking at new ways to deliver the business and market it. We really talk about it but our marketing campaigns in Aerie, they're so innovative and so fun. And I think it really sets us apart in the mall. So, there's a lot more to come there I just -- like I said for both brands I just approved the spring early sets and oh my gosh, I mean is it fun and new and just feels -- you know at the end, I hope we're going to stand out in the mall and stand for what we do an each in brand. Intimate certainly again in Aerie is not an oversight. We're continually invading in our bras. I like what I'm seeing on the go forward. So hopefully we can please and delight our customers as well because that's what we're up to. Jen, just to go back to your enthusiasm, you sound -- itâs the best you sounded in a while. So I'm really excited about that. But it sounds like the supply chain is back to a level where you're able to test and reorder as well as chase. So I guess my question is, as you go into the spring season, how much are you buying up front versus leaving on the table to be able to do that and read demand? And then for Michael or Mike on inventory. Can you remind us, was up 37% at the end of 4Q, 46% and then 37% again in Q1 and Q2. Can you remind us what portion of that was in transit? Because if we see are your inventory numbers down double-digit, and it was all in transit. I just don't want people to get worried that you can't comp, because it was unavailable for sale. It wasn't very high utility. And de facto, you -- in my opinion, I think you're not going to order excess inventory. So I just want to make sure that messaging -- that part of it is clear. Thank you. We're constantly evaluating our inventory to sales relationship and ensuring that our sales positioning depending on the plan is certainly positioned higher than our inventory position. So that's what we're up to, that's what we've been up to. It's definitely a best practice for both of our brands. And roughly, we leave about, I mean, I would say I'm going off the top, but roughly about maybe 25% open. And as Michael said, we're just way more flexible right now. We're able to get goods here, faster and more swiftly. And we're certainly taking advantage of the supply chain. And we're leveraging that. So, I would like to say that -- what you're seeing for holiday and these, what we just released as far as our inventory, you'll see more of the same on the go forward. And with some of the new technologies, we believe we can get even more efficient with our inventory. So, I hope that answers your question. Jen, I wanted to follow-up on what you're seeing on trends in the business. If you could just sort of frame the changing consumer preferences, if you're seeing any this year, compared to last year? And how are those ebbs and flows and what consumers are gravitating to, how is that informing your buying for 2023? Thanks. Sure. I think, I've said this before in my past. For both brands, we're up to comfort soft and that in conjunction with our price value equation, and our quality I think is like no other. So, where I do -- you're hearing there's conversations out there and there has been some shift into going out that was earlier on this year, dresses, some of those categories. But at the end of the day, our core demographics, they want comfort. We haven't seen a shift in fleece. We're seeing upticks there for both businesses. They just -- American casual comfort is not going away. And I think that's the most important thing any brand can do is stand for what they represent. Both brands are fit intensive. So our bra categories in Aerie and our denim, bottoms categories in AE, it's so important. Our customers want to look good in their clothing and that's where I think we stand apart. We focus on the best fits in the industry, comfort, like I said. And on the go forward, I think we're just -- we're going to continue to deliver what our customer expects from us. We're a bottoms based business in American Eagle. We're shifting underneath the covers there. And in Aerie, we're still going to stand for our intimates business, but we like some of these new categories that we're adding. And the thing I like about Aerie is, customers are demanding more from us every day. I mean, literally, they want more categories from Aerie, because they love what we stand for. They love the platform, and they want to be part of that community. Just -- I think it was brought up in the prepared remarks, AUR versus pre-COVID. Was that quantified at the grants? And if not, I guess, where is it and where you think opportunity may exist? Thank you. We didn't cover it in the prepared remarks, but it is up -- pre-pandemic levels for both brands. We don't have specifics for you right now. But yes, AUR is healthy and up in both brands. Just one question on marketing costs. We are seeing some elevated costs for customer acquisition. Curious as to how you're managing your costs at the moment and what your plans are for next year? Thank you so much. Thank you. Yes. Yes, you're correct. There's definitely sort of headwinds in terms of advertising and marketing costs. We've got a lot of different moving parts within our advertising spend. So, we are prioritizing that spend to make sure that we can offset those costs, not incrementally incur expense for the company, but then redirect spend where we need to for customer acquisition and retention. So the teams are hard at work at that. It's kind of week-to-week, month-to-month conversation in terms of where investments are made. And then on a kind of preseason planning basis that's definitely the focus they have looking into next year. But we believe we can spend to similar levels and similar rate of sales to generate what we need to from an acquisition retention perspective without incrementally incurring expense, as the opportunities we're uncovering. All right. And on that note, as Mike has said, we are intently focused on improving profitability and cash flow, and weâre maintaining strong discipline around inventory, expenses and capital expenditures. Our brands are healthy, our operations are resilient, and I'm confident we will emerge from the current macro stronger. I look forward to updating you on our continued progress. I wish everyone a happy and a safe holiday season. And on a personal note, go Buckeyes.
EarningCall_1861	Greetings. Welcome to the Tilly's, Inc. Third Quarter 2022 Earnings Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Gar Jackson. You may begin. Good afternoon, and welcome to the Tilly's Fiscal 2022 Third Quarter Earnings Call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the Company's results and then host the Q&A session. For a copy of Tilly's earnings release, please visit the Investor Relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days. Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, December 1, 2022, and actual results may differ materially from current expectations based on various factors affecting Tilly's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2022 third quarter earnings release, which was furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks. Thanks Gar. Good afternoon, everyone, and thank you for joining us today. Our third quarter sales performance was stronger than we anticipated throughout the quarter, resulting in both topline and bottom line results exceeding our outlook and analyst consensus estimates for the third quarter. As expected, we saw a deceleration in sales trends from month-to-month as we anniversaried last year's early holiday shopping that was driven by supply chain concerns and other pandemic-related factors in the later stages of the quarter. Not surprisingly, as we lap those prior year conditions amid this year's highly inflationary environment, all geographic markets comped double-digit negative and most merchandising departments comped double-digit negative with the expectations -- exceptions of footwear, which was just slightly negative and accessories, which was led by strengthened backpacks, but still decreased by a single-digit percentage overall. Also, not surprisingly, customer store traffic and conversion both declined by high single-digit percentages compared to last year's record results. Despite current economic challenges associated with inflation, we continue to believe that Tilly's has meaningful future growth opportunities in many of our existing markets, particularly California, Texas, the Northeast and greater Chicago area. With very few exceptions, our new store openings over the past several years have met or exceeded our expectations, and we believe it is important for our long-term earnings potential to continue to grow our store base, along with our e-comm business. In the third quarter, we opened five new stores. In the fourth quarter, we have opened two new stores so far with two more we'll be opening in a few more days, bringing our total new store openings to 11 for the year. We anticipate closing two stores in mid-January, bringing our fiscal year and store count to 249. For fiscal 2023, we have a preliminary expectation to opening up to 15 stores, assuming we can negotiate what we believe to be appropriate lease economics relative to the retail environment. At this time, two of those potential new stores have been fully -- have fully executed leases, and we are engaged in active negotiations on the remainder. In addition to new stores, we continue to invest in company infrastructure during fiscal 2023 to support our future growth plans. We plan to upgrade our warehouse management systems to create greater efficiencies in managing inventory between our stores, e-commerce and our two distribution centers as well as to improve distribution labor efficiency. We are also planning to upgrade our merchandise planning and allocation systems with the goals of improving inventory efficiency and reducing the volume of inventory transfers. In total, including 15 new stores, we preliminarily expect our total capital expenditures for fiscal 2023, not to exceed $25 million. Turning to the fourth quarter of fiscal 2022, we are off to a softer start than expected. Total comparable net sales through November 29, including both physical stores and e-comm decreased by 18.5% versus the record comparable period of last year. For Thanksgiving weekend, Thursday and through Cyber Monday, we saw an improved relative trend with total comparable net sales decreasing 13.4% compared to last year and a high single-digit negative comp on Black Friday, specifically. Assuming our fourth quarter sales exceed third quarter sales, as has been the case throughout our history, except for last year, we believe we have an opportunity to produce an improved comp sales trend for the fourth quarter relative to recent quarters, although still below last year due to the much more difficult economic conditions in play this year. We will continue to manage our business prudently relative to the current environment, but remain focused on our longer-term goals of continued growth and improved operational performance. I now turn the call over to Mike to discuss our third quarter operating results and fourth quarter outlook in more detail. Mike? Thanks, Ed. Our third quarter operating results compared to last year were as follows: Total net sales were $177.8 million compared to a company record of $206.1 million last year. Last year's results were fueled by unprecedented pandemic-related factors, along with supply chain concerns about the holiday season, which we believe pulled sales forward into the third quarter last year. Total comparable net sales, including both physical stores and e-commerce decreased by 14.9%. Total net sales from physical stores were $141.5 million compared to $165.3 million last year, with a comparable store net sales decrease of 15.8%. Net sales from physical stores represented 79.6% of our total net sales this year compared to 80.2% last year. E-commerce net sales were $36.3 million compared to $40.8 million last year. E-comm net sales represented 20.4% of total net sales this year compared to 19.8% last year. We ended the third quarter with 247 total stores, a net increase of four stores since the end of last year's third quarter. For additional perspective, our total comparable net sales for the third quarter increased by 8.7% relative to the pre-pandemic third quarter of fiscal 2019. Gross profit, including buying, distribution and occupancy expenses, was $54.6 million or 30.7% of net sales compared to a company record of $76.7 million or 37.2% of net sales last year. Buying, distribution and occupancy costs deleveraged by 360 basis points collectively due to carrying these costs against a significantly lower level of net sales this year compared to last year. Product margins declined by 300 basis points this year, primarily due to an increase in more normalized markdown rate compared to last year when full price selling was at record levels. For additional perspective, product margins were down less than 100 basis points compared to the pre-pandemic third quarter of fiscal 2019, primarily due to lower initial markups and a higher markdown rate. Total SG&A expenses were $48.3 million or 27.1% of net sales compared to $47.7 million or 23.2% of net sales last year. The primary increases in SG&A compared to last year were $0.6 million from store payroll due to having four net additional stores, along with higher hourly wage rates and $0.5 million from corporate payroll due to wage inflation. Partially offsetting these increases were a $1.8 million reduction in bonus expense due to the lack of any bonus accrual this year and a $0.6 million reduction in marketing costs. Operating income was $6.3 million or 3.6% of net sales compared to a company record of $29 million or 14.1% of net sales last year. Other income was $0.7 million compared to zero last year, primarily due to earning higher rates of return on our marketable securities investments and the absence of any costs associated with our former ABL credit facility, which were included in last year's results. Income tax expense was $1.8 million or 26.3% of pretax income compared to $8.2 million or 28.1% of pretax income last year. Net income was $5.1 million or $0.17 per diluted share compared to a company record of $20.8 million in net income and $0.66 per diluted share last year. Weighted average shares were 30 million this year compared to 31.4 million last year. Turning to our balance sheet; we ended the third quarter with total cash and marketable securities of $105.8 million and no debt outstanding. This compared to $155.6 million and no debt outstanding last year. Since the end of last year's third quarter, we paid special cash dividends to stockholders of $30.9 million in December 2021 and repurchased 1,258,330 shares of our common stock for a total of $10.9 million during this year. We ended the third quarter with inventories per square foot down 6.9% compared to last year, following being up 4.1% to last year at the end of the second quarter. Total year-to-date capital expenditures were $11.9 million this year compared to $10.9 million last year. We expect our total capital expenditures for fiscal 2022 to be approximately $19 million at the end of the year. Turning to our outlook for the fourth quarter of fiscal 2022; we remind you that last year's fourth quarter was a historic anomaly for us with fourth quarter sales below third quarter sales for the first time ever due primarily to supply chain concerns and other pandemic-related factors, which we believe pulled some holiday season sales into the third quarter last year. While some level of similar customer behavior may have been repeated this year amid the current highly inflationary environment at this time, we assume that our fourth quarter sales performance will revert to a more traditional cadence such that it would be the largest sales quarter of the year. Based on our quarter-to-date net sales results through November 29, 2022, that I had shared earlier and our pre-pandemic historical sales build patterns we currently anticipate our total net sales for the fourth quarter of fiscal 2022 to be in the range of approximately $183 million to $188 million, SG&A to be approximately $54 million to $55 million, pretax income to be in the range of approximately $0.8 million to $2.6 million, our estimated income tax rate to be approximately 27% and earnings per diluted share to be in the range of $0.02 to $0.06 based on estimated weighted average diluted shares of approximately $29.9 million. This compares to a company fourth quarter record of $204.5 million in net sales and $0.38 in earnings per diluted share for the fourth quarter last year and total net sales of $172.5 million and earnings per share of $0.21 in the pre-pandemic fourth quarter of fiscal 2019. Hello. This is Rick Magnusen for Jeff Van Sinderen. Can you provide more insight into how you are planning incoming inventory for spring? And do you expect inventory to be up or down on a square foot basis at the end of fourth quarter? Hi Richard. We expect inventory to be down on a per square foot basis finishing the fourth quarter. As we think about next year as a whole, one thing to keep in mind is, obviously, 2021 was crazy to the good side of things. All year long, we've been going up against that, and you see the comparisons in the negative double-digit comp that we've seen all year. The last month that we will have that is February. February 2022, we had a plus 15% comp. After that, every month -- after that, we'll be going up against this year's negative double digits. So there's some optimism there that assuming we can stay on trend with our merchandise assortment the way we consistently have we think there's an opportunity for us to be able to turn around back into positive comps once we get into 2023 and past the month of February, in particular, which is a small month. But we're expecting to improve our business in 2023 and do better business in the spring than we did this year. All right. No, that sounds good. And can you provide some detail on the different trends that you saw in Cyber Monday and Black Friday sales in e-comm? It was pretty erratic. I think we were going up against a lot of our competitors were much more aggressive promotionally than us, and we elected, as we consistently do, we elected to not play the aggressive promotion campaign and may have somewhat negatively impacted our demand. But overall, it was close to what we expected. Well, as I just mentioned on the -- it was a total business, we're going to be going up against double-digit total business. Spring, yeah, it will start right after the month of February. We had similar directional performance between stores and e-comm. I'm looking at the chart here, e-comm was up single digits in February and then down double digits the next four months in a row. Still negative in July, August and then back to double digits September, October, November. So similar in nature to how stores compare. Okay. And then my last question is, what are you seeing in brick-and-mortar this week, if you can speak to that? No, I'd say it's -- in the past, you usually go through Black Friday weekend and then there's a little bit of a lull after everyone kind of goes through Black Friday promotions and all the buzz of that and Cyber Monday and those kinds of things, you tend to go through a lull and we're experiencing that. We do think that the overall patterns for holiday shopping will be later this year than they were last year. We also think that's part of why our fourth quarter start was weaker than anticipated because remember, we talked about the fact that we thought some early holiday shopping pulled into October, well it also pulled into early November because of all the supply chain concerns last year. So I do think we are anniversarying and lapping some of that early holiday shopping patterns of last year because of the supply chain concerns. Come to this year, everyone's got more inventory than they need and has pretty much all year long, really promotional environment. We do think that we'll see the holiday season come into being. It will just be a later flow than it was last year, and we have contemplated that and how we've thought about our outlook. Just to add to that, too, is we're going into the next few weeks the quality of our inventory, both in terms of quantity and the mix is really in great shape. So we're positioned -- we feel like we're well positioned to do the business if it's there. Starting with the Q4 to-date comp, I think, Mike, in the press release, and it's down 18.5%. Do you know what that is on a sales basis? And then also, do you happen to know what both comp and sales are for that period versus three years ago? I don't -- all I have is what we just reported is the comp number. I don't -- we haven't closed fiscal November. We're in the process of closing fiscal November. So I don't have all-in sales numbers to report at this early date. Okay. And then you referenced the pull forward last year because of supply chain and some COVID. Can you remind us how -- so I think last year, you guys did, I think, a 12.5% comp, if I have that correct. Can you remind us kind of how that flowed through the fourth quarter maybe on a monthly basis, just so we have a good -- a better sense of the compare? Yes. So last year, '21 versus '20, November was the strongest month in terms of comp at a plus 21%, then December was about half that at 10.5%, and then January was a plus 4%. So it gets easier as the quarter goes in terms of those comparisons. This is another reason why despite how slowly November started, you look at all the historical relationships of how we just finished Q3, how we finished Q3 relative to 2019, it just -- it all points that if history means anything at all -- we have to be somewhere in the $180 million range for the fourth quarter. We just reported $178 million for the third quarter. Fourth quarter is larger than third in any way, shape or form, the way it traditionally was other than last year, you're in the $180 million. So it seems to make sense again, if history proves to be accurate at all. If something else happens, there's no way I can predict it. I have to believe, despite our slow start in November that the holiday season will come and that some sense of a normal cadence of Q3 to Q4 will take place. Coupled with, the fact, we did just do nearly a plus 9% comp to 2019 in the third quarter, some level of positive comp in the fourth quarter relative to 2019 also gets you in that $180 million area when you contemplate, we have nine additional stores than we did then. So it seems to line up despite the soft start, those other metrics seem to point you to a place that says the business will come, it's just later than what it was last year. Yes. And do you have a sense as to how much of the quarter is in the books through November 29? I imagine the vast majority is still in front of you? It is. The largest we serve right around Christmas, as you would expect, Thanksgiving week is one of the largest weeks. But that last full weekend before Christmas, that last full week before Christmas, those are the hugest weeks of the quarter, those two. And then usually, the first week right after Christmas is pretty big before -- then for the rest of January, the weeks get really small. So the great majority of the quarter will be in once December is done. Okay. And then lastly, Ed, there's been a lot of talk on other retail earnings calls about how challenging the apparel environment is, in particular. Can you just elaborate on what you guys are seeing? Yes. The apparel environment has been challenging. Honestly, I think part of it's because there's no dominant trend, particularly in our -- cater to our age group. And for us, what we've seen is one of our best-performing categories is long bottoms, and it's been good. I'm not saying denim other long bottoms, but the other typical categories that are really strong have slowed down. And I think part of its economic and part of it is lack of really dominant trend. This is Ray [ph] on for Matt. Most of my questions were already asked, but maybe if you guys can talk a little bit about how Black Friday, Cyber Monday, I guess, how much of that sorry, okay. Maybe like Q4, how much of the revenue actually come from Black Friday and Cyber Monday and kind of like understanding that last year was a little bit out of the norm. I don't have any data points on Black Friday as a piece of the quarter. I mean, it's in the top five sales volume weeks of the quarter, top four, but the real bulk of the business comes around Christmas typically. And again, because of the difference of last year to this year it's going to come later. There is an extra day of shopping before Christmas to say later this year. So there's still a lot of business to be done yet. We did see during the Black Friday weekend, as we referenced, the month as a whole was down 18%. We were down worse than that in the first three weeks of November. And then Black Friday weekend was down about 13%, and Black Friday itself was only down 9%. So during that particular peak weekend, we saw a meaningful improvement in the trend of our business. And given that we are expecting a later flow of the holiday shopping versus what it was last year, we'd expect to see similar sorts of behaviors during those key peak weeks in the mid- to latter part of December in particular. [Operator Instructions] It looks like we have reached the end of the question-and-answer session. I will now turn the call back over to Michael Henry for closing remarks. Hi. Unfortunately, it's Ed. Thank you for joining us on the call today. We look forward to sharing our fourth quarter results review in mid-March 2023. Have a good evening.
EarningCall_1862	Good morning, ladies and gentlemen, and welcome to the Rogers Sugar Inc. Fourth Quarter 2022 Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question-and-answer session for analysts. [Operator Instructions] This call is being recorded today, Thursday, December 1, 2022. Thank you, operator, and good morning, everyone. Joining me for today's call is Jean-Sebastien Couillard, VP Finance and CFO. During today's call, I will review the fourth quarter and year end results of 2022, our expectations for fiscal 2023 and the trends in our industry. Please be reminded that today's call may include forward-looking statements regarding our future operations and expectations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. Please also note that we may refer to some non-GAAP measures in our call. Please refer to the forward-looking disclaimers and non-GAAP measure definitions included in our public filings with the Securities Commission for more information on these items. A replay of this call will be available later today. The replay numbers and passcodes have been provided in our press release and an archived recording of this call will also be available on our website. Given this quarter is also our financial year end, I would like to give a quick review of our full year 2022 performance before I move on to our fourth quarter results. Overall, in fiscal 2022, we recorded very strong financial performance. We demonstrated excellent operating performance and agility as we carefully manage through the challenging environments. While also identifying and capturing opportunities as they arose. As a result, we generated record performance in the year with our highest adjusted EBITDA in our 134 year history and also our highest sugar volume to date. We started the year with lower volumes in sugar impacted by road closures associated with the floods in British Columbia and lower retail demand from high inventory levels. However, we saw demand rebound over each of the next three quarters and we achieved consecutive record volumes in the second and third quarter. Notably, we saw increased sales in our Industrial segment from strong global demand for sugar containing products. We also opportunistically responded to several unforeseen supply events in the latter half of the year that drove incremental volume. Our strong performance was also underpinned by successful paper crop in 2021 and higher byproduct revenues. Altogether, these factors led to our best ever financial performance. Although more impressive considering it was achieved during extremely high inflationary pressure, supply chain challenges and the ongoing impacts of the pandemic. I am particularly proud of our employee safety record in the fiscal 2022, which has been steadily improving over the last number of years, leading to a record low incident rate across all sugar sites. In Maple, our business faced pressures throughout the year and lower demand, inflation and global shipping challenges. In the latter half of the year, we implemented an updated pricing strategy aimed at recouping incremental costs as contracts came up for renewal. The competitive nature of this industry has made passing through price increases more challenging and led to lower margins from fiscal 2021. Now I will turn to our fourth quarter results. Performance in our main business driver, our sugar segment, was strong in the fourth quarter. Sugar demand was robust and we were able to capture some incremental supply opportunities in the quarter, which enhanced our product mix, improved sales volumes and increased gross margins. In Maple, the business continued to face pressures from lower demand and a delay between higher operating costs and selling price increases. Prices have begun to increase, although recovery continues to lag inflationary pressures. In sugar, volumes reached 214,700 metric tons in sales, which was up about 6% from Q3 and in line with the same quarter last year. During the quarter, strong growth in our Industrial segment more than offset lower volumes in liquid consumer and export categories. Our Industrial segment increased by almost 10,000 metric tons compared to the same quarter last year. This was due to continued strong demand for sugar containing products, as well as an unforeseen peak in demand as a result of temporary tightness in the supply of North American market. We leveraged our operational flexibility to pivot from export sales to supply our domestic customers. The resulting favorable product mix led to a boost in revenue for the quarter. Our consumer business was slightly lower in the fourth quarter, mainly due to the timing of orders from customers. While we have seen increased variability quarter to quarter as inventory holding policies from retailers evolve, we believe that demand has now largely returned to pre COVID levels on an annualized basis. Adjusted gross margin in the quarter improved as a result of favorable pricing, mix and strong demand when compared to the same period last year. This was partly offset by inflationary pressures and lower byproduct contribution due to timing. Despite inflationary pressures, we're proud of the work the team has done in managing higher costs. As sugar remains an essential ingredient of the food supply chain, we expect minimal impact from the potential recession and our volumes remain relatively stable. As for our 2022 Taber beet crop, the harvest period was completed in early November and we are currently in the processing stage. We have received the expected quantity of beets from the growers. However, unfavorable weather conditions, including hailstorms and warmer temperatures encountered in the later stage of the growing period have reduced the expected sugar content of the sugar beets. Due to the damage, we expect to produce between 100,000 and 110,000 metric tons of sugar from the 2022 campaign, below last year's production of 120,000 metric tons. We will provide an update to the market on final production number at the end of the second quarter. Finally, we would like to share an update on our Montreal refining facility expansion. We are progressing well and we expect a detailed engineering study to be completed by the end of the second quarter. We continue to see strong interest in taking up the incremental 100,000 metric tons of capacity expected from the expansion. This project remains an exciting growth opportunity for Rogers Sugar. And I look forward to updating you as it progresses. Now turning to the Maple segment. In Maple, adjusted EBITDA lowered in the fourth quarter largely due to increased operating costs that outpaced price increases and lower sales volume. Sales volumes lowered in the fourth quarter, driven mainly by lower demand from the existing retail customers and market competitiveness, further exaggerated by a bumper crop -- bumper maple syrup crop in 2022. Although we see overseas supply chains improving modestly, it is not translating into cost relief as quickly as we would hope. However, as inflationary pressures begin to recede, we expect to see improved performance in this business segment. In the quarter, adjusted gross margin was negatively impacted by higher operating costs from inflationary pressures and increased compensation costs, as well as lower volumes. The delay between recovering the increase from price increases from contract renewals continued to be felt in the fourth quarter. As we mentioned last quarter, we continue to focus on securing volumes and maintaining our share of the global market. As we look outward to 2023, we expect stable financial results, driven by continued strong demand and steady gross margins in our sugar segment, along with slightly improved financial performance in our Maple segment as the unfavorable inflationary pressures begin to recede. In sugar, we expect underlying demand in North America to remain strong, supported by favorable market dynamics. Pricing actions implemented in 2022 are expected to continue to mitigate impacts of higher operating costs. Volumes are expected to be slightly lower given the non-reoccurrence of the opportunistic sales we recorded in the past two quarters. And finally, before turning the call over to JS, I just want to say a quick word about my first full year as CEO. Throughout the year, I have seen the adaptability and the care our team has taken to overcome challenges and consistently meet the needs of our valued customers. I am extremely proud to work with you and grateful for the effort and dedication you have shown across all our teams from east to west. Thank you for all that you do. Over to you, JS. Well, thank you, Mike, and good morning, everyone. In the fourth quarter of 2022, our adjusted EBITDA was $29 million, an increase of $4.2 million from the same quarter last year. Higher adjusted EBITDA in the quarter was driven by the strong performance of our sugar segment, which was partially offset by lower than expected results in our Maple segment. For fiscal 2022, adjusted EBITDA was $102.1 million, up $11.1 million from the same period last year, once again driven by the record setting results of our sugar segment. Despite the softer results of our Maple segment, we were able to improve our overall financial performance and exceed the outlook provided a year ago, including surpassing our anticipated volume by almost 25,000 metric tons for the sugar segment. We currently anticipate that the sugar segment will continue to perform well with firm customer demand to remain in 2023. And as inflationary pressures begin to recede, we expect our Maple business performance to begin to improve in the later part of 2023. Let's start my remarks with a review of the Sugar segment. Adjusted EBITDA for our sugar business was $26.2 million in the fourth quarter, up 27% from the same quarter last year. While volumes were largely in line with the prior year period, higher pricing and a favorable shift in product mix drove improved revenue and adjusted gross margin. Adjusted gross margin increased in the quarter, up $9.3 million or 36% from the same quarter last year. On a per unit basis, adjusted gross margin increased by $43.39 per metric ton to $164.55 per metric ton. The impact of improved pricing on adjusted gross margin in the fourth quarter was partially offset by higher cost as inflation led to higher operating and labor expenditures. Distribution costs increased by $1.4 million in the fourth quarter due to higher freight costs and additional logistical costs incurred to support our supply chain as we continue to move sugar produced in the West to Eastern Canada to meet customer demand. As Mike mentioned previously, a portion of the fourth quarter sales volume was attributable to non-recurring issues encountered by one of our competitors, leading to tight temporary market conditions. Our team did an excellent job of capturing these incremental sales and meeting customers' needs. However, we don't expect these additional volumes to continue into 2023. Administration and selling expenditures in the fourth quarter increased by $2.5 million as compared to last year. The increase is mainly due to higher compensation expenditures, driven by higher accruals for share based compensation, reflecting the impact of the recent increase in our share price and higher performance fee accrual attributable to our strong 2022 financial results. Our outlook for the Sugar segment remains positive as we move into fiscal 2023. Underlying North American demand remained strong across all our customer segments and we expect the increased price implemented in the last year will mitigate the current inflationary pressures. Sales volume in 2023 are expected to reach 790,000 metric tons. This is a slight reduction from fiscal 2022, reflecting the unexpected additional sales opportunities noted in the past two quarters, that we don't expect will reoccur in 2023. Our overall domestic volume is expected to grow slightly in 2023. We are anticipating steady growth in our liquid and consumer volumes, which will be partially offset by a small decrease in our industrial volume, reflecting the one-time sales opportunities of the last two quarters of 2022. Finally, we expect our export volumes to decrease as we focus our sales efforts on meeting the demand of the strong Canadian domestic market. I will now move to our Maple segment. Our overall Maple results were lower than the same quarter last year as inflationary pressures and increased competition continued to negatively impact our business. This unfavorable trend has impacted our Maple business segment throughout the year in 2022. As a result, adjusted EBITDA in the fourth quarter was down $1.4 million, as lower sales volume and higher costs more than offset the benefit of increased pricing. Revenue decreased by $4.5 million as volumes were lower by GBP1.8 million, reflecting increased industry competition. Inflationary pressures continue to affect operating costs, particularly in higher packaging, freight, energy and labor costs. As a result, adjusted gross margin was 8.1% in the quarter, a reduction of 160 basis points from the same quarter last year, but largely in-line with the third-quarter of 2022. As Mike mentioned, we have experienced some delays in passing through increased cost to customers due to the competitive nature of the Maple industry. In the fourth quarter of 2022, we perform our annual accounting impairment testing and concluded that the carrying value of the net assets of our Maple segment exceeded the current estimated recoverable amount. Accordingly, in compliance with IFRS we recorded a non-cash, non-recurring charge of $50 million to our income statement in the fourth quarter. This charge is a non-cash accounting adjustment and has no impact on our ongoing operations or on our commitment to this business. It reflects the weaker results of 2022 and current state of the Maple product market, which has been impacted by the recent challenges in the global economy. Moving forward, we anticipate improvement in the results of our Maple business segment. We believe the unfavorable financial and operating pressures might remain for the first part of 2023. However, as the year progresses, we expect Maple to slowly recover and to deliver slightly improved financial performance as the impact of additional volumes from new customers and price increases on recently negotiated agreements flow through to the bottom line. Before closing, I would like to highlight a few other related financial items. Our consolidated adjusted net earnings for the fourth quarter were $12.2 million or $0.12 per share, compared to $9.6 million or $0.09 per share for the comparable period last year. For the full-fiscal year, adjusted net earnings were $40.7 million or $0.39 per share, up from $33.9 million or $0.33 per share last year. These figures exclude the non-cash impact of the $15 million goodwill impairment charge that we recorded in the fourth quarter. Free-cash flow for the last 12 months was $46.8 million, an increase of $1.7 million compared to the same period last year. The increase was mainly due to higher adjusted EBITDA, excluding non-cash items, partially offset by higher interest and income taxes paid. Our capital expenditures for fiscal 2022 amounted to $23.7 million and were aligned with recent years. The expenditures are mainly related to improvement to our current facility and development of improved business processes aimed at increasing financial performance. For 2023, we expect our capital expenditures to follow the same trend with an approximate spending of $25 million on various capital project. This estimate does not include potential expenditures related to our planned capacity expansion project. As Mike mentioned, we are progressing and planning all aspects of this exciting growth opportunity and we will provide further updates when it is appropriate. Today, we are also announcing that the Board of Directors approved a payment of a $0.09 per share dividend in relation with the results of the fourth quarter, consistent with the dividends paid in previous quarters for the last several years. In closing, I would like to highlight, once again our overall record results of 2022. We expect ongoing stability and strength in our sugar business moving forward. Affirmed need for sugar containing product across North America is providing stable demand for our sugar production. This underlying strength along with our ability to maintain our margins during this current challenging economy provides me with confidence in our operations and our financial results expectations. We remain committed to growing our maple business going forward. In 2023, we anticipate improved financial results as the inflationary pressures should begin to recede in the second half of the year. Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will come from George Doumet at Scotiabank. Please go ahead. Mr. Doumet, your line is open sir. Mr. Doumet? Your first question will come from Michael Van Aelst of TD. Please go ahead. So I guess I'll start with sugar. You talked about the opportunistic sales in Canada. Are you able to quantify how much that was and I'm assuming this is from your primary competitor having some operational challenges? And then the liquid was lower than, I think, what you're guiding. If I remember correctly, in this quarter. Was there any -- was there a possibility of delaying liquid sales that you could -- you been supplies on more commercial and industrial or is it just -- or is there something else that happened? Yeah. No, it's just timing in the market. We wouldn't delay any domestic customer shipments, especially liquid, as you appreciate us, usually just in time delivery. So itâs just timing in the market amongst various customers. There is nothing material. Okay. All right. And then the capacity expansion in Montreal and Toronto that you see. You're not budgeting any CapEx for that this year. When should we expect the CapEx to be recognized? Michael, it's JS here. We are in the design and engineering process right now. So I think we -- our expectation is in the third -- second or third quarter we will have a more firm finalization of the total detail of the project and then we will shortly thereafter probably start spending the project, assuming the project moves forward as expected. Well, we're looking we're currently looking at a few options. Without overly stressing our balance sheet, we're going to take advantage of some of our existing tool. And there's other options available to us. Right now, there is different involved in the year that we're looking at in order to finance that and we're confident in our ability that we will be able to execute that and would it be anticipated timeline for construction. While there is different options that we have, several options. And we don't want -- that will allow us to do so without overly stressing our balance sheet. And as the final detail of the project will be coming along, then we will firm up those option and select our plan. There is a small negligible amount that is still left on the balance sheet, approximately a $3 million at some customer contracts, but most of it, I would say, vast majority of the goodwill has been written-off. Okay and then. I guess -- coming into the year, I think you're expecting -- you're expecting better volumes. I guess I'd like to -- they're going to better as to what -- what were the major changes in the competitive dynamics during the year. And you had new investors in the Canadian maple syrup industry and quoting other financial players jumping in this year, so how has those -- the market dynamics changed over the past year? Michael, as we said in most corners, the Maple business remains very competitive. And as you [indiscernible] a new financial player involved as well. The Maple business will just remain competitive. It is what it is. The difficulty in Maple for us was passing through cost increases through pricing. During the year, the pricing -- the cost pressures came quickly and because of supply chains -- the global supply chains, especially on freight and packaging and components from overseeing and we're not able to get those costs put into new pricing into the customers as quickly as we'd like. And of course, being a highly competitive segment, it makes it even more difficult to get the cost recovery as quickly as you'd like. But we remain focused on it, we're focused on maintaining our share of the global volume, the global market in Maple and we'll continue to toil away maintaining that share. So the price increases that you started to implement, are you getting full pass through or -- like it doesn't sound like you're expecting a full recovery by the second-half of next year and margins. So, is it -- are you assuming that the competitive nature of the industry stays pretty elevated and therefore you don't get full pass-through or do you -- is there any sign that you will be able to get some pass through? And what are those signs? Michael, the pass through would be great if we could get it all through. The whole industry is facing the same cost pressures. And so over time, one would think those pricing increases would get through, but we'll continue to push on them. One of the other competitive factors that developed out of the -- coming out of the year was, we had a bumper crop. So there's lots of syrup now as well and many producers are sitting on syrup. And so [indiscernible] keep the market for different reasons, just more competitive and we will remain engaged in it to make sure we maintain our share. Yes, this year down a little bit Michael. We did see volume drop in the US and in Europe in the whole sector, but it was modest. I kind of remember, coming off of â20 and â21 back to back 20% compound annual growth rates. And so ,the Maple is softening and of course, with food inflation, maple we would see as a luxury item, so we may see further softening in global demand from because of those factors. Hi, good morning. Thanks for taking my questions. I'll start with the Sugar. First, you reference that you expect to increasing, I mean, there is growing demand in the Canadian market. Can you talk a little bit about what is driving this growth? Is the expansion in Montreal are related to this growth that you referenced or is it new demand? Thanks, Endri. It's Mike. Yeah, the growth in the Canadian market is really the phenomena of food manufacturing, sugar containing products, food manufacturers that are making high sugar containing product items, like chocolate and confectionary and other foodstuffs that are manufactured in Canada are taking advantage of the strong sugar supply chain network and favorable world pricing. Manufacturing just continues to grow here to take advantage of those things. We've seen in fact, I think, publicly was announced in the last quarter, one of our large customers is building a brand new plant in Ontario, that is also a sugar containing product manufacturer. So it's just the market dynamics of producing goods here in in Canada for export to the US and other markets. That's great to hear. Thanks, Mike. And the other question I had on sugar and especially if you expect volume to shift from more exports to more domestic. I mean, if I recall correctly, historically, export volumes had higher margins versus domestic one. Do you -- any color you can give us on margin expectations for next year? Sure, with pleasure. The export margins typically are lower margin than domestic margins unless there's some specific specialties or special TRQs that we would have, for example, our [indiscernible] which would be tariff free, but otherwise exports are seeing as opportunistic sales to take and use up any available remaining capacity we might have. Certain timing of quarters which might be softer than other, we can pivot to the export market to make sure we maximize our output. Great, thank you. And then on the Maple a couple of questions there. The first one, you mentioned in the last quarter you might bring in foreign labor. Do you have any updates on that? I mean, we've seen some reports that integration applications are pretty slowly being process [indiscernible] bit over long, but any color you can share there. That's a great question. We're quite proud of the work the team has done with bringing in [donations] (ph). The half of the team that we have recruited are here now, the other half will be here in mid-December. And the Maple team and our HR team have worked diligently for a year to get this done and we're very happy to see that the processes has come to a conclusion there. Here they are working in our plant and we've had great success in getting the final documentation done to have them here. Great, thank you. And the last one I have for Maple. Is there -- I mean, you referenced on the prior questions and your prepared remarks that you expect to pass through prices in Maple, but are you expecting demand in Maple to softened because of inflation input costs. And Maple usually -- I mean as you also mentioned, itâs a luxury items, it usually doesn't sell well if we have a slowed down next year. What gives you confidence that you can pass those prices into second half of â23? Well, we continue to toil away of putting price increases in as contracts come up for renewal. As I said earlier, I think one dynamic is pretty obvious, everybody in the Maple business has the same cost pressures and because it's a global issue, it's not a Atlantic issue. And I would think that over time people will have no choice but to put those cross price -- cost pressure prices through to contracting. We're seeing a modest recovery in our volume with some contracts moving back-and-forth. So too early to tell, but we're cautiously optimistic on the volume for next year, then we're working at maintaining our share of the global market. Question on Maple from me. Maybe sticking with that segment a little bit here. On the -- aside from pricing, I mean, I'm just wondering in terms of the consumer behavior and that product being a luxury item, is there other ways for you guys to maybe stimulate demand? And there I'm thinking maybe of tweaking some SKUs, maybe we do think formats on that product sizes, so that the sticker shock is maybe not as visible for the customer. Any thoughts on initiatives such as other initiatives to sort of stimulate demand there. It's a great question, Fred. We're always looking at our product assortment and our mix and our packing capabilities across various plants and looking to make sure we optimize what we produced to capture the share of the market that we're after. And I wouldn't be prepared to share any details of those strategy on this call. But we're constantly looking at our strategy and adjusting our strategy in Maple to make sure we're executing against our long term plan. Perfect. And maybe on competition in Maple. I'm just curious to see if there is -- if it's a broad based behavior or like if there is a too smaller players that are being less disciplined, just your view on sort of how the market is reacting here? Is this just a few players just being less disciplined or is it the broad based issue? Yeah, it's a great question. I wish I knew. It's largely a private label business. So you really don't know who is on the shelf in this business, but overall, it just remains highly competitive sector of our business and we're committed to the Maple, and we'll continue to toil away at earning our share. Okay. Last question from me, maybe for JS. Just given the upcoming expansion and you're looking at different funding options. Can you remind us what's your leverage comfort level? I think our leverage is about comfortable [indiscernible] I think 3.5 was something that we had. I think I'm looking at where we are right now, we're approximately 2.2, so I think somewhere in between that. So, I think that's where we'd be looking at. But the 3.5 number is what we had stated in the past and that hasn't changed. Yes. Hi, good morning guys. I wanted to ask a little bit -- in the past, you gave us a little bit of kind of at least directional point of view on the EBITDA in the Sugar segment. So obviously there is a quite some puts and takes on the gross margins. I think you called them out, but maybe give us a sense of directionally, it feels like you want -- you guys expect EBITDA to be up, but anything you can provide there. And maybe any commentary on kind of the net effect on the gross margins expected in the next year? Hi, George, itâs JS here. So when we look at our outlook. I think one of the point that we're making is, we had some opportunistic sales in the later part of â22, mainly in the fourth quarter, but also in the third quarter, as Mike mentioned. So we're not expecting those to be there. And so if we look at the volume guidance we have, I think we're fairly consistent with what we had that delivered this year less opportunities -- opportunistic sale. So I think we are expecting our sugar business to be fairly stable. I think from our perspective, the market -- there is demand in the market. We're trying to address the domestic demand as much as possible as we are moving forward in our expansion -- the development of our expansion project. Okay. And maybe on that topic, can you maybe just tell us how much of the 100,000 tonnes would have been made out west and maybe by when do you expect the 400,000 tonnes to be consumed by? Yeah, George, it's Mike. The 100,000 tonnes that -- the expansion will add to our network is attracting a lot of attention from existing and new accounts. And so it's selling well. Our commitment level is looking very good. We move -- depending on what's going on in the business and the peaks and valleys we can move anywhere from 10,000 to 20,000 tonnes a year out of Vancouver, depending on what's going on in the market and how much time we get the plan for some of these events that take place without any warning. Okay. Would you expect that 400,000 to be consumed, I guess, 12 to 18 months after the facility is built? Just kind of put the timeframe. Okay, just one last one from me to JS. Quite a big working capital drag this year. Maybe how should we think of working capital next year? Any color you could provide there. Thanks. Yes, George. Working capital this year, the reduction in working capital is mainly timing. If you look, we can make a very close link to our inventory level and lot of it is timing and when we are receiving some vessels for our rocking sugar from -- in our Vancouver and Montreal facility and also the timing of some of the purchase of maple syrup. As Mike mentioned, we had a bumper crop this year. So we didn't have to go and buy later in the year in that feedback reserve. So a lot of those are timing related. We're not expecting to have working capital drag actually, should rebound the following in. There are no other questions. So at this time, I will turn the conference back to Mike Walton for any closing remarks. Thank you, operator. And we look forward to speaking to everybody in Q2 as we update the results of our Q1 program. So have a safe and happy holiday season and we'll talk to you. Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating, and ask you to kindly disconnect your lines.
EarningCall_1863	All right. All right. Good afternoon, everyone. Welcome to the Final Day of the Credit Suisse 26th Annual Technology Conference. My name is Phil Winslow. Iâm the software analyst. I recognize many of you from prior sessions, so thank you joining us as always. Very excited to have what has been one of our favorite stories for many, many years, Cloudflare, and a longtime friend, Thomas Seifert, the CFO. Thomas, thanks for coming down, appreciated. And so â so I was actually â when I was prepping for this, I started to think I was like, you know what, youâve just celebrated your five-year anniversary at Cloudflare just this June. And I guess just to level set things for everybody, could you sort of just reflect back since the time that you assume this position. Can you walk us maybe some of the key issues, initiatives that you and management team that have addressed? And how is that evolving to where you are right now in the go forward strategy? Well, first of all, five years, thatâs the longest Iâve been in for a while, and it has been quite a ride. Every time we get ready for an earnings call and we pick what are the customer samples we want to show and how do we talk about new products, and we said, gosh, we did all this in a quarter. Now you want me to summarize the five years. I â we went public. That was a huge initiative. And itâs not so much the fact that we went public. Itâs I think what differentiated it is how much effort we put into the pre-IPO getting ready for being a public company. And thereâs always this donât worry about this one day in your life, worry about what comes after it and what systems do we need and what processes do we need, not only to be a public company, but how do we scale, what is life going to look like when you are running for at this time â at that time $500 million of revenue. So that was always a big part of us thinking ahead and getting ready to scale system-wise, process-wise, people-wise. And when you grow north of 50% for compounding it for so many years that is the true challenge. I think what is always amazing to me even after five years is the amount of innovation that happens. I still remember when we try to find a way to convey our business model in simple terms and have people like you understand what Cloudflare is all about, and we came up at that time with this bumper of Cisco â Cisco as a service, right, and that was quite a way to get started, but you have added â weâve added zero trust. We added network services. We added storage products. Thereâs workers and edge computing. So the sheer amount of innovation that happened over the five years, I think, is astonishing and keeps us up. The network went from 270 points of presence in many cities. We are in more than one location. Now this journey, I think that from a premium model to a pay-as-you-go model where people give us a credit card, to place now where most of our revenue comes from enterprise customers and large enterprise customers, customers that pay us more than $100,000 per year is for more than 50% of our revenue. And we still had this reputation less than three years ago. Oh, youâre only serving small businesses and developers. So digesting this as a company in terms of go-to-market and messaging and branding, I think, was a big part of what kept us up and will keep us up on â on the journey to the next milestone. How do we move up the enterprise stack from our customer size and structure perspective and still keep what we think makes us competitive and efficient as we scale up. So there was plenty to do and thereâs still a still a lot that needs to get done, yes. Yes. So, well, youâre still growing, youâre growing fast and youâre driving the train at scale. So it only gets itâs harder, but thatâs a fun part. It is. The â so weâve talked about over the sort of the past five years. Now the next question is one that Iâm sure you wouldnât have guessed is the near-term. So the â because weâve been asking everyone with obviously theyâre these cross currents and headwinds, macro, geopolitical. How are customer conversations changing? You talked about this a little bit on the last call, but what is being prioritized, maybe de-prioritized where are people saying, look, I need to invest in Cloudflare now versus maybe taking a little longer. Yes. Well, for us, this was a picture that started to form really early. I mean I think we â the first time we talked about headwinds that would be building up was as early as the fourth quarter of last year already and people just â we had a little folks at that time gave us a little credit for that. But we see a lot. We see a lot of data and that influences business decisions. So what has certainly become a theme over the last two or three quarters is that new logo acquisitions have become significantly more difficult that the more ACV is under negotiation, the longer it takes people measured twice before they sign. Weâve seen that. And we have not seen many changes to the better over the last two quarters to be very honest. Where we see hope, especially unique to us, is when it comes to security and the threat landscape has not â has become more relentless. The war in the Ukraine does its thing to heighten the threat landscape. So there are certain tailwinds that we are seeing. But overall, from a macro perspective, the themes that showed up in the second quarter continued in the third and have not changed materially in the fourth quarter. Got it. So we went from five years, the last few quarters. Letâs talk about today now, actually sort of the blog post that I woke up to this morning. And so obviously, in the blog post, you talked about this is going to be your first price increase in 12 years, 25% beginning January 2023. But you also announced the option of â to pay annually rather than monthly, but do so at a discounted rate. So the question Iâm beginning in the hallway is, hey, could you help us figure out sort of the why behind the change and also just the kind of the math on the sort of the impact so to speak. Yes. So there are â if you look at our business, there are literally three parts to it. Thereâs a freemium business, where you have millions of customers that use our products and services for free. Then there is a business that we call pay-as-you-go. This is literally how the company got started, where folks gave us a credit card, and we charged them in the beginning $20 a month and then later $200 a month. And you bought literally eat-as-much-as-you-can plan, right? Everything that we offered in terms of products and services was included in this plan. And then there is an enterprise business, which is today the majority of the business. So when we talk about this price increase, it refers to the pay-as-you-go business, where people gave us a credit card and give us a credit card, and we charge them monthly. So this is a business that is less than 15% of our revenue. So, it used to be all of Cloudflare, now itâs significantly less. And weâve had discussions over the years a lot in terms of when do we increase prices in these segments because what you get today for $20 is very much different from what you got for $20 10, 11, 12 years ago in terms of number of products, quality of products and service levels. So we have been doing a lot of work over the years, when would be the right time, what is the price sensitivity in this segment and we decided to do it now. Well, there is inflation, but cost is not really the important part. Itâs also not so much a revenue topic to be very honest. Weâve been quite vocal about our push to get to free cash flow breakeven. And the important part in this program of raising prices is not only that prices will be increased, but that you can lock in existing prices if you commit to an annual plan. And I think this is literally the main motivation behind this move is turning another 15% of our revenue, probably not fully, but to a larger extent from a monthly to an annual billing concept with all the advantages that comes upfront, which gives us an opportunity to reinvest more and earlier into more innovation. But thatâs pretty much the motivation behind it. Excellent, thank you. All right. So letâs zoom back out here for a moment because Cloudflare at a high level, addresses multiple markets, application services, Zero Trust, network services to develop the platform. Can you really touch on the opportunity in each of those markets, specifically, where are you seeing the most growth and traction near term, but what offers the greatest longer-term opportunity? So, we started application services, Cisco-as-a-Service is how we got started. This is obviously today the main portion of our revenue. The IPO we sized it, this is a TAM of about $35-ish billion that we are going to disrupt. The second wave of product is what you call Zero Trust or is Cloudflare One for us. So thatâs e-mail, browser isolation, access, gateway and now a fifth product feature called Threat Intelligence that falls into that category. Itâs probably another $30 billion to $35 billion market that we are disrupting. We call it a second wave product. So, itâs gaining momentum this year. It will be a significant part from an ACV new business generation opportunity next year. So, this will drive growth in the short term. And then network services come next. And then there is storage. And then there is Workers. Workers is a product that allows you to literally write code and deploy code at the edge of our network. That is how it started. Now it has become significantly more. I remember discussions as early as five years ago where people said, you have to push this for revenue and we are not going to monetize it? And Matthew, thank God, was really strong pushing back and said this is not about revenue, this is about adoption, how do you get more developers on the platform. So, even in the next year, this will not be a significant revenue opportunity that will come towards the end of this five-year horizon. Got it. Yes. And so when we started discussion, you talked about the $0.5 billion, now $1 billion. And obviously, youâve given the target of $5 billion. But just like how Cloudflareâs revenue streams have evolved to your point or call it past five years, when you think about sort of this next target $5 billion, how do these revenue streams evolve from here? Like how does the contribution mix change when you think about sort of backing into that $5 billion? I think our core business will continue to grow. Zero Trust will be the second wave that builds on that, then we will see Network Services and Storage and then Workers will come at the end. I think what makes this discussion so interesting for us is that we think we can get there with the products we have or in the features that are in the short-term pipeline. Because, first of all, the innovation engine is so strong. And then, of course, the TAM that we address is quite significant, and we have penetrated only to less than 1% at this point. I definitely say that Cloudflare has a very big menu. To choose from there, multiple pass and multiple different options to choose from that are kind of connected, disconnected, but actually you all do provide. And very unique in the sense of what you provide versus other people that maybe are just focusing on a sliver of that. When you think about just multiproduct, call it bundling or go-to-market, how do you expect this to evolve at Cloudflare? How is this sort of changing or impacting your competitive position? I think it will impact it rather favorably. I mean when we â the first part of the journey was literally all-you-can-eat plans. And we sold you everything you want in one piece or in single pieces. As product complexity increases, you have to find way to make it digestible. So we thought like all successful software companies that went ahead of us and in front of us, we bundle our products in groups application services is one zero trust or what we call Cloudflare One is another really important bundle. And you become this one-stop shopping place where people can bundle point solutions in one platform, through one control plane with all the efficiencies that come from a cost, from an ROI and from a performance perspective and especially on Cloudflare One which is zero trust security bundle. We want to be this place, where customers and enterprises go for anything that concerns enterprise security, similar to you go to Microsoft 365 when you think about enterprise productivity. Thatâs the kind of opportunity, I think, we have. And the products are put in place now. There are five now that make up this bundle, you can buy it in one. Yes. And so when you think about this, letâs double-click on Zero Trust and call it Cloudflare for a little bit because to your point, you have this bundle. So when you can talk about sort of the key products, obviously, you talked about access, but youâve remote browser isolation, you have added e-mail. So you have this bundle. But you also and if you think about your â you can actually have a more modular, you can just take RBI, you adjust your components of it. So how does that impact both you competitively, the go-to-market and how customers can adopt. Well, it gives us and the customer, the utmost flexibility, right? If your gateway on-premise licenses up for renegotiation, we can just sell you that and pick up the other features as need moves or as budget dollars moves or as existing contracts expire, we can sell also the whole bundle. What makes it so interesting from our perspective is that once you are on the network, with one product and one feature, literally every additional service we offer is one mouse click away, right? This is the neat part about â there are no professional services. There are no Cloudflare employees that need to sit you and get on promise. And you see the benefit of moving to the next product immediately. We have now a feature that we call Fly Fishing, where for enterprise customers, testing out all features that we have is just an opportunity. If youâre an enterprise customer, you have five products. You can test every other feature that is on the platform for a certain period of time. And if you are a firewall customer and you switch on bot mitigation, you probably see that 40% of the traffic that hits here, your firewalls or your load balances as malicious traffic. So enabling the feature automatically instantly reduces whatever the 30% to 40% of the traffic. It lowers your cost, it increases your security posture. So in terms of flexibility for the customer, itâs huge. And for us in terms of finding a path to expansion is very close at hand. Letâs talk competitively a little bit about the Zero Trust and sort of just SASE market because there seems to be sort of a split right now when we think about sort of, call it, the architecture. So youâve got people that maintain their own their PoPs, own networks, NetsGo, Cloudflare, et cetera, versus those who are trying to leverage hyperscalers really Palo Alto Networks, Checkpoint. Can you walk us through sort of why running your own network is the optimal architecture versus â and how this sort of impacts the competitive dynamics versus these others that donât. Our CTO, would sit here, I would say, the speed of light that is the reason and that is â thatâs an early answer, but itâs true in a way. That is the thing we cannot make faster, so the wayâ¦ There is â at least not in our universe. We need to get as close to the eyeballs as possible. This is what we have done with our reverse proxy. And our Zero Trust offerings run through the same network, through the same points of presence. So the performance, the latency you have by being this close to the eyeballs, regardless of where you are in the world, not in big cities, where a lot of knowledge workers live, but even in remote places is one of the big advantages of our architecture not sitting on a hyperscaler, owning our own infrastructure. And everything we do over the 12 years, you talked about what else did we do is getting closer to the eyeballs that want to connect. And today, we are less than 100 milliseconds away from 99% of the things, things that want to connect to the Internet. Thatâs a clear performance improvement and the advantage that we have in the architecture we offer. Got it. Letâs talk about another advantage. I think itâs a little maybe unique and esoteric, but is often overlooked as Cloudflare versus letâs say other Zero Trust or SASE players that use, letâs say, forward proxy networks to secure users access to applications or a Cloudflare added these four proxy capabilities to your core reverse proxies. So youâre forward and reverse. Youâre both ends of the connection theoretically. What can that do for you as you sit in front of more and more of the Internet and more and more of the origin service, but also more users? What can you do security-wise connection â the performance of the connection, et cetera? So the connection to the application and the application and the data you want to address in some cases, if its cash is siding in the PoP that youâre addressing, and that is huge from a performance and from a latency perspective, a huge benefit. It has some other benefits to our business model. Because you have to imagine that the reverse proxy, all the first wave of products is paying for the infrastructure of the network. So how the network is cost structure, itâs the size of the pipe that is moving data is determining the cost and not the amount of data that goes back and forth. So the size of the pipe is already sized by the reverse proxy. Zero Trust is a products are bringing traffic back, the size of the pipe is there. So we are adding these products at literally 0 marginal cost to our infrastructure. They are very high margin, and this gives us an advantage in how we partner and how we can compete in this market. So there are significant security and performance advantages for the customer, but they are inherent competitive advantages just in the architecture of the network itself that allows us to be super competitive in the space. Yes. Pay for the higher egress and ingress. Egress is up here. So therefore, it takes a long time to close those two and it subsidizes the other. I think thatâs another â Iâm glad you brought that up. That was actually my next question. Because I think thatâs an aspect of it to the people, itâs not just the performance, not just security be on both ends, but egress and ingress, thereâs a pricing dynamic here and a gross margin. And so letâs talk about extending Cloudflareâs network directly into building. So point it to be as close as possible with Cloudflare for offices. Youâre talking about moving Cloudflare is basically backbone directly into it where millions of people work. So how does â is this a multiplier when you think about your global background, your SaaS initiatives, edge computing with workers, et cetera? Well, in the â if you keep the philosophy of how can you get closer and closer to the eyeballs that connect, then pushing your â the edge of your network out as far as possible is hugely important. And today, we are in north of 270 cities, north of 100 countries in many cities in more than one location. This gives us now literally an opportunity to move into additional hundreds and thousands of office buildings. So you get closer to what connects you, you allow a smoother on-ramp of our customers into our network. But it also allows you to turn this around and get moving forward our services and products closer to the eyeballs that want to connect. So thatâs a huge opportunity for us in all fairness. From an investment perspective, we slowed this down a little bit because the post-COVID world needs to figure itself out, which offices will grow and which office locations will move forward. But itâs a really interesting concept for us to take â to move the edge further out inâ¦ Exactly. I love the line of your blog post, the most global network, but also the most local. And so those are great line. So weâre going to go on to what is one of my favorite topics. You know this. I mean, Iâve obviously been â so Iâd call it the original fan boy of Workers five years ago. And obviously, we remain huge believers in just the rise of the edge is really a third tier of compute and storage. Now you think back to the Cloudflare Connect, Matthew highlighted 450,000 developers are using Workers, with the goal of having million developers by year-end. Can you walk us through just sort of think the growth trajectory? You touched on this a little bit earlier, thinking about adoption first. But how do you think about this platform? What are the key puts and takes? Well, for Workers was â you talked about the five years and the initiatives work has started actually before it. But it was one of these key innovations that allowed us to be what we are and to keep this speed of innovation, right? Worker is literally this product that allows you to write and deploy code at the edge of our network. And it was originally developed for us, right. Because we saw that in our traditional development processes, we were slowed down, how we â how fast we could deploy, how fast we could test. And our innovation rate came down. And then in one of those interesting sessions, night sessions at a restaurant, not far from our office, this idea of workers was born and then further developed. And then we opened it up as a product for our customers. So the original application was actually enabling our customers to use our products and use Workers in conjunction to make our products the most customized version of whatever they wanted to buy. So you had load balancer, your business model was about uptime. You attach to Workers and you made this the most customized load balance on the planet, and that was true for every product. Today, itâs much more. And the idea has changed over time. This is really, really interesting blog post that Matthew wrote a couple of â two years ago, I think it was now I said when we built workers and we looked at the use cases that could benefit from the ability to deploy code at the edge of our network. And you have to â you think about before workers, there were two places where you could write code. You could drive it on your â on an endpoint on your mobile phone and your laptop wherever compute speed was latency dependent and important or you could deploy code in a data center where speed and execution was the most important parameter the edge of our network, you try to optimize for both, right, almost at the latency as if it were on the device because you are less than 100 milliseconds away from the device, but at the speed if it were in the data center. So this is how this all started. And so we saw it in the beginning that the most interesting use cases would all be about speed and taking advantage of that. We learned over time that it shifted that actually be deploying code at the edge of our network, together with the fact that we have this very global, but very local network allowed for use cases where the controlling the flow of data was the most important criteria, especially in a world where data serenity and data privacy is of increasing importance, whether itâs Europe, South Korea, Brazil. So the ability to wrap something around the piece of data and saying, this is Philâs credit card number at Credit Suisse. You can only be move between data centers in Switzerland and only in data centers of that security class became almost â all of a sudden, the most important use case. Today, this has evolved. Itâs about controlling the flow of data; minimizing, maximizing speed; and minimizing Egress Fees data that has high moving philosophy needs to be moved between different clouds. And adoption has exploded. We are on our path to million developers, as you just said. And the diversity of use case is just incredible from controlling flow of data, building and rearchitecting complete business models on workers. We just announced together with a large group of venture capital firms a $2 billion fund that supports start-ups that are founded on Workers, and we just priced out the first and awarded prices and support based on this. So it has become this unique tool, so to speak. And Iâm glad we didnât drive for revenue maximization, but for penetration and adoption. And it will it will get to revenue by itself. Exactly give a time. Give it time, and so I can keep talking about Workers in R2 and D1 all day, but okay, letâs focus on go to market because I do get this question because obviously, that was one of the big announcements on the Q3 call. Obviously, Chris Merritt, incredible run do you know [indiscernible] Cloudflare. Matthew, I think, said less than 10, and I did some math here, and I could only find 7, itâs how people that have gone from zero to... Okay. So maybe somewhere between 7% and 9%. 7% to 9% okay. So I must have forgotten somebody along the way. But point being very few. The â but what was the thought process I call it the skills, the experience that Marc now brings to when you think about sort of the next evolution of Cloudflare from a go-to-market motion perspective when you think about in particular that $5 billion target, what needed to evolve? Itâs a good question. So it was a rather smooth process because Chris was rather proactive when we signed. So we had lots of time to get ready and find the right person. We think weâre convinced we found the right person with Marc. But if you â if you just go back from the person for a second and look at the business model, right, so there is freemium, there is pay-as-you-go, there is enterprise. So in our evolution you need a go-to-market leader that understands and is familiar with all three motions. Itâs really easy. Itâs a lot easier, I shouldnât say easy. Itâs a lot easier to find experience enterprise salespeople, but we are more than just enterprise sales. Our efficiency, our cost of customer acquisition, the ease of install of use for the product literally comes from the freemium and pay-as-you-go model, right? If you sign-up with your home block or your home page, it takes you five minutes. If the largest bank in New York signs up, it takes five hours. So there is a reason why it only takes five hours. So you need somebody who is familiar with all three go-to-market motions and is comfortable in them. That was a big part. I think the â of course we needed somebody who has seen scale before this is getting to you learn that whatever gets you to 100 doesnât get you to 500, will not get you to 1 billion, will not get you to 5 billion. So you need somebody who has seen that before. I think the other thing that makes us really unique is that our sales motion on all three go-to-market venues is a very data-driven approach. So this relationship is important, campaigns are important, personas are important that we target, but data really drives our go-to-market motion. So you have to have somebody in this lead revenue responsibility position that is highly comfortable with data science and making use of the data, and we think Marc is. So he hit all the prerequisites and the chemistry was good, and heâs a fun person to work with. So heâs a couple of weeks in his job. Iâm going to get his arms around it, because I think we are off to a good start. Awesome, alright. Our 30 minutes is up. But I always like to end with one final question, which is, letâs say weâre sitting up here two, three years from now, what do you think that youâre going to look back on and say, hey, sort of this technology, this product is trend or maybe even call it something in the business model that it was more impactful to Cloudflare and its customers and maybe people were giving a credit for back in 2022? I think there are two parts that I would answer, for sure Workers. I think the opportunity, the potential, the disruption that will come with workers and how it develops and what we now call super cloud computing is going to be very disruptive. I still think that the architecture of the network itself that you have this off-the-shelf hardware in a software stack that allows you to deliver every product and service we have on every server. And now imagine the server is not in 200 cities, itâs in thousands of buildings. It could be on endpoints. We talked about having in virtual SIM card, without their SIM card is I think thereâs still even after 10 years, the most underestimated part in the competitive moat we have built and we will look back to that and say this drives, and being global and so much local at the same time is I think what makes us...
EarningCall_1864	Good day and thank you for standing by. Welcome to the Ciena Fiscal Fourth Quarter and Year-End 2022 Results. [Operator Instructions] Please be advised that todayâs conference is being recorded. I would now like to hand the conference over to your speaker today, Gregg Lampf, Vice President of Investor Relations. Please go ahead. Thank you, Katherine. Good morning and welcome to Cienaâs 2022 fiscal fourth quarter and year-end review. On the call today is Gary Smith, President and CEO and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services is also with us for Q&A. In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor presentation that reflects this discussion, as well as certain highlighted items from the previous -- from the quarter and the fiscal year. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business, as well as a discussion of our financial outlook. Todayâs discussion includes certain adjusted or non-GAAP measures of Cienaâs results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in todayâs press release. Before turning the call over to Gary, I will remind you that during this call we will be making certain forward-looking statements. Such statements, including our quarterly and annual guidance and long-term financial outlook, discussion of market opportunities and strategy and commentary about impacts of supply chain constraints on our business and results are based on current expectations, forecasts and assumptions regarding the company and its markets, which include certain risks and uncertainties that could cause actual results to differ materially from the statements discussed today. Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we will post shortly after, are an important part of such forward-looking statements and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-Q filing and in our upcoming 10-K filing. Our 10-K is required to be filed with the SEC by December 28 and we expect to file by that date. Ciena assumes no obligations to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. As always, we will allow for as much Q&A as possible today. I will ask that you limit yourselves to one question and one follow-up. Thanks, Gregg and good morning everyone. Today, we reported strong fiscal fourth quarter results, including higher-than-expected revenue of $971 million and adjusted gross margin of 45.2%. This performance reflects the benefit of some favorable supply chain dynamics that occurred in the second half of the quarter, including that we received more integrated circuits than expected from certain suppliers and that we were also able to procure more parts in the open market than originally projected. These developments enabled us to ship more products to customers in the quarter, especially modems, which also had a positive impact on both revenue and margin. For the full fiscal year, we delivered revenue of $3.63 billion, essentially flat with fiscal 2021, due entirely to the challenging supply chain conditions that we encountered during the year. Despite the difficult supply environment in fiscal â22, we saw robust demand from customers across our segments, regions and applications, as evidenced by annual order growth of 26% and a backlog of greater than $4 billion as we exited the year. Our results across FY â22, including the strong finish in Q4, demonstrate the continued volatility and unpredictable nature of the current supply dynamics. With respect to supply, overall, we are seeing ongoing signs of gradual improvement. The majority of our suppliers are delivering to their current committed lead times and volumes are slowly increasing. And we also expect continued improvements in these areas as we move through fiscal 2023. We are also starting to benefit from the various mitigation steps that we have taken over the last year or so. As a reminder, these include product engineering redesigns and qualification of alternative components designed to minimize the impact of supply chain challenges on our customers. At the same time, the unpredictable performance of specific vendors for a relatively small number of components, even if they are low cost, low value, can negatively and disproportionately impact our revenue and significantly shift our product mix, which is what happened in Q3 of last year. Conversely, our Q4 results, particularly on revenue and margin, illustrate how these same supply dynamics can have an unexpected and disproportionate impact in a favorable direction. So to be clear, the volatility can obviously manifest as both headwinds and tailwinds, but generally, we believe them to be moving in the positive direction. With respect to demand, we remain very positive that the fundamental drivers, including 5G, cloud and automation are durable over the long-term. Based on these drivers for network investment, we continue to see a strong demand environment in the coming quarters and the next several years. Importantly, we are confident that our leading technology, as well as our strategy to expand our addressable market in key areas are closely aligned with these drivers and the areas of investment for our customers. As we look to FY â23, specifically the combination of continued signs of gradual supply improvement and our significant backlog gives us confidence that we will deliver outsized year-on-year revenue growth and gain market share. Jim will expand upon this shortly with more specifics on our outlook and how we are thinking about our business over the longer term within these demand and supply conditions. Before he does that, I want to share a few highlights from the fourth quarter and fiscal year. Of particular note is the growth in our routing and switching portfolio, for which quarterly revenue was up nearly 40% year-over-year in Q4 as we benefited from the addition of the Viada Solutions and organic portfolio enhancements. In fact, during Q4, we reached a milestone of more than 200 Adaptive IP customers, fueled by momentum in coherent routing, metro aggregation, PON and high-speed business services. And we continue to invest in our next-gen metro and edge strategy, particularly in our routing and switching portfolio. As you saw, we recently closed the acquisition of Benu Networks and announced that we are acquiring Tibit Communications, which we expect to close in Q1 â23. These acquisitions will enable us to build upon our existing strategic investments in fiber broadband access and pursue a larger set of opportunities in this market segment. Specifically, the addition of advanced subscriber management and next-generation PON technologies will advance our ability to address fast-growing applications, including residential broadband, enterprise business services and fixed wireless access. This also represents a significant addressable market expansion for Ciena, something we have been talking to you about for some time within our routing and switching segment and is expected to be a considerable investment area for many customers. In optical, we added 15 new customers for WaveLogic 5e in Q4, bringing our total global customer count to more than 200 with more than 50,000 WaveLogic 5e modems shipped to-date. In Blue Planet, we won several new logos during the year, while expanding our presence at a number of Tier 1 service providers. Additionally, our strategic win at DISH has now gone live with both our inventory and our service order orchestration solutions. And our network transformation services grew 50% year-over-year. I think this really reflects the increased demand from customers to move from legacy to next-generation networks. And lastly, with respect to diversification, our non-telco revenue was approximately 40% for the year. And within that four of our top 10 customers were major web-scalers. And like last year, we had more than $1 billion in orders from web-scale customers in FY â22, once again demonstrating continued strong demand from this key customer segment. With that, I will now hand over to Jim to take us through the results in a little more detail and provide our outlook. Jim? Thanks, Gary. Good morning, everyone. As Gary mentioned, we delivered a very strong Q4 performance. Revenue came in at $971 million, well above the midpoint of our guide. This revenue result speaks to the durability of demand and the clear need by our customers for more equipment faster. Importantly, it illustrates what can happen when we get more of the components that have been in the shorter supply and which have most severely gated our deliveries to customers. Additionally, it reflects some benefit of additional production capacity brought on with our investments, which helped us to deliver our largest shipments month in history in October. Q4 adjusted gross margin was strong at 45.2%, reflecting a favorable product mix as well as lower-than-expected incremental supply and logistics costs in the quarter. Adjusted gross margin in the quarter benefited from the greater-than-expected supply of key components allowing us to deliver more modems. Clearly, availability of components and the performance of our vendors play a disproportionate role in our quarterly mix of deliveries. Q4 adjusted operating expense was as expected at $313 million. With respect to profitability measures, in Q4, we delivered adjusted operating margin of 13%, adjusted net income of $91 million and adjusted EPS of $0.61 per share. In addition, in Q4, our adjusted EBITDA was $154 million. Cash used in operations was $14 million. We continue to build inventory of certain components in Q4 while we wait for delivery of those components that are the most constrained. We also experienced a back-end loaded quarter, which caused accounts receivable to increase. With respect to our performance for the full fiscal year, annual revenue was $3.63 billion. As Gary mentioned, we ended the year with $4.2 billion in backlog, slightly below where we ended in Q3, but still nearly double our backlog as we entered fiscal 2022. We have obviously seen periods of record order volumes and significant backlog growth in fiscal year â22. That said, as supply chain conditions gradually improved, we expect order growth relative to revenue and backlog to moderate over time even in a strong demand environment. Adjusted gross margin for the year was 43.6%, a good result and in line with expectations and adjusted OpEx for the year totaled $1.17 billion. Given our large order intake throughout the year, we paid higher sales commissions than we had planned. However, with lower-than-expected revenue and operating income, we will pay a much lower corporate incentive bonus than originally planned. If normalized for these two items, adjusted OpEx would have been just over $1.2 billion, which was what we expected and guided for the year. Moving to profitability. Adjusted operating margin in fiscal year â22 was 11.2% and adjusted EPS was $1.90. Free cash flow for fiscal â22 was negative $259 million. This reflects the increase in inventory caused by lack of availability of a few key components. Finally, our balance sheet remains strong as we ended the year with approximately $1.2 billion in cash and investments. Just as a reminder, we also met our goal of repurchasing $500 million in shares in the year and plan to repurchase shares in fiscal â23 in the range of $250 million. Turning to guidance. In the last few years, our revenue has been relatively flat as a result of the unique market conditions that stemmed from a global pandemic, which led to the supply chain crisis. Looking forward, we see signs of continued gradual supply improvement, which, when combined with our significant backlog, sets us up well for outsized growth in fiscal â23. Accordingly, we expect to grow our revenue in the year in the range of 16% to 18%. To be clear, this outlook includes key assumptions that are particularly important in a still uncertain environment. First, with respect to macroeconomic conditions and geopolitical dynamics, due to the size of our backlog, we believe our fiscal â23 outlook is somewhat less dependent on the macro environment than in a typical year. That said, to be clear, our guide assumes that the global economy does not significantly worsen and more importantly that there are no material adverse effects on our business. Second, with respect to component availability and general supply conditions, as Gary mentioned, we continue to see and we expect volatility, but we have seen overall improvement. Our forecast assumes that supply chain dynamics do not worsen. With respect to gross margin for fiscal 2023, our outlook reflects the expectation that supply and logistics costs will ease somewhat, but will remain elevated. And that as supply improves we will take more revenue on the new wins we have secured over the last several years -- two years. Accordingly, we believe that our gross margin for the full-year 2023 will be in the range of 42% to 44%. Our operating expense, intend to continue investing strategically on our business in order to expand our addressable market and to advance our position in key growth areas. Therefore, we expect adjusted operating expense to average $325 million per quarter in fiscal â23. I will point out that we are using an as adjusted tax rate of 22% in our fiscal â23 outlook. The 1.8% rate increase from last yearâs 20.2% rate takes into consideration our best estimate of having increased taxable income and higher tax rate locations during the fiscal year. In the more immediate term for Q1 2023, we expect to deliver revenue in a range of $910 million to $990 million, adjusted gross margin in the low-40s range and adjusted operating expense between $320 million and $325 million. Looking beyond next year, we remain confident in the positive secular demand drivers, including continued growth in bandwidth demand, which over a long period of time has been unaffected by macroeconomic conditions. We believe our customers will be compelled to prioritize network CapEx to address this demand over the coming quarters and years. And as we continue investing in our long-term strategy to expand our addressable market, we will be in a strong position to intersect those customer network investments. All of that, in combination with more normalized supply chain conditions, positions us well to deliver strong revenue growth over the next several years. More specifically, we expect the industry to grow in approximately the mid single-digits percentages during this time period and we intend you to gain footprint and take market share as we have over the last decade. That said our revenue growth over the next three years will not be linear, particularly given our expectations for outsized revenue growth in fiscal â23 predominantly driven by improvement in supply. Our revenue growth expectations for fiscal â24 and fiscal â25 are based on an assumption of more normal business conditions, which are by definition more dependent upon the macro environment. Nevertheless, we are confident in continued strong demand dynamics and our leading market position. For that reason, we currently expect to deliver a three-year annual revenue growth rate in the 10% to 12% range throughout fiscal 2025. That does take into account the 16% to 18% next year. Furthermore, we expect over the next several years that adjusted gross margin will improve to the mid-40s range and that we will increase profitability. In closing, while â22 has been a challenging year for Ciena, because of supply chain conditions, our market position has never been better and we expect that it will continue to improve. Demand for bandwidth is growing at rates of 30% plus. Demand for capacity from customers is sturdy and Ciena has the best technology and customer relationships in the industry. We believe that our supply chain will continue to improve as we move through â23, which will enable us to better service the strong demand from customers. And we believe that our financial results will reflect this. Weâre also aware of a technical issue with the Q&A line. Weâre resending a link to the cell setters for you to be able to access that way. Hi, this is Karan Juvekar on from Morgan Stanley. Congratulations on the results. And I guess just first question being, as youâve seen supply chain loosen up a bit in the second half of the quarter, have you seen any changes to maybe customer conversations, maybe with conversations with customers that have moved to other vendors or maybe just generally at a high level, any incremental hesitation around macro and maybe any purchasing patterns? So why donât I take the second part of that? The answer to your question is no, we havenât. We continue to see, as we talked about in the earlier comments, very strong demand characteristics across the board, across geographies, across applications, across different customer segments. And thatâs evidenced from a demand point of view in the outsized order that we -- orders that we received in the year. When you think about it, weâve got 26% order growth in the year. And thatâs a very strong indicator around demand. And a lot of our customers still want the equipment faster than we can get it to them for all the secular demand dynamics that weâre aware of. So not seeing any change right now across the customer piece in terms of demand. Scott, do you want to comment on any of the supply chain stuff specifically? In the supply chain stuff side that Gary mentioned it, we got more supply of components than we were expecting in the second half of the quarter. And that was across the board, but particularly important was those constrained components also we saw more supply. We also have more success in procuring those in the open broker market as well. And given the investments that we've talked about in the past around building up a bigger manufacturing capacity so we can turn those components into finished goods faster, that came into play significantly in our month of October. And I think Jim mentioned, our biggest shipment month ever. Got it. Okay. That's very helpful. And then just a quick follow-up on maybe just quantifying or just any idea on how much of a benefit in the quarter the price increases was? And maybe how should we expect that to trend sequentially to Q1? Anything we should expect, an uptick sequentially? Or how we should think about that? Still not seeing a ton of effect of that price increase in Q4. We did not see it. As we look into our backlog, it is there. It's fully encompassed in our guide. And without giving a number, I'll just say that it's in the single-digit percentages ranges. Thanks. Gary and Jim, I did hear your responses to the previous question during the calls, but I'm still going to ask you two related questions. One, one of your competitors have made comments about competitive gains. They clearly were referring to you, and I trust you listened to the Infinera call about competitive gains due to inability -- your inability to deliver because of the supply constraints. The question obviously being to what extent that has been an issue. But from your comments, it doesn't sound like it's a big issue. The other related question, again, from your comments, it sounds like not an issue, but given via the Corning, CommScope's commentary, a lot of which seem to be specific to AT&T, but perhaps other Tier 1s as well, it doesn't sound like you're seeing weakness, but I want to ask you the question. Look, let me take the first part of that, Paul. Listen, there's been a lot of volatility with sort of whipsawing in supply and demand at any one moment in time and any given account. If we're sharing with others, then they're obviously going to try and get supply from who they can. I would say, overall, and we are also taking new accounts as well. Overall, I mean, I think the order demand and the performance in Q4 kind of speaks for itself. And we expect very strong share gains, which are really built into our backlog and our guidance for the year. So our share gain is in our orders, and customers have voted. And they continue to migrate towards the best technology at scale, which is what Ciena has. Take part of that question, do you want to? Our outlook for all of our major customers is good, and our order volume is good. We're not seeing any sign of weakness in AT&T or any of our major customers. All right. And Gary, just to be clear, going back to the share gain commentary, if you have lost in certain situations share because of inability to deliver, you're telling us that's not among Tier 1s or it's not something you think is... We've not lost any major customers whatsoever during this. And if there are particular, one moment in time someone shipped more than we have into that, we think that is transitory given the demand characteristics that we're seeing and engagement with these customers. Just to be clear though, Paul, we did see a relatively small number of cancellations in the quarter, probably the same dynamics that Gary is talking about. But that number has been overshadowed by the strong demand that we see overall. And whatever share we might have lost in any account, I'm confident that we will get it back over the coming quarters and years. Alright. And for my follow-up, there is obviously been a lot of investor concern about web-scale, the health web-scale, in particular. From the commentary of the various major web-scale players certainly suggest they are not coming back on [indiscernible]. They set a strategic -- what are you guys seeing from that segment? Obviously, not just here now, but looking downstream. So we had a very strong performance both in terms of revenue and in terms of order intake. It was well over $1 billion. We're continuing as we work with them in FY â23, we expect to shift revenue significantly more to GCN than we did last year. And that's a combination of orders that we've got in the backlog and other orders that we're about to get. So it varies between the various players there. But overall, we see pretty strong demand as they continue to focus on building out their networks. I also say that we have over the past few years developed a much deeper and more strategic relationship with those web-scale customers, who are driving so much of whatâs going on in our industry. And so weâre very excited by the fact weâre engaged with them by much more than just plain data center conditions. And hopefully, we will be able to tell you about some of that stuff as we move through time. Guys, can I ask for a clarification on one thing? For those of us who remember your acquisition continue to back in 2004, which was as identical to your acquisition of Tibit as two deals could be. And correct me if Iâm wrong, but there is nothing left to contain employees, revenue, nothing. Now I recognize that was a copper DSL-based solution. The market is incredibly different. This is optical. Maybe thatâs the answer. That is just a very different environment and youâre a very different company than you were 15 plus years ago. But any lessons learned from that deal? Well, I think you answered the question on that, Paul. I think youâre absolutely right. Weâre a much different company. Weâve got much greater scale. And I think the complementary nature within the switching and routing technology that we have is â the context of it is very different because we can wrap all that stuff around. And the customer relationships that we have. Weâre now the largest player by quite a large way in the space that weâre in. And those relationships have been developed and matured. And we think now that with bringing on Benu and Tibit, it really provides an excellent complement to the portfolio that weâve already got. Great. Thanks for taking my question. I had a couple, and maybe if I can start with the gross margin outlook here. Jim, the gross margin outlook that youâre providing, I donât know if you can walk us through a bit more of the puts and takes because it does sound like with the revenue, out sized revenue growth youâre expecting, you should have a bit more leverage to the gross margin, particularly with most of the sort of new product shipping at that time. But maybe help me understand sort of any pressures, and also sounds like your sort of pressures from a supply logistics perspective are going down. So we would have expected a higher number. Maybe walk me through the puts and takes, and I have a follow-up. Thank you. Yes. The big driver of our gross margin is mix of products, and we do have sort of a continuum of margins. Typically, the early parts of projects weâre laying down line systems or we do that at lower gross margin. When we fill those line systems with capacity, weâre putting in cards or modems, which are higher margins. Thatâs just the way the business works. It helps our customers get through the early less than fully loaded conditions in their network. So thatâs the way it works. This year or in 2023, our expectation is that our mix will shift pretty significantly toward line systems. Thatâs why we made the comment that weâre talking about starting to ship on some of our new wins that weâve had over the past year. So thatâs whatâs going on in our gross margin, and we will see how it comes out, but thatâs our expectation. We do think that the exception costs will ease in terms of the percentage margin effects. But they are still going to be there, and thatâs going to impact gross margin. What weâve said is that, that probably cost us 400 basis points or something like that last year. And itâs going to cost us something like that, although maybe a little less in â23. And finally, Iâll make the point that we are totally outsourced in terms of our manufacturer. And so our cost per unit is mostly variable. We donât have a lot of fixed cost in our gross margin. We do have some, and that helps when we get our volumes. But the biggest part of our cost structure is variable and varies per volume. Got it. And for my follow-up, if I can sort of ask you about whatâs sort of embedded in terms of supply improvement in your fiscal â23 revenue guide? Because when we look at sort of â even the average of 3Q and 4Q, youâre above $900 million run rate, and youâre expecting that to go north of $1 billion. Is that generally as you talked about more predictability from your suppliers, and the upside there could be being able to buy more from the open market? Iâm just trying to understand whatâs embedded in the guide for supply? And what sort of downside or upside to that number can come from? Thank you. Yes, Samik. So first of all, just starting with what weâre seeing in the environment today and a little bit in the rearview mirror. Things are getting better gradually. People are delivering more reliably to their commitments, and they are delivering more components to us period-over-period. You saw that in our Q4 results, and youâre seeing that in our Q1 guide. Looking forward, in terms of their commitments to us, they are committing more components to us going forward as well, and thatâs factored into our guide. In addition to that, we talked in the past about a bunch of mitigation activities that we have control of, redesigning products to open up the aperture in terms of alternative design sources, building up a manufacturing capacity such that we can turn finished components and finished goods faster for our customers. All those things will benefit us in â23. And weâve taken that into account as well as the learnings of the variability that weâve seen to try to give you a balanced view of where we think weâre going to land from a supply and therefore, a revenue perspective in â23. Specifically, we assume that supply chain dynamics do not worsen. Specifically, we believe that component suppliers will largely deliver on their current supply commitments. And we do not expect to encounter any substantial new decommits that we cannot mitigate, given all the work weâve done in our R&D group. Great. Thanks. First question is on the mix assumptions for â23. Can you talk a little bit about the â youâve talked about $4.2 billion in backlog, but underneath the surface of that is also your service business, which doesnât show up in backlog but is related to additional shipments. So can you talk about the growth assumed in service versus product in the guide? Well, services are in our backlog, Alex, just to be clear. When we get orders, we get orders for the product and related services. So it is in our backlog. The $4.2 billion includes a meaningful amount of services. I believe if you look at the various pieces of our services business, which we have maintenance, we have deployment, and then we have advanced services, we expect to see strong growth, stronger than average on the advanced services. We do probably -- we will probably see higher-than-average demand on implementation because we did a lot of motives in the past year, and we expect that we will have more line systems, which comes in many cases, with implementation. So those are the parts of the services portfolio that we think will grow faster than average. The maintenance, we think will grow, but probably in line with our product. So would your services then be a double-digit growth rate or a single-digit growth rate? Iâm just trying to gauge the mix for the year. Right around 10% is probably the right answer. The second question I have for you is relative to the backlog. $4.2 billion in backlog is an enormous number. If I take 17% growth, thatâs $617 million off of your â22 base. So how much do you think the backlog will work down? And if the backlog is still, say, I donât know, $3 billion next year at the end of the year, doesnât that imply continued outsized backlog going into â24 and â25 even? Very hard to predict where our backlog is going to be next year. Itâs going to be good, though. I can certainly expect that to be the case. Our backlog at the end of this year will depend upon what customer behavior is like, how our lead times change and of course, our deliveries during the year. So itâs just hard to predict that specific number on backlog, but itâs going to be good. Now we said weâre going to grow 10% to 12% average over the next 3 years, which implies higher than our previously stated growth for the long-term in fiscal â24 and â25, not a lot higher but somewhat higher. Hi, guys. Thanks very much. Great to see the improvement in supply chain for you here. I was curious about what the expectations are for the Tibit and Benu acquisitions. I guess Iâm wondering if they are a significant piece of your revenue expectations for January and then also for the full year. And then also curious about what kind of cost structure comes with those acquisitions. Thanks. Yes. We donât expect to close on Tibit until sort of towards the end of this quarter. And Benu is not large in terms of revenue. So really nothing significant in Q1. As we move through the year, we will see some from both of those, but itâs less than a couple of percentage points of our revenue. However, what it will do, the combination of those two acquisitions will help us as we attempt to build out our PON solutions and our position in that PON market. So, we are very excited by it. And as far as the OpEx, itâs in the sort of $20 million to $30 million of OpEx next year. Okay, got it. Great. That makes sense. And then do you guys have a purchase commitment number out of curiosity for the end of the year? Great. Thanks for taking the question. Just maybe first, a quick clarification on some of the metrics here. Gary, you said that backlog remained over $4 billion. I think last quarter, you talked about $4.4 billion. And I assume that certainly part of the whole sort of normalization process, we have got to begin to be working down backlog, so understandable. But I want to verify that backlog did come down by roughly $300 million to $400 million. And I assume orders this quarter were down year-over-year. Is that a metric you are able to share? Yes. Itâs down about $200 million. So, you are right, went from about $4.4 billion to about $4.2 billion. You are right, I would -- as Jim was saying, this should normalize over time. We are not going to continue to run with this kind of backlog, given the size of business we are and the growth that we are seeing even with I think we are going to have -- to the previous question, longer lead times for a while than we have all seen traditionally. So, I expect us to have on the backlog. I will give you another interesting sort of statistic, so far in Q1 we are off to a very strong start on orders in Q1. And in fact, despite the fact that we have upped our guidance in Q1, sort of midpoint of the range, about sort of 950, we still expect to build backlog in Q1. We are seeing very strong order flows already in the current quarter that we are in. Thanks. And then in terms of my more substantive question, I wanted to see if you could elaborate on your thoughts on India as a market. I recall, I think it was 2018, it was I think, just over 9% of revenue and slowed down subsequently. It seems very evident that India has changed for the mobile infrastructure suppliers. I know you have got some operations there. If you could elaborate what you expect over the next one year to two years from that region. Thank you. India has been a big market for us. Itâs gone through some cycles, for sure. And I think â I guess whatâs behind your question as well is itâs now with the whole sort of 5G commitments that everybody has made going through a very bullish cycle for the next couple of years. And we have number one market share in India, and we are very well positioned to take advantage of that growth. You are beginning to see that show up in the numbers. India, I think off a fairly low number relative to where itâs been. We are up about 30% year-on-year when a quarter change. And year-on-year in total is about 10% to 12% growth. So, you are beginning to see that come back. I would expect that to be an outsized growth driver for Ciena for the next one year to three years, absolutely. And does it have a negative impact on your margin, because the RAN vendors all talk about great revenue, but then dilutive to gross margin, neutral to operating margin. You are in a different business. I just want to make sure folks understand what it means to you from a profitability perspective as well. Generally speaking, the way they do their project builds, yes, they put line systems out, which is generally lower margin. And we will see a little bit of that, but they tend to build out quite quickly in terms of capacity. So, generally speaking, itâs not dilutive to our overall margins. It may sort of ebb and flow quarter-to-quarter whatever. But generally speaking, I mean itâs consistent with our overall margins there. While we are waiting for the next question, I got the answer to Georgeâs question about purchasing commitments, itâs $2.6 billion. Thanks for taking my question and my congrats. Maybe to start off with as you think about fiscal â23 guidance, which is fairly robust, can you just talk about how do you think growth across the different verticals? And obviously we see starts to going versus maybe a little bit slower, whatâs that 16% to 18% top line growth? I would expect â I mean, next year, FY â23, our balanced view is itâs really all about supply and not specifically demand. So, with that as a caveat, I would say pretty strong demand across the board. I think GCMs, I would highlight, have been very strong in terms of our revenue guide for the year. So, I expect very strong from the overall web scalers. I think certain geographies, we just talked about one, India, I expect to be strong. I expect to see strong growth in the cable space in North America. Switching to routing, I would also highlight relative to -- we sort of got 40% growth this year. Some of that was non-organic. But we are seeing a lot of new wins in that space, as we talked about. So, I think there is various different applications and geographies that we think are going to be hot for the next year or so. Those are the ones that would come top of mind. And overall, we will just again point out that demand for bandwidth globally continues to grow at outsized rates, 30%-plus. That has been -- that growth rate has been really unaffected by whatever happens in the macroeconomic environment. Thatâs what we have seen for a long, long time. So, our outlook for the year assumes based on our past experience that any effects in our business with respect to customersâ CapEx or their ability to take their products from us are immaterial. Thatâs really helpful, and just a follow-up. How should we think about the cash flow generation into fiscal â23? And sort of, I guess to some degree, do you think inventory levels at peak, and this has to trend lower? Just any parameters on how free cash flow would start up in â23 will be really helpful to understanding that. Maybe expanding that, you see a capital allocation evolving for that to hopefully improve next year. Yes. We are not going to see an enormous amount of free cash flow in â23 partly because we are going to spend a couple of hundred million or so on acquisition of Tibit. Generally speaking, too, we donât expect that our inventory level is going to decline sharply this year. We could be wrong. I hope we are wrong. That would mean we ship more than we expect to ship now. But we expect our inventory position to come down, just not as far as it will in subsequent years. So, without giving a number today, I can just say that we are not going to be in the free cash flow generation mode that we have been in, in past years. We will have free cash flow of course, but itâs just not going to be as big as itâs been. Given the backlog and your strong guidance for fiscal â23, can you comment a little bit about seasonality? I would assume that seasonality, I mean with COVID, itâs been a long time since we have normal seasonality. But could you comment about seasonality for fiscal â23? I would assume the backlog and supply makes seasonality kind of less relevant? Yes. Jim, I would â yes, I mean that really is the answer to that. I think it is less relevant. Itâs interesting that we are seeing even stronger order flows in the Q1 that we are in right now. And typically, it would be lower. So, I think because of all the whipsaw of demand over COVID and the supply chain, I think those dynamics have kind of been thrown up in the air. And I think itâs going to take a while before they kind of bed back down again, frankly, because people want to make sure that they are in the queue and that they are able to get the security of supply and even if it is further out. So, itâs sort of uncharted territory for us in terms of the seasonality piece. The whole -- I mean as I think about FY â23, just to sort of simplify it, itâs really all about what we can ship and supply. It really is. Thatâs going to be the cause of any ebbs and flows in the various quarters. Itâs all about supply. If you take the midpoint in the year, 22%, which is a little higher than what we have experienced for the long period of time. So, that just sort of proves out what Gary is saying. Itâs all about how fast we can get components and deliver to customers, not so much the typical seasonal order pattern. And then my follow-up is, you mentioned backlog went from $4.4 billion to about $4.2 billion. And then earlier in the call, you mentioned that really, the upside to the quarter came late in the quarter. You got a fantastic month of October, outsized growth. So, is that fair to say that $200 million work-down in backlog that we could actually see a faster work-down in inventory -- I am sorry, on backlog as we have progress in the quarters ahead because it was kind of an outsized month for the quarter, or how should we think about the cadence of the backlog? I think itâs very difficult for us to predict that, to be honest. And thatâs why I sort of shared with you what we are seeing in Q1. I actually think our backlog is going to go up in â coming out of Q1. Even though we have upped our shipment and our revenue guide for Q1, I think midpoint was 870. And I think we have just this morning shared midpoint would be about 950. Even with that, we still think we are going to add backlog coming out of Q1. So, I think itâs just a testament to the A, the strong demand characteristics that we are seeing across the board, and B, supply chain is improving, but lead times are still long. Thanks for taking my question. Excellent print. Can you describe the target markets you are specifically looking at with these two new acquisitions? It looks like you are trying to go more into the regional market, but just clarify that for me. And then thank you. Catherine, the two acquisitions from a solution perspective, I will talk to our broadband access part of our portfolio, which is one of the key use cases we have talked to you about as part of our next-generation metro and edge TAM expansion. So, anybody building our next-generation fiber access solutions would be the target market. There is lots of activity. Of course, some rural broadband funding that speaks to your Tier 2 opportunity, but there are also Tier 1s around the world that are looking at their architecture for their fiber build-outs as well. And we are attacking both of those spaces. We were â we had indicated with our focus on next-generation metro and edge that our TAM expansion had basically almost doubled, and we had talked about that in the past. This really is a part of securing a stronger solution portfolio set to go after that already announced expanded TAM. Great. Thanks a lot. I just wanted to clarify on the gross margin for this quarter that you reported, the strength. Was that really all mix towards modems, or was it supply chain improvement? Is there not only better supply, but is it more coming at a more reasonable price than before? Mostly mix. We did see some improvement from expectations in our, what we call exception costs, which are a combination of logistics costs and the premium costs that we paid. Itâs mostly mix. Okay. And then just quickly, for this year, for â23, I didnât really hear a gross margin outlook for the full year. I got a revenue outlook for the full year, but I mean should we think this year, 43.6, I want to model consistently for this year and is that fair? I guess I just missed that commentary, apologize. I will let somebody ask any question since a lot them already been asked. So, thanks very much. Great. Thanks guys for squeezing me in. I know we have danced around sort of the backlog and the strength of the business question, but I want to maybe take a longer term view and maybe pull back a little bit. If I look at your business back from, letâs say, fiscal â19 before COVID, and I kind of run it forward through your â25 guidance, I think at the high end of your 3-year plan would suggest that your business would have grown at a 6% CAGR, which is kind of consistent with your model. I mean is that the right way to think about it as we go through â23, â24 and â25, backlog normalizes, and we are back to sort of a normalized mid to slightly better growth dynamic for the overall business? I actually think thatâs a pretty good way of thinking about it because our market has been roiled very significantly over the past three years, and we are going to have outsized growth for the next three years. But I would just say this, if you deconstruct the 10% to 12% average annual growth rate that we project for the next three years, and you say we are going to do -- we believe we are going to do 17% in â23, which is the midpoint of our guide, then the growth rates for the last two years are actually a bit higher than what we have called before. Remember, we have said 6% to 8% was our long-term growth rate for a great number of years now. So, I think the business is strong now, and we have not just the fundamental growth that we have seen, but also the subsidies for broadband that is â that are going in the U.S. and other places. Right. And maybe just a quick follow-up. I know you have talked about backlog being difficult to predict. But can you just share with us sort of what underpins the â24, â25 from a backlog perspective versus in-period orders and how you are thinking about that? The â24, â25 is much more dependent upon orders that will come in over next year and the following years. â23 is we have got the backlog, frankly, to deliver â23. We just have to get the parts. So, itâs -- we assume that we are going to have good orders as we move through â23, â24 and â25, and that underpins our guide. The thing I didnât mention when I was talking about the outlook is our TAM is expanding. And thatâs something that we are attacking and with early good returns. Thank you, David and thank you everyone for joining us today. We appreciate the opportunity to speak with you. We wish you all happy holiday, and happy New Year. We are looking forward to connecting with you all over the next week or two weeks. Thank you. Have a good day.
EarningCall_1865	Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the SAIC Third Quarter Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] Thank you. Good morning and thank you for joining SAICâs third quarter fiscal year 2023 earnings call. My name is Joe DeNardi, Vice President of Investor Relations and Strategic Ventures. And joining me today to discuss our business and financial results are Nazzic Keene, our Chief Executive Officer and Prabu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the third quarter of fiscal year 2023 that ended October 28, 2022. Earlier this morning, we issued our earnings release, which can be found at investors.saic.com, where you will also find supplemental financial presentation slides to be utilized in conjunction with todayâs call and a copy of managementâs prepared remarks. These documents, in addition to our Form 10-Q to be filed later today, should be utilized in evaluating our results and outlook, along with information provided on todayâs call. Please note that we may make forward-looking statements on todayâs call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, the statements represent our views as of today and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. Thank you, Joe and welcome to those joining us today. This morning, we reported solid third quarter results, which reflect revenue ahead of plan and strong business development activity, both of which contributed to the improved outlook for fiscal year 2023 and further builds momentum as we enter fiscal year 2024. Before I review the quarter, however, I would like to continue a practice we began last quarter. I want to recognize a member of the SAIC team whose accomplishments reflect the values of our organization and contribute directly towards executing our strategy to drive long-term value for shareholders. In October, SAIC was recognized by Frost & Sullivan as a JADC2 company to watch and is one of only three companies named as being a provider of both services and products in support of the JADC2 effort and the only company in IT services. Katie Sheldon Hammler, our leader in Industry Analyst Relations continues to ensure that our unique offerings are well understood by the market. She played an important role in our recognition by Frost & Sullivan, a resource relied upon by many of our customers. The recognition highlights the unique role SAIC can play as a trusted integrator and builds upon other successes in recent years in executing on our JADC2 campaign, which is summarized on slide six of the presentation. Two recent accomplishments serve as solid platforms for further JADC2 related growth: the first being one of two IT solutions providers named to the five member ABMS Digital Infrastructure Consortium and the second, a key $100 million JADC2 related award won in September. With this momentum, we are very proud of our leadership position in the JADC2 mission area as this is critical to our national security and an integral part of our growth and GTA strategy. Now, on to a review of our third quarter financial results. We reported revenues of $1.9 billion, approximately 1% growth as compared to the prior year. We were able to overcome pressures from contract losses with new business wins and a continued focus on driving on-contract growth. Our revenue performance year-to-date contributes to our ability to increase guidance for this year, as outlined on slide 12 of the earnings presentation. I am pleased with our program execution year-to-date, which contributed to the solid margin performance in the quarter. We remain on track to meet our full-year margin guidance of 8.9% and expect to see modest margin improvement in fiscal year â24 with further progress in fiscal year â25 and beyond. Our focus remains centered on driving long-term value for our shareholders, which we believe can be best accomplished by positioning the business to deliver sustained organic growth, improving margins and deploying capital based on the highest ROIC. Given the importance we place on capital allocation as a strategic priority, Iâd like to spend a few minutes reviewing our approach to capital deployment. Our first priority for cash flow is to invest internally to support future growth. Over the past 24 months, we have continued to refine our process to ensure that our internal investment dollars are allocated to markets and strategies that will produce the best long-term return for our shareholders. We see evidence of this priority in our pipeline as represented on slide 11, which continues to expand with disproportionate growth in our GTA area of focus. With the excess free cash flow generated, we will then deploy capital in ways that maximize long-term ROIC amongst various options, including our share repurchase program, dividend, debt reduction and M&A. Over the last few years, our capital deployment has skewed more towards M&A with roughly two-thirds of capital going towards acquisitions with the remainder return through dividends and share repurchases. Based on the current market conditions and competitive landscape, we expect capital deployment to be focused more towards returning capital to shareholders while opportunistically leveraging M&A to add capabilities, solutions or technologies where and when we can accelerate our growth strategy. Our April 2021 acquisition of Koverse is a good example of this as the capabilities acquired have produced true differentiation in our solution and served as a key contributor in winning over $300 million in total contract value since we closed the transaction. Our current pipeline includes over $6.5 billion of contract value, where we expect Koverse to serve as a key differentiator in our AI solution. As I said in our earnings release, aligning capital allocation with long-term shareholder value creation is our focus. Our results year-to-date and outlook for the next year reflect our commitment to this strategy. As I close out my remarks and reflecting upon the season, I would like to take a moment to extend my sincere appreciation to our SAIC family. Your contributions as demonstrated everyday with your dedication to our nation and customersâ missions, your engagement in the communities in which you live and work and your support to each other is never taken for granted. I thank you all for what you do for SAIC. And to all of you that continue to take an interest in SAIC and participating in our call today, I wish you a very happy and healthy holiday season. Thank you, Nazzic and good morning everyone. I am once again proud of the financial results we delivered for our shareholders in the third quarter. Our teamâs focus on on-contract growth and new business wins resulted in 1% organic revenue growth. Our results to-date contribute to our increased revenue guidance for FY â23 and to our confidence in being able to deliver organic growth, improve margins and drive 10% free cash flow growth in FY â24 despite an over $100 million revenue headwind from fewer working days next year. I will discuss our outlook in more detail shortly. For the third quarter, we reported sales of $1.91 billion, representing organic growth of 1%, with results ahead of our plan, largely due to stronger on-contract revenue performance, which enabled us to overcome a roughly 3 point headwind from recompete losses. Third quarter adjusted EBITDA of $170 million resulted in an adjusted EBITDA margin of 8.9%. Adjusted diluted earnings per share in the quarter of $1.90, represents growth of 3% year-over-year. We reported free cash flow in the quarter of $122 million and returned approximately $81 million of this to shareholders via share repurchases and dividends. We delivered third quarter awards of $2 billion, 72% of which represent a new business resulting in a book-to-bill of 1.1 times in the quarter and on a trailing 12-month basis. On a year-to-date basis, roughly one-third of our total bookings are in our GTA area of focus. Note that third quarter awards do not include the roughly $900 million DCSA One IT program, which we were previously awarded as this remains with the customer following a competitorâs protest. We are particularly encouraged by our business development success in the quarter and highlight the diversity of awards that contributed to the $2 billion total with the largest award representing roughly $240 million in our classified space business. We believe this reflects our ability to drive strong awards and growth without a reliance on large orders. Our pipeline of submitted proposals remains healthy at over $20 billion on a trailing 12-month basis. Based on expected submissions over the next few quarters, we expect this to increase in FY â24, a good indication of growth we are seeing in our addressable end markets. On slide 13, we provide an initial outlook for fiscal year 2024. We expect to deliver revenue growth of approximately 1.5% at the midpoint despite pressure in the first quarter from contract transitions and an at least $100 million headwind in our fiscal fourth quarter from five fewer working days compared to this year. This should translate into the second and third quarters providing the strongest growth rates for the year. Adjusting for the working days headwind, we are encouraged by the 3% to 3.5% growth expected from the business and is a trend we believe can be sustained beyond FY â24. We remain confident in our ability to return recompete win rates to historical norms and are encouraged by the financial performance that should contribute when paired with our recent success in new business capture. We expect to see modest margin improvement to approximately 9% in FY â24 as benefits from mix and other initiatives are partially offset by reinvestment into the business. We continue to see opportunities to further narrow the margin differential between SAIC and peers and expect to show additional progress again in FY â25 and beyond. We are expecting FY â24 free cash flow of approximately $560 million, driven by earnings growth, a continued focus on working capital efficiency and a $50 million year-over-year benefit from having made our final payroll tax deferral payment in FY â23. These tailwinds are expected to be modestly offset by higher cash taxes based on our current planning. As Nazzic indicated, we are focused on ensuring that the free cash flow we generate is deployed effectively. We currently expect to allocate the majority of our deployable cash to our share repurchase program in FY â24, but can adjust this based on changes in the interest rate environment and broader market conditions. Our view that the repurchase program represents the best ROI for our excess free cash flow is informed by three factors: one, the confidence we have in our ability to deliver earnings and free cash flow in excess of market expectations over the next several years; two, our belief that stronger financial performance versus our peer group will drive improved relative valuation; and three, recent transactions, which indicate still robust demand from the private markets for businesses with our end market exposure and cash flow durability. As you can see on slide 13 of our earnings presentation, the strength of our expected free cash flow in FY â24 should allow us to return significant capital to shareholders. While we maintain the flexibility to adapt this based on interest rate trends and market conditions, our current expectation is to sustain our dividend, use a minimum of $125 million to pay down debt with the remainder going towards our share repurchase program. This scenario will result in net leverage declining to just under 3 times by the end of FY â24 and allow us to have returned approximately $1 billion of capital through dividends and share repurchases to shareholders between FY â22 and FY â24. Beyond FY â24, we have good visibility into continuing to increase free cash flow despite manageable cash tax headwinds expected in FY â25 and FY â26. On slide 14, we provide an illustrative view of our free cash flow potential over the next few years, which assumes roughly 2.5% revenue growth and 10 basis points of annual margin expansion. To be clear, this is not intended to be guidance, but rather show our ability to offset the roughly $30 million in total cash tax pressure between FY â24 and FY â26 with fairly modest core earnings growth. As shown on slide 15, our cash tax assets beyond FY â26 remained fairly stable through the mid-2030s. Before turning the call over to the operator to begin Q&A, I want to echo Nazzicâs sentiment and extend my thanks to my colleagues at SAIC for their dedication to our customers and our shareholders. I wish all of you happy holidays. Appreciate all the detail in the slides. Thatâs really helpful. I just wanted to ask the 3% to 3.5% growth rate that you think you can do over the next few years or what does that assume in terms of a budget? What does that assume in terms of book-to-bill? And just what kind of visibility do you have there? Gavin, Prabu here. Thank you for the question. In terms of sort of our view of the growth rates here, the way we think about this is weâve delivered about 2.5% organic growth last year, about 5% total growth. Weâre on pace to deliver somewhere between, letâs call it, 2% to 2.5% organically again this year and that includes about 3% in headwinds from recompete losses. So as we sort of project out into next year and beyond, we believe that, that is a sustainable rate of growth for a business like this. In terms of the budget environment, sort of more narrowly the question, I would say weâre not assuming some dramatic improvement in the underlying budget condition. We do expect things to remain as tight as they are right now. We do see budget growing in the low single-digit area, again, depending on what areas youâre referring to specifically. But thatâs sort of the budget set up that we see. So weâre not assuming suddenly a burgeoning sort of scenario on the budget front, and thatâs sort of the baseline assumption that we have right now in the projections out there. Got it. And then maybe just in terms of backlog duration, thatâs expanded. Youâve got much more visibility, though, that has led to a bit of a disconnect between backlog growth and revenue growth. Are you at a more kind of level backlog duration on the go forward such that backlog growth should translate more directly to revenue growth? Yes. And I think maybe a couple of caveats there. So as we think about our pipeline, one of the key elements we look to inside of the pipeline is the period of performance of the works that we were bidding. And that has tended to grow over the last couple of years, Our average period of performance has been roughly between 4 and 5 years, depending on kind of the programs and the specific mix you see inside of a particular quarter. I think our focus as a team is to not get too concerned about the specific period of performance inside of a quarter but to think about this qualitatively over a period of time to make sure that we are lengthening the period of performance as much as possible. So I would not necessarily think of a direct correlation between the period of performance and revenue growth translation. But Iâd say weâre starting to see stronger connection between whatâs in the backlog and the revenue growth that we are translating specifically through the on-contract growth that the teams have been able to deliver. Nazzic, would you want to add to that? I think the only thing Iâll reinforce, And I think Prabu captured it well is as we sit here today and reflect back on the last seven quarters, give or take, and we look into the future, I think we believe strongly in the strategy that weâre executing against is working. Itâs demonstrating sustained, profitable organic growth, and weâve got certainly proof points coming into this particular quarter. And as we look out into the future by looking at the pipeline, by looking at the balance between GTA and core, and we just continue to execute on the fundamentals of the business, we do feel weâre in a good position to be able to continue to deliver on the strategy that weâve been operating under the last couple of years. Hey, good morning. Maybe to follow-up, maybe more of a -- hey, good morning, Nazzic. Follow-up maybe a near-term question, one thing people have been watching is outlays, and we saw some really good traction in August, September, and that seemed to come off in October. It probably expect some volatility through the CR. Your fiscal quarter ends in October. Iâm just curious if you could comment on maybe what you saw as the cadence through the quarter in terms of activity from your customers and ability to capture opportunities? Yes. Let me start a little bit and then if Prabu wants to add some color always. But I think in general, we havenât seen a very significant change in buying behavior over the course of the last year or so. And given the elections, given the CR, given the future, as we sit here today, we donât see anything that is radically different in the future either. So for us, itâs very much been business as usual. There is always some short-term opportunities and some contracts to do some pickups, but thatâs really a normal practice for us. So from my perspective, I havenât seen anything thatâs really fundamentally different over the last few months nor do we see it going into the next few months. Prabu, youâve got anything to add? Thank you, Nazzic. The only other thing I would add, Bert, is that our book-to-bill was our 1.1 times, our trailing 12-month book-to-bill has been 1.1 times. I think we are demonstrating that there is a way to a robust, healthy book-to-bill metric that does not rely overly on large awards. And I think in this environ, if youâre relying on large awards, I think youâre likely to see some delays there. And thankfully, weâre not in that boat. And I think thatâs probably the other source of a healthy book-to-bill trend. Yes, thatâs great color. Thank you, both. Maybe just for my follow-up question on the margin side, I appreciate all the color you gave on your initial outlook for next year. Prabu, as we think about the 9% range relative to where the peer group is probably closer to 10%, do you think there is something that you guys can do to get to narrow that range? And could you maybe just walk us through what you think the largest contributors to margin expansion are going to be when you start to see that perhaps in the next year or so? Yes. I appreciate the question, Bert. And I think we reflected on this particular topic on our last earnings call and acknowledge the fact that we do see that difference between us and our peers on margin rate. Weâve been consistent in the way we thought about margin and communicated that story to say that we do see over time a path for us to continue to bridge the gap between where we are and where our peers are. Now having said that, we do see that as a substantial opportunity to create shareholder value over time, and we do expect to make progress against this target over time. Our incentive comp and our metrics are aligned to improving the margin performance from the underlying business. Look, itâs early days for FY â24. We wanted to get a baseline view for where we see margins for next year. And we are always seeking to balance improving margins against the needs of the business to make sure that we are taking a balanced view of that investment potential against the backdrop of improving margins over time. So I think thatâs the balance weâre striving to always, I think, bring into the equation. And the last but not least, Iâd say over the last maybe one year to two years, inflation has been maybe more of a factor. While it hasnât improved or it hasnât impacted the margin performance of the business, the reality is it is keeping a little bit of a check on underlying margin improvement because we are seeing escalating costs on the labor side. So if you sort of combine all of these factors together, we do see the potential for margin to improve. And what you have there is our initial baseline view for FY â24 and recognize that Nazzic and I are committed to improving the underlying margin performance of the business, and thatâs where the focus is going to be for the team. Yes. Just to clarify something, I guess I could ask us better because I know Iâve sort of asked about margins before. Do you think the opportunity is more to get rid of overhead load or is it portfolio mix shaping or is it the combination? Iâm just curious if there is one thing that stands out is this is going to be an easy opportunity for us to get margin expansion? Well, I can certainly say that -- I donât know that I would use the word easy, but I will tell you that weâre focused on all of the above. And so youâre exactly right. there is multiple levers as Prabu outlined. We are continuously looking at our cost structure and ensuring that we are spending our precious dollars in those areas that support our strategy of sustained organic growth. And so that is ongoing and continuous. And we recognize that absolutely has to be a lever and part of conversations. As we think about the portfolio, GTA drives in general, greater profitability. So the further we mature our strategy in GTA as in balanced against core, we see that as an opportunity as well. And then even in the current -- in the existing business, where there is opportunities to cross-sell solutions and bring some of the higher value work into the current contracts and drive on-contract growth, we look for those opportunities. So I think itâs very fair to say we look at every lever and we never sit idle and assume that either our overhead structure is where it needs to be or our pipeline is where it needs to be. We are always looking at the opportunity to drive, again, consistent with our strategy, sustained profitable organic growth. But just please note that we are looking at all those levers. Hi, good morning, guys. And thank you for the time. Maybe going back to Gavinâs question, I wanted to go over how you guys are thinking about the budget growth over the time frame sort of listed on slide six -- slide 14. And then how you think about your different verticals growing, you had significant space in Intel awards, if you could maybe talk about your end markets and whatâs driving that? Yes, a couple of comments. On the budgets, obviously, we will enter with the CR. Itâs a little early to tell. But I think in general, we assume low single-digit budget growth at the macro level and in some areas growing more than others. And then obviously, the federal government is dealing with the same challenges that industry is and looking at inflation, which creates some headwinds on the budget as well. So I think, Sheila, in general, weâre not looking for any dramatic change in the budget environment. To the extent that good things happen, thatâs good for industry. And to the extent that there is challenges obviously, we will navigate that. But I think itâs just fair to say, stepping back, looking at the macro view, weâre not seeing anything that we view as very significantly changes our approach to our strategy. As it relates to our end markets, we do see modest growth opportunities across the portfolio. So obviously, increased focus at the federal level on DoD, improves our access to the DoD market, the balance of some of the civilian programs obviously helps as well and then, of course, Intel. And so I would say, itâs relatively balanced across the macro verticals that we operate in. But obviously, there is -- as with any given portfolio, there is some pockets of the business that we expect more growth out of than others. And weâve made reference to that as we think about the GTA areas as it relates to core. We expect and we position the company to grow across the board, but disproportionately over the next several years, we look the growth to come out of the GTA part of our portfolio. Prabu, do you want to add anything? Yes. No, that does. And then maybe going to free cash flow, if I could ask about working capital efficiencies, how you think about those? And then Iâll stop there because Iâm being greedy, and Iâll get back in the queue. Sure. I appreciate the question, Sheila. So on free cash flow, look, we outlined that weâre going to grow free cash flow by about 10% this year. And we said we are intending to grow free cash flow by another 10% next year. I think for better or for worse, there is been a view out there that we are over earning on our cash tax assets. And Chart 15 is intended to I think address the specific question on are we actually over earning on our tax assets or not? As you could see, itâs just a modest level of decretion, if you will, on the cash tax side, and there is good visibility on the cash tax assets inside of the portfolio. As we think about specifically working capital, there are a handful of things that we are doing coming into this year and that we are going to continue to focus on that includes everything from DSO management to DPO management to inventory management to terms and conditions on our prime contracts to terms and conditions on our contracts with our subs to make sure that we are getting as much benefit out of the working capital management side of this as we can. At the end of the day, as you think about the free cash flow potential growth for this company over the next several years, we think working capital tends to be less of a driver to improving free cash flow in the outer years. We do believe that based on just the demonstrated growth that weâve shown over the last couple of years into next year that if the business grew between 2% and 3% a year and we had modest margin improvement of about 10 basis points. There is plenty of potential for us to offset and grow free cash flow, offset the headwinds from the tax assets and grow free cash flow. So as we think about it with a very nominal set of assumptions, we think we can continue to very nicely grow the free cash flow, recognizing, of course, as we caveat it, this is not intended to be free cash flow guidance for the next three or four years, but itâs a directional view for where we think the potential for this company is in terms of being able to generate the free cash flow and then deploy the cash flow effectively over the next several years. So the 3% to 3.5% growth that youâre talking about sustaining beyond â24, it sounds like youâre implying that youâll grow maybe a little bit above the underlying budget. How do you think youâll grow relative to your peer group? Do you think that will -- do you think you can outgrow your peer group? Does that 3% to 3.5% plus translate to above peer group growth? Yes. So let me take that one. So very big picture as we think about sort of what the nominal view for next year looks like. We said at the midpoint, itâs about 1.5%. If you adjust it for the five fewer working days next year, in the fourth quarter, but 4 days overall, we think that translates to a growth rate of about 3% to 3.5%. I think there are probably two key dependencies here: one, continuing to recover and restore our recompete win rates back to where they were. Thatâs a key assumption. I think we are demonstrating good progress internally on the recompetes. So I think Nazzic and I are both encouraged by the trend, early trend that we are seeing in that regard; two, we are winning a higher percentage of our new business pursuits this year. I think itâs important for us to continue that trend. I think the basics are working really effectively. As for the budget question and the peer question, look, I think -- we think about this as a relative game. We see the projections out there that we get from some of our peers as well as the models that are out there. I think we are targeting growth rates that are sort of in that circa 3% to 3.5%. And I think with the right mix of investments tied to a healthy pipeline and good execution, there is no reason that this business could not generate that 3% to 4%, 3% to 3.5% underlying organic growth. It doesnât mean it is going to be linear. Let me be doubly clear on it. You will always have a recompete that will cause a bottleneck along the way, and you will have a new business win that creates extra growth. So, to me, as I step back and sort of step aside from the noise of the recompete wins and losses and the new business wins and losses, there is an underlying growth rate that we are targeting for this business, and we are encouraged by the progress we have made, but we recognize this is one quarter at a time, and we have to keep up the level of intensity on our execution. Great. Thanks for the color. And then you mentioned the better win rate on recompetes. Can you just talk about the kind of level set us where we are in terms of recompetes, how much of the pipeline going forward is up for recompete? What do you reason recompete win rates have trended -- how they have trended? Our recompetes, they always tend to be lumpy depending on whatâs in the mix. I would say, in general, we have said 10% to 20% of the portfolio comes up for recompete in a given year. And we see next year is no different from that. Obviously, the timing of Vanguard and PVMRO is going to have some level of outsized impact on those percentages, but thatâs nominally what we are seeing in this business. I wanted to ask about some of your comments on M&A. In the prepared remarks, it sounds like itâs going to be less of a focus. Can you just talk about what you are seeing in the market there? And I mean are assets kind of more expensive, or are there more bidders? And to the extent that you still do maybe smaller deals, are there specific areas that you think are sort of focused areas you would look at? Yes. Let me tackle a couple of those and then Prabu can add some color. I think in general, the M&A market continues to be active. So, there are certainly assets that come to market. We certainly look at some. We donât look at some. Interest rates, obviously, have the potential of creating some volatility in the M&A market, but we havenât seen it to-date. So, I would say the market for the most part is pretty much what we have seen in the last couple of years. With that being said, as I think about SAICâs interest, it would be along the lines of the GTA areas of focus that we have highlighted. So, as I mentioned in my prepared remarks, if an asset were to come to bear that accelerates, our ability to drive profitable organic growth in those areas of our portfolio where we have decided, we believe is in our best interest to grow. Those would be of interest to us. Obviously, anything we do, we go through in a very intense process to make sure that itâs not just good for the company and the employees, but also for our shareholders. But those would be the types of assets that we would be interested in and we would be very, very selective as we looked at M&A right now. Okay. Great. Thanks. And then I guess I want to ask about Counter-UAS. I know there was the demo the other day. But if you could talk about maybe how big kind of that potential market is and any kind of big opportunities you see coming up in that market? Yes. We are very excited about the market. It is -- as we highlighted in our last call, I believe it was, it is an area that we have been providing services in over the last several years. But as we sit here today, we have developed, what I believe, is a very compelling solution. We had the opportunity to show many of you over the course of the last week. And actually, I was down there a month or two months ago and got a chance to see it as well. And itâs really exciting stuff. With that being said, this particular solution set is relatively new. We are working very close with the DoD, obviously, to position ourselves. We are very proud of the fact that we are one of the three solutions as recognized by the Army in providing holistic solutions, end-to-end solutions. But at this point, I would say itâs too early to tell what we -- where we think that market is. We are doing a lot of work to assess that. It is a relatively small revenue set for us today. But we do see it as an opportunity to grow. It is consistent with our strategy, especially in the systems integration space. And clearly, it is an area in which not just the U.S. government, but in support of other governments as well, we believe there is a great market access. So, more to come on it and happy to share more as we learn more, but thatâs how we sit here today. But very excited by it, and very proud of what the team has been able to accomplish there. So, maybe you could -- yes, could you maybe give us some more color on some of the outstanding bids like the One IT protest Where are we with evolve, how many pieces, when do the bids come up and the PVRO? Yes. So, the One IT is back with the customer, going through their process. So, itâs come out of the protest, the formal protest window and it is back with the customer. So, I really donât know much more than that. They will decide the timeline and they will work through their award process. As it relates to evolve or our Vanguard that will -- we believe we will continue to develop their procurement strategy as we go into next year. I believe itâs a relatively low risk for us in the first part of the year, certainly, as they continue to advance their procurement opportunities and the way they are going to adjudicate and how they are going to award. We get more clarity as we get into next year. But some of that is certainly going through the change cycle right now. And I will let Prabu add any more color. Cai, the only other comment on DCSA One IT is we do expect some clarification perhaps before the end of our fiscal year. And then we will take it from there. AOC Falconer, which was under protest a quarter or two quarters ago, thatâs fully underway now, and we are on contract and the teams executing to what they need to do there. So, we have got some good momentum on the new business front, but I would say DCSA One IT has probably got the biggest impact potentially on FY â24. Great. Thank you very much. And then you made the comment that you see the stronger growth in the second half of the year. And am I correct that the kind of the five-day fallout is basically in the fourth quarter, which would suggest that, thatâs going to be a tougher compare. So, maybe walk us through the quarterly pattern and some of those factors? Yes. Got it. Appreciate the question, Cai. So, for next year, as we sit here today, recognizing with all of the health warnings that, that calendar brings on us. Q2 and Q3 of next year is where we see the greatest level of growth potential for this company. Q1, we are likely to still see some headwinds from the NASA NEX program fully rolling off. It turns out, if you will, at the end of Q1. And Q4, of course, is sort of where we see the headwinds potentially from having five fewer working days relative to Q4 of this year. As we sort of estimated at the start of this year, we said Q1 would grow, Q2 and Q3 maybe small levels of contraction and Q4 will be growth. What this team has done and Nazzic and I are just incredibly proud of the work the team has done this year is for us to go out there and make sure that we can do a little bit better every quarter and then keep up that level of intensity. So, as we sit here, thatâs our estimate for next year, but recognize we have got three months left to the end of this year. And of course, we have got a whole bunch of to next year. So, we will continue to focus on making sure we are delivering ahead of internal plans, but thatâs truly risks and opportunities driven and making sure we are doing as much as we can to ensure that we are delivering a smooth year for us and our shareholders. Thanks. I was wondering if you could give us some color and describe your -- where your space business ranks in your possible growth vectors. I think Nazzic, you said moderate-to-modest kind of growth opportunities across the portfolio, but how would you characterize space relative to the overall business? Space is as we have mentioned before, is certainly part of our growth strategy. And if we think about the intersection of our space business with the areas, the GTA areas that we focus on, itâs a great combination and a great opportunity for us to expand in both dimensions. So, certainly, in the systems integration and delivery space that area, that GTA, we see the opportunity to drive that in space. Obviously, as more applications, whether they are mission, especially mission go to the cloud, we see the opportunities there as well. So, I would just reiterate that space is an important domain for us. It is part of our growth strategy, and it is very complementary and directly interlocks with our GTAs. My follow-up, how do you juxtapose in sort of reconcile your strategy, which is focused on the sort of existing contract portfolio and extracting as much as you can out of that and in revitalizing organic growth with what seems to be a pretty steady externally and internally driven growth strategy among some of your industry competitors and at the end of a multiyear period of focus on sort of just more organic growth and less external. Is there any risk that the portfolio kind of wonât be positioned as you want it in three years, four years, five years? Hi there. Prabu here. Maybe I will take this part of the question. Part of whatâs in our space business is our restricted space work that is also a fair amount of SETA work that we do for the government. We think about growth inside of the space business in these two buckets, kind of the SETA work and the non-SETA work. The non-SETA work has the potential to grow at higher growth rates than the SETA work, not surprisingly. And therefore, the way we think about it is how do we sort of bring sort of legacy capabilities onto the development side in a way that allows us to gather market share on the non-SETA side, and thatâs sort of how we think about the space market. And having said that, the SETA work is really good work, and itâs the legacy of this company. And it gives us a fair amount of ability to allow us to continue to invest in the business and grow the business. But I would say overall, we think about the non-SETA business as sort of the area where there is real growth. And as we have disclosed over the course of the last year or so, we have won some restricted work on the development side of our space business, not SETA that has allowed us to continue to grow our market share. It is a solution-based offering that we are hopeful we can take to other parts of the market where we are not impacted by our SETA positioning. So, thatâs how we think about the positioning inside of the portfolio. Now where it ranks relative to the peers and all the folks that have 100% development work, thatâs I think proofâs going to be in the pudding, and we will see that over the course of the next several years. I just wanted to ask one quick one, just to kind of level set about the growth expectation. And I think when you talk about the underlying market growing at kind of like this low-single digit pace, we look at the overall budget, that grew a little bit faster than that in â22. We will see what comes out of the Congress this month, but there is a decent chance itâs going to grow faster than that in â23. So, the -- I guess the sort of low-single digit view, is that based on the fact that a lot of that budget growth is headed toward the weapons accounts whereas your view of your particular end markets and those of your closest peers is more in that low single-digit range within this kind of robust overall budget growth environment? Yes. Seth, Prabu here. Thatâs a fair way to think about it. I would say the other dynamic that we are working our way through is there are sort of nominal growth rates in the budgets and sort of real increases in the budget ex-inflation. And so we tend to think about the world in sort of a qualitative way as well as a quantitative way. In real terms, we think of budget growth as being in that low single-digit growth rate, nominally, itâs a little bit higher, as you just mentioned. And the reality is, we are also seeing some element of, I would say, bias would probably be a harsh way to describe it, but certainly directionally, a view that itâs tending to go towards the hardware side, more than the services side or the system side recognizing that there is an incredible amount of demand for these underlying services on the services side. But thatâs sort of our view of where the budgets are trending at least as we sit here right now. I think one thing I will add is, we touched on this earlier. Certainly, the government is dealing with some of the impacts of inflation as well. So, we are continuing to watch that. And I know that Prabu reminded all of us early in the call, but we have tried to provide some early guidance into next year, but we look forward to the opportunity in March to further develop that. And certainly, there are some things that can change the guidance up or down. As always, that Prabu pointed out, but there are some very, very great opportunities. We have great pipeline that supports our ability to grow, and we have demonstrated the last couple of years to be able to grow in the low-single digits. So, we certainly wanted to put forth an early view of what we think next year looks like, but we will provide more color and more dimension on that as we get to the March timeframe. Okay. Thanks very much. And then maybe as a really quick follow-up, Prabu, I think you mentioned in the press release year-on-year, there were some headwind EACs. Was that because they were exceptionally high in the year ago period, or is there anything about any particular contract performance in this period to be aware of? Yes. Fair question. I think we had about negative 6% in EAC adjustments for the quarter. Most of it was related to a single program where the period of performance has ended. So, I would say not a recurring thing, but itâs in the process of cleaning up these things that we had the adjustment, but that was it. And there are no further questions at this time. Mr. Joe DeNardi, I will turn the call back over to you for some closing remarks. Great. Thank you, Rob. Thank you to everyone for joining us on the call today. If you have any further questions, please feel free to reach out, and have a great day.
EarningCall_1866	Welcome to Lennarâs Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Todayâs conference is being recorded. If you have any objections, you may disconnect at this time. Thank you, and good morning. Todayâs conference call may include forward-looking statements, including statements regarding Lennarâs business, financial condition, results of operations, cash flows, strategies, and prospects. Forward-looking statements represent only Lennarâs estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennarâs actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in yesterdayâs press release and our SEC filings, including those under the caption Risk Factors contained in Lennarâs Annual Report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements. Very good. Thank you and good morning, everyone. Thanks for joining us. This morning, I'm here in Miami and joined by Rick Beckwitt, our co-CEO and co-President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; and Bruce Gross is here, our CEO of Lennar Financial Services. Happy to have Bruce back in the seat. And of course, Alex, who you just heard from. Jon Jaffe, our co-CEO and President is on -- is out in California and on the line and will participate remotely. As usual, I'm going to give a macro overview and strategic overview of the Company. I'll be a little longer than usual. We've got some strategic matters that we want to cover. After my introductory remarks, Rick is going to walk through our markets as he did last time around. Jon's going to update supply chain, cycle time and construction costs, and give a little overview on land as well. I think that Rick and Jon will both talk a little bit about land. As usual, Diane will give a detailed financial highlight and we'll give some rough boundaries for the first quarter to assist in looking forward, thinking and modeling. And then we'll answer as many questions as we can. And as usual, please limit yourselves to one question and one follow up. So, let me go ahead and begin by saying that once again, the Lennar team has turned in excellent results for the fourth quarter and year-end 2022, which continue to enhance our positioning for evolving market conditions. Market conditions continue to deteriorate in the fourth quarter as the now well-documented interest rate driven sales slowdown and pricing correction intersected with the still stressed supply chain, high labor and material costs and elongated cycle times to make for a very complicated landscape to bring the year 2022 to a close. The very sudden movement in interest rates experienced over the past six months has very quickly affected both, affordability and consumer confidence, resulting in a very rapid change in market conditions and demand. Sales and sales prices are down materially across both, the new and existing home markets and given commercial underwriting and lending criteria, new for rent properties are being curtailed as well. Our current view is that production of single family and multifamily dwellings nationally will be down between quarter to a third in 2023, exacerbating the national housing supply shortage. Numerically that means that approximately 1.5 million homes produced over the past couple of years per year will drop to around 1 million homes produced. Now, Rick's going to go through market review and market conditions across our platform in a few minutes. So, stay tuned for that. But even as demand has cooled very quickly, the overhang of a now correcting, although disrupted supply chain, stubbornly high labor and materials costs and production or cycle times that have grown by over two months, have created an unusual wedge that the home builders have been left to navigate. Jon will give a lot more detail on that. On a positive note, very limited new home inventory exists. Limited existing home supply exists as existing homeowners hold on to extremely low mortgage rates and very limited multifamily production combines with the chronic housing production shortfall over the past decade and leaves the industry in the middle of what we believe will be a fairly short duration correction without an inventory overhang to resolve. Against this backdrop, in addition to the two hurricanes that swept through Florida, the home building and financial services team at Lennar have focused and have executed on the strategies that we've detailed over the past quarters as we have very quickly and efficiently adjusted our business and business model. We laid out that -- the Lennar strategy playbook over the past quarters and those strategies, the successes and the misses are reflected in our first quarter and year-end results. And I'd like to give a brief overview. So, first, as the first playbook strategy, we detailed that we are going to continue to sell homes and adjust pricing to market conditions and maintain reasonable volume. In fact, we relied on our proprietary dynamic pricing model developed by our inimitable Jeff Moses to guide to volume-based pricing in order to drive sales at market pricing so that we maintain the volume that maintains our starts and sales base, so they remain in sync and drive steady production. The result of this program is that margin as opposed to volume becomes the so-called shock absorber, and fluctuates up and down like an accordion as market conditions especially interest rates change. Accordingly, interest rate changes, especially downward, potentially improve lagging margins. In the fourth quarter, we saw our margins adjust rather quickly, down some 270 basis points to 25.3% before impairments as we used price reductions plus incentives in the form of both, closing cost payments and interest rate buy downs to offset volatile interest rate and market shifts. We did this both to sell homes as well as to protect our backlog by adjusting pricing and incentives to ensure closings. While our cancellation rate of 26% is decidedly higher than the 12% last year, it has been falling from the peak of 28% reached in October, and we expect it to normalize below 20% in the near future. Also in the fourth quarter, we used our pricing strategy to in orderly fashion maintain our volume. While our sales were still down some 15% year-over-year, that result has compared favorably to reported market conditions and enabled us to start over 68,000 homes in 2022, which is only a 1% reduction year-over-year and gives us visibility to potentially flat 2023 deliveries. While this is not intended to be a projection, it is within the broad boundaries of our outlook ahead. We derive confidence in our ability to achieve sales base at the best possible prices from our significant investment in digital marketing, which is more relevant than ever before. Our proprietary digits platform, which we built on a Microsoft backbone, provides digital marketing insights and analytics that guide us to better execution with appropriate pricing from our dynamic pricing model. Our digital marketing team under the guidance of Ori Klein, is doing some very interesting, innovative, and very credible work. Our second playbook strategy was to work with our trade partners to right size our cost structure to current market conditions. On this item, let me say that Jon will cover this in great detail shortly, but Jon, together with Rick is giving a master class on cost reconciliation across our platform to our production and our purchasing teams, as well as to our trade partners. Make no mistake, Lennar led the way with reduction in margin, while maintaining volume and increasing market share as the market has corrected. We expect our trade partners to work side by side with us and follow suit. As margins expand -- expanded in the best of times, they benefited; and as margins have now contracted in the more difficult times, we are driving costs down as prices are reduced and we expect participation as well. While there is no doubt a lag in those reductions coming through our -- there is no doubt, a lag in those reductions coming through our reported numbers; there will also be no doubt a significant reduction coming, period. Cost reductions will improve lagging margins. Our third playbook articulated strategy was to sharpen our attention on land and land acquisitions. While Rick and Jon will give additional detail on our land reviews, this has been a specific concentrated focus by all three of us, myself, Rick, and Jon, across the platform, working, connected and together to reconsider every land deal in our pipeline and minimize exposure to falling land values. In that regard, I dare say we have stopped the bleeding early. We have reconsidered every land deal in our pipeline; we have reconsidered land development dollars being spent; we have walked from deposits or renegotiated terms and price; and we have been relentless in focusing on protecting cash and only purchasing the next strong margin at today's pricing. Newland purchases will improve lagging margins. Fortunately, we are well-positioned with well-structured contracts and shorter-term deal structures that enable our capital allocation to be micromanaged constructively. We started the quarter with $2.5 billion of expected land closings. We ended the quarter with three quarters of that spend, either walked from, renegotiated to produce a responsible margin or pushed for reconsideration at a later time. As with our trade partners, our land partners or sellers understand that we are maintaining volume and increasing market share while taking the first hit to our margin. They will need to work together and participate or we'll need to move on. Our fourth playbook strategy was to manage our operating costs for our SG&A so that even at lower gross margins, we will drive a strong net margin, and as much as we have been driving our SG&A down over the past years, quarter-by-quarter to new record lows. And many of those changes, although not all are hardwired into permanent efficiencies in operations. Nevertheless, as average sales prices come down, the percentages won't hold without corresponding additional cuts. We also know that in more difficult times, there will be an upward pressure on some of our sales and marketing costs in order to drive and find purchasers, and drive new sales. In our fourth quarter, we were able to maintain our 5.8% SG&A at the operating level. And we believe if we continue to drive volume, we'll be able to contend increases and manage to a very attractive cost level. Each of our operating teams, as well as our corporate teams are looking for additional efficiencies, especially now that COVID is behind us, and teams are reconvening in person in our offices and finding those inefficiencies face-to-face and together. Our fifth playbook strategy was to maintain tight inventory control. This is exactly what drives the cash flow machine, and we're focused on this part of our business every day. Both land and home inventory control is the mission control of our overall business. And in our fourth quarter numbers, you can see in our 14.4% debt to total capitalization and our $4.6 billion cash position that our inventory is being carefully managed. Now, we know that the questions have been raised by the press and others about a mysterious 5,000 homes being sold to single family for rent purchasers at deep discount because of dire market conditions. The fact is that we, like other builders, provide a tape of homes available for sale to the single family for rent buyers, so they are aware of what is available in the ordinary course of our business, and we've been doing that over the past many quarters. That tape might have had completed homes and homes that are one to four months out from completion. Over the course of the past year -- and these are the facts, over the course of the past year, we have sold approximately 7% of our homes to single family for rent purchasers, including Quarterra. That percentage is approximately the same range quarter by quarter. And as we look ahead to 2023, we think the percentage will be roughly the same or less. Net margins on those homes are approximately the same as homes sold to primary buyers, and there is no unusual discounting or advantage. In our operating world, our focus is not on fire sales to manage inventory. Instead, it all starts with the starts, sales and closings management of our business. These elements of the business are managed through an every other day management meeting where numbers are reviewed at the regional and divisional levels by the entire management team. Starts, sales and closings are maintained in a controlled balance with the end result of volume that defines expectations. This is the most carefully reviewed and managed part of our business and enables us to maintain an extremely low inventory of completed not sold homes, which has consistently been at or under one home per community for the past years. And right now, we have approximately 900 unsold completed homes. Currently, land inventory is managed equally carefully. From the corporate office, tight oversight is maintained on the land and land development spend. Diane oversees every dollar spent on land acquisitions and development dollars and maintains accountability relative to years of land owned versus controlled and years of land owned overall. If we aren't hitting targets, we aren't spending money. Like with home, there are no fire sales, just careful day-to-day management. We're aware that inventory has grown through the year because of expanded cycle time due to the supply chain disruption. We also know that this inefficiency will correct over the next few quarters and will turn approximately $150 billion of inventory into additional cash and will provide the cash to pay down debt due in 2024. That is on the radar. Additionally, a pause on growth this year will reduce inventory and generate additional cash over the next year as well. Because of the tight control of land and completed home inventory, our cash flow has grown, pushing our balance sheet to the point where our net debt to total capital is actually negative at this point. That makes Diane happy. The sixth playbook strategy was to continue to focus on cash flow bottom line in order to protect and enhance our already extraordinary balance sheet. If we reflect on our fourth quarter results, it is mission accomplished and we are still just getting started. If we continue to execute our playbook strategies, we will continue to drive strong cash flow and even through bottom line profitability -- and even though bottom line profitability will be compressed year-over-year, as prices and margins are impacted in a correcting market, our balance sheet and cash position will continue to improve. This improvement enables the flexibility to be opportunistic as market conditions stabilize as well as opportunistic in repurchasing both stock and debt. We have tremendous optionality. Now, the final playbook strategy is the one where we must report a miss. That of course, being the spin of Quarterra by year-end. In spite of our best efforts, in spite of my best efforts, the current market conditions are simply not favorable to our commercial asset manager spin on the year end timeline. Not to be clichÃ©, you just can't and don't want to fight the tape. We believe that we have a very high end public company waiting and almost ready to enter the public arena, but we're going to postpone for the time being and wait for the right timing, Quarterra deserves exactly that launch. While I remain confident, enthusiastic, that Quarterra will be spun and Lennar will become a pure play home builder as promised, it will not happen by year-end, and I'm not prepared to posit another date, given current market uncertainties. So, please be patient. So, at the end of the day, if you're keeping score and are considering success in the difficult market conditions, I believe that we from the Lennar homebuilding team to the Lennar Financial Services team, to the Quarterra team, have had a truly remarkable fourth quarter and year-end 2022. In extraordinarily difficult market conditions, we focused on strategy and we executed with precision. We ended the year with the highest revenues, the highest profit, the highest cash flow, the best balance sheet, and the highest liquidity in Lennar's history. We have a plan of execution to move into the uncertainties of 2023 with a focus on maintaining volume, maximizing margin, managing inventories, driving cash flow, managing land and land spend, and further enhancing our balance sheet, in spite of challenging market conditions. Accordingly, we are guarding our first quarter closings to between 12,000 and13,500 homes with the gross margin of approximately 21%, which we believe will be the lowest gross margin for the year. Additionally, we're targeting delivery volume to be flattish for the full year as we drive volume and pickup market share, and build margins through reconciliation of construction costs and land costs and adjustment to product efficiency, while carefully managing SG&A. We are prepared once again to look adversity square in the eye and stick to our strategies and pull out a big win. Simply put, that's what we expect of ourselves. As a conclusion or an epilogue, let me add that we've come to an end of another year, and we have a truly wonderful leader who will be retiring after 27 years of service. Jeff Roos is one of our Regional Presidents who has overseen many of our western divisions. Jeff has been an absolute warrior of Lennar over these past decades, but as with all great leaders, he leaves us with ample, handpicked talent to fill the void. In fact, his people will be even better than he has been. He wants it that way. While I have a somewhat heavy heart, I feel a great sense of pride to have worked so many years with such a talented partner. Many of you on this call don't know Jeff Roos, and he liked it that way. Jeff is the very essence of Lennar. He is a quiet engine under the hood, never the shiny paint job, extraordinary on the field, always a leader in execution and always willing to learn something new. They say that you can't teach an old dog new tricks. Well, Jeff was always the old dog that taught us all new tricks. Off the field, Jeff is even better. He has been ever focused on making the world a better place through HomeAid or diaper drives or anything that works for community. He never stops caring, never stops driving, and you can't help but love everything that he stands for. So, with that said, Jeff is a shining example of all that drives us here at Lennar to be better and to reach higher. And it is Jeff and people just like him that make it a certainty that Lennar will continue to succeed. Thanks Stuart. As you can tell from Stuartâs opening comments, the overall housing market has been reacting to a significant increase in mortgage rates, which has impacted affordability and home buyer confidence. While we continue to have many strong markets, in our more challenging areas, we've had to adjust base sales prices, increase incentives, and provide mortgage rate buydowns to maintain or regain sales momentum. As sales strategy -- our sales strategy has been to find the market clearing price for each of our homes on a community by community basis as quickly as possible, and price our homes accordingly. In many cases, we're solving to a monthly payment and not to a sales price. This requires a detailed understanding of community and product specific pricing, financing programs, traffic trends, inventory levels, and buyer sentiments. During the fourth quarter, our new sales orders declined 15% from the prior year on a 4% lower year over year community count. Our year-end community count was lower than we projected at the beginning of the year as we walked away and renegotiated on many communities. Jon will walk you through this as he discusses our land strategy. While our cancellation rate and sales incentives increased sequentially from the third quarter, our sales orders and sales pace per community was relatively flat throughout the fourth quarter, as we successfully executed our pricing strategy in most of our markets. To maintain and regain sales momentum, our fourth quarter new sales order price declined 9.5% sequentially from our third quarter with mix accounting for 250 basis points of the decline, and base price reductions and incentives, accounting for 200 basis points and 500 basis points, respectively. The combination of adjusted pricing and rate buydowns have created a more stabilized environment. As we cleared out or closed many of our older contracts in our backlog, our backlog has reset to these new prices, admittedly at lower margins, and we're seeing more stability and a trend toward lower cancellation rates. To this point, our cancellation rate peaked in October, declined significantly in November, and we've seen a continued reduction thus far in December. We fundamentally believe that this price to market strategy reflects our balance sheet for its focus, where we can maintain starts and sales, generate cash flow, and keep our home building machine going. To this end, as Jon will discuss, by maintaining our starts pace, we've been able to get cost reductions from our trade partners, and significantly increase our market share as many of our competitors that either stopped or slowed starts altogether. I'd like to now give you an update on our markets across the country. They really fall into three categories: One, markets that are performing well; two, markets where we've adjusted pricing and incentives, found the market price and have successfully regained sales momentum; and three, markets that may require some additional pricing adjustments to regain our targeted absorption pace. During the fourth quarter, and so far in December, we had eight markets that are performing well. These include Southwest Florida, Southeast Florida, Tampa, Palm Atlantic, New Jersey, Charlotte, Indianapolis, and San Diego. These markets are benefiting from extremely low inventory and many are benefiting from strong employment and strong local economies. While these markets continue to be strong, we've had to offer mortgage vote, buydown programs, and normalized incentives. Our category two markets, which reflect markets where we've made more significant adjustments and have successfully regained sales momentum, include 23 markets. These include Jacksonville, Ocala, Atlanta, Coastal Carolinas, Raleigh, Virginia, Maryland, the Philadelphia Metro Area, Chicago, Minnesota, Nashville, Dallas, Houston, San Antonio, Colorado, Tucson, Las Vegas, California Coastal, the Inland Empire, The Bay Area, Central Valley, Sacramento, Seattle, and Boise. While inventory is limited in each of these markets, we've had to offer more aggressive financing, base price reductions, and/or increased incentives to regain sales momentum. The size and adjustments -- the size of the adjustments is varied on a community by community basis and has often been limited to specific homes each week. In some cases, to avoid cancellations, we've had to adjust pricing on our homes in backlog. Weâre being very proactive with our pricing and not reactive. This has allowed us to sell homes and avoid building up finished inventory. We're outselling the competition, and as I said, increasing our market share. Our category three markets which reflect the more significant softening and correction include eight markets. These include Orlando, Pensacola, Northern Alabama, Austin, Phoenix, Utah, Reno, and Portland. While the driver of the individual dynamics of these markets vary somewhat, traffic is slowed, buyers are taking more time to purchase and many need to be convinced that now's the time to buy. There is fear that prices haven't hit bottom, which has led to elevated cancellations. In these markets, we're focusing on establishing pricing that generates new growth sales to offset the cancellations, and we have achieved that. This is required to work with our backlog to prevent cancellations. It's also required a mix of base price adjustments, sales incentives, and mortgage buydown programs. While we've made progress in each of these areas, we still need to make some adjustments going forward. There's not a one size fits -- one size fits all solution. I'm confident however that we're making progress in each of these areas and we're very fortunate to have limited completed unsold inventory, so we should be able to get these markets back on track in the first quarter. I hope this gives you a better picture of our markets across the country and what we're doing to keep our sales activity going. The markets are very fluid and we're making proactive strategic decisions and adjustments every day. We are committed as a management team to address any future market changes. And as we've said in the past, we're going to keep our homebuilding machine going to maintain our starts and price our homes to market. This is our balance sheet first focus. Iâd now like to turn it over to Jon. Our well executed strategy of pricing to market to maintain sales volume as Stuart and Rick have detail, set us up for the next part of our game plan, our construction strategies. Simply put, by continuing to sell homes and generate cash flow, we'll keep starting homes. Our construction playbook has three primary areas of focus, lowering construction costs, reducing cycle time, and achieving even flow production. Properly executed, these strategies improve both, gross and net margins, allowing us to profitably continue the cycle of finding the market to sell homes. Let me address each area. Reductions in construction costs have historically lagged the change in market conditions. While that is true this time, what is different is the speed of change in the market conditions has caused a sharp reduction in industry wide starts, thus speeding up the availability of labor and materials for Lennar. This is very quickly turning the shortages of the last two years into excesses. Taking a look back at our fourth quarter, construction costs continue to increase as we guided on our last earnings call. Increases in both materials and labor resulted in a total direct construction cost increase of 6% and 16% sequentially and year-over-year, respectively. Moving forward, our process is a three-pronged approach of first, working with our trade partners to reduce the cost of labor materials; second, evaluating all specifications in the home; and third, an intense value engineering review. We have very strong relationships with our trade partners. We have demonstrated to them that we have taken the first step by lowering sales prices to drive sales, and they understand this and understand the dynamic of labor availability as overall starts slow and they're working closely with us to lower their prices. Since the beginning of our third quarter, we have reduced contracted costs by approximately $14,000 per home, or $6.22 per square foot. And this amount will grow throughout our first and second quarters as reduced demand for labor and materials accelerates. These savings will start to flow through our results in the back half of the second quarter, and will primarily be seen in closings for the second half of the year. What has been a steady increase in construction costs over the last few years will reverse course in our first quarter with a small reduction in cost per square foot compared to our fourth quarter. This is primarily driven by lower lumber costs from earlier in the year. This improvement is already baked into our backlog as these homes started in the last four to six months. Cycle time is the second area of focus for our construction strategy. We see meaningful improvement in this area as cycle time was flat sequentially for the quarter, despite the cumulative effect of supply chain disruptions experiencing the two hurricanes that impacted production in Florida and parts of the Carolinas. Importantly, we saw cycle time improvement during the quarter for the front end of construction, which measures the duration of time from trenching to insulation. This first part of construction process is the first to see labor free-up and came down an average of eight days during the last four weeks of our quarter as compared to the prior four weeks. As Stuart noted, bringing down our cycle time throughout the next few quarters will free up significant amount of cash that is tied up in inventory, further strengthening our balance sheet. The third area of focus is even flow production. Prior to the pandemic and its related supply chain disruptions, even flow production was a core focus for us. It is a key pillar for being the builder of choice for the trades as it maximizes efficiencies for them. The steady pace and rhythm of starts through completions is absolutely critical and is only achieved with real time communication between all parties. From Lennarâs offices and fields to manufacturers, to distributors, to trades, and then back to us, information such as projected start dates and day by day scheduling in the field is enabled with rigorously adhered to technology driven tools and processes. Level construction flow of our homes drives field and G&A efficiencies for both the trades and Lennar open improved margins for both. As Stuart noted, this is an intense focus of both Rick and myself, along with our national, regional and divisional purchasing and construction teams. All of us are focused every single day on lowering cost, reducing cycle time and achieving even flow of production. Turning next to our land light strategy, this focus has been the primary driver of cash flow generation over the past several years, leading to the strongest balance sheet in our company's history. And we have taken it up a notch in the current environment. Quarter-after-quarter, we have worked with our strategic land banks and land partners where we have established relationships to purchase land on our behalf and deliver just in time finish home sites to our homebuilding machine on a quarterly basis. During the fourth quarter, we reassessed every land deal in our pipeline, utilizing updated underwriting, we either restructured the price, the terms, and/or the timing, or we did not proceed with the transaction. The result of this focus was that 75% or approximately $680 million of land purchase in the quarter were just in time deliveries from our land banks or land partners. The remaining $220 million of land purchases were made up of option payments and small short duration land purchases. In fact, about 88% of the land purchased in the first quarter were for transactions under $2 million each. During the quarter, we also terminated contracts totaling about 27,800 home sites. There was approximately $37 million in forfeited land deposits associated with some of these terminations. The ongoing focus on our land light strategy resulted in ending fiscal 2022 with a controlled home site percentage of 63%, up from 59% last year. Additionally, we reduced the years of owned home sites to 2.5 years at the end of the fourth quarter down from three years last year. Stuart, Rick, and Jon have provided a great deal of color regarding our homebuilding performance, so I don't need to provide any additional details. Therefore, I'll spend a few minutes on the results of our other business segments and our balance sheet, some points already noted, and then provide high level thoughts for Q1 â23. So starting with Financial Services, for the fourth quarter, our Financial Services team produced operating earnings of $125 million. Mortgage operating earnings were $80 million compared to $77 million in the prior year. We benefited from a higher level of lock volume than expected as buyers locked in the attractive rates offered with our interest rate buydown programs. These discounted interest rates provided certainty to our buyers to avoid potential future rate increases. Title operating earnings were $44 million compared to $30 million in the prior year. Title earnings increased primarily as a result of higher volume and a decrease in cost per transaction as the team continues to focus on efficiencies through technology. These solid results were accomplished as a result of great connectivity between our homebuilding and Financial Services teams as they successfully executed together through this choppy environment. Then turning to our Lennar Other segment. For the fourth quarter, the Lennar Other segment had an operating loss of $106 million. This loss was primarily the result of non-cash mark to market losses on our publicly traded technology investments, which totaled $96 million. Although, it's been a very tough environment for technology stocks, we have found and continue to believe that there are incremental operating efficiencies through these technology partnerships for both, our homebuilding and Financial Services platforms, as well as greatly improving our home buyer's experience. Then turning to the balance sheet. As we've all noted, this quarter, we were laser-focused on our balance sheet. We focused on pricing to market, turning inventory and thus generating cash as we -- and we also focused on preserving cash by matching our starts pace with our sales pace, and as Jon mentioned, reevaluating every land deal in our pipeline to ensure the underwriting aligned with today's market conditions. The results of these actions is that we ended the quarter with $4.6 billion of cash and no borrowings on our revolving credit facility. This provided a total of $7.2 billion of homebuilding liquidity. During the quarter, we continued our progress of becoming land lighter. At quarter-end, we owned 166,000 home sites and controlled 281,000 home sites, for a total of 447,000 home sites. This translates into 2.5 years owned, which exceeded our year-end goal of 2.75 years owned and was an improvement from three years in the prior year. We controlled 63% of our home sites, which was slightly lower than our goal of 85% since we walked away from approximately 28,000 home sites related to option contracts that we terminated this quarter. Last year's control percentage was 59%. When we calculate our years owned and home sites controlled, we include home sites with vertical construction that is homes in inventory. Since the goal of these calculations is to assess future balance sheet risk and homes in inventory present lower risk since they turn into cash in a short period of time, we plan to exclude inventory homes from the calculations on a go forward basis. It's just a better way to look at our business and will provide greater comparability to others in our industry. So, for reference, we had approximately 40,000 homes in inventory, mostly under construction at November 30th. If we exclude those homes from the calculations, our years owned was 1.9 years and home sites controlled was 69%. We also remained committed to our focus on increasing shareholder returns. During the fiscal year we repurchased 11 million shares totaling 967 million or about 4% of our outstanding shares at the beginning of the year. Additionally, during the year, we returned cash to our shareholders by paying dividends of $438 million. From a leverage perspective as we mentioned, we continue to benefit from our paydown of senior notes and strong generation of earnings, which brought our homebuilding debt to total capital down to 14.4 at quarter-end, our lowest ever, which was an improvement from 18.3 in the prior year. And as we mentioned, our net debt to total capital at quarter-end was a negative 2.4%. As we look forward, we do not have any senior note maturities in fiscal â23. Our next maturity is $400 million due in December of â23, which is our fiscal â24. And just a few finer points on our balance sheet. Our stockholdersâ equity increased to $24 billion. Our book value per share increased to $83.16. Our return on inventory was 32.8% and our return on equity was 20.9%. In summary, the strength of our balance sheet, strong liquidity and low leverage provides us with significant financial flexibility for the upcoming year. And with that brief overview, let me turn now to the first quarter of â23. It continues to be difficult to provide the targeted guidance that we have historically provided, given the uncertainty of market conditions. So, as we did last quarter, we're providing very broad ranges to give some boundaries for each of the components of our first quarter. So, starting with new orders, we expect Q1 new orders to be in the range of 12,000 to 13,500 homes and expect our Q1 ending community count to be about flattish with the prior year as we walked away from deals that would have produced new active communities. We anticipate Q1 deliveries to also be in the range of 12,000 to 13,500 homes. Our Q1 average sales price should be in the range of 440,000 to 450,000 as we continue to price to market. We expect gross margins to be about 21%. This number will adjust somewhat based on the number of deliveries, primarily as a result of our policy to expense field costs. As Stuart mentioned, as we see things today, we expect our Q1 gross margin will be the low point for gross margins for the year. And we expect SG&A to be about 8%. This too will adjust based on deliveries and homebuilding revenue. For the combined homebuilding joint venture and land sale and other categories, we expect to have a loss of about $10 million. And looking at our other business segments, we anticipate our Financial Services -- earnings for Q1 will be in the range of $50 million to $55 million. We expect a loss of about $25 million for our multifamily business and for the Lennar Other category also a loss of about $25 million. This guidance does not include any potential mark-to-market adjustments to our technology investments, since that adjustment will be determined by the stock prices at the end of our quarter. We expect our Q1 corporate G&A percentage to be about 2.0% to 2.2%, as a result of lower total revenues and our continuing investment in internal technology initiatives to produce efficiencies. Our charitable foundation contribution will be based on $1,000 per home delivered, and we expect our tax rate to be approximately 24.5%. The weighted average share count for the quarter should be approximately 287 million shares. So, when you pull this together, this guidance should produce an EPS range of approximately a $1.40 to a $1.70 per share for the first quarter. Finally, given the market uncertainty, we're providing boundaries for deliveries only for the full year of 60,000 to 65,000, but are not providing further details at the time. However, we do look forward to giving another update on our next earnings call. Thanks very much, guys. I appreciate all the information, very exciting times here. I thought that the most interesting thing you commented on today was your outlook for gross margins in 1Q to be the low point for the year. And so I wanted to explore that a little bit. I think you -- there were a few components. I think you talked about lower costs that would start flowing through -- I think you said in the back half of 2Q and mostly into the back half of the year. You also mentioned, I think, Jon, that lumber benefit is already in the numbers for 1Q. So, that's probably not the reason. So, there's two other potential reasons I could see why margins might improve. One of them is that maybe you're benefiting from having lower the level of specifications or finishes, finish level of the homes, and so its cost in U.S. Maybe -- and those would be delivered in Q2? Or that maybe you've seen an improvement in buyer demand over the past several weeks. And so, I was wanting to see if you could comment on either of those. And also tell us what range of mortgage rate are you assuming in your outlook? So, that's a lot of questions, Steve. So, let me start by saying we do expect that our first quarter margin, we think, is going to be a low point. I think it derives in large part from a very general notion, and that is we've gotten out ahead of the migration downward in pricing. We've done it by price reduction and by incentive structure, as noted. And we took a very strong first move in that regard in order to keep the machine, the volume moving in the right direction. With that in mind, we started the reconciliation process with land. Remember, our land position is much shorter term than it's been in past. And therefore, we have flexibility. And so, we think that we'll be able to reconcile some land pricing. And as far as our trade partners are concerned, I think I was clear, we've been working with trade partners, both on labor and material. Some of those materials like lumber are already filtering through, just at the very early stages filtering through some of the price reductions that will build as we go through the year. But we are working hand in hand with our partners. And given our volume and pickup in market share, there's a lot of labor, a lot of other people out there that are looking to do business with us. We think we'll be able to bring our pricing down. And additionally, we've been hard at work, reconciling efficiencies in the homes that we built, changing product where appropriate and making sure that we are best positioned at sales prices, at interest rates that are higher to be able to access the market and refine our margin as we go through the year. You asked a question as what our assumption is relative to interest rates. We've kept a flexibility in our numbers. We recognize that the Fed is focused on unemployment numbers and wage numbers and are likely to continue raising interest rates. But the tenure has had a mind of its own, and mortgage rates have been trending down. I noted the flexibility, the shock absorber nature of our program, our dynamic pricing program that we have in place. All of it is almost agnostic to interest rates. We're going to keep moving through the year, adjusting our pricing and the affordability for our customers in order to do what we can to maintain volume. So, we don't have a forward view on interest rates that defines how our program is working, we're going to be adaptable to the interest rate as it evolves through the year. All indications though are that we're probably not going to see much more spiking and more moderating relative to interest rates. But that's a toss-up question. I guess the only thing I think I would add to that is very thorough -- is that -- our gross margin is impacted by the volume of closings that we have at every quarter. And Q1 is most likely going to be the lower volume quarter. And as we close more homes, as Diane said in her description, the level field overhead that gets absorbed is spread over more closing, so that has a positive impact on margins. I just want to clarify, Steve, on what I said about construction costs. As I noted, we're currently working closely with our trade and adjusting contracted pricing. That's what I was referencing in terms of will start flowing through in the second half of the second quarter. The biggest needle mover is lumber, which moved down throughout the year, and we will see a benefit of that throughout the entire second quarter. Gotcha. Okay. That is helpful, Jon. So, in other words, you're not talking about deliveries in the back half of 2Q with that lower contracted pricing. That's going to be on stuff you're sort of starting in the back half of 2Q, I guess. No, starting now and through quarter and even on some open commitments on homes already started. It's just that we'll see the first benefits of those renegotiated prices with trade starting to happen in the latter part of the second quarter, and we will see the full -- the benefit throughout the full quarter of lumber reductions that started happening in the summer of '22. Okay. That's helpful. I appreciate that. Second question is on your owned lot count. I know you talked a lot about the ratio in years and all that. But your actual number of owned lots declined for the third straight quarter, and it's down almost 20% from 1Q. And so, I'm wondering, can you help us anticipate how much the actual owned lot count might fall over the next few quarters if market conditions stay challenging and conversely, what kind of market conditions would you need to see for your owned lot count to start rising again? Yes. I mean, Steve, the way I look at it, I think that it's a positive direction that our owned -- home site count has been going down. The desire is to always protect the balance sheet and reduce risk. So, the growth really comes from controlling as much as we can and keeping our owned at a much lower level. But the owned home sites really should be primarily finished home sites where we're going to put a shovel on the ground pretty quickly. So, I'm not bothered by the reduction of owned. The goal is to keep that as low as possible and keep growing the controlled percentage. Well, and I think that basically, if you think about what we're doing strategically, really building the pipeline between our land bankers, our land bank programming and the execution strategy embedded in our volume-based programming. And that's just going to continue to build confidence. I think that you'll see our owned home site count continued to moderate and be right sized relative to the business to be able to adequately provide for either stable delivery levels or growth levels as we choose. But that confidence that we're building and that pipeline I think is really value-add for the future. Great. Yes, I didn't mean to imply that. I thought that that was a bad thing, Diane. I certainly agree with you. It's a good thing. My first question is thinking about the sales pace, would you actually maintain ahead of your historical normal level in the last quarter, despite everything that's going on, on the ground. And assuming that that does kind of tie to this broader strategy that you have around, inventory controls and cash generation, can you talk to how we should be thinking about the sales pace for next year? The ability to hold it perhaps elevated even as we do continue to move through this environment and what that will mean for the level of cash that you can generate in 2023? So, looking at our sales pace for last quarter as well as our go-forward sales pace, we're going to keep -- as Stuart said, we're going to keep the machine going and feel that from an overhead and operational standpoint we get greater leverage by keeping that sales active. We know it's above where we were in 2019 from a pace standpoint and our focus is to keep and maintain that pace as we move forward into 2023. I think you can expect a lot of consistency. I probably haven't spent enough time talking about our dynamic pricing model, but it is really at the core of how we're running our business, and we're doing it on a day-by-day basis, focusing on how do we get the right pricing for the customer base for today's affordability to maintain that sales pace. I think you're going to continue to see us working hard in that direction. As I noted, it has the ancillary business of informing our land banking pipeline, but the dependability they expected is the dependability they'll get. And we're moving through our pipeline of higher-priced land that was priced or bought to yesterday's pricing, and we'll be bringing in land that is more appropriately priced to current market conditions. All of this kind of works synergistically to really inform us to keep that volume and that sales pace consistent. I would just add and remind you that our strategy has been and remains matching sales to our start pace, and we have a very steady start pace that will inform our sales pace as we move forward. That ties directly into the dynamic pricing model that as a tool our operators use to do exactly that. Okay. That's all very helpful. And I guess it also leads to the next question of how do you think about the uses of that cash. You mentioned that you're obviously in a net cash position now as it relates to your balance sheet. What are some of the priorities? You bought back stock in this past quarter. Would you consider getting more aggressive there, or anything else that's on your radar? Yes. So, I'm happy you asked that question. I know it's on the minds of many of our investors and people that follow the Company. We're not ashamed of having too much cash. In fact, in these -- in times like we've been in, it's a tremendous advantage and produces a lot of optionality. Looking backwards to this quarter, this was a tough reconciling quarter. Again, you have the clash of prices coming down in a very complicated supply chain that was in this repair, exacerbated by two hurricanes rolling through our primary markets. This was a very good quarter to focus on our balance sheet and cash generation. But here we sit in what we do with cash, we're likely to continue to generate cash with the program that's in place. Stock buybacks are clearly one of those avenues. We're constantly looking opportunistically at repurchasing stock. We did purchase some stock this quarter. But in the abundance of caution, we just decided to go slow before we go fast. Stock buybacks are on the table. But, also as we come around, we know -- and remember that in the body of my messages, we are going to sit with a production reduction, I think, it's going to be by a third, maybe more, a reduction in production of homes, both multifamily and single-family. We are not going to see the existing home market, putting a lot of supply in place because buyers are protecting low interest rates. And we're not going to have an inventory overhang. So, it is our belief that the duration of this correction is going to be somewhat smaller or more limited. And having additional capital enables us to be opportunistic in growing our business when those signals start to come our way as well. And you know us from the past. People have seen how we operate in the past. Lennar tends to be a first mover; we probably will be in this case as well. So, book to grow our business and to buy back stock and to pay down debt, all of these are viable uses of cash. We're fortunate to have the optionality to go slow first and then to accelerate and to pick and choose where the best returns are garnered. Stuart, an iconic movie says, ABC, always be closing, which requires you to start homes to optimize inventory turns, which reduces your land, your most cyclical asset. A simple strategy as many investors overlook when considering margins alone. My first question is, with starts leading orders, could you comment on how you balance the unit economics of, let's say, the lower margin, 5% versus the incremental cash flow of selling that unit as your land goes down 20% or perhaps 50% when your actual inventory units decline because I think the idea is the income statement is nice, but the cash flow that comes from these choices is much more cyclically important. Well, in your question, you basically embedded the entirety of our strategy because the reality is if you look backwards, we have been reducing our SG&A to extremely low levels so that as margins come down, we're still producing cash and we're producing profit and bottom line. But at the same time, it enables us in tougher time to continue turning our inventory, turning our land inventory, as I noted, our higher price purchased to yesterday's pricing land inventory. We will continue turning that. It is cash productive and we'll redeploy that into repriced land purchases for the future. All of this is symbiotic and works to drive cash flows, replenish inventory appropriately positioned while keeping the trains running on time and generating cash flow, improving the balance sheet and maintaining profitability. So, that is basically the game plan. Great. And then second question, Diane, I think your comments on owned land, 2.5 years versus 1.9 [ph] absent WIP is new. Within that context, my question is if you do 12,500 starts at 50,000 annualized, just to make it simple, does that suggest or imply your ending inventory units will probably be down versus -- year-over-year versus your 60,000 closing because that's going to be potentially an enormous amount of cash flow from that unit reduction? Thank you. Yes. I think that's right, Ken. I mean, as you've heard us say consistently, we're very focused on keeping volume up, capturing our market share. We're enthusiastic about resolving some of the supply chain issues. You heard Stuart mention that we think embedded in our balance sheet might be about $1.5 billion. So, whether that's the exact right number or not is we can debate. But directionally, the point is there's a lot of cash sitting on our balance sheet. And so, as we unwind all of that, that would lead me to believe that you'll see lower inventory level and low home and construction -- construction. And by the way, it reminds me of a meeting that we had with one of our investors some years ago, where we mapped out -- and when I say some, Iâm talking about like 6 or 7 or 8 years ago, where we mapped out exactly the strategy. You remember that, Rick? We mapped out exactly the strategy and said, this is what we're going to do, all the way down to the reduction in that inventory level, and this is exactly the game plan. So, I just wanted to ask about sort of the, I guess, the downside scenarios. The balance between price, margins and pace, clearly, your price taker model is successfully keeping that sales pace elevated and you're getting the cash generation out of that. And I know you mentioned the 21% gross margin is going to be -- or potentially the low point for the year. But my question is if market conditions were to deteriorate, kind of where the limit is to your willingness to trade margin further? Is there somewhere where you would draw the line? Basically, how does the model kind of change when you get to these levels on gross margin? Thank you. Well, let me just say that as I noted just a minute ago, we've been preparing for this for quite a long time. We have been focused on building efficiencies, sticky efficiencies into our SG&A, especially at the division level over the past years, quarter-by-quarter, basis points by basis points, we have been refining, reducing the cost of doing business. I think that if market conditions were to continue to deteriorate, we're going to continue to lean into the consistent program going forward. We have a lot of room to be able to make those adjustments. I think that there's been some concern about notions of impairment. There might be some modest impairments that flow through with further deterioration, but it's not going to be the significant kind of programming that you've seen in the past. I think we've got really terrific shock absorbers within our operating platform to be able to continue the program even as -- even if you look at a downside scenario, we'll continue to be building and volume focused through alterations of the market. And you really can't underestimate the leverage that we get in working with our trade partners as things slow down across the board. People are looking for work. If we're going to be the ones out there to do -- starting homes, we're going to get cost concessions, bringing cost concessions from our trade partners, from our land partners, and we're just going to continue, as Jon said, value engineer and re-specify product in order to make it more affordable, so we can have more higher margins. And second one, Stuart, you just alluded to it, but I wanted to ask about the impairment side. You did take the small write-downs in the quarter. It sounds like you're -- as you just mentioned, that you might expect some smaller ones going forward. But just kind of I guess, number one, given what you did write down this quarter, did that kind of clear the deck, so to speak, or as you think about potential market deterioration, what would be that kind of next decile of communities where there is risk? Just kind of any elaboration on owned land impairments and then further option walkaways? Okay. Look, I understand the concern and the black box of impairments that naturally people feel. If you look historically, we've been very quick to get ahead of the curve. And so, when you ask the question, did we clear the decks, we're always clearing the decks and that's how we think about it. The answer is as if the market is going to continue to deteriorate, and we can't put a boundary on what that might mean. We're going to always be straightforward and give as much visibility as possible. And I don't think there's additional visibility to give right now. I think that the size and scale of what we took as an impairment is about all there is. We really -- especially given cash and balance sheet and everything else, we really shook the tree this time and -- as we always do, and the -- cleared the decks, as you say. I think you're going to consistently see that with Lennar. It's always been the case with Lennar. Diane, do you want to add to it? Yes. I was going to say, Matt, if you think about what you're looking for an impairment, it's where you're finding negative net margins. And so if you look at where our gross margins are, it's not a surprise that our impairment split between backlog and active communities. On the active communities side, it was 8 communities, and we have 1,200. So, there's always going to be some communities that have negative net margins. But given where we are as a company on average, I don't think that the concern for net margin should be as great as some people are articulating. There's always going to be some backlog adjustments. There's always going to be some communities that are below the norm, but I don't think we're anywhere near the widespread impairments that people are voicing concern over. Diane, congratulations on the cash balance. So first question is kind of three part with your dynamic pricing model. One, could you just elaborate on it a bit more with perhaps not giving away too much competitively, if you will. But second, I understand every market is different, but could you just discuss generally what level of pricing maybe below nearby competing communities is generally needed to move the inventory. And then three, you all, Stuart, I believe, said that incentives kind of accelerated through the quarter, discounts. Any way in orders, you could just kind of give us an understanding where you sat in November, December versus maybe a year ago? To be able to understand and really get into the pricing model, you'd have to talk to the inimitable Jeff Moses, and he doesn't talk to anyone. Keep it internally. But, do you want to go ahead and answer that, Diane? It's really an incredible tool, Truman, and we really should spend -- and I'm happy to do that, I'm really happy to spend some time. It's much more involved than you would imagine. It's a home-by-home assessment, each home, each community, each market, and the tool looks -- of what we've sold that exact plan for over time. And it also looks at the market competition for that plan in that community in that market. So, it's a lot of detail, but the point is it truly gives us an unbelievable amount of real-time detailed information because that's really the only way that you can price. We talk about it at a very high level, but pricing really is at a planned community market level. And it allows us to be really flexible when pricing is going up as well as pricing is going down. We use the tool in all market conditions. And it is real-time available to the local market as well as to the corporate office and everyone in between. And so that connected engagement really enables us to stay close to the market, close to the pricing and very interactive at all levels of the company. The other thing that tool does, you hear us throughout our strategies, talk about start pace and sales pace. This tool connects all of the dynamics and metrics Diane just referenced to that pace, so we can adjust in real time to make sure that we're not ever getting behind the pace that we want to be at. Okay. Perfect. And then any -- I'm just trying to understand maybe the elasticity of demand with how much might be needed to move relative to some competitors nearby? Well, as we said in the commentary, we're constantly evaluating what's going on with other competitors, what their inventory position is, what their pricing is, are they generating sales? And this is a very fluid conversation that Jon and I have with the regional presidents and the division presidents. We are all over this. And to the extent someone make a pricing adjustment and if we need to move something, we're going to move it. We want to stay ahead of it and hopefully have them follow what we do. And there's not anything that we're really not familiar with that's going on out there. And it dovetails -- all of this dovetails with our digital marketing focus. We have a robust digital marketing group with data science component that dovetails exactly with the dynamic pricing program. So, we're generating -- we're generating the customer base and building the pricing that is going to appeal and creating the intersection. And I think that the drop to mic or the proof in the pudding is, and Stuart mentioned that we've only got 900 completed homes in the Company right now. And in many ways, I would tell Jon, Iâd like some more. Jon said he'd like less. We have our even flow and machine going and homes are being produced as we match them to sales, we've got the perfect amount of inventory. Yes. And I'm going to say as long as you brought it up, we have 900 homes in inventory. We would actually be better with more of that standing inventory because of today's customer is... Yes, itâs premium. And I'd want to emphasize one more time there were no bulk sales at discounted rates to clear inventory. And you donât always trust what you read. So, let's go from there. Okay. Perfect. And then just on the vendor and contractor savings specifically, what inning of cost savings do you think we're in today? And as of, we'll call it, December 15th, are the savings primarily on the labor side, or are there certain materials, products, outside of lumber? Look, we're clearly in the early innings because as the homebuilding industry is completing the fourth quarter of the year, you have for all builders really the largest production quarter, so labor has been -- has remained very busy while the market has slowed down prior to the fourth quarter. And as Stuart noted and I noted, it's -- that's why you typically always see a lag between sales prices moving down and then construction costs moving down. So, we're clearly in the early innings of that. We feel like we've got tremendous traction. And as I noted earlier, I think we'll see significant movement as we move through our first quarter, into our second quarter in terms of reductions. And that will happen primarily because starts have dramatically slowed within the industry. We've kept our start level at a consistent pace. And so as that labor frees up, that brings the cost of labor down. But also as the starts come down, that creates more availability of materials for the manufacturing production. So, material prices come down as well. That also tends to lag a little bit more behind labor because it's got a longer production cycle where labor is more immediate. Stuart, I'd love to drill in a little bit on your kind of industry-wide starts outlook for next year. My initial reaction when you kind of threw out down 30% was a little bit of a surprise. And I guess the way I'm thinking about it is, you guys are targeting a pretty flat pace for the year. Your largest competitor D.R. Horton has kind of articulated something similar. You guys are 25% of the single-family production market. There's been a lot of other builders that pulled back very sharply this year on starts as they were kind of clearing through some of the spec they built up in the spring. But if you have said we see the advantages of spec. We're going to ramp our start pace heading into the spring to kind of capitalize on that as well. So, I guess, my question is, how do you kind of arrive at that number? And let's say, for argument's sake, the decline is less than that, let's say, 10% or 20%. Does that impact your confidence on kind of getting the cost savings that you're clearly expecting for the year and the margin guidance that you gave as far as 1Q being the low watermark? So first of all, Alan, I'd say that we could look at some of the larger builders, and I'm sure that they'll adjust their start pace and no one has fleeted the switch in industry, a lot of very smart participants. But there are some practical realities relative to smaller builders across the country. Remember, the larger builders are that we make a proportion. And the capital markets are complicated right now. It's not just a question of strategy for some. It's a question of what can you actually get started and how are the capital markets supporting it. I think that it might be only 10% or 20% or 30%. I don't know what the percentage is going to be. My personal view is that it looks like many of the smaller builders are really pulled back, the complication of price reductions and what's been paid for land and stuff like that. The other side of it, which makes up about a third of production is multifamily. And the multifamily capital markets are very frozen up right now. I think that the number of new communities coming out of the ground for multifamily and even the single-family for rent buyers are kind of seized up because of capital markets considerations. So, let's not even throw in strategy just from a capital market standpoint, it feels to me, can't prove that, a very sizable portion of starts for next year are going to be under limitation. Now, if it ends up being only 10% instead of 25%, still, you're looking at a housing shortage. I know that there are many with different opinions on this. I believe there's been a production shortage, housing shortage across the country. If you talk to mayors and governors across the country, their single biggest concern is workforce housing supply and affordability. It is a drumbeat that is in almost every major city and every state. And we feel that there is a shortage that is going to be compounded by the fact that there will be some production and reduction out of this and whether 10% or 35%, it's still going to be short supply, and I think a more limited downturn. I appreciate the insight there, Stuart. Secondly, I think you kind of touched on it a little bit. You highlighted your can rate peaking in October, but just to kind of be more explicit. Can you just talk about what changes you have seen over the last 3, 4 weeks with the pullback in rates? Have you seen home buyer demand improving? And any pricing power coming back even or maybe a moderation in the need for additional incentives thus far in November and early December so far? So, we've seen a combination of increased traffic, greater buyer demand, traffic increase, both on -- in the community level and on our website, definitely fewer cams, [ph] which we noted. And all of that has just been stabilizing the environment, hasnât quite led to higher pricing yet, but those are generally happened before you gain some sort of pricing power accounts. And just to be clear, that is incorporated in your 1Q order guidance of down 15% to I think 25 or so percent that incorporates... First question, just wanted to be clear. I am sorry if I'm not fully grasping elements of the guidance or comments. But on your view around or outlook around first quarter gross margins being the lowest of the year and improving from there on in. Just wanted to be clear that -- or perhaps you could articulate a little bit what type of view on price or pricing trends over the next 6 to 9 months does that incorporate? Because certainly, it appears that it's incorporating some amount of cost relief, I guess, as you're going into the back half. I'd be curious how much of a basis point standpoint the cost relief is. But more importantly, what type of view on price does that outlook for gross margins throughout fiscal '23 reflect? So from a price ASP standpoint, we're not assuming any appreciation in the market. That's what our underwriting is at. That's what we see out there. To the extent that there's price appreciation or we're able to increase our ASP, what we do with incentives and there's a benefit in the financing market, that's just incremental upside to what we view will happen in 2023. Just to emphasize Rick's point, Michael, if you think about mortgage rate buydowns is really being a very effective tool in making sales in this environment. To the extent that rates come in, the cost of that buy down becomes less expensive and you could see probably potentially the biggest benefit from that if that come in. So just to be clear then, you're not baking in, obviously, any price appreciation. But on the flip side, you're not baking in any further softening in pricing trends from here on in as well in terms of additional incentives or price discounts needed if the market continues to slip from here? That's correct. So, we're assuming no price appreciation, no incremental price reductions. We think that the incentives that we've been offering are good, solid incentives and base prices in order to attract the volume. I think you can see that in the numbers that we've been generating. The margin upside throughout the year as we noted Q1 is going to be the low point. Itâs really going to come from several things. One, Jon went through the cost side, Jon went through the cycle time, Stuart talked about land and we're going to continue to value engineer product to the extent that we need to. And to the extent that prices curtail a bit more, some of the embedded cost savings are going to be offsets to that. But I think that we've gotten ahead of where prices have been going. And so, we're looking at kind of a level field right now. Okay. No, I appreciate that. And I guess just secondly, any thoughts around community count growth as the year progresses? I know obviously, there's been movement on the lot side and walking away from different amounts of lots on the option side. But oftentimes that might impact one or two years out. So, any thoughts around where the community count might be by year-end '23 versus '22? So we rather not talk about community count right now because it's a very moving picture. You might expect since weâve renegotiated, repositioned deals that community count could or should grow in the back half of '23. But I think right now, it's just too soon to give any guidance as to what those numbers would be. Okay. Thank you, Mike, and thank you, everyone, for joining us. I know that we went on a little longer than normal, but these are complicated times. It's been a complicated year-end and we wanted to give a lot of detail. Look forward to reporting back in our first quarter. And if you have further questions, give us a call. Thank you, everyone.
EarningCall_1867	Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Fourth Quarter of Fiscal year 2022. At this time, all participants are in a listen-only mode. [Operator Instructions] Todayâs call will last one hour. And as a reminder, todayâs call is being recorded At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead. Thank you, Lisa. Good afternoon, everyone. Hosting the call today are Aart de Geus, Chairman and CEO of Synopsys; and Trac Pham, Chief Financial Officer. Before we begin, Iâd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and todayâs earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement and 8-K that we released earlier today. All of these items, plus the most recent investor presentation, are available on our website at synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call. Good afternoon. I am happy to report that Synopsys completed an outstanding year with sustained forward momentum. Since about four years ago, we communicated our dual objectives of accelerating growth and expanding margin. Synopsys has delivered on and, in fact, exceeded those expectations. This is visible through over 60% revenue growth since that point, 11 percentage points higher non-GAAP operating margin and more than doubled EPS. This quarter, we also crossed the $5 billion annual revenue milestone. Simultaneously, we substantially evolved our product offering, expanded customer relationships and increased competitive differentiation. Building on this, we delivered another record year in fiscal 2022. Revenue grew 21% to $5.08 billion, with double-digit growth in all product groups and across geographies. We further expanded non-GAAP operating margin to 33%, grew earnings by 30% and generated record cash flow of $1.7 billion. While semiconductor industry revenue growth has moderated, design activity remains robust. In addition, our time-based business model, with $7.1 billion of non-cancelable backlog and a diversified customer base, all provide stability, resilience and forward momentum. While fully mindful of the macro dynamics around us, including the most recent US government export restrictions, Synopsys is poised for strong results in fiscal 2023. We intend to grow revenue 14% to 15%, continue to drive notable ops margin expansion and aim for approximately 16% non-GAAP earnings per share growth. Trac will discuss the financials in more detail. Looking at the landscape around us, some of you have asked us why customers design activity remains solid throughout waves of the business cycle. Two reasons. First, the macro quest for Smart Everything devices and with its AI and big data infrastructure is unrelenting and expect it to drive a decade of strong semiconductor growth. Second, semiconductor and systems companies, be it traditional or new entrants, prioritize design engineering throughout economic cycle precisely to be ready to feel competitive new products when the market turns upward again. We've seen this dynamic consistently in past up and down markets and expect it to continue. Today, Synopsys aims to be a key engineering catalyst towards this Smart Everything world as our mission is to enable innovation at the critical interplay between semiconductors and software. Our customers are racing to differentiate along three axes; first, still higher complexity chips with massive compute capability; second, super tightly integrated systems of chips optimized for the software that will run on them; and third, increasing focus on security and safety across both software and hardware in virtually all vertical segments. Synopsys is uniquely positioned to address these challenges as we provide the most advanced and complete design and verification solutions available today, the leading portfolio of highly valuable semiconductor IP blocks and the broader set of software security testing solutions. In the past few years, we have introduced some truly groundbreaking innovations that radically advance how design is done. Let me begin the highlights with our DSO.ai artificial intelligence design solution. With already well-over 100 commercial production design, it continues to deliver amazing results. Applied simultaneously to multiple steps of the design flow, DSO.ai reduces efforts for months to now weeks, while also delivering superior performance and reduced power. Results reported by customers include 25% reduction in turnaround time and compute resources and up to 30% power reduction. With customers such as Samsung, Renesas, Intel, MediaTek, Sony and many others reporting impressive achievements, customer adoptions have accelerated across a wide range of process nodes and market verticals. In FY 2022, the number of customers more than doubled, and we've already seen significant repeat orders and broadening proliferation. Seven out of the top 10 semiconductor companies have adopted DSO.ai for production design. Meanwhile, we're also extending machine learning capabilities across other EDA workloads from verification to test, to custom design. These next phase solutions are already in customers' hands, showing excellent impacts and promise. Central to the impact of DSO.ai are the powerful digital design solution engines underpinning it, specifically our Fusion Compiler products. It drove numerous competitive wins with accelerated proliferation for a wide variety of customers. Key adoptions range from the largest processor firms to influential systems companies, to major hyperscalers. Fusion Compiler is used in over 90% of advanced nodes down to 3 and 2-nanometer, with a majority exclusively using Synopsys. In Q4, cumulative customer tape-outs surpassed 1,000, more than doubling the combined total of FY 2020 and 2021. Our customer solutions also saw strong market momentum this year, continuing the drumbeat of competitive displacements. With options ranging from large semiconductor companies at advanced nodes to automotive to memory vendors, as we added more than 45 new logos this year, nearly one per week with double-digit revenue growth. To address the highly advanced chip mentioned earlier, multi-die system design, sometimes also called chiplet-based design, is opening a whole new era of silicon complexity. Having forecasted this a number of years ago, Synopsys now provides a differentiated multi-die solution that enables architecture, analysis, design, and sign-off all integrated in one place. This includes our 3DIC Compiler solution and our industry-leading portfolio of state-of-the-art die-to-die interface IP. Today, we're already tracking more than 100 multi-die designs for a range of applications, including high-performance compute, data centers, and automotive, seeing strong adoption of our broad solution. A notable example is achieving plan of record for multiple 3D stack designs at a very large, high-performance computing company as well as expanded deployment at a leading mobile customer. Meanwhile, the recently introduced UCIE protocol, short for Universal Chiplet Interconnect Express, has become the interconnect of choice for multi-die systems. Both our UCIE interface IP and HBM3 memory IP are at the forefront of enabling multi-die designs with multiple wins at Tier 1 customers. More broadly, third-party IP is a must-have for designs across the board. Our market-leading IP portfolio, by far the broadest in the industry, continues to drive significant adoption and growth. In fiscal 2022, our IP business delivered another record year with more than 20% growth. We continue to see particularly strong demand in key markets such as high-performance compute, automotive and mobile, where the systems are driven by smart everything, high-speed secure connectivity and advanced process geometries. While maintaining technical leadership in IP for advanced process technologies, we delivered multiple IP products in the most advanced 3- and 4-nanometer process nodes to our customers in high-end mobile and HPC applications. Very strong adoption also of our automotive-grade IP solutions as cars are being re-architected towards both electrification and autonomous driving. The acceleration of car electrification driven by urgent climate considerations notably drives a slew of new sensor, actuator, and control chip designs. Our automotive solutions had outstanding growth. Today, we have engaged with hundreds of designs from more than 30 leading semiconductor providers, more than 10 OEMs, and three of the top four Tier 1 suppliers. At the core of these systems is the intersection of hardware and software. To optimize the system, our customers must verify both the software in the context of the hardware and the hardware in context of the software. While verification is fundamentally an unbounded problem, our state-of-the-art simulation, emulation and prototyping products tackle these tough verification challenges at unparalleled speed with the fastest engine, highest capacity, and lowest cost of ownership. Specifically, our hardware-based products delivered a record year with competitive momentum, adding more than 30 new logos and over 200 repeat orders. Moving now to software security, the critical nature of which continues to grow as management teams and Boards are keenly focused on ways to protect their companies and their customers from destructive cyber attacks. Our Software Integrity solution enables organizations to manage the security and quality of software across a wide range of industry verticals from semiconductor and systems to financial services, automotive, industrial, health and more. Industry groups such as Gartner and Forrester recognized Synopsys leadership. Gartner positions us at the top and farthest right of its Magic Quadrant, rating us highly for technology depth, breadth, consulting capabilities and vision. While this is the one area where we did see some impact from the macro environment in the quarter, revenue growth for the year accelerated over FY 2021. Notably, we saw good progress with the go-to-market and product initiatives introduced last year. Our indirect channel partner business, for example, continues to ramp well by expanding our reach into customer groups and geographies that we haven't connected with in the past. We are building momentum with the goal of another significant increase in indirect sales in FY 2023. On the product side, we expanded our offerings by launching two new SaaS services for static analysis and open source analysis integrated into our Polaris platform. We expect these SaaS capabilities to accelerate adoption and consumption of our solutions as they are particularly well-suited to growth in the mid-market. Early customer reception has been quite positive. Our continually evolving and strengthening platform also provides more and more valuable insights to help companies drive increasingly robust top-down software risk management. In summary, Synopsys exceeded beginning of year targets and delivered a record fiscal 2022 across all metrics with the additional spark of passing the $5 billion milestone. We enter FY 2023 with excellent momentum and a resilient business model that provides stability and wherewithal to navigate market cycles. Notwithstanding, some economic uncertainty, our customers are continuing to prioritize their chip system and software development investments to be ready with differentiated products at the next upturn. On our side, many game changing innovations across our portfolio position as well to capitalize a decade of semiconductor importance and impact. Finally, our execution and operational management continue to drive growth and margin expansion, and we're particularly thankful to our employees around the world for their vitality and diligence throughout the year. One more comment. As you may have seen yesterday, we announced the appointment of Shelagh Glaser to become our new CFO on December 2nd. She's here with us today, listening in as we prepare to pass the torch from Trac in a few days. Before I pass the microphone to Trac for his review of fiscal 2022, it's wonderful to say a heartfelt thank you for his contributions that helped build the company we are today. With 16 years on our team, eight as Synopsys CFO, Trac is a cornerstone architect and execution leader of the strong results of the past year. During his tenure, he strengthened our fiscal discipline and acumen, engineered trusting and effective relationships with the other parts of the company and, most importantly, assembled and grew a great team that we will continue to build on. So it is all the more meaningful to voice our gratitude to Trac at the very moment that we pass this unique revenue milestone. Thank you, Trac. Thank you Aart for the -- those kind of words. It has been a privilege to serve as the CFO of Synopsys. I'm immensely grateful to be a part of this team, and I'm proud of what we've accomplished. While I'll miss the rich interactions with the Synopsys team and the investment community, I'll be here through the end of December to ensure a smooth transition. Synopsys is in a great position as reflected in strong results and outlook. FY 2022 was an excellent year and featured record results in all key metrics, including revenue, non-GAAP earnings, and operating cash flow. We continue to execute well and are confident in our business heading into FY 2023 driven by our strong technology portfolio that is expanding customer commitments, robust chip and system design activity despite moderating semiconductor industry revenue growth, and a resilient and stable time-based business model with $7.1 billion in non-cash backlog. As a result, while the macro environment is stressed, we expect to grow revenue 14% to 15% and expand operating margin more than 100 basis points, driving non-GAAP EPS growth of approximately 16% in 2023. Let me provide some highlights of our full year 2022 results. We generated total revenue of $5.08 billion, up 21% over the prior year, with double-digit growth across all products and key geographies. Total GAAP costs and expenses were $3.9 billion and total non-GAAP costs and expenses were $3.4 billion, resulting in a non-GAAP operating margin of 33%. GAAP earnings per share were $6.29 and non-GAAP earnings per share were $8.90, up 30% over the prior year. Semiconductor & System Design segment revenue was $4.6 billion driven by broad-based strength across all product groups and geographies. Adjusted operating margin was 35.3%. Software Integrity segment revenue was $466 million, up 18%, with adjusted operating margin up slightly to 10.1%. For 2023, even in light of some of the marginal macro-related impact in Q4 orders, we expect revenue growth to be within our 15% to 20% objective with increased adjusted operating margin. Turning to cash. Operating cash flow for the year was a record $1.7 billion reflecting our strong results, robust collections, and approximately $100 million in early collections. We ended the year with cash and short-term investments of $1.57 billion and total debt of $21 million. During the year, we completed buybacks of $1.1 billion or 69% of free cash flow. Now to our targets, which reflects the impact from the recently announced export control regulations and assume no further changes for the year. Based on our current assessment, we expect quarterly revenue and non-GAAP EPS to steadily increase through the year. For fiscal year 2023, the full year targets are; revenue of $5.775 million to $5.825 billion; total GAAP costs and expenses between $4.49 and $4.537 billion; total non-GAAP costs and expenses between $3.81 billion and $3.84 billion, resulting in a non-GAAP operating margin improvement of more than 100 basis points; non-GAAP tax rate of 18%; GAAP earnings of $10.28 to $10.35 per share, cash flow from operations of approximately $1.7 billion. Now to the targets for the first quarter, revenue between $1.34 billion and $1.37 billion, total GAAP costs and expenses between $1.033 billion and $1.053 billion, total non-GAAP costs and expenses between $875 million and $885 million, GAAP earnings of $1.89 to $2 per share, and non-GAAP earnings of $2.48 to $2.53 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations. Finally, we are reiterating our long-term financial objectives of annual double-digit revenue growth, non-GAAP operating margin expansion of more than 100 basis points per year and non-GAAP EPS growth in the mid-teens range. In conclusion, we entered 2023 with excellent momentum and confidence, reflecting our innovative technology portfolio, ongoing design activity by our customers who continue to invest through semiconductor, through semiconductor cycles and the stability and resilience of our time-based business model. Thank you. Just before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants, if you have additional questions please reenter the queue and weâll take as many as time permits. Great. Hi, everyone, and let me just say, Trac, all my best wishes. It's been a pleasure working with you. Maybe I'll just start. It seems your customers are heading towards a demand environment that maybe is most akin to what we last saw in 2019. And if I just think about Synopsys in 2019, I think you grew your recurring revenue at a low double-digit pace. Your non-recurring revenue was down at a high single-digit pace. I don't know, it seems both are probably trending better into 2022 than the last down experience to the industry. Can you just compare and contrast similarities, differences? And maybe a little bit more detail on how those two revenue components might track next year? Well, first, actually, I think your comparison is pretty good because 2019 was really just waving around the medium for the growth of the semiconductor industry. And so in that sense, I don't see a long-term change in the trajectory, which essentially forecast that for this decade, semiconductors are making it to $1 trillion, and we see all the reason why it will get there. The fact that some years are higher, others are slightly lower is just a given. And in a context like that, Synopsys has the good fortune to have a business model that is very stable and self-sustainable, but also a set of customers that have no interest in going up and down in their R&D force, because it's a continual investment over typically products that take two to three years to develop, and so I think we provide a good solidity in pretty much all the fronts. In general, Joe, but I'd also add that we're seeing just better momentum today than we did a few years back when you look at where our products are and with regards to the strength of the portfolio, how we're executing the changes that we're making and just the overall strength of the business. I think we're heading into an environment that may be stressed outside, but we're well positioned to grow there. Okay. Great. And then I was hoping maybe just reconcile some of the year-over-year changes with your cash flow outlook. Even, I guess, if I adjust for the $100 million in early collections, I think cash from operations is growing a bit more slowly than your core EBIT and earnings. And then the -- it looks like a big step-up in CapEx. Maybe just what's behind that? So, let me start with the cash from ops. The second thing in addition to the $100 million of early collections is the -- our cash flow projections reflect the change in the tax rules that now requires us to capitalize R&D expense. And so as a result of that, cash taxes are going up in 2023. So, that affects the number. With regards to the CapEx, it's a little higher than it's been over the last couple of years, primarily because of our efforts to consolidate space and our facilities in the US, mostly to drive better productivity in the employee base going forward. Hey thank you for taking my questions and Trac, congratulations on your last quarterly call as well. I hope you enjoy your retirement. The first one is just I wanted to focus a little bit on the DSO. You mentioned, Aart, that you've doubled the amount of customers in 2022. My question is, how early are you in that potential to penetrate the customer base, especially the ones that move the need and the better and within the ones that already adopted? Do you feel it's just the beginning from them in terms of being productive? Or do you think there's still a lot of room to sell deeper into those accounts? I think there's a lot of room. As a matter of fact, I think that the whole AI-driven design wave is easily the next decade because it fundamentally changes so many things at the very moment that the customers one way or another are going to grow complexity dramatically because they see so many opportunities in this notion of smart everything. And so in order to do that, you don't want to just have tools that use AI and be better and faster and so on, you want actually to impact the very design flow. And to me, the big breakthrough in DSO.ai felt very similar, as a matter of fact, as some 30 years plus ago, synthesis, it changed how things are happening. Now, in that sense, the adoption will, on one hand, take time; on the other hand, I think he is very fast. Literally just a couple of days ago, among the team, we were discussing how do we manage the number of people that have interest because they all want support, they all want to be the first ones, and it's a good problem to have. That's very interesting. Thank you. And then just as a follow-up, you mentioned automotive solutions and the OEMs as well coming in, both from the semi companies and the OEMs kind of increasing demand, and that's kind of driving part of the growth. I guess if I do math and I think about your growth vectors today, I'm thinking maybe specifically about next year when you look at your pipeline, how does the reliance on the core semis, the leading-edge companies, compared to the systems companies in terms of the growth? Who's bearing the higher proportion of growth in terms of responsibility to deliver those targets that are pretty impressive? Thank you. Well, I'm glad you bring up automotive, because looking at the numbers; I was surprised myself how well we had done this year. At the same time, I think there's some good explanations for it. For starters, the very fact that there was a supply shortage in automotive; suddenly everybody gets full attention of automotive. And then simultaneously, the world has now recognized that the cost of climate change is upon us. And I expect that the rate of change toward electrification is absolutely going to accelerate. And so investments that started probably seven, eight years ago. And we always sell, oh, automotive is so slow, is so slow, now suddenly are moving forward very fast, and it's along the entire supply chain that is reconfiguring itself around new architectures. So I think there's a lot of opportunity, lot of challenges there as well, but I think we're in a great position for it. Hey thanks for fitting me in. Trac, it's been an absolute pleasure. Bad to say goodbye. So hopefully, we can chat with you later. The 14% growth guidance is very impressive, especially the year that you are coming out of. I'm curious, though, with the upfront business having a tough comp. You did 40% growth there this year. How much of upfront or hardware, I'm using those terms interchangeably, are you kind of taking into the guidance for 2023? I wouldn't naturally attach hardware to upfront. Of course, it will show up in online. But keep in mind that we do have IP that is reflected in that category as well. And keep -- remember, in our statement, we -- our IP business grew over 20% in 2022. So heading in 2023, really the 14% to 15% guide for revenue growth is coming across all product areas. And that's where we're -- and that's all product areas and all key geographies, and so that's where the confidence and the comfort is in terms of our ability to execute against that plan. Okay, excellent. And then DSO.ai, it seems that you're getting a lot of traction there, and you mentioned some other areas where you're looking at AI capabilities like verification, tests and customs. Can you talk about this roadmap and where we are with deployments and how customers are using it for some of these other applications? Sure. I'll be a little careful with giving too much of the roadmap. But I want to make sure that you understand that in all of these areas, we have worked on those now for already quite a while, and we have a number of very positive results directly with customers. And at the end of the day, it's like the old the VC, do the dog, feed the dog, dog food, not that I would ever want to compare customers to dogs, of course. But the fact is, it's in the field that you realize what are the issues that one may not have contemplated, and the feedback is very positive because there, too, while the tools have long been optimized with a variety of machine learning and AI capabilities, changing the very workflow is how you get a more profound impact. And so we have a long opportunity space to grow into, but the engagement already signifies that we have results that customers want to keep and turn into production. Good afternoon and congratulations on the solid results and outlook. And Trac, best of luck, and thanks for all the support. As you guys pointed out, chip design activity in leading-edge digital is very strong, where you have accelerated compute processors, next-gen networking, switching and routing ships, new ASIC programs. Very strong, but also significant increase in design complexity and more importantly, chip design cycle times, Aart, I'm wondering is the complexity and cycle time dynamic requiring your customers to use hardware emulation and prototyping as an integral part of the verification and software development process versus it being somewhat discretionary five, 10 years ago. And is this what's helping to sustain the hardware growth into next year? The answer is yes. And another yes. Yes, it does require much more attention to the intersection of hardware and software. And in order to do that, you need simulation that is blindingly fast, and that's why you use hardware accelerators or we call them emulators or prototyping to be able to do that. But underneath your question, there was another comment, which is really the comment that is it true that complexity still is increasing massively, and the answer is very true, but it's going to be in a new form, meaning it's not one chip, it's multiple chips as close as possible, and it is architectures dedicated to whatever the end markets are. And so the race is absolutely on in all of these dimensions, but it brings a challenge for our customers that by now after many, many decades, have certainly learned how to optimize for performance and power. They now have to optimize for making it all work: multiple chips, hardware and software, thermal issues. And that complexity is going to drive all kinds of new products on our side, but also necessitates to look to have focus on the entire flow. And that's why I'm very encouraged by being at the dawn of really multiple new decades of new technology. Thanks for that. And then on your IP business, we've got Intel and AMD, they're now starting to roll out their new processor chips, right, supporting next-gen memory and storage interfaces, right? Strong area for you guys, big DDR5 from memory, PCI Gen 5, CXL for storage. These processors are starting to roll out now. Additionally, you have more of your customers bringing on additional foundries as a part of their diversification and reshoring efforts. I think this should drive higher adoption of your foundational IP as well. So what are the other dynamics that are going to drive the IP business next year? And does this segment continue at strong double-digit year-over-year growth in fiscal 2023? Well, we'll take 1 year at a time, but there's no doubt that there's an opportunity to continue to grow very well. And a greater respect for you mentioning all the keywords of things that we sell. I would add one other category that we alluded to, which is a category that actually looks at the new types of interfaces in these multi-die integrations because those integrations are predicated mostly on one thing; how short and how fast can you make the wires between the chips? And therefore, it's another form of miniaturization with enormous connectivity between chips. And so these connectors are extremely sensitive to the speed, the voltage and all these things. And so there, too, we are leading in providing the IP that makes this possible. And I think that's an area that will grow on top of what you mentioned. Hi, good afternoon. Thank you for taking my question. I think first question I want to ask is about China. This has been or maybe had been a major bear case on your stock, at least over the last three, four months. And especially after the very, I mean, unprecedented round of restrictions that the USA implemented since the beginning of October. I understand you did qualify that the impact is not material, but it seems to me that investors may still be a little bit skeptical. And maybe can you just give us some sense from your perspective why -- what do you see as a reality being nonmaterial versus what the perception among the investment community is being like a China restriction being a major, major bear case for you? Is there any way that you can provide us some perspective why that has been the case? And what do you think that should help investors to really change or, I mean, have a more grounded view about this issue? Thank you. It's a very good question, and I understand why it's difficult because a lot of these things are written in terms of hard to understand technology. And so of course, whenever there's a change, we look solidly at all the changes, as is the impact. And actually, I think we explicitly communicated that our assessment showed that it was not material in the financial terms. We highlight that we have factored in, to the best of our ability, exactly what the situation is today in our forecast. And moreover, we have put a lot of emphasis on making sure that we are 100% compliant with all the rules so that we act in a clean fashion. I would add only one more thing, which is China is a very broad market, and so there are many technologies that are not anywhere close to being touched by the advanced restrictions. So we see continued great opportunity, but we understand with you that it's an area to keep watching and to make sure that we grow in other parts of the world as well. Thank you Aart. Maybe the second question, maybe this is for you, Trac. First off, congratulations on the retirement done. But I want to ask you, I think one year ago, when you gave the guidance about fiscal 2022, you guided fiscal 2022, maybe like first half, slightly first half loaded over second half. But your fiscal 2023 guidance, if I hear you correctly, you're guiding second half likely to be higher than first half. And your number seems to imply that every quarter needs to be somewhere 4% to 5% higher than the preceding quarters throughout the entire 2023. I wonder where exactly the assumptions there for steady growth into the year and that you have assumptions like maybe the semiconductor industry needs to have a rebound or recovery out of the downturn to the second half of your fiscal year. And if possible, can you give us some color what exactly driving the second half rebound, I mean the growth into the second half, which one will be the primary driver. It's EDA? Is it IP? Is it hardware? Or is it the SIG part of the business? Thank you. Sure, Charles. Let me zoom out a little bit because over the last couple of years, we've had some unusual profiles coming into the year, right? So 2020 was very back end -- 2021 was back-end loaded. Heading into 2022, we said it would be very front-end loaded. When we look at the profile this year, keep in mind that it's based on backlog that we have scheduled out for our software business, IP and hardware. So, there's good visibility into how it lays out throughout the year. And when you look at the profile, you're right, it's slightly to the back half, but just marginally so. And if you look at the first half comparison -- first half, second half comparison for 2023 and you go back in time, it's just actually in line with what we have historically seen, which is kind of unusual but nice to get back to that profile. And it does imply that there is incremental increases in the business as we progress throughout the year. The basis for the forecast, as I said, is grounded very much on visibility of the backlog, but also what we expect to book in the year. And we are playing the year based on what we can execute, similar to what we have said in the past. So it's not a stretch to assume that it's dependent on major market forces or anything out of our control. We want to give guidance in terms of the outlook for the business, both top line and bottom line. That really is heavily dependent on our ability to execute. And at this point, given our visibility, the portfolio that we have and the -- our confidence in our execution, we feel really good about the 14% to 15% growth and driving 16% EPS growth. Thank you. Good evening. Aart, for you first, a product question since the term road map came up a couple of times. I'm wondering if there is some potential development of catalysts that you might be able to bring to market. For example, would it make any sense or would it be feasible for you to increasingly connect SIG with hardware-based prototyping? Along the lines of an earlier question, you haven't mentioned silicon lifecycle management or SLM, but would it make some sense there to connect it increasingly to your sign-off business and so forth and other kinds of intracompany integrations that could be differentiators or new catalysts for product growth? And then my final question for Trac. With regard to SIG, could you comment on the results that you've been seeing for your investments in international expansion for SIG over the last number of years, including, in particular, your investments in security consulting outside of the US? So, let me zoom out a little bit on your question because generically, I think you're pushing absolutely on the right buttons, which is that while many of the things we've done in the past have been sort of point efforts, point tools and so on, for the last decade, we have started to integrate many tools more forcefully together because that's the only way of solving problems of complexity where power and speed and thermal and locations and reliability strongly intersect. Then if you move to the next level up, we have already mentioned the fact that there are strong interconnectivity between software and hardware because the hardware has one mission, make the software faster. And the software has one mission, make the hardware work harder for it. And so these optimizations are already going hand-in-hand. SIG adds an additional angle to that is the angle of security and quality. And we have, by the way, sort of the equivalent of a SIG inside of the EDA side as well and the IP side, because in the IP, we have a variety of security capabilities being built in. I think it will take a little bit of time before you can see a strong connectivity between those, but it has not taken that much time to see at a number of customers that they start to recognize that our vision moves up into the domain of software and moves down into the hardware at the very moment that they are learning about this. And the earlier mentioned automotive, but it could also be industrial and a few other segments, are precisely now arriving at this junction or figuring out that they have to make it all work at the same time. And so while many of the specific things that we're working on, we'll talk about as we release them, the general direction of your question, I think, is very much the way we think about systemic complexity now being the hallmark of the next decade. Jay, this is Trac. So to your question regarding SIG and international expansion, you're right, that was a really intentional focus for us a couple of years ago in terms of improving the go-to-market function, both internationally and with channel partners. And I would say that when you look at the results over the last couple of years, I think we've made really good progress with regards to how we're executing internationally and the additions and the execution with new channel partners. I'm optimistic not only because of the results has been good, but we're in the early stages of actually seeing strong results from that. So I think there's a lot of progress ahead of us and lot of opportunities ahead of us in both those areas. Hi, thank you. And Trac, congrats from me as well. Thanks for all the support over the years. I guess Trac or Aart, one thing I wanted to just touch base on again is on the SIG business. Aart, you mentioned that you did see some impact from the macro during the quarter. The numbers look pretty good. I've got you down for 16% year-over-year growth, so maybe if you could just expand on that. Was that towards the latter end of the quarter and looking ahead or any other detail you can give us, please? Sure. Well, first, I do think that the results were quite good. What we did see, and it probably started a little earlier than this quarter that some of the negotiations turned out to be a bit longer, maybe some more layers of approval. And actually, that is very, very common when you see economy looking at, well, is it going to be a recession or not, people little bit worried. Well, they just start putting some breaks on the decision making first and foremost. But at the same time, we were encouraged by the fact that growth continues to improve over the previous year. And there's no doubt in our mind that this is a very good part of Synopsys and there's a lot of opportunity, so we'll keep pushing. Okay, great. Thanks for that detail. And then a quick follow-up. On the DSO.ai, you mentioned Aart that thatâs -- you're starting to gain attraction across a wide range of process nodes, which is interesting to me, can you maybe talk a little bit about the value prop across those nodes, proposition across those nodes, is it power reduction for some, reduction in turnaround time for others or how does that work? Okay, well the first one is turnaround time reduction for everybody and that in itself is interesting because if you remember my other comments about moving into a whole different league of complexity, while people will continue to push on performance and power and right now they're pushing on making just sure that they can finish the job, and in that context, improving the turnaround time is extremely valuable. But the other thing is that in many areas, it opens up doors that they didn't have before because if you can work in multiple nodes, the question is can you also start to translate from one node into another. And we have in the last 12 months specifically seen more and more really outstanding experiments and showcases where we helped people move from one node and design in let's say the next node or even some nodes that are quite different from the ones where they started with the benefit of the learning from the original node. And I think that that opens the fertile space because in reality, most design is redesigned. You try to always use what you did in the past. And the question is, how easy is that when the past becomes more and more complex? And that's where AI I think has a lot of potential going forward. So, sometimes you call that retargeting or remastering and I think it's going to be a lot of need for that. And that concludes the question-and-answer session. I would like to turn the call over to Aart de Geus for closing comments. Well, first and foremost, thank you for all the support and the good questions over the last year. I think we concluded a very strong year. Of course, again, it's a very strong market, but I think we also demonstrated that there's momentum going forward. And so that 2023, even without Trac, will be a good year for us. And we thank Trac one more time. We also thank you for your support and for your continuing support of our stock. With that, have a great rest of the year, and we'll talk to you soon.
EarningCall_1868	Welcome to VIA Optronics Preliminary Third Quarter 2022 Earnings Conference Call and webcast. At this time all participant lines are in listen-only mode. So those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note this conference is being recorded, an audio replay of the conference call will be available on the company's website within a few hours after this call. Thank you, and welcome. Joining me today are Jurgen Eichner, Founder and Chief Executive Officer; and Dr. Markus Peters, Chief Financial Officer. I'd like to remind everyone that statements made during this conference call relating to the company's expected future performance, future business prospects or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Participants are directed to VIA Optronics Form 20-F for a description of certain business risks, some of which may be outside the control of the company that may cause actual results to materially differ from those expressed in the forward-looking statements. We expressly disclaim any duty to provide updates to our forward-looking statements whether as a result of new information, future events or otherwise. Our earnings release for the preliminary third quarter of 2022 results is posted on the company's website at via-optronics.com. Yes. Thank you, Sam. Good morning, and thank you all for joining us today. We are delighted to report record quarterly revenue, which exemplifies the strong demand we are seeing across all of our end markets. We grew top line revenue by 27.3% with 39.2% growth in our Display Solutions segment, driven by growth in the automotive market as well as in the industrial area. In the third quarter, we benefited from increased production output at our Nuremberg headquarters and increased demand and order volume for the automotive and industrial end markets. We continue to expect increased adoption of our innovative and cutting-edge displays as both automotive and industrial vehicles demand are more robust. Sunlight readable, weather resistant displays, camera and sensing as well interior vivid and crisp optical solutions are needed. Our capabilities, which allow us to provide customizable technology with unique specifications and the high amount of in-house production content avoiding going through suppliers, separate VIA from its competitors and allow us to address the accelerated -- accelerating needs of customers today. I'm very proud on sort of how our teams executed in the third quarter, delivering positive EBITDA despite ongoing global supply chain challenges. Elevated freight costs, which were a headwind in previous quarters, are now easing, and we have begun to see the benefits of the previously announced performance improvement projects in our profitability and cash flows. The cost savings and pricing initiatives we have implemented start being reflected in our results this quarter as we continue to renegotiate with customers and suppliers. Also, we see a softer demand from the additional car OEMs in Q4. Going forward, we believe that these activities will continue to help improve our margin profile and position the company for long-term sustainable profitability. This quarter, we announced the appointment of Roland Chochoiek, as Chief Marketing Officer CMO. Roland has been actively creating a successful go-to-market strategy and promoting the new and innovative technologies of VIA to our customers and partners. In conjunction with the appointment of Roland Chochoiek as CMO, the company has brought the marketing organization, the project management team, the team from research and innovation and the strategic sourcing team together under Chochoiekâs leadership. As we announced previously, we plan to establish a new camera production line in Thailand. As the desire for driver and operating assistance as well as autonomous driving functions growth, so must the vividness and resolution of camera images. This new equipment will allow VIA to use bare die instead of house sensors, increasing the precision and cost effectiveness of our solutions. Additionally, our camera production in Thailand opens the door for us to market our other solutions in the regions. We are in decision with OEMs interested in the new functions that we provide with our touch screens and the overall dashboard integration. We remain encouraged by the strength of our growing project pipeline, as we continue to focus on higher-value projects that will support margins. Additionally, we continue to execute our strategy with a target of â¬500 million in annual revenue by 2026. We currently maintain awarded business of approximately â¬250 million, which supports this forecast. With that said, now I'd like to turn the call over to Markus for a review of our third quarter 2022 performance and full year outlook. Markus? Thank you, Jurgen, and good morning, and good afternoon to everyone. I will start by reviewing our financial and operating performance for the third quarter 2022, then I will outline our outlook for the fourth quarter and the full year 2022. For the first -- for the third quarter, total revenue of â¬62.9 million increased by 27.3% from â¬49.4 million in the third quarter of 2021, driven by further growth in the Display Solutions segment. Display Solutions revenue of â¬58.6 million increased by 39.2% from â¬42.1 million in the third quarter of 2021, driven primarily by growth in the automotive end market. Sensor Technologies revenue of â¬4.3 million decreased by 41.1% from â¬7.3 million in the third quarter of 2021 due to slower demand in the consumer end market after a record turnover in the prior period. We continue to strive to overachieve and meet the demands of those that require our products and solutions. Revenue from the automotive end market increased 46% in the third quarter 2022 and accounted for 44% of Display Solutions revenue, driven by strong demand for our solutions. Revenue related to the industrial and specialized applications end market decreased 7% in the third quarter 2022 and accounted for 27% of Display Solutions revenue. Gross profit margin decreased to 8.6% from 13.8% in the third quarter of 2021. Display Solutions gross profit margin of 8.9% decreased from 10.9% in the third quarter 2021 due to ongoing margin pressure, material and labor cost increases and higher logistic costs. Sensor Technologies gross profit margin of 7% decreased from 26% in the third quarter of 2021, driven by changed market conditions and lower utilization. Research and development expenses decreased slightly to â¬1.4 million from â¬1.5 million in the third quarter of 2021 and is in line to support our long-term strategy. General and administrative expenses of â¬5 million decreased from â¬5.1 million in the third quarter of 2021 due to improvements in our cost structure. Operating income was â¬2.1 million in the third quarter of 2021 compared to operating income of â¬6 million in the third quarter of 2021. Net income was â¬1.2 million or â¬0.27 per basic and diluted share compared to net income of â¬0.1 million or â¬0.002 per basic and diluted share in the third quarter of 2021. EBITDA was â¬3.7 million in the third quarter 2022 compared to an EBITDA of â¬2 million in the third quarter of 2021. Display Solutions EBITDA loss was â¬2.4 million. Compared to EBITDA of â¬1.5 million in the third quarter of 2021, driven by operational performance as well as onetime effects. Sensor Technologies EBITDA loss was â¬0.2 million compared to positive â¬1.1 million in the third quarter of 2021. Other segment's EBITDA was â¬1.5 million compared to EBITDA loss of â¬0.4 million in the third quarter of 2021, driven by onetime effects. We finished the third quarter with cash and cash equivalents of â¬54.3 million, up from â¬53.3 million at the end of the second quarter. This slight increase while expanding operations was supported by ongoing improvements in inventory and cash management. For the fourth quarter of 2022, we expect total revenue in the range of â¬37 million to â¬42 million. For the full year 2022, we are raising our revenue growth guidance to a range of approximately 10% to 13% compared to 2021. Again, this forecast is based and may be influenced by our planned sales portfolio adjustments, a potential slowdown in the consumer end market and a potential component shortage in the camera business as well as the overall economic uncertainty. We had very strong sales in the third quarter of 2022, and we will continue to work hard to improve our profitability further and further optimize our working capital and exercise financial discipline to meet our strategic goals. With that financial overview, I'd like now to turn the call back over to Jurgen for a few closing comments. Jurgen? Thank you, Markus. As you heard, we are very pleased with what we achieved during the third quarter in terms of improving our margins and returning to profitability and feel confident about our prospects for the remainder of the year. Despite a challenging macroeconomic environment, there remain strong structural tailwinds in the market that we operate in, and we remain well positioned to capture the expanding applications and use cases for our products. Our financial discipline remains strong, and we have a solid base from which we can deliver strong growth and shareholder value in the years to come. Thank you for your continued support. That concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A. Good morning, guys. I have quite a few questions actually. Maybe if you could, Jurgen, take a look out into 2023, maybe comment about the number of design wins that you have that you think will go into production in 2023 versus what you had maybe in 2022. Perhaps give us a guess as to revenue growth rates? But more importantly, on the gross margin front, again, this was always part of your plan to increase them as part of the IPO? What progress have you made in it? Is purely your cost side and what you're quoting your customers? Any help would be appreciated on kind of revenue growth rate and gross margins for next year? Many questions in one. So with regards to next year in terms of projects and ramp-up. So for the big projects, we are expecting one more project to ramp up. I mean we are having a few smaller projects ramp up, but one big one facing in next year. With regards to cost and margins. So during the course of this year, we had a lot of discussions with customers about cost up and price up and how we can improve and how we can actually forward the cost for additional trade and so on to the customers. So they are all in, let's say, to my opinion, in good shape. Of course, nobody was happy about the cost increases, but the understanding was there and customers basically accept it. However, it's not easy for everyone. It was also not as easy as for other companies for us to increase the price throughout the board without any arguments. So we discussed in detail with every customer. Not all the discussions are over. Some are going to be closed hopefully by the -- before the end of the year. And for the next year, I think we should be out of the group with the price adjustment and everything. Now with regards to the margins, I have to say that we are still following our initial target. The only thing or the only thing which is a big thing which happened over during the course of the last two years, that the customers actually used the COVID pandemic to drive down the overall prices. So the margins, even in the automotive market became tighter. But this is the main reason for us to phase in and to target system designs to have more added value, more content in the products that we deliver, which should bring us back on track. There are a lot of reorganizations in our product portfolio and market approach in regards to sales and marketing and also being done together with Roland Chochoiek, the new CMO and restructures in the sales force. So we'll implement that and start to push for that in -- during the course of next year. So tighter margins from existing products and existing customers, overall, whether it's in the automotive or even definitely in the consumer market, but our plan again is to deliver more value to get up in the margin. So we still think that, based on what we know today, this is possible with what we have in-house. And we push on that to that kind of product portfolio hardly on the sales front. Okay. Just shifting back to kind of expectations on revenue for next year. You commented about a goal of â¬500 million in revenues in 2026. Help us understand or bridge the gap getting from where you're at now, what that looks like in 2023, '24, '25? Is it somewhat linear or is it spike up in 2025? I'd love to hear your thoughts on kind of next couple of year's revenue growth. It's -- we are -- let's say, it's kind of difficult to answer because at the end of the day, if -- let's give you one example. We are working on 1 project. If that kicks in, it would be a spike in 2025-'26. So it will be a drastic increase. And there are others which would be -- which are in between. So it could be -- so we are planning for a soft growth over the next years, similar to what you have seen maybe. But as soon as those project come in we will see a drastic increase. So maybe most likely towards -- not coming year, also not the following year, but the years. So the years after, if we are successful with the acquisitions, there will be a stronger growth. [Operator Instructions] At this time, we do have no further questions, so I'll hand you back over to Jurgen Eichner for closing remarks. Yes. Well, as usual, I'd like to thank everybody for participation in the call. Again, we'll see quite a drastic change in the future in terms of the environment. But on the other hand, we see that our markets are drastically increasing. The potential for our products is growing every day, I have to say, and especially in the field of electronic cars, we are seeing tremendous growth opportunity, but not only there. So again, thank you for the call. I'd like to hear you next time, again. Thank you. Bye-bye.
EarningCall_1869	Ladies and gentlemen, thank you for standing by and welcome to the Seanergy Maritime Holdings Corporation Third Quarter and Nine Months 2022 Financial Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be the question-and-answer session. [Operator Instructions] Please be advised that todayâs conference is being recorded. Many of the remarks today contain forward-looking statements based on the current expectations. Actual results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that can cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2022 earnings release, which is available on the Seanergy website, www.seanergymaritime.com. I would now like to turn the conference over to one of your speakers today, Stamatis Tsantanis. Please go ahead, sir. Hello. I would like to welcome everyone to our conference call. Today, we are presenting the financial figures for the third quarter and the first nine months of 2022. We're also pleased to announce the distribution of another cash dividend this quarter, our fourth consecutive cash dividend. The second half of 2022 has not leaped up to our initial expectations and the challenging market conditions affected negatively the freight rates of the Capesize sector. We attribute the slowdown to the following factors: China's zero-COVID policy and continued lockdowns, which have resulted in a self-imposed slowdown of industrial production; the conflict in Ukraine that created various trading disruptions, as well as global inflation and a slow economic growth worldwide. Lastly, the unwinding of vessel congestion, improved fleet efficiency and thereby increased effective vessel supply. Notwithstanding these conditions, the third quarter was yet another profitable quarter for Seanergy, thanks to the flexibility of our fleet and our smart commercial strategy. We continue to believe that the market weakness will be short-lived and we expect within the first half of 2023, a sustainable recovery of the Capesize sector with a long-term duration. Regarding our financial performance during the third quarter, we recorded net revenues of $34 million and adjusted EBITDA of $19 million, while net income was equal to $7.1 million. For the first nine months of 2022, net revenues reached $96.5 million, almost equal to the previous year respective period. Adjusted EBITDA was $53.1 million, while net income amounted to $16.7 million. Our daily time charter equivalent for the third quarter was about $2,600, representing a premium of over 50% compared to the average Baltic Capsize Index for the period attributed mainly to our freight hedging activities and some profit selling from our scrubbers. In the nine-month period, we achieved a daily time charter equivalent of $21,000, representing a 25% premium over the BCI. Compared to the corresponding nine-month period of 2021, our time charter equivalent has declined by a mere 10%, which compares very favorably with a 44% drop in the Baltic Capesize Index. Looking ahead to the fourth quarter of 2022, we have fixed approximately 70% of our open spot days at a daily rate of $18,500, which again converts very favorably to the Baltic Index average of $14,700. As regard to TCE guidance for the fourth quarter, at the current FFA rate for December, our full quarter time charter equivalent would be equal to about $16,600. On a more positive note, more and more of our long-term charter contracts move in to their optional periods, so our fleet will be earning a larger share of the profit arising from the use of the scrubbers. This is expected to have an additional positive impact on TCE in the future quarters. In terms of commercial updates, four of our vessels secured new time charter employment or extended their existing agreements since our last call. All these time charters are linked to the BCI and were concluded at equal or increased premiums over the index compared to the expired agreements. In addition, we managed to improve the scrubber profit sharing scheme for scrubber-fitted vessels that were due for renewal. Moving on to corporate and financial developments, we continued our reward commitment to our shareholders with the declaration of another regular cash dividend of $0.025 per share for the third quarter with a total cash dividend payout reaching $22.5 million or $0.125 per share over the last four quarters. This represents a dividend yield of approximately 25% based on the closing price of our shares as of yesterday. This excludes the distribution of United Maritime shares in the summer, which has had a very successful course over the last months. In addition, we repurchased convertible loans, warrants, and shares during the same period, resulting in the total rewards initiatives of $49.2 million, illustrating in fact, our objective to create and distribute value to our shareholders. In addition, we have recently launched a tender offer to purchase our Class E warrants, aiming to reduce the risk of potential dilution from legacy share linked instruments [ph]. I've also personally continued my open market stock purchases, which reflects my strong confidence in the company and its prospects. Concerning our $5 million buyback program authorized at the end of the second quarter, we have not conducted any buybacks to-date as we have prioritized consistency on the dividend distribution front. Our intention is to utilize the whole available amount for the repurchase of our outstanding convertible notes and the Class E warrants through the tender offer in the coming months. On the financing front, as Stavros will continue in a minute to discuss, we refinanced the only remaining 2022 loan maturity that was due in December with a new facility at a considerably lower margin. As a result, there are currently no other maturities until November 2023. We remain committed to continuously improving the capital structure of our company, while ensuring sufficient financial flexibility to deal with the Capesize market volatility and our ability to take advantage of potential opportunities if vessel values correct further. I will now pass the call to our CFO, Stavros Gyftakis, who is going to discuss more thoroughly our financial results. I will come back to the call at the end for the market update. So, Stavros, please go ahead. Thank you, Stamatis and welcome, everyone, to our earnings call. Let us start by reviewing the main highlights of our financial statements for the third quarter and nine-month period that ended on September 30, 2022. During the quarter, we recorded net revenue of $34 million, decreased from $48.2 million in the same quarter of 2021. This reduction reflects the slower Capesize market conditions that prevailed in the third quarter of 2022 as elaborated previously by Stamatis which caused our daily time charter equivalent to decline similarly percentage-wise to $20,614 from $30,764. Adjusted EBITDA and net income for the third quarter were equal to $19 and $7.1 million, respectively. The adjusted quarterly figures exclude the $2.8 million non-cash gain related to the spin-off of the Gloriuship to United Maritime in July. For the nine-month period, net revenues was $96.5 million compared to $96.4 million in 2021 with increased fleet size compensating for the decline in the time charter equivalent on a year-over-year basis. More specifically, our daily time charter equivalent for the nine-month period was $21,000 compared to $23,400 in the corresponding period of 2021. Adjusted EBITDA in the nine-month period of 2022 increased to $53.1 million from $51.4 million in the same period last year. Net earnings were equal to $16.7 million versus $20.7 million last year. On a US GAAP basis, earnings per share for the quarter and nine-month period were $0.04 and $0.10, respectively, highlighting our profitable performance under Capesize day rates that we consider to be below historical average or mid-cycle levels. Operating expenses, excluding pre-delivery expenses incurred in connection with vessels that entered the fleet in the subset period, were $6,875 per day per vessel in the first nine months of 2022. Continued COVID-related expenses, especially on the crew and forwarding fronts and inflationary pressures on cost of materials and services globally have a direct impact on OpEx. In addition, included in this figure are also the costs related to the transfer of certain vessels in our in-house management platform, which we expect to benefit the OpEx side in the long run. Lastly, the increase is partly driven by increased repair and maintenance costs incurred on the bulk of our maintenance program, which ensures that we retain satisfactory rights operating across our fleet. The priority placed on environmental efficiency requires proactive actions on our part to ensure our ability to provide quality service to our customers with minimal expiry days and over time, such expenses are rewarded with premium charter rates and higher asset values overall. In general, we expect our operating expenses to plateau, if not improve from this point onwards. In terms of CapEx going forward, we are pleased to have already completed our ballast water installation program with 100% of our fleet complying in that zone. We have one vessel dry docking in 2023 with an estimated CapEx of about $800,000 to 1 million. With regards to our balance sheet, we ended the third quarter of 2022 with $25 million of cash and $233 million of senior debt outstanding. The latter translates to approximately $30 million of debt outstanding per vessel secured against an average market value of about $28 million, meaning that the average loan-to-value across our fleet is below 50%. It is important to note that our net debt is covered by the scrap value of our fleet, which amounts approximately $209 million at current scrap prices. Further to this, in the fourth quarter, United Maritime redeemed the Series C preferred shares held by Seanergy, which increased our cash position by $10.6 million in addition to the preferred dividends of about $170,000 received earlier in the same quarter. Turning to our financing activity, since our last update in October, we entered into $28 million loan facility with [Indiscernible] for the refinancing of the indebtedness outstanding other credit facility, which matured in December 2022. The new facility has a term of five years and an interest rate margin of 2.5%, a significant improvement compared to the 3.5% margin of the previous facility. Taking into account the repayment of the old facility, the refinancing resulted in a net cash inflow of approximately $4.4 million. Following this transaction, our next loan maturity is $4 million scheduled for November 2023, secured by one 2011 built scrubber-fitted vessel. We have successfully addressed all remaining loan maturities for the current year, while strengthening further our cash position, which will allow us to navigate through a seemingly softer market environment, which we nevertheless expect to be temporary, while at the same time, we'll continue to evaluate opportunities to expand and renew our fleet. This concludes my review. I would now turn the call back to Stamatis, who will discuss the market and industry fundamentals. Stamatis? Thank you, Stavros. Let's now elaborate on the Capesize demand and supply fundamentals. As I mentioned in my introductory comments earlier in this call, the Capesize freight market in 2022 proved quite disappointing. The average level of the Baltic Capesize Index for the first nine months of the year was approximately $16,600 with a low of $2,500 per day in late August and a high of $38,200 in May. With the third quarter being the weakest in the year so far, which is unusual, and the weakest third quarter over the last six years. The main reasons were the following: the continued lockdowns in China resulted in a self-imposed slowdown of industrial production. In addition, the conflict in Ukraine that created various trading disruptions as well as the global inflationary pressure and slow world economic growth. Lastly, the unwinding of vessel congestion, improve fleet efficiency and thereby increased effective vessel supply. However, the historically robust vessel supply fundamentals as well as the gradual improvement in Chinese infrastructure -- industry allow us to be confident that the steady market recovery will occur in the coming quarters. From a vessel demand viewpoint, third quarter was a rather old period for the Capesize sector. While trade volumes rose overall, the freight rates of Capesize has declined. As mentioned, a major reason for the lower freight rates was the reduced port congestion globally. Specifically, in China, port congestion declined by an estimated 13% during the third quarter, adding more vessels in the open market, which intend applied pressure on freight rates. However, recent data from China is showing a slow but steady improvement in industrial production, as illustrated by key indicators such as investment in infrastructure and excavator and heavy machinery sales. Coupled with recent news about additional economic support measures and the ongoing easing of the COVID restrictions, makes us feel quite optimistic. Furthermore, coal is expected to continue supporting the Capsize sector with trade flows likely remaining healthy amid Europe's energy supply crisis caused by the Russia-Ukraine conflict. Meanwhile, we expect that the ban of Russian imports during the third quarter will further boost [Indiscernible] demand as Europe has started to increase imports from longer coal suppliers. Moving on to vessel supply, figures are extremely encouraging for the Capesize sector. First, the new vessel order book currently stands at the lowest point of the last 20 years. New vessel deliveries are at a meager 1.72% [ph] per annum, which is lower than the expected scrubbing rate. The spread of a new building contract compared to a 10-year-old ship, the price of a 10-year-old is at a multiyear multiple. So, new orders do not make any financial sense as this huge premium cannot be amortized. Moreover, the uncertainty of the environmental regulations adds an additional reason to the reluctance of new orders. We also see a rising trend in vessel demolition volumes as we have seen 17 units being sent for scrapping this year so far compared to 14 in 2021 full year. One of the most important issues that will affect the vessel supply in the coming years is the introduction of the EEXI and CII regulations in January 2023, which is effectively next month. While the EEXI has a one-off effect, the CII will have a progressive impact of the global fleet. The combination of these regulations will be a continuous speed reduction that will affect one way or another the majority of the Capesize vessels. Hence, the effective vessel supply will start to contract in the following periods. We believe that the effect will be more severe in the next few years and this has been grossly underplayed by a number of market participants. The healthy vessel supply fundamentals combined with the gradual improvement of demand in 2023 will lead to a positive Capesize market in the near future. Seanergy is in a solid position to endure any low points of the economic cycle and very well-placed to benefit from the upside in the market. As a closing remark, I firmly believe that the worst part of a Capesize downward trend will soon come to an end and we should expect much brighter days ahead. On that note, I would like to turn the call over to the operator and answer any questions you may have. Operator, please take the call. Thank you. Hello. Thank you. Good day. How are you? You provided some detail on the scrubber profit sharing schemes in the contracts that you announced so far in 4Q 2022. Can you give more detail to how those work? Are those managed by the contract -- the customer on those contracts, such as Glencore or what are the specific cash schemes within those profit sharing schemes, please? Very well. Thank you. So, first of all, the agreement -- the initial agreement was signed back in 2019 and we had an initial period that is now coming to an end and we're getting into the optional period that the charters have the option to extend the contract. Now, in the optional period, the Seanergy has profit participation of about 50% on all the scrubber installations that the charters paid for back in the day, 2019 and 2020. So, now we're going to start to see the benefit -- the real benefit without having invested for those scrubbers and the equity ourselves. So, we estimate at a spread of about $250, the profit to be in the region of $2 million to $2.5 million per quarter arising from the use of the scrubbers. So, it's quite substantial for the company, especially for something that we didn't allocate in initial capital for. Thank you. And then on the warrant tender offer, you announced earlier this week, should we look at that as a form of repurchases? Or what made you decide to go forward on that tender offer? Well, it's part of our overall repurchase and buyback program. So, we're using some capital to repurchase back some remaining legacy warrants that are outstanding and may have some dilutionary effect in the future. We don't really expect them to have. So, it's a good opportunity to clean up the capital structure without allocating any significant capital of that. So, it's basically among the buyback initiatives of the company to clean up the capital structure as much as we can. Okay. And then did I hear you mentioned that have you tracked heavier excavator and heavy machinery sales in China? Can you give more -- where are those data points from? Is that what you're referring to? Yes, we do. I mean we have local intelligence in China from various sources and we see that the sales of excavators and heavy machinery has been on the rise, which means that the government is funding infrastructure projects more and more. And we believe that this effect combined with the -- hopefully, soon reopening of the economy is going to drive up infrastructure and new construction investments over. So, we're very optimistic about that. We see all the signs in place. All the listed companies selling heavy machinery apparently, they're rebounding significantly. As you can see, all the construction companies listed on the Asian markets have been rising anywhere between 50% to 100% the last month or so. So, the signs are there. We just need to see that's happening in action before any real increase happens on the rates. And last for me, I mean, with the outlook for the rates to start to recover and those data points from China in 2023, can you talk about your opportunity to fix more rates for the first half of 2023. I mean can you fix rates today above cash breakeven levels? Or can you provide more detail on your strategy for fixing rates going into 2023? Yes. We are -- we strongly believe that the first half of 2023 futures are very, very low. So, they're gross lever. So, in our opinion, it doesn't make any sense to fix at this very low rates, which we believe will -- the actual market will be much higher than those presented on the forward rate. So, we believe that now there has been a big over-sell in the market for various reasons that I don't want to comment on and I strongly believe that we will see much stronger rates, much higher rates than those denominated by the future contracts in the first half. So, to answer your question, is we will try and place [Indiscernible]. We have the premium on the BCI on the majority of our ships. We have the scrubber premium as well and we are all very reluctant here as management and BOD the company to commit at these very low levels. Thank you. Dear speakers there are no further questions. I would now like to hand the conference over to our speaker Stamatis Tsantanis for closing remarks. Thank you. Thank you for letting me ask a follow-up. I think Rio Tinto yesterday guided to unchanged iron ore production for 2023. I'm not sure on the timeline for Vale to get 2023 guidance. But I mean, if Vale comes out and also keeps production guidance -- production guidance unchanged at 2022 levels, would you view this as positive for the market or probably to -- how do you look at those data points before? Well, yes. I mean, first of all, 2022 iron ore production was below the initial estimates and I'm talking about the overall production globally. For various reasons, Vale underperformed once again, but if they manage to produce and export the same quantities in 2023, the key in the game will not be whether demand is going to be stable or it's going to be a bit higher or a bit lower. The key in 2023 will be the fact that the supplier vessels, the effective supply is going to start to gradually reduce. Let me remind you right now that there is basically no congestion globally. So, the vessel turnover in all the major ports is very fast and very efficient. And right now, the rates -- one of the main reasons why the rates are so low is because there's no congestion and everything is operating with high efficiency. So, the key for 2023, assuming the demand is going to remain the same, will be the beginning of the reduction of the effective supply of vessels. This is going to start to create a long-term effect on the rate -- positive effect on the rates, which is going to last for years because that is going to have a progressive result. It's not a one-off thing. So, very confident that once the new regulations start to kick-in in the beginning of 2023, we will start to see rates start picking up because the effective supply of the vessels will start to reduce gradually over the next quarters. Okay. So, I would like to thank once again everyone for joining our call today. Like I said before, Q3 has not lived up to our initial expectations. But nevertheless, Seanergy manage to perform much better than the Baltic average and we expect that the same is going to happen in Q4. So, thanks, everyone, for participating in our call and looking forward to catching up with various good news in the future. Thank you.
EarningCall_1870	All right. Everyone could take the seat. We'll get going with our next session. Good morning. I'm John Hodulik. I am the telecom and media analyst here at UBS. And I'm here with Jeff McElfresh, the COO of AT&T. Jeff, thanks for joining us this morning. So we've got about 40 minutes for Q&A. And I've got a list of questions here to run through, but I also have the iPad, so if you scan the box in front of you, it will open up an app and you'll be able to ask some questions, and I'll filter them into the conversation to make sure we have a comprehensive list here. So Jeff, a lot to run through. But first, I thought we'd start with sort of the macroeconomic environment and then drill down a little deeper into each of the segments. But you guys are a big company. There's been a lot of change in the industry or in the economy. Just can you talk sort of high level how you guys are sort of navigating the macroeconomic headwinds that we're seeing and then potentially segue into the impact of the inflation that we're seeing and how the company is handling that? Yes, a small question. Before I get started, many of my comments might be forward-looking. And so, we've got the safe harbor statement here on the screen. And if you want all the specifics about it, please visit our IR website. And now that I've got that obligatory comment out of the way. So the economy, I think it's proven to be fairly hard to predict. I mean while you've got high inflation and certainly maybe some stress in the economy, you're seeing high demand for products and services like which we offer and our industry offers in broadband connectivity via wireless or fiber. And so it's an interesting dichotomy, John, when you're in a business like we're in as you mentioned, it's large scale. We are seeing really good execution inside of AT&T, I would tell you, that I'm confident our teams have made the necessary operating changes to our cost structure and the way we manage through our growth or our service elements with our customers such that we can kind of overcome some unexpected inflationary pressure and input cost or wages or things of that nature. I think you saw some of that probably come through in our third quarter results. And we feel pretty good about our ability to manage through what has proven to be kind of hard to predict. How do we do that? Well, we pay attention to, obviously, the intake and the customer growth that we're seeing in our wireless and our fiber product sets. And the health of that growth remains very strong, high-quality customer base, high-quality credit scores. And we've continued to grow in that manner, posting some decent growth metrics. And so we're confident we've got a really stable, high-quality customer base, and it's going to be pretty resilient. Our team did a nice job earlier in the year, working through a few pricing actions in some of our legacy rate plans. We did see at the beginning of the year some increase in DSO and payment terms. But not anything that alarmed us beyond what we saw pre-pandemic. And so we monitor that. We look at it on a weekly basis, in fact, to make sure that we don't see any early warning signs. Got it. So no change in what you guys had said in terms of the slow pay that you might have been -- I think you guys said that a couple of quarters ago? Yes. I mean nothing actually -- I mean, if we would go back in time, back to the 2018, 2017 timeframe, the metrics the industry is printing isn't anything that would be out of line for that time period in the business. And so it's something we monitor, but it's not really impacting what we do in our growth or our go-to-market strategy right now. What about -- you talked about the demand side, but what about the cost side from an inflation standpoint. I think you guys have called out some inflationary pressure you were seeing. I mean has that changed meaningfully recently? Or are there any signs that, that might be starting to slow? No, I don't know about starting to slow. I think any large-scale company like ours who is positioned with large-scale procurement agreements and a long-standing relationship with many of our partners like our labor union partners, we have an ability to weather a lot of the near-term turbulence with a very long-term lens. And so John, I think it's important over the last several quarters, certainly since John took over as COO, and I became the CEO of AT&T Communications Company, we went to work hard core on getting the cost structure improved in the business. And that gave us a little extra oxygen in the tank to weather some inflationary pressure that we might see or competitive pressure from offers in the marketplace. And so I think there's now, you're starting to see some of that operating leverage kind of kick-in in the back half of that multiyear program. And so we're thankful we've been after this cost optimization and improvement plan for many years now, and it's proven to be helpful to navigate this. Just as a follow-up to that. The -- so I think your $4 billion through a $6 billion cost cutting program and maybe there's more to go beyond that. I frankly don't remember a time where Batya and I have been covering AT&T, you weren't cutting costs. So I'm assuming that that's going to continue. And I thought the most interesting thing you just said was that it's starting to fall to the bottom line. So the $2 billion that we're going to see and maybe some more beyond that, does that all fall to the bottom line? I mean are we at a point where we can look across the segments and see like improving margin trajectory at least in the medium term? Well, I think when we launched that program, we had stated we're going to reinvest in the early part of the program, reinvest in technology platforms, reinvest in our distribution structure, reinvest in our market momentum, kick start back again, a healthy build with fiber. And all of that early investment, of course, did not fall to the bottom line because it was going into a more long-term oriented investment strategy. And now what you're seeing as we're gaining attractive customers with very attractive ARPU and low churn on our product set, you're now starting to see the fruits of that labor manifest itself in operating leverage. And so I think I would be remiss if I didn't call out, it's not about taking costs out. It's about reinvesting what you've optimized for growth engines in the future. And that's what you're starting to see now, I think, come out loud and clear in the results. Great. So let's drill down now into each of the segments, first of all, wireless, which really drives the bus here at AT&T. And you talked about reinvesting some of the things in the business. You guys have had a lot of success with your device promotions, which I think you've been -- in time I guess I think you guys have been doing now for two years. It really does. And so first of all, I think you can talk about it from two ways. First of all, the sustainability of this program, A, what's driving the success; and B, is this sort of how we should expect the AT&T to operate looking into the future? Yes. I mean, I think we've been asked about the sustainability, the smarter choice before. And I'm not sure how many quarters are required before that question kind of gets answered, all kidding aside, though. When we started that program, that wasn't something that we looked at and said, "Oh, that would be the right thing to do." We actually looked at deep research with our customer base and we asked them basically what it is that they're looking for us to do. And it was loud and clear that the AT&T subscriber base told us, you need to be investing in me as aggressively as you're investing in earning others, business and loyalty to the company. And that kind of gave birth to the program, and we've lapped that now. And because we've lapped it, I've got confidence that the value proposition that we're offering, our wireless subscriber base is strong. We're at record level churn. Our volume and our activity in the business continues to be strong and not that we're looking to be the leader in growth in any one quarter. We're kind of right down the fairway. Growing the return profile of our wireless business over the long haul requires a growing healthy customer base. And we've proven even through dynamics of the economy, adjusting through competitive -- competitor actions that it's been pretty durable and been pretty consistent. And so for us, we kind of like the steady as she goes. We think the industry is healthy. We think that the products that we offer in this industry is in high demand and in great need. And I can point to the growth that we've experienced at AT&T. It's not been solely because we've got a device promotion. I mean we've got several other actions, not the least of which is our FirstNet program in serving first responders that continues to perform incredibly well, especially in this wireless space. So I think our program is sustainable. I think we proved in the third quarter that our wireless business can achieve some operating leverage, and you would expect that we will continue being focused on that in the coming quarters and years. Speaking to the coming quarter, can you give us a sort of -- in sort of round terms, how Black Friday went for you, maybe what your promotions were through what is a pretty meaningful selling period in the wireless market? Yes. The wireless industry, clearly, the fourth quarter is the season and the holiday shopping season tends to be the one where you throw down most of your competitive offers. And we took a tactic this year. I think if those -- that price checked and channel checked what was going on in the market, we were not the most aggressive and haven't been the most aggressive in the market for quite some time. I think I ought to give investors some confidence that the reason AT&T's growth performance isn't simply from a rate card promotion or a heavy device offer. There's something else that's occurring and why AT&T is able to attract high-quality growth, add volume and generate the performance in the business. And so for Black Friday, we were not the most aggressive. Others were quite more aggressive. And we're right where we need to be for where we guided the company to be in 2022. So we feel good about that. Back to competition, you said it's a relatively stable market. I mean what are you seeing from the cable companies? And how do you expect that to evolve? And as we look right now, I mean, especially the cable companies effectively have a bring-your-own-device model or 4G. As they move to 5G, do you think -- and the usage increases, does that change, in your view, the competitive landscape and potentially the profitability of that business for them and their competitiveness? Yes. I mean, obviously, they would be the experts at answering those questions. I would tell you this, like if you look at the competitive share gains and losses in the industry over the last three to four years, I've not seen a material shift in volume making its way to cable and a cable bundle. It's been a nice healthy dose for them. And because it's small subscriber share, right, share of nets tend to punch above the volume weight. Having said that, I think that the usage characteristics we, as an industry, are experiencing with the adoption of 5G, it's definitely up and on the rise. And I think as more consumers utilize those capabilities, not in their home, but broadly where they live, work and play on the go, sure it's nice to have ownerâs economics in a scaled wireless business that makes that a profitable venture. So does that change the margin profile of somebody renting a network? Probably it could. You called on another point, though, and that is, largely the cable companies have leverage to bring-your-own-device model. And there's a reason for that. The devices are expensive. The cost to manage a large-scale attractive customer base in the wireless industry requires reinvesting in that customer base. We've proven that at AT&T in the last eight quarters. That reinvestment takes a capital allocation decision. And is that the best use of capital? You'll have to ask them where they see their best use of capital. For us at AT&T, we believe we have now lapped our investment in this, and we have the ability now to self-fund that part of our program, and that enables us to allocate our capital to things for longer-term value creation which is around our fiber network expansion that's proven out to be a winning play for us. Makes sense. So the industry is seeing sort of outsized growth in the postpaid phone market right now and some attribute some of that to cable, which may be sort of pulling from prepaid to a certain extent with a bring-your-own device. What do you think is really driving it? And do you -- I think you guys have said and John has said this on the calls in the past that we expect over time to go back to normal. It didn't in '22. I mean I don't want to -- I'm not going to hold you to it, but do you think that it happens in '23? I don't know. I mean -- well, one thing is pretty important that I think investors should know. And that is, our business plan, our forward guide, our investment strategy doesn't require the industry to grow at this elevated base. Now it has. And weâve performed pretty good in that environment. So we've been opportunistic, but it's not a prerequisite for us at AT&T to deliver the returns that we're committing to deliver to our investors. Having said that, it's possible maybe that you've got some prepaid to postpaid migration. It's possible that not all subscribers are created equal. I mean, I oftentimes ask the question, what do you define as a subscriber? How do you know a sub is a sub? What kind of free line promotional activity is occurring? What kind of temporary lines are occurring in an industry number in aggregate? So I think it's probably healthy and conservative to plan on a return back to the 6 million ballpark range and punching above that as the industry has been doing over the last couple of years when the growth is there and available, and if it's good quality growth, and I think you should reward companies that achieve it. And when that subsides a bit, then I'd be looking for a company that maybe has other products and services that are in high demand like fiber and can provide an attractive return over the long haul. Right. Maybe shifting to sort of wireless -- the business segment of wireless. I mean that has often been pointed to as one of the drivers of the outsized growth we're seeing, just strength in the business market. I think in a previous conversation, you had mentioned some of your FirstNet initiatives were also driving an expansion of the market. Could you expand a little bit on that? Maybe just what your strategy is in the business market and talk about the competitive market on that side of things? Yes. It's interesting. Actually, I appreciate you bringing that up. The way we report our business and wireless mobility in total, Consumer Wireline, which is our landline fiber and copper business and then Business Wireline, I don't think it does justice to the position AT&T has in the business space. I mean we lead the marketplace. Weâre at large in this regard. But we have plenty of areas of improvement in growth. For the last three years, we've really been investing, John, in getting our operating cadence, our execution out in the local markets for our subscribers in the Enterprise segment up when it comes to wireless. FirstNet is a clear part of that. I mean the growth of FirstNet, the number of agencies that we continue to add weekly, this isn't something that's done. It's been a long-term 25-year investment strategy in a public-private partnership between the FirstNet Authority and AT&T, and that play is continuing to perform. And the growth that we see in that segment is attractive growth. And in some cases, it's actually expanding the market. We're taking using 5G or mobility solutions that replace other services that are not in our sector on what these public safety agencies need, providing bandwidth and cruisers for state police, things like this. So it's definitely a TAM expansion. It's not the largest. It doesn't move the industry in aggregate, but accretive growth for AT&T like this is nice to have. I'd say then, secondly, while we are the wireline share leader in enterprise, we are not the wireless share leader in enterprise. And where this is really seen is in the mid-market segment, mid-market down to small business. And this is harder to get after. It's a ground game, I like to say. It's local in nature. It's where -- you've got a subscriber base that's not large and complex, and they tend to be a little bit more akin to a prosumer or a consumer-type product offer and we are just underway right now of really improving our performance in that regard. So there's still growth that's available in our Enterprise segment. And there's been a lot of change at AT&T, clearly, at the capital structure level at the top that John has led, down in the operating unit, which is where I spend my days and nights. I can tell you there's a real change that's been underway over the last several years about how to leverage every component of our operating team to improve our returns in each specific geographic market. It's not a national game. It's a local game. And I'm proud of the team and their diligence and staying disciplined in doing that. Got you. Sticking with wireless, a couple more on that segment. The -- one of the sort of big occurrences here in '22 was the price increase that you guys pushed through. Could you talk about the sort of results of that, the yield which you expected? And you saw a little bit of increased churn. Was that within the realm of what you expected? And then B, is there room to do that given what we're seeing in the competitive environment, additional price increases as we look out into '23? I would tell you, I was delighted at the performance of our team. We didn't really push through a pricing change. We navigated customers through a couple of adjustments that we made and what we learned in that process was we did it right. And it may take a little bit longer. But John, you'll note, we were probably the first to come out about this plan before others. And what the team did, keeping the customer at the center as the primary focus of really the boss of the company, the people that pay the bills, we were able to navigate through a lot of change in that regard such that, yes, the financial performance of that tactic was solid, the churn impact from that was better than expected. Do I think that there's an opportunity for us to adjust and tune our product offers and pricing in the future so that we have some ARPU accretion and still have that possibility in the future? I absolutely do. I do not believe that, that's the only lever, the most important lever. It's one of many. And getting the right returns and operating leverage is a combination of growth. Having the momentum that you need in a healthy business, coupled with cost efficiencies and other areas of the business where I can see still opportunity for us to drive deeper than the $6 billion plan. And coupled with pricing tactics that are needed, maybe to move a legacy rate plan customer up to something a bit more current to participate in the 5G space, and have access to some of the best features and capabilities we can offer. So it's a very balanced play, and I'm confident we've still got room. Got it. Finishing up on wireless. One of the at least strategic differences between AT&T and your sort of facilities-based competitors T-Mobile and Verizon is the approach to fixed wireless. Both of those companies are -- see it as a nice growth opportunity. They're pushing it, I would say, relatively aggressively. And for a while, we've thought that there's a couple of reasons why AT&T hasn't. One is, you had a large wireline footprint. Two, you guys are pushing fiber aggressively. And three, you guys are a bit slower to deploy the mid-band spectrum, which is going to carry a lot of the load. Now that you're getting the C-band out there, it doesn't seem like your strategy is changing that much. I think we had expected that maybe you guys would come up with a sort of maybe a DSL saver strategy or something. But you give us a sense for why you aren't being more aggressive or why you don't have -- with the C-band out there and then all the capacity in the network? Yes, I think it's a good question because it seems like, well, that's just so obvious. Why aren't you doing that? And look, we're not opposed to the use of fixed wireless as a point solution for a particular use case, let's say, for example, like in our Business segment, we actually do a lot of it. We don't talk about it. It's not the lead product that we offer, but it's a solution we use to connect up a business or a bank branch, where we have a little bit off network footprint to cover. And that's proven not to be very successful. Customers love it. They love the ease of installation. I think, as it's kind of intuitive, but the bandwidth itself isn't overwhelming such that it damages the performance of high-performing wireless asset where you've got high ARPU, low churn, high-value postpaid subscribers paying you for that level of service. . At AT&T, I mean, we've been very disciplined and very clear on this. Our lead offer and our priority is 5G and fiber, and that's where our capital goes. Where we have an opportunity to maybe loosen up the controls a bit on capacity utilization and tune a fixed wireless product maybe in areas of a copper catch as you point out, we may do that opportunistically, but you won't see AT&T do that in a large scale. And the reason isn't may be intuitive beyond the fact that the usage characteristics of what consumers want in a fixed broadband solution is measured in the hundreds of gigs. And at some point in time, the technology itself of wireless cannot serve that demand and generate a positive return. And I say that, John, you and I have known each other for a while. I've operated large-scale fixed wireless networks throughout Latin America. I've seen it. And so maybe temporarily, it might be a nice growth vector, but long-term returns, AT&T is placing our bet in fiber. We'll be opportunistic with fixed wireless, but it won't be a lead offer. So you're going to hate this question, but when is it? I mean, what you're saying is eventually becomes obsolete. When do you believe -- I mean, right now, some of the data we've looked at is the average household use is about 500 gig. We're crossing the sort of 500 gig sort of threshold. We are on a way to a terabyte. When do you think that you start to really see -- I mean, obviously, there's some segmentation in the residential market, we have some decent data on that. But when do you think it becomes a problem? Is it -- it doesn't seem like it's in the next 12 months. Is it in the next five years or 10 years? Or can you give us -- can you put some boundaries on that? Well, our investment horizon, as hopefully you can tell here is we're looking at a five, 10-year horizon. That's why we continue to double down on fiber. When you get usage characteristics like that, the cost per gig to serve on a wireless architecture is, plug that into your model and ask what ARPU are you charging? And what kind of return are you getting? That math is almost as simple as that. How long can fixed wireless be a viable alternative? Depends on scale, depends on where. But it's not the investment thesis that we're driving toward at AT&T. So let's pivot now to the consumer or the wireline side Consumer and Business. First of all, on the fiber side, I think there's been some worries or some thought that you guys might be actually slowing the fiber build, can you talk about where you are? You've scaled up a lot in terms of your construction. Give your outlook on sort of what you think the future holds for AT&T's fiber construction? Well, we have remained vigilant and consistent in our guidance. We will build and achieve 30 million homes passed with fiber by 2025. We are on that plan today. We remain on that plan. As you pointed out, when we restarted the fiber investment, we had to build a lot of infrastructure. This is probably one of the largest infrastructure programs in the country. And I mean, as we sit here today, there are more or less about 10,000 neighborhoods where women and men are digging dirt, laying the fiber and installing service today across this nation. So it's a very large-scale operation. We went hard at that to get that scaled up to where we can have a consistent level-loaded investment, steady as she goes over a year after year after year, so we can keep our fiber business expanding and moving. And so we remain committed to the $30 million. So nothing's changed on that. We've not guided to how much we do a quarter or how much we're going to do in a year. But I think from a modeling perspective, you should take my words as you can see we're at $18.5 million at the end of the third quarter, $30 million is the objective in '25, and then I'll let you model out the pace that, that requires. Got you. I know thereâs probably not a ton to say on this topic, but there's been speculation, some press reports about potentially building fiber outside of the region, have a test market in Mesa, Arizona, I believe. Can you just talk about the -- maybe in sort of general terms about the benefits of building out a region, maybe the returns you would expect and maybe whether or not or how much it maybe helps your wireless business in those areas? That's interesting, right? If you really think about AT&T, you might describe us in two different realms. Realm one is a nationwide wireless company that has a point of presence everywhere. We've got distribution everywhere. Then you could think about the different realm of AT&T being a fixed wireline based local exchange carrier telco from our history and that somewhat captures us in specific geographies of where we invest in the hard copper or fiber investments, right? And so you sit back and you say, well, there's some attractive markets that we aren't the legacy wireline incumbent. We've got a really good wireless position. So we've got market presence. Our brand is known, and we've got scale as the largest builder of fiber in this country with procurement agreements, supply chain, labor, know-how, go-to-market with the best product, I think it's the best product AT&T offers period. Our fiber architecture is, as an engineer, I enjoy saying this. I mean it is the best that we can build multi-gig, like connecting the Internet straight to your gateway, nothing in between. I mean fiber goes from the core backbone router all the way to the back end of the router there is nothing in between. And so as I think about John, building your home with fiber, of course, you're the customer today. But the investments that we make in that location are for anybody and everybody that use that location in the future. And so having a technology like our fiber and our design architecture and investing that in attractive markets like we publicly announced in Mesa, give us courage and an opportunity to grow beyond our borders, and you pointed out, possibly even help us return our ROIC or our return on invested capital in a market like Phoenix, which is an attractive demo where our wireless network is the only thing we have to offer. And so as you think about modeling AT&T in the future, I think it's a combination of scaled fiber deployment that's durable, that's future-proof that doesn't require incremental spectrum or a tech upgrade over the long haul, couple that with strong -- getting stronger wireless business is a good combination to win in the market. Makes sense. I would imagine you guys won't build where there is a sort of strong cable company and a competitive fiber. So how many markets are there left like that, that are attractive in terms of traffic demographics and density and everything you need to -- because obviously, fiber was sort of moving along, then it sort of stopped, now it's moving along again. But is -- I guess where I'm trying to get is how big could that opportunity be? I'll say large enough for us to pursue it. We're not guiding on what that aspiration looks like because, John, we're being very transparent in what we're doing, and we're being very consistent in our approach in the market. We're not moving our strategy quickly one quarter to the next, like we want to be predictable, and we want to prove to you and ourselves that we can actually achieve the returns we believe are possible by expanding our fiber out of footprint. And if we prove that, if we're satisfied with those results and you're satisfied with those results, there's plenty of opportunity. I would say there are a lot of fiber overbuilders, lots. This is a scale game. This is hard work. This isn't easy to do. Others have tried. Large companies have tried. They've left some assets stranded in markets A, B and C. I mean it's -- you got to have the physical infrastructure like a company like AT&T has to bear the brunt of what a large fiber investment really requires. And that's what we're doing. That's what AT&T is doing. And John, I like this position because we're local, we're in the markets, and we've got -- the government's going to be leaning in with some [B] funding down at the state level to help augment some of this fiber investment. And that, I think, changes the return profile where the risk capital isn't just ours, is somewhat subsidized. And so if you got the workforce, you've got the fiber, you've got the know-how and you've got the funding, maybe there's an opportunity to expand at a faster rate than what you assumed you would do going it alone. We got to prove that, and we're here to do that. Got it. Maybe a couple of quick questions on the consumer fundamentals. First, broadband, you talked about penetration in areas where you have fiber, and that's going nicely. Your net adds are moving up, and the revenues are growing nicely, too, I think because of the ARPU differential. Subs haven't really moved that much. You're still losing on the... Yes, in aggregate. So can you talk -- I mean, when is that dynamic? And maybe it's really just from a visual standpoint, but when does that change? And I guess, are you converting a lot of those customers to fiber? And then -- or are you -- and at the same time, seeing increased competition, say, from both the cable guys who are obviously struggling to grow and the fixed wireless guys who have emerged? Yes, there's nothing outsized on the competitive dynamics that it's creating the pressure. That we see I would tell you, it exists though. I mean there's definitely cable companies being more aggressive, fixed wireless players being more aggressive. But it's not moving the dynamic of our subscriber volume as much as you might realize or you might assume. At the same time, you've got economic pressure. Most of the areas where we see churn is in our really low-speed DSL to your earlier question about could you offer a catch product with wireless to serve that home as if the economics make sense. And if it's a durable solution, we may pursue that. But at the same time, at the beginning of John's tenure, we announced this wireline transformation strategy and a copper sunset strategy where we looked at zero demand and low demand footprint areas of low-speed copper and we declared whether or not we were going to work ourselves out of that and serve that only with wireless or if that territory is future guided for fiber. So what you're seeing now play out on our volumes is some decisions we've made to not stimulate growth in certain areas where two years ago, we might have taken a DSL inward in a territory. But now as part of our program, we're starting to attrit that volume. So you don't have that gross add to offset a disconnect. And so I don't see in the metrics of the business. I don't see huge moves in the competitive dynamics that are driving that. When do we overcome that? When we continue to expand fiber and we continue to drive our pin rates higher, and I'm pleased to report everything that we are seeing today in our fiber investments and the take rate from our subscribers is -- our pin rates are exceeding our expectation. We're beating ourselves, our bests that we did a year ago, five years ago. And so the demand is high, value prop is right, price is right, execution is right, rinse and repeat, keep going steady. You got time for two more questions. We squeeze them in. First, I'm going to combine business and consumer here. On the margin side, you guys have made some nice improvement on the margins really on the business side and consumer side. On the consumer side, they're still low in the 30s, but we're into the cable competitors are sort of in the 40s. I mean, you have -- I guess, for both sets, you have line of sight that we can see, given everything you talked about in terms of the cost transformation and it's falling more to the bottom line that you'll see improved margins in both segments, say, over the near to medium term? Yes, I think, yes. I mean we're not guiding what that's going to look like. But I think it's important to note, and you called it earlier, maybe in the past, long, long time ago, five, six, seven years, maybe the cost reduction that you might remember as part of AT&T, that's not what this margin expansion or operating leverage is about now. It's a combination of growth, that's high quality and future proof, a combination of cleaning up the corporate structure because now we're a more simplified company and then getting more local in our execution has uncovered plenty of areas of cost improvement and synergy between our various divisions like enterprise and consumer. And so I'm confident as the COO, I've got line of sight myself on my plans how to continue to drive really good operating leverage improvement. And that helps give us oxygen to continue to grow accrete share and expand the revenue and the subscriber base in a healthy way and provide a good return for our owners. Great. And then my last question, and sort of the most important given that the call volumes and the -- what we are talking about with AT&T every day. Are you still confident in reaching the $14 billion in free cash flow for the year? And then can you talk about what are the major drivers of free cash flow as we look out to '23? Yes. And so we've -- we're not guiding '23. We'll give you an update on that in -- obviously, in January. But just a couple of things. One, we have reiterated our guide on capital for this year at $24 billion. I think through the third quarter, year-to-date, we were at $19.5 billion. So if you compute the math, that gives you a little over $2 billion, $3 billion to $4 billion lower capital spend in the fourth quarter, add that to what we generated in cash flow in the third quarter. When you sum that up yes, I'm confident we'll hit $14 billion. Second is, if you think about AT&T in the future, think about we've got a larger subscriber base that is showing ARPU accretion and checks to position against a cost structure that's improving through our transformation program and our accretive share gains gives me confidence that our operating leverage and our conversion to cash flow is part of the plan. And I think it's going to continue as a very healthy company that will self-fund itself and the investments needed to be a really attractive return. And I don't think it's a whole lot of hockey stick in, I think it's pretty much a straight model, and you'll see what we see.
EarningCall_1871	Good morning, good afternoon to the operational highlights and financial results for the quarter ended September 30, 2022, as well as our upcoming Annual General Meeting. Apologies for the slight delay due to technical difficulties; beyond our control. If we could go to the first slide. If we go to Slide No. 4, please. Survival outcomes have not improved over the past 2 decades, for children or adults with the most severe forms of steroid-refractory acute graft-versus-host disease. In particular, the lack of any approved treatment for children under 12 means that there's an urgent need for a therapy that improves the dismal survival outcomes in children. In light of the unmet need, remestemcel-L has been granted fast track designation and BLA priority review from the FDA. A major milestone in the company's complete response to the FDA was our submission at the end of the last quarter of substantial new information on clinical and potency assay items to the IND file for remestemcel in the treatment of children with steroid-refractory acute GVHD as has been guided by the FDA. Mesoblast has optimized the potency assay that was in place at the time of the Phase III trial and which demonstrates a relationship between the products activity in vitro and its effect on survival in the Phase III trial. Additionally, Mesoblast has now generated data from the expanded access program, EAP 275 in 241 children, which confirmed the ability of the in vitro potency assay to measure product activity relevant to survival outcomes. Next slide, please. Today, Mesoblast provided new results from a 4-year observational survival study performed by the Center for International Blood and Marrow Transplant Research, CIBMTR, on 51 evaluable patients, with steroid-refractory acute GVHD, who are enrolled in Mesoblast Phase III clinical trial of remestemcel-L. Overall survival in the remestemcel cohort was 63% at 1 year, 51% at 2 years and 49% at 4 years. Across 4 recently published studies of children or adults with steroid-refractory acute GVHD, one-year survival of just 40% to 49% and 2-year survival of just 25% to 38% was seen after best available therapy or the only FDA-approved agent for adults, ruxolitinib. The new long-term survival data provide assurance that the short-term day 28 responses and early survival for 180 days in the 54 patient Phase III trial in children with acute GVHD previously presented to the FDA in the original BLA submission are unlikely to have arisen by chance. These long-term survival outcomes are a cornerstone of the BLA resubmission. Next slide, please. This slide is a snapshot of our late-stage clinical pipeline. As you can see, we have 2 platform technologies. In red is our lead technology platform, remestemcel-L. And in blue is our second-generation technology platform, rexlemestrocel using immunoselection to isolate stromal cells. Our remestemcel platform is more advanced and our lead product is currently in the approval phase for acute graft versus host disease in children. I will be talking more about this product shortly, as well as updating on rexlemestrocel for chronic low back pain and chronic heart failure from reduced ejection fraction, both conditions due to severe inflammation. Now we move to the financial results for the quarter for the period ended September 30, 2022. Andrew, over to you, please. Thanks, Silviu. Now turning to Slide 8. We have the financial highlights for the quarter. As at September 30, 2022, cash on hand was $85 million, up to an additional $40 million may be drawn from existing financing facilities subject to certain milestones with current discussions to extend the period for the drawdown option. Net cash usage for operating activities in the quarter was $14.3 million. This represented a 22% reduction of $3.9 million on the comparative quarter in FY 2022, and a 47% reduction of $12.5 million on the comparative quarter in FY 2021. Revenue from royalty on sales of TEMCELL in Japan for the quarter were $1.4 million and $1.8 million on a constant currency basis. For the 12-month period ended September 30, 2022, royalties were $7.7 million, and on a constant currency basis $9 million, which was a 9% increase on the comparative period. Turning to the next slide, which is Slide 9, please. We can see the P&L results for the 3 months ended September 30. Within revenue, the majority of the change was due to one-off licensing milestone in the prior period and the impact of currency movements. There is a reduction in expenditure for R&D, manufacturing and management administration, totaling a decrease of 23% or $5.2 million for the period ended September 30, 2022, on the comparative quarter. During the quarter, we continued prelaunch manufacturing activities and product testing for remestemcel to support the potential commercial launch. On FDA approval, remestemcel inventory will be recognized on the balance sheet, currently valued at $28 million. Within finance costs, we include actual cash interest paid of $1.2 million for the quarter ended September 30, 2021, and also quarter ended 2022. The increase in our reported finance costs was primarily due to the recognition of a noncash gain on the revaluation of our borrowings in the comparative year. And turning to the last finance slide, Slide 10. This slide highlights our reduction in burden, which has reduced 33% or $30 million on a rolling 12-month basis. Now I'd like to turn the call back to Silviu. Thank you, Andrew. If we can now go to Slide 12, which is our pipeline slide. And I'll focus on the updates to our product candidate remestemcel for acute graft versus host disease in children. This continues -- if we go to Slide 13, please. This continues to be a significant unmet need with high mortality in children under 12, there are no approved therapies. Slide 14, please. Slide 14 summarizes the data that has been generated over a number of years with remestemcel on improvement in early survival in children with steroid-refractory graft-versus-host disease. The data highlighted on this slide come from 4 distinct studies, 27 children who are randomized in a controlled Phase III trial of 260 patients mostly adults with steroid-refractory graft-versus-host disease. A second study of in a Phase III trial of 54 children, open-label, 89% of whom had grade C/D disease who were compared with 30 propensity controlled children in the magic cohort. An expanded access protocol, overall survival of which has been analyzed in 241 children where remestemcel was used as salvage therapy after failure of steroids and other biologic agents. And finally, a subset of that study and expanded access protocol around a controlled study against propensity controlled children in the CIBMTR database. As you can see, in each of these studies, short-term survival of day 100 was high in all of the remestemcel-treated cohorts, including just the Grade D patients in the expanded access protocol. And you can see that in the matched controls, propensity matched controls, as outlined, the short-term survival was substantially less than with the remestemcel. If we go to the next slide, please, Slide 15. This slide now is a summary of the long-term survival outcomes of children with steroid-refractory graft versus host disease from our open-label single-arm study Phase III trial in 54 children, where remestemcel was used as first line after steroid failure, 89% of whom had grade C-D disease. Overall survival for 4 years in the 51 children who are available for follow-up, 1-year survival was 63%, 2-year survival 51%, 3-year survival 49% and 4-year survival 49%. And what you can see in this table is an analysis of the survival outcomes at 1 and 2 years in this remestemcel-L cohort in light blue and survival outcomes in 4 recent studies from 2019 and 2020 of children or adults with steroid-refractory acute graft-versus-host disease. The McMillan study covered 128 children, 22% of whom were Grade 3/4. The Rashidi study; 203 adults, 54% of them were grade 3/4. And then the REACH2 study comparing ruxolitinib against best available therapy, where approximately 63% had Grade 3/4 disease. In addition to that the open-label study of ruxolitinib that supported product approval of 71 adults with 68% of whom were grade 3/4. And you can see the overall 1- and 2-year survivals in these studies. If we go to the next slide, please, Slide 16. This compares the Kaplan-Meier results on the left-hand side in 2-year survival outcomes of children with steroid-refractory acute graft versus host disease treated with best available therapy. And you can see the 6-month survival with best available therapy is 49% and the 24 months is 35%. In contrast, the Kepler-Meier curve on the right shows that the 6-month survival in the remestemcel cohort was 69% and at 24 months, survival was 51%, substantially higher. We can go to the next slide now, please. Slide 17. These data published in bone marrow transplantation last year further show that in the most severe patients in the remestemcel cohort, those with high MAP scores, MAP biomarker score above 0.29, a validated threshold for very severe disease, a very high mortality that in this group and focus on the right-hand figure, in this group of patients, we see a particularly striking difference in survival against propensity matched controls, matched for the same biomarker severity score. Here, we see a 64% survival in the remestemcel cohort versus 10% survival in those treated with best available therapy. So evidence now both short term and long term that remestemcel-L therapy resulted in substantial survival benefit against best available care in a subject population which continues to have abysmal survival outcomes and for whom there are no approved therapies. This becomes the cornerstone of our BLA resubmission. Next slide, please. Let's move on to the rest of our late-stage pipeline, and I'd like to just focus on now some of our other advanced indications that we think are going to be value propositions for the company going forward. Rexlemestrocel is our second-generation product based on immuno-selected STRO-3 stromal cells. And let me just focus a little bit on the leading indication for chronic low back pain in patients with inflammatory degenerative disc disease. This is also a very large unmet need and in fact, inflammatory back pain is a cause of progressive severe unremitting pain is the number one cause of opioid prescriptions across the U.S. with 50% of opioid prescriptions being for discogenic back pain. The market opportunity is very large, about 6 million to 7 million patients suffer from inflammatory chronic low back pain due to degenerative disc disease in each of the U.S. and the EU5. Other than opioids or nonsteroidal anti-inflammatory drugs, there are no other therapeutics that have made the difference in this space. And if we go to Slide 20, this is a slide that shows the patient journey once conservative treatments have failed other than opioids, really, you're left with interventional therapies and ultimately, potentially surgery. We believe that rexlemestrocel targets the moderate to severe patient population before anybody would consider to use opioids. Next slide, please, Slide 21. In our first Phase III trial, we demonstrated that in the subset of patients with relatively early disease or severe debilitating pain for up to 5 years. In a randomized controlled trial, you see in red, our sales delivered with a hyaluronic acid carrier, giving a substantial reduction in pain at 12 months relative to controls to receive the saline injection in green. And that difference, which is of the order of something like 20 points on a VAS score of 0 to 100 is very substantial and remains separated at every time point during the duration of follow-up through 36 months. These results were highly significant and they were concordant with a number of other secondary endpoints, including quality of life and functional improvement. If we go to the next slide, Slide 22. This provides the pricing points for various agents that are currently used in the treatment of pain and back pain in more particular, including on the left-hand side, a variety of abuse-deterrent opioids. And on the right-hand side, various biologic agents, including Humira for the treatment of ankylosing spondylitis in the back. We believe that a biologic that treats inflammatory discogenic back pain will be favorably seen assuming that we can replicate the data on reduction in pain for 12 months and improvement in function. Next slide, please, Slide 23. So we've met with the FDA. We had a very good meeting and alignment on how this product can be taken to market. The OTAT agreed with Mesoblast proposal that the primary endpoint for a confirmatory, second trial would be 12 months reduction in pain, and that would be an approvable indication for the product. I mean functional improvement and potentially reduction in opioid use would be secondary outcome measurements. The planned upcoming trial in the U.S. is aimed to also include 20% of subjects in the EU to support submissions to both the FDA and EMA and we're in the process of completing our final protocol design with our key investigators, and we'll be submitting -- we'll be waiting for clearance from the FDA in short order to begin this trial. Moving on to the last indication in our pipeline. Slide 24, is Rexlemestrocel for chronic heart failure with reduced ejection fraction, another very large unmet medical need. Go to Slide 25, please. Cardiovascular disease remains the leading cause of death in the U.S. Heart failure affects as many as 6.5 million to 7 million patients annually across the U.S. And despite the fact that there are a number of new drugs that improve the symptoms of heart failure and reduced hospitalizations due to symptomatic shortness of breath, they do not reduce the major complications of cardiovascular mortality and other complications such as heart attacks and strokes. And we think that this is where our product can be differentiated from the competitive landscape. The next slide, 26, shows the continuum of heart failure across Class 2, 3 and 4 and a single intervention with our cells, we believe, can change the natural progression of this disease. Slide 27. So where -- what did the data show to date? We completed a 537 patient study in patients with low ejection fraction heart failure. And at 12 months, we saw a 50% greater increase in left ventricular ejection fraction in those who received a single injection of rexlemestrocel than in controls. While both groups had similar ejection fractions at baseline, the difference was substantial at 12 months for those who had cells versus sham. And that resulted, in particular, in those patients with evidence of inflammation as measured by simple CRP measurement, an 86% greater increase in ejection fraction from baseline 12 months relative to controls. If we can go to the next slide. Those short-term 12-month changes in ejection fraction and systolic volume appear to be predictive of long-term outcomes in this disease as evidenced by on the left-hand side, time to first event for 3-point MACE as measured by a reduction in cardiovascular death or nonfatal heart attack or nonfatal stroke and even more striking on the right-hand side in the presence of inflammation, you see an overall 45% reduction long term in the 3-point MACE in rexlemestrocel patients compared to control. So that's our last slide. And I think we're very excited today about, in particular, the status of our long-term survival data in our acute graft-versus-host-disease study, which becomes the cornerstone, of course, of our BLA resubmission. We'd like to take some questions and happy to address questions by the three folks who are on the call today. Thank you. This is Carvey on for Louise on Cantor. Congrats on the progress. First, on remestemcel-L commercial front, can you comment how quickly you could launch the product after approval in acute GVHD? And when do you expect a potential approval? What are the remaining steps to get there? I have a follow-up question after this. Sure. Thank you. So of course, we have a priority review designation for the product. We are working towards a complete response the FDA that addresses their issues around the clinical survival data, potency assays and relationship between potency and survival. And all of those data have been provided in a submission to the IND to the FDA about 6 weeks ago, and these new survival data will fall now the cornerstone of the rest of the documentation to the FDA. We would expect that somewhere between the statutory requirement is to complete the review between 2 to 6 months. And we are building out our commercial capabilities putting in place with the team that will lead the interactions with the payers and with the key opinion leaders at the end users to the hospital, and we should be in a position [indiscernible] if we get approval to launch the product immediately after approval. Got it. Awesome. Our second question is on your heart failure opportunity. What is the pathway to approval look like in this opportunity? We expect to be meeting with the agency over the next couple of months. And the data before them is the totality of data in patients in Class II, III heart failure from the DREAM trial, as well as in patients with end-stage heart failure that previously generated in patients with LVADs. What we're seeing is a continuum of improvement in systolic function in patients with inflammation, whether they're last 2, 3 or 4 disease. So I think that's the basis of the discussion. We already have an RMAT in place that focuses on the LVAD population. So we will be having a discussion around it. The continuum of the data set, not just in the LVAD population, but in the broader class [indiscernible] patients with high CRP. Great. Thank you very much. So Silviu I'll not split hairs, but I really want to just understand the exact process under the new survival data that you included in the IND, does that constitute the response to the CRL? And does this 2- to 6-month clock kind of start ticking from October 3. And then I have a follow-up there. No. The survival data we've just provided today has just become available to us. So today's announcement is the new data that has been generated by CIBMTR completely independently. That has not yet been provided to the FDA and will now be filed with the FDA. So the clock is not [indiscernible] until these data are in the hands of the FDA. Okay. Excellent. Just with respect to launching the lower back pain study. What are plans to advance that into Phase III? And kind of, I guess, similar question for heart failure. Is the goal still to partner heart failure and develop quite a lower back pain on your own? Or what's the kind of latest on that. So I'll take -- I'll give the question on heart failure, and then I'll have -- I'll ask Eric Rose to talk about the back pain program. So with respect to the heart failure, you're quite correct. As soon as we've had our meetings with the FDA and pathways clarified. We intend to work with partners to complete the commercialization of the heart failure program. Eric, do you want to talk about our plans for confirmatory Phase III trial in back pain? Silviu. Sorry to interrupt, Eric, sorry to interrupt before you start on lower back pain. But Silviu, have the FDA meetings regarding FRAP in scheduled phase. With regard to back pain, our expectation is to do two trials, which we will begin -- we hope in the second quarter, the third quarter of '23. We're finalizing that trial design with pain as the primary endpoint at a year. As a secondary, we'll be using a scale and quality of life, but it will not be a co-primary. It will be secondary endpoint. We believe that we will show a quality of life benefit using this scale as well. It's a scale which we have familiarity with, and we expect to finalize the design with the agency in the next few weeks, actually. So the final trial design will be submitted to them in accordance with the discussion that we had on what it should be in the past. But again, with that, we expect to start that trial in the second quarter of 2023. I might -- Ted, I might add. So the U.S. trial will start rapidly. A second trial is likely to be a European-focused study so that we can get potentially in front of both FDA and EMA concurrently. And with that, that brings us to the end of today's call. I'd now like to turn the floor back over to Dr. Itescu for closing remarks. Great. Again, thank you to everybody for joining us this morning. We're extremely excited by the long-term survival data, which really are unparalleled, and we'll have a lot more to say at our upcoming AGM. Thank you very much.
EarningCall_1872	Right. Good evening, everyone or good morning, if you're joining us from the U.S. I'm delighted to welcome again James Quincey, the Chairman and CEO of The Coca-Cola Company to our 2022 Redburn CEO conference. James, thanks for joining. Great to have you. Some housekeeping, just first of all. So this presentation will be broadcast live on investors.cocacolacompany.com. The format will be a 50-minute fireside chat mainly between James and myself. But for those on the webcast, there is a Q&A function, so please submit some questions, and we'll try and squeeze in a few towards the end. I don't think any introduction's needed. Everyone knows the Coca-Cola Company, a 136-year-old total beverage behemoth that's actually been delivering tech levels of organic sales growth in the last year, a company with enormous history and heritage, very much at the front of mind at the moment being a key sponsor of the FIFA World Cup, where it's advertised every year since 1950 and good to see wins on both sides of the Atlantic last night. So James, when we finished last year's conference, we ended by talking about Omicron and then this year, we've had the awful war in Ukraine followed by soaring inflation. You've been CEO for five years now, but three of those years have faced significant disruptions. So how do you think about consumer centricity and how has it helped you navigate the challenging operating environment? And also, how do you assess the current health of the consumer? So, I mean, whether it's good times and stable or disruptive times and difficult times in places, whether it's pandemic or war or economic side inflation, maintaining that focus on the consumer and its parallel twin of creating money for retailers is always going to be imperative. Perhaps, one could argue more so in disruptive times because you end up having to change more things, whether it's the consumer marketing, because the mood of the consumer swings more drastically in volatile times, whether it's the packaging and the price points and the RGM because you need to move around a lot more or even frankly with the pandemics, the disruptions to the supply chain and the need to focus on continuity. But ultimately, the North Star being centered on the consumer is always going to be true and so that, I think, is part of what has guided us through these tough years. It was what guided us through the better years. It's what will guide us in the future. So it always will remain incredibly important. I think the other thing that goes with consumer centricity is not just thinking about the consumer in the sense of today, but where are they going towards and so not falling into a kind of a short-termers mindset of following them slavishly on the rollercoaster of the economics, but looking to where the puck is going towards and building the business for the long term. And that's really driven by the insights engines that we drive internally in the company. Where is the state of the consumer now? Look, clearly, there is a lot of pressure in the system. I think it is somewhat important to disaggregate the consumer. We perhaps have a tendency â or perhaps there is a tendency to overweight what's happening to U.S. and European consumers and underweight the rest of the world. And perhaps for many companies, that's an appropriate balance, given where their revenues and profits come from. Obviously, Coke being so global, that understates what's happening in the rest of the world. And you can see that in some of our numbers so far this year that there has been good â not just resilience but good growth in a number of the emerging and the developing markets. So, the U.S. consumer â the central developed market conundrum that everyone's struggling with is inflation shooting up, whether it's leveling off is a matter of current debates. But the inflation has gone up. It's gone up faster than wages, yet the consumers seem to continue to spend. Yes, it's sector-specific as to what they're spending on. Yes, those with more income seem to be more impervious to the squeeze on purchasing power than those with less. Those with less, clearly in the U.S. and Europe are responding with what I would see as classic recessionary behavior, reducing basket size, substituting brands or occasions into private-label, into the categories that they value less and saving the specialists for the categories or the brands they love the most, classic signs of recession. So you do see that across the developed markets. There are other parts of the world which are more resource-driven economies, which are quite resilient. Obviously, the emerging market economies, which are resource-dependent tend to be doing less well. But again, that isn't even a rule because we've got very robust growth in India, which is also a resource importer, largely speaking. So, I think we're still in the territory of slightly weird economics. The math ultimately will play out and I think, therefore, it's going to be really important as we go into 2023 to remain consumer-centric to remain focused on creating value for retailers, and to remain flexible, and accompanying the consumer with the right marketing innovation, and of course, RGM to hit the price points as we expect the consumers to feel more squeezed from a purchasing power point of view going into 2023. Interesting. And then, perhaps more broadly, how is the company's strategy strengthened the resiliency and responsiveness of KO and the broader Coca-Cola system over the past few years? I mean, the latest curve pool we've had has been a stronger dollar. Does your approach to managing the business change at all during periods of high currency volatility? We manage the business for the long-term. We've lived with some dollar strengthening for a good number of years now. I think what's changed very specifically is we have added to the store of saying, look, this is a local business and just to back up one second, that the beverage industry largely competes in local terms on local pricing. Even though there are a number of commoditized imports that are priced in dollars or euros, the business is largely run in local currency because there are much more local costs than there are commoditized international dollarized costs at a pricing level. So we look to be relevant with consumers and retailers locally, which means winning in local money. Historically, we have therefore been, in some respects, unfairly oversimplifying perhaps the sum of the parts and we â on the talk over the last number of years to become more than sum of the parts, by being more focused on our resource allocation and our portfolio management such that, particularly in times of dollar strengthening, we could become more than the sum of the parts and as we are this year, clearly delivering strong U.S. dollar growth in the EPS, despite a very strong dollar this year. So, very much, it's a question of how do we overlay that agility and resilience as a corporation to be able to redirect resources, all in the service of the long-term health of the brands and the top-line, but how can we use that to offset in the meantime and that's allowed us to strengthen the brands, work with the bottlers on the RGM and the distribution and the local market execution, such that we can be an all-weather performer. Yeah, that local focus has really paid off. I mean, one of the hallmarks of your tenure as CEO has been that organic sales growth acceleration towards the top end of that 4% to 6% long-term range. I mean, inflation-driven pricing skews short-term results, but what gives you confidence over the long term of sustaining top-of-the-range growth? And how do you see the balance of that between price mix and volume? Sure. So, the first â the first kind of foundation stone in long-term sustained growth is the degree of development of the beverage industry on a global basis. If you just imagine two bottles for a second, one that's the developing markets, one that's the developed markets â the developed economies, the developed economies are about 20% of the global population and the beverage industry is a people business. So 20% of the world, you imagine their bottle, 3/4, 70% to 75% of everything they drink is a commercial beverage of one sort or another, whether it's non-alcoholic ready to drink, whether it was hot drinks, whether it was alcohol, it accounts for about 7 to 7.5 out of 10 of all the drinks they consume. So it's commercialized. But our share within that is still in the low teens. We often talk about our share in any RTD. But as we've expanded the beverages we drink and as we gain share from other categories, we have an enormous opportunity, not just to finish off the development of commercial beverages in the developed economies, but continue to gain share as we have done over a long period of time. The other bottle, which is 80% of the world's population, so think China, India, Africa, to some extent Latin America, there the beverage consumption is a quarter. So only a quarter of beverage consumption is actually commercial and there, again, we have a modest share seen in total. And so we think there is huge long-term potential to build out the beverage industry. Ultimately, this bottle is four times bigger than the bottle that's already been developed in the developed economies. So we think there is huge long-term potential for the development of the beverage industry. Second, as the leader in non-alcoholic ready-to drinks, not just the leader but the leader gaining share each year, we think we're the winner â the long-term winner in the industry. So it's an industry that grows and if we gain share, then that adds to the growth equation and it's not just a growth industry. It's actually a very stable growing industry. And what I mean by that is if you take a histogram chart and you plot out over the last 20 years or go back further, what did the industry grow each year, like how many times did it grow 4% or 3% or 5%? The highest column, the median column is 4% and if it didn't grow 4%, it grew 3% or 5%. Of course, this year is slightly different with inflation. But I think it underlines the stability of the growth of the industry and then if you add on the share gains, you see that relatively, clearly that idea of getting into the top end of the 4% to 6% range is doable if we do our homework. There is no silver bullet to making it happen, but we absolutely can make it happen. And it's likely over time to translate into a balanced contribution from volume and price mix. Not necessarily the same everywhere. So the U.S. would be less volume and more price and in India, clearly, it's going to be much more volume than price. But the net of all those different states of developments of the markets is roughly an equal mix of volume and price over time. Yes, itâs been a 80% volume growth in India in Q2 is probably my personal highlight of the year so far, but within that vibrant industry, Coca-Cola is obviously the biggest brand. And I think it's fair to say you've taken a more experimental â or your predecessors with the launch of Coke Energy in 2019 and then more recently, the Creations have launching some pixel and space-flavored variants. How would you describe your approach to stewarding the Coca-Cola brand? See, for me, it starts with this idea that over the last 130-plus years, as you pointed out, each generation of managers has managed to make Coke relevant to the next-generation consumers. If they hadn't done so, one of those S curves would have turned up and someone else would have substituted Coke. So that the one part of the great success of Coke has been the ability to make it relevant for each generation. And so that is our North Star as we think about Coke today and Coke going into the future. Like what makes it relevant? And then that then breaks down into a series of things, whether it's the nature or the tone and style of the marketing or where the marketing is. It's shifted from â over time, it's shifted through every media form as they've been created and then displaced by the next media form, so the content, the style, where the consumer is engaging with content, all the way through to where the boundaries on the part of variants of Coke. It's not that long ago that a Diet Coke was seen as an outrageous heretical idea, Diet Coke only being launched in the early '80s and here we are many years later with Coke Zero growing fantastically double-digit volume growth for multiple years in a row and really powering alongside, yes, still growth in Coke Original. But that testing the boundaries, whether it's Space Coke or pixel or marshmallow, that's about engagement with consumers. They are not designed to be variants that will last forever, but they are more engaging and more interesting demonstrably than a flavor, a Coke with vanilla or something. And so really, it's about marrying the insights of the consumers with the central mission to continue to make it relevant for the next-generation. And if we do things that don't work or don't work in their first version, like Coke Energy, then we should stop them and move on to the things that do engage consumers. And I think that combination is really helping us drive growth through the Coca-Cola total franchise and of course, the latest iteration of that, something we're very excited about, just launched in Mexico is the premixed cocktail of Jack Daniel's and Coca-Cola. And so it's about this testing the boundaries of what consumers want to engage with and the degree with which they engage with it, all in the service of continuing to make Coke relevant for the next-generation. Yes. See people with some of that Jack and Coke to that CMD, it was great. And Coke is obviously the backbone of the portfolio. But what are your considerations when you think about constructing a brand portfolio that reflects both what consumers want today, but then also your view of â your longer-term view of what the future looks like. And we've seen the company push into coffee and alcohol recently where do you set the boundaries of what the company's portfolio would encompass? We don't set the boundary. The boundary is set by, I guess, at the end of the day, two things. One is what is the consumer actually interested in? Where is the growth in beverages going to be? Back to the consumer-centricity, it's got to start there. And then secondly, of course, is can we do it? Can we do it and be competitive? Can we generate a competitive advantage in the service of the consumer and in creating value with the retailer? Obviously, the business system we have today is a starting point that, obviously, we look for synergy with. So the boundary is not a fixed line. Being an engineer, I describe it some people like explanations, some people hate it, but I'll go with it anyway. For me, it's much more probabilistic. It's not that there's a line from here to X that will do all that and then beyond X, it will do none of that. The line â the idea is more probabilistic in the sense of I already have this position with these brands. What is the next thing that is most likely to be successful and that's a combination of how it connects to consumers, how it sells to retailers, how it fits with our business system and the type of marketing brands that are good at selling. So then it becomes a probability of success. Clearly, things that are near or in are more likely to be successful than things that are more different to us. But you've got to marry that probabilistic idea or our starting point with where is the consumer going and put it all together. So the boundary's not fixed. We're interested in things that grow, that have good economics and in which we can believe we can generate competitive advantage. And so that then turns into what I've described as kind of four buckets or four podiums. And what I mean by that is the portfolio ultimately ends up being made of the gold-medal position on the podium, which is things like Coke. Those brands or categories where we are a clear leader either globally or in some countries in a category by a good distance, real quality leadership and that tends to come with scale, obviously, and margins. And so job number one is to reinforce and make relevant all the brands in the gold-medal position. Then the silver-medal position, still big brands, but they might not have the clear leadership. They might just be number one or a close number two. And really, the mission there, and it includes some big brands like Fanta and Sprite is to enhance the degree of leadership, because, as we do so, we gain, not just scale but margin. The margin improvement is greater than the corresponding scale improvement. And we've got quite a lot of positions around there where we would like to see increased quality of leadership. The third podium in the portfolio ends up being those things where we have a clear vision of how value and competitive advantage can be created, but we've got to execute. And in that, you can put coffee. We put out a strategy when we invested in Costa. Obviously, that all got sidelined by the pandemic. But ultimately, we are back to the question, okay, now that things are largely reopened, let's execute and demonstrate is â does the vision hold water or hold coffee if done. And then the fourth bucket is experimental things. We don't know enough to even get to the third podium, but we're willing to try things and perhaps that's where alcohol has been in the last couple of years is we tried Lemon-Dou in Japan and then we tried premix cocktails in Brazil. We've tried distributing spirits in a couple of countries. And as we learn more, obviously, the next step is to be able to crystallize out of vision, okay, this could be big, because if it's not big, it's not going to be material for the Coke company and we don't want to distract ourselves with lots of small things. So scale is the price of entry and there'll be many more things in the experiment bucket, but not all of them will make it to the next stage. Interesting. And then supporting the portfolio has been a revamped marketing approach, and we're a year into the new relationship with your global marketing partner, what have been the main benefits for moving to this new marketing model and the broader transformation of your marketing approach? I think the benefits are very simple and straightforward, not that we have got it all fully up and running and are completely happy. But the easy starting point was when you make a huge simplification like that, and you increase the scale, you get a great deal of efficiency benefits that we have used to reinvest in a number of things. So there is a great deal of improvement in the efficiency of the buy and the spend. But more importantly and perhaps more longer term, because the efficiency is kind of a one-off that then gets baked in, is the increase in the effectiveness and as we've started to simplify the number of campaigns and focus on higher quality ones, we already start to see, not just benefits in terms of impact, whether in terms of turnaround time and speed, which then obviously helps us keep more consumer-centric and keep driving value for the retailers. And so, whether it's examples like the #WhatTheFanta campaign or even the Coke creations which traveled around the world, I mean, the rate at which we are moving the right things around and stopping the things that don't work and moving the best practices and really driving up the effectiveness of the marketing, I think that's the thing that actually is the one that then endures as an advantage going into the future. And those traditional â the red lorries are still out in force, which is good to see. They were in London last weekend. It's good to see. And then it got me on YouTube as well, so full end-to-end marketing. A bit of a sweeping question, but as you look forward, what are the opportunities you see that have the greatest potential for growth from a regional and a category perspective? Well, part of the problem here answering the question is like what time frame are we talking about and like what are we â what do we mean by growth? Is it volume? Or is it immediate revenue, immediate profits or long-term development? In a way, this goes back to the bottles question and to the portfolio answer. There is no one lever at Coke that gets pulled or doesn't pull that makes all the difference. Unquestionably, the nearer terming you are, the more that the top-line is going to be driven by the existing portfolio, that's kind of a self-evident, kind of mathematical certainty. And so, the sparkling business, Coke, Fanta, Sprite and the other sparkling bevs have been driving growth and will continue to drive growth for a long time into the future. As I said earlier, that might be more price led than volume led in places like the U.S., but it's going to be volume led for many, many years to come in Africa and India or ASEAN and China. So, I think the decomposition of growth is about what's growing where and the portfolio effect and how that then turns into creating a business mass and then creating ultimately U.S. dollar revenue over time. And I think the thing we focus on is how do we optimize resource allocation, so we make the best decisions to get the most progress each year. I think that's how to see it because everywhere you look, there are opportunities, the decision is not the lack of opportunities. The decision is, how to make sure we advance in a methodical way and we don't just disburse our efforts over lots of small things and overweight, if you like, towards the experiment podium and underweight to the gold and silver medal podium. There has to be â if you take all the countries in the world, they each have their gold, silver, bronze and experimental podiums. The key art is managing the resource allocation over the number of podiums and the number of countries to optimize the long-term development and also get the near-end results that we're looking for. Exactly. And you've spoken before about how top-line growth drives the bottom-line performance given the outsourced operating model. But beyond top-line growth, what are some of the key long-term operating margin levers that you can pull to drive margin expansion? Yeah, clearly, the primary driver for profit growth is going to be the top-line. The sheer effect of volume and price mix with all its components of RGM. Within that, as I kind of intimated in the description of the portfolio and the podiums, there is potential for margin improvements in the sense in the gross margin as brands and categories move up the podiums, they don't just get bigger. They tend to also come with improved margins. Now even for us in an asset-light model, sometimes the improvement is more the operating margin than the gross margin, because the company is likely to be investing heavily in marketing, which is post-gross margin rather than the bottler. So the effect is there still. It's just not as pronounced for us as it might be for bottler, and we'd be looking for the operating margins. Having said that, that does not mean we won't pursue high-value categories where it basically works in dollars and cents rather than percentages. Sometimes people rotate too far to percentages and decline to pursue opportunities that have a lot of dollars and cents, but don't necessarily have the right percentages largely because they have our high-input costs. And so, we do see there is a number of categories that remain attractive for us that have large â or larger than average input costs, and we're not going to deprioritize them just because the percentage is if we think they create a lot of value and so that tends to kind of be the calendar effect on the gross margin. The other thing that is happening, it's not fully happened yet. Obviously, the refranchising is not totally complete. We continue to aspire to be the world's smallest bottler. We're down to owning about 3%, either majority or controlling majority of the global bottling system from a much higher number 5, 10 years ago. So we will over time and at the right time look to get that number down, which obviously has these mechanical effects on our margins. Then beyond that, it's about managing each of the line items, whether it's the trade promotion spend, the SG&A, the productivity of the marketing, we will be judicious detailed stewards of the investments. But in summary, let me come back and say this that the margin expansion is not going to be the driver of the value creation of the Coke Company. It's going to come from the top-line. The top-line is the first, second and third drivers of profits and, ultimately, cash flow. All right. And we've seen the system shift over the past decade or so from a volume to a value-oriented system, which definitely means a stronger focus on driving revenue per case growth by expanding single-serve formats and improving execution in the away-from-home channel. If we enter a consumer recession, what benefits does this yield versus the previous model that focused on volumes? Yeah, sure. Let me just open parenthesis and talk a little bit about how this â one of the principal mechanics behind the value shift, which is how we charge our bottling partners for the concentrates. The value model was largely linked to a model of concentrate pricing, whereby we charge X amount per gallon. Whether the bottler used that gallon of concentrate in large 2-liter PET packages or small 8-ounce glass bottles, the price of the concentrate was the same, which obviously created an incentive in the year for the bottler to focus on selling as many eight ounces and not trying to overpromote the 2 liter because it came with very expensive concentrate because it's an average. The value orientation is underpinned by a pricing mechanism referred to as incidence pricing, whereby essentially the gallon of concentrate is a percentage of the price realized by the bottler. Therefore, if the 8-ounce bottle is sold at a higher price per liter, then the cost of the concentrate that's in it is higher and in the two-liter PET bottle, which sells at a much lower price than the cost of concentrate. And what that does is it orientates both the company and the bottling people to pursue - they don't have the same economics, but they have the same directional interests as to what should be built over time, not just on an in-year basis but on a long-term basis. The mechanism was actually designed or brought into life to help combat inflationary pressures in a fixed concentrate world actually converted from fixed price to incidents precisely to deal with runaway inflation. But it turned out to have much greater benefits of aligning the system and focusing them particularly through RGM on what is the optimal price pack channel strategy to engage with consumers and create value for retailers. And it was a very important discovery underpinning initially the long-term success of the Latin American system and then it was rolled out around the world, including into the U.S. And I think this has helped bring the system much closer together, which means instead of arguing across purposes, we can now focus on the direction of the things that work for both of us in similar directions. And I think it's been a critical enabler of RGM and the packaging diversity strategies that have been a critical way of meeting consumers with the right price points in the right channels, particularly as income inequality winds and inflation goes up. And so, it's very important to us and that's part of what has underpinned this shift. Yes, it's also been critical for building alignment with the bottlers. And we continue to see an evolution of the relationship between KO and the bottling partners increases to instance rates, territory refranchising and recently signing of some new agreements and long-term agreements in particular with some of the Latin American bottlers. How do you think about stewarding the system over the long term? And what is the optimal structure of bottling - bottlers in a region? Well, optimal sounds like a destination and unfortunately, I am not a believer that there's some perfect world, nirvana, which we will certainly reach because, even if we did, the changes in the consumers' interest, the retail landscape and our competitors' actions is going to mean it â it automatically is not the optimal answer the next day. So, that's not to say it should change every day and there's an infinite number of answers, but we need to constantly ask ourselves the question, what is the way â the best way to organize ourselves to drive the long-term health of the system, which is about value creation and our competitive advantage and to the extent that invites us to boldly do new things at scale or experiment with things to learn about where the boundary is and where the evolutions could or should take place, then we should do so. It's a very valuable symbiotic system. But it would be a mistake, I believe, to see it as fixed and final. We always have to challenge ourselves to say, how are we staying relevant, and therefore, what do we need to add and what do we need to subtract in making this happen. And as you point out, we've worked â having deepened our relationship with the bottlers, got more and more aligned around succeeding with the products we've had reinforce the competitive advantages of the system in any particular region and it doesn't even have to be the same answer in every region. Interesting. I'd like to end on a few on ESG, where â the first one on plastic. I mean, given 90% of your packaging is already recyclable. The main challenge is getting consumers to recycle their products and improve collection rates. What are some of the key initiatives the Coca-Cola system has taken in that regard to improve collection rates? Yeah, sure. Collection rate is definitively the biggest gap. Let me segment the world into a couple of pieces. One, the developed economies where labor rates tend to be high and emerging markets where labor rates tend to be low and the importance of the distinction there is the cost of the collection system because, ultimately, our bottles, our PET or plastic bottles have an intrinsic value. Unlike many other types of plastic or single-use plastics, like ourselves, we use shrink wrap around the cans, which like, for example, in Europe, we've moved out of and moved to cardboard because that shrink wrap has no recycling value. The PET bottles have a recycling value. If they can be collected, they can go to a system and can be made into new bottles, or they can be made into the sportswear that most of the people on this call wear at some point or into carpets or into lots of other things. Unfortunately, that's down-cycling because it's lower-grade plastic. So, the key is collection and recycling into PET bottles, because then it keeps the economic value and keeps the circular economy. Collection is a challenge. In the emerging markets, collection rates are going up because the economics are there to have people collect the bottles or the cans or the glass or the cardboard, but specifically our PET bottles. Then we have to do two things. We have to help get our PET laws. So we have to make sure that the regulatory environment allows recycled PET to be used in food-grade PET, so in packing our own bottles. And we've had â we made good progress around the world in encouraging - helping governments to put in place a regulatory structure. And secondly is building infrastructure to actually do the recycling and that's making a lot of difference in the emerging markets. In the developed world, where labor is more expensive, really even more so than in developed markets where we need to work with other industry partners to get the collection up, in the developed world, really, it's a coming together with the manufacturers, the retailers and local governments to get the collection facility, whether it's curbside collection or deposit systems, it needs a more cohesive structure from all the players to put in place the collection system that then obviously is multi-material, but will include the PET. And it's very doable. There are countries in the world with over 90% collection, both emerging markets and developed countries with overnight inflection, so it's very doable. And we have countries where we're already selling the full portfolio in recycled PET bottles. So this is not a moonshot problem. This is an organizational challenge in the near term. It's hard. It's doable. We're at about 60 â just over 60% collected. There is a long way to go, but it is very doable, and we think it can be done. Great. And then, lastly, on the climate. Given most of the system's CO2 emissions are Scope 3, i.e., sit with suppliers and distributors, how do you encourage these third parties and support them to decarbonize their operations? Yes. The challenge in net zero is it's actually always someone else and in a way we're the retailer's Scope 3. For us, the Coke Company, the Scope 3 sits with the bottlers and the suppliers. So our focus is on what's happening in the bottling system, and we have â there are bottlers who set their own net zero goals, like CCEP and CCH. And so, that's a key part of it is the bottler goals that are being set and then we've got to work into the carbon footprint. And really, it's in a few primary areas, whether it's the cooling equipment, the conversion cost, the electricity, if you will of making the packaging materials and then in agriculture. And in the end, it comes down to a relatively small number of key things. We either can find innovation that means we use less energy to run the coolers or we use less energy to do the packaging, and this is very doable. If you take a can â most people can remember cans when they were kids, particularly the older one on this call. And if you stood on it, you had a very hard time making that can crumble because the wall of the can was very thick. Nowadays, the thickness of an aluminum can is about the thickness of a hair. You just need to touch the side as you're standing on it and the whole thing crashes. So using less material, what we call lightweighting, uses way less carbon. So less use of material uses less carbon. Secondly, the collection or the recycling of the circular economy is a critical way to reduce the carbon footprint. A recycled PET bottle or a recycled aluminum can has a much lower carbon footprint than a virgin one. So actually, the climate goals and the world without waste goals, the packaging goals, heavily work together. They are very synergistic, and they deliver results for each other. So, as you look at the close-in system, the stuff that we touch more of, that makes a huge difference. Obviously, as the green transition happens and energy itself comes with less carbon embedded in it, that makes a huge difference. You can't get all the way there without green energy. And lastly, agriculture. There, it's a much broader scale problem of improving agricultural practices, of which we and many others are engaged so that they can be â we can get the outputs without the same level of carbon being used or released in the production of agricultural inputs. And like you say, many of your climate initiatives are good for financials as well, such as lightweighting. We'll have a look at the Q&A in a second. So please submit questions if you have any, but I'd like to bolt one on just quickly if I may, please where we've seen a few appointments today, such as Henrique Braun as the newly appointed President of International Development, which coincides nicely with 100 years of international bottling operations, I think. What would be his key priorities going forward? And then also what does John, the CFO's adding oversight for bottling investment groups add? Let me do it in reverse order. John taking on bottling investments is relatively simple in the sense that it's â our objective is to be the world's smallest bottler. In other words, a good number of those are subject to ultimately when will we divest them. We have an on-hold IPO with Coca-Cola Beverages Africa, and we are trying to complete a couple of deals in ASEAN. We've just done Cambodia. We're just trying to get Vietnam online. So simply put, see it as part of completing the play on becoming the world's smallest bottler and then it's more easily connected on a day-to-day basis because it intersects with the decisions on where these â where the refranchising's going. So it's kind of like makes sense from a purely practical point of view. Henrique's role is to help develop and lead the operating units. We have, as a company over the years, had â we have, in a simple way, two objectives in â organizationally speaking. One is to be obviously the most efficient and effective that we can today and the second is, it needs to also develop the talent for the future. And when you look at the Henrique's announcement, clearly, as you've seen over the last 10, 20, 30 years, we've taken lots of different shapes and forms at the top of the house in order to help people develop, but also to help lead the operating units. So Henrique's role is clearly to fulfill a part of what Brian was doing in terms of being the core part of corporate, working closely with me and John to help direct and lead the operating units and help grow the talent there. Interesting. And then following on, there is a question here on why does the Coca-Cola company need to hold stakes in many of the anchor bottlers? And what benefits does that confer beyond just economic interest? I mean, need, in a strict sense, you can argue about it. We have most of the stakes that we hold in key bottlers are part of a joint commitment and alignment and are typically linked to shareholders' agreements. So most of the large bottlers in the Coke system now, particularly the public ones, the essential composition is a large family or family grouping that owns the biggest stake in the bottling company. The Coca-Cola Company that owns 20-and-a-bit percent of the company and then public shareholders and we have found over time that having the anchor family, it really provides a long-term-view investor group that are not distracted by the ups and downs of today and tomorrow but are really focused on the long-term value of the franchise and the enterprise with which there are deep relationships with the company and frankly between the bottlers. And that provides a lot of stability and support for the management teams of those public â of those public bottlers. We tend to be tied in with shareholders' agreements in a lot of those and so, the equity stakes are part of that ecosystem of keeping us all together. Perfect. And then I think the last question we'll take from the Q&A. So there's been a lot of focus on the success of Coca-Cola Zero Sugar after reformulation. Do you see a similar opportunity with some of the other sparkling flavors like Fanta and Sprite Zero? Hopefully. Look, I don't â let me back up. We are always on the Zero versions, whether it's the sparkling beverages, or frankly, some of the other stills categories, are always looking at the quality of the Zero version relative to the Original and trying to get them closer and closer to be able to deliver on the brand promise and the intrinsics without the calories. So, to the extent there are Sprite Zeros out there or Fanta Zeros out there that we don't feel are as good as the original, absolutely, we keep looking to try and improve that. And we have done so over the years. So it's not a sudden big bang. We have been making tweaks over the years to those different formulas. Bear in mind that the Fantas and the Sprites around the world are not all one formula partly because of juice content regulation in different parts of the world. So there is not a big bang, and it's not exactly one thing. But absolutely, we continue to look at opportunities to do even better by improving those Zero formulas. Perfect. Well, we're very close to hitting on time. So I think we'll call it a day there. But James, thank you very much. It's been a pleasure as always, a fascinating discussion. And thank you very much, everyone online for listening, and have a great festive period coming up.
EarningCall_1873	Thank you for standing by and welcome to nCinoâs, Third Quarter Fiscal Year 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, todayâs program is being recorded. Good afternoon, and welcome to nCinoâs Third Quarter, Fiscal 2023 Earnings Call. With me on todayâs call are Pierre NaudÃ©, nCinoâs Chairman and Chief Executive Officer; David Rudow, Chief Financial Officer; and Josh Glover, President and Chief Revenue Officer. During the course of this conference call, we will make forward-looking statements regarding trends, strategies and the anticipated performance of our business, including, without limitation, the acquisition and integration of SimpleNexus. These forward-looking statements are based on managementâs current views and expectations, entail certain assumptions made as of todayâs date and are subject to various risks and uncertainties described in our SEC filings and other publicly available documents, the financial services industry and the global economic conditions. nCino disclaims any obligation to update or revise any forward-looking statements. Further, on todayâs call we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in todayâs earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call. Thanks, Harrison, and thank you all for joining us today. I am extremely proud of our teamâs execution in the third quarter as we once again exceeded top and bottom line expectations. We generated $105.3 million in total revenues, including SimpleNexus, a 50% increase over the third quarter of fiscal â22. Subscription revenues were $88.3 million, an increase of 55% year-over-year. Excluding SimpleNexus, subscription revenues grew 28% organically. This quarter marked our first quarter with over a $100 million in total revenues and also our first profitable quarter on a non-GAAP operating income basis. For the past two earnings calls, we have emphasized our commitment to profitability in fiscal â24 and Iâm very happy with the progress we have made to-date. We plan to significantly increase our non-GAAP operating income next year, and I will touch upon that shortly. On the customer front we were pleased to issue a press release shortly before this call, announcing that the Bank of New Zealand has selected the nCino Bank Operating System as a foundational technology platform, making the bank of New Zealand one of our largest customers globally. With over $55 billion U.S. dollars in assets, Bank of New Zealand is one of the countryâs largest financial institutions. We couldnât be prouder to be in business with them and greatly appreciate the opportunity to showcase the value our solutions can bring to financial institutions around the globe. Iâm also pleased that following the announcement last month of a successful Go-Live with Kiraboshi Bank in Tokyo, we have two additional Go-Lives in Japan in the quarter, including SMBC Trust Bank. We are excited to see good momentum and traction in the market, representing an estimated $1 billion opportunity. Among numerous other Go-Lives in the third quarter, our first customer in Germany is now live. Hamburg Commercial Bank or HCOB was recently recognized by Euromoney as the âWorldâs Best Bank Transformation for 2022â. We are honored to be their partner as they continue optimizing systems and processes to maintain their market leadership position. As I mentioned before, getting customers live and referenceable is what we truly celebrate at nCino and this is of particular importance in our newer markets. I also would like to highlight the performance of SimpleNexus business, which had another strong quarter under difficult market conditions. SimpleNexus grew total revenues 38% organically year-over-year and had six competitive takeaways and five cross-sells through nCino customers. Despite the current headwinds in the U.S. Mortgage Market, we believe the quality of this business, including its people, technology and recurring subscription based revenue model, positions us to continue to take market share and emerge on the other side of this rising interest rate environment as the clear leader in this space. Obviously, the macro environment remains top of mind. We have spoken with numerous customers and prospects about market conditions and their feedback has generally been positive. With banks and credit unions sharing that they are well capitalized, realizing improved net interest margins and that credit risks are in check. This bodes well for nCino over the long term. Financial institutions remain focused on the need to digitally transform in order to be competitive and to better serve their clients, and as a result our sales pipeline remains healthy and continues to grow nicely. That said, we are not tone deaf to external conditions and the bottom line expectations of the market, which have changed materially over the past year. Against the backdrop of macroeconomic and geopolitical uncertainty, we are seeing a more measured buying environment and increased executive scrutiny on purchasing decisions, particularly in Europe, which extends sales cycles and the time required to close deals. Additionally, FX headwinds and a challenging U.S. mortgage market persisted through the third quarter. So what does this mean for our business? Well, we actually view this more challenging macro environment as an opportunity to aggressively evolve from a best-in-class growth SaaS company into a best-in-class profitable growth SaaS company. With the investments we have already made in sales, products, customer support, professional services and geographies, we are very well positioned to grow market share and continue leading the digital transformation of financial institutions around the world. On the bottom line, you have seen a significant improvement in our performance during the course of this fiscal year, and we expect that trend to continue next year and beyond as we further optimize our cost structure and drive more meaningful leverage on the expense side of the P&L. We have been able to accomplish this improved bottom line performance without changing our strategy or investment priorities, but instead through a more conservative approach to managing headcount and disciplined investment decision making with an even more relentless focus on ROI. We have also been able to realize cost synergies from the SimpleNexus acquisition as the two businesses work more closely together and our integration activities accelerate. On the top line, the fourth quarter has typically been our strongest sales period and we still have two months left in the fiscal year, so we will wait until our Q4 earnings call to provide specific financial guidance for fiscal â24. However, we think it is important in uncertain times to provide even greater visibility into our current thinking as we factor in the impact of the three headwinds I mentioned earlier, and the overall macro environment we are currently planning for nCino to be a rule of 30 company next fiscal year with a mix between total revenue growth, and non-GAAP operating income margin trending towards 20% and 10% respectively. We will accomplish this without changing our investment priorities, which remain making sure we have the right sales coverage for our investable markets; that our support and professional services organizations provide the best customer experience in the industry, and that we continue investing our product portfolio to extend our track record of innovation. Thanks Pierre. The Bank of New Zealand win was certainly a highlight of our continued success in Asia-Pac. We were pleased this quarter to also add a new logo in Australia with the government sponsor lender and an expansion deal within a New Zealand Bank for commercial pricing and profitability. The ability of our nIQ product to embed intelligence, insights and data into the Bank Operating System is a huge differentiator. Our nIQ offerings are resonating with our customer base and are now a standard part of prospecting and expansion conversations. Also in the quarter, we signed an expansion deal for a new line of business with A Big-4 U.K. bank, again, demonstrating our success and adding value across business lines within our customer base. That customersâ initial contract was signed in the first quarter of fiscal â23, so we expanded to a second business line in less than nine months. We also closed several solid multi-product commitments with new customers in the community and regional market this quarter. A few examples include, our single platform vision resonating with a $14 billion bank in Oklahoma as they selected nCino for both commercial and retail lending. An agricultural lender selecting us for commercial and retail lending, deposit account opening and treasury sales and onboarding, which will provide a true 360 degree view of their customer relationships. And a $3 billion bank in Virginia embracing nIQ with their initial nCino contract, selecting us for a commercial lending, pricing and profitability and automated spreading, which will enable their commercial lending employees to compete with the largest financial institutions. We also had significant expansion deals with existing customers in the community and regional market, including a $7 billion Colorado bank expanding their use of nCino from commercial lending to add deposit account opening and treasury sales and on-boarding, and a $7 billion bank in Hawaii, adding retail lending and deposit account openings. Another highlight of the third quarter was our Portfolio Analytics team, signed the biggest deal in the history of that business with the addition of one of the largest trade unions in the world as a loan analytics customer. As Pierre mentioned, Go-Lives are a key measure of success here at nCino, and this quarter marked a record for successful implementations headed by a significant contribution from the portfolio of analytics team as the CECL adoption deadline approaches. Our first commercial lending customer in German, a business banking customer in Canada, Japanese market early adopters, and a retail lending customer in the U.S. regional market were all beneficiaries of focused efforts from nCino Professional Services Teams and certified system integration partners. As always, Iâm deeply appreciative of the trust our customers and partners place in nCino and Iâm proud of the teamâs commitment, energy and results as we continue to tell the story globally. Thank you, Josh, and thanks everyone for joining us this afternoon to review our third quarter fiscal â23 financial results. Please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in todayâs earnings release, which is available on our website and as an exhibit to our Form 8-K furnished with the SEC just before this call. We again delivered strong results for the third fiscal quarter. Total revenues were $105.3 million, an increase of 50% year-over-year, including a negative $2.3 million impact from FX. Subscription revenues for the third quarter were $88.3 million, an increase of 55% year-over-year, representing 84% of total revenues. Organic subscription revenues were $72.9 million, representing 28% year-over-year growth. Professional services revenues were $17 million in the quarter, representing 31% year-over-year. Professional services revenues included approximately $1.5 million of SimpleNexus services and other revenues. Non-U.S. revenues were $15.9 million or 15% of total revenues in the third quarter, up 36% year-over-year or 55% growth in constant currency. Non-GAAP gross profit for the third quarter of fiscal â23 was $68.6 million, an increase of 54% year-over-year. Non-GAAP gross margin was 65% compared to 64% in the third quarter of fiscal â22. Our gross margins again improved due to subscription product mix as enterprise and international customers comprise more of our revenues, as well as the impact from subscription revenues being a larger contributor to total revenues. Non-GAAP operating income for the third quarter of fiscal â23 was $2.5 million, with a $3.2 million loss in the third quarter of fiscal â22. Our non-GAAP operating margin for the third quarter was positive 2%, compared with negative 4% in the third quarter of fiscal â22. As Pierre mentioned, this profitability was achieved through a more conservative approach to managing headcount, particularly in R&D and G&A, as well as savings on insurance and synergies from the SimpleNexus acquisition. Non-GAAP net loss attributable to nCino for the third quarter fiscal â23 was negative $1.4 million or negative $0.01 per share compared to negative $3.7 million or negative $0.04 per share in the third quarter of fiscal â22. Our remaining performance obligation or RPO increased to $919.2 million as of October 31, 2022, up 28% over $717.7 million as of October 31, 2021, with $603.9 million and less than 24 category, up 43% from $420.9 million as of October 31, 2021. New and expansion sales contributed more to the sequential increase in RPO than renewals this quarter. Turning to cash. We ended the quarter with cash and cash equivalents of $111.8 million, including restricted cash. Net cash used in operating activities was negative $4.1 million, compared to negative $19.1 million in the third quarter of fiscal â22. Capital expenditures were $4.6 million in the quarter, resulting in free cash flow of negative $8.7 million for the third quarter of fiscal â23. During the quarter, we drew down approximately $30 million on our line of credit as the fourth quarter is a seasonally slower period for customer collections. In providing Q4 guidance and updating our full year outlook, we are taking a few factors into account. First, longer sales cycles, particularly in Europe. Second, the state of the mortgage market, including elevated churn in the IMP space in SimpleNexus. And finally a 2% to 3% negative revenue impact from FX. For the fourth quarter, we expect total revenues of $104 million to $105 million, with subscription revenues of $90 million to $91 million. This guidance assumes year-over-year subscription growth of 44% at the midpoint of our range, with approximately 28% organic subscription growth for the fourth quarter. As a reminder, the fourth quarter is typically seasonally slower for professional services revenues. Non-GAAP operating loss is expected to be approximately negative $3 million to negative $4 million and non-GAAP net loss attributed to nCino per share to be negative $0.04 to negative $0.05. This is based upon a weighted average of approximately $111 million basic shares outstanding. Note that we expect our non-GAAP operating loss in Q4 to be impacted by elevated payroll taxes, professional services fees and additional investments in marketing, technology and automation. For fiscal â23, we expect total revenues of $403 million to $404 million with subscription revenues of $342 million to $343 million. This full year guidance assumes the year-over-year subscription growth of 52% at the mid-point of our range, with approximately 28% organic subscription growth. For SimpleNexus we now expect full year subscription revenues of approximately $59 million versus the $60 million we previously expected for the year. We are improving our non-GAAP operating loss guidance for fiscal â23 to negative $7 million to negative $8 million. Non-GAAP net loss attributable to nCino per share is expected to be negative $0.15 to negative $0.17 per share, based on a weighted average of approximately $110.5 million shares outstanding. We are proud of the financial milestones we achieved in the third quarter, and remain focused on serving our customers and continuing to improve profitability. Yeah, thanks for taking my questions. Hi, Pierre, Josh and David! Iâve got a couple of questions. One might be a multipart question, so technically it could almost be three questions, but itâs good to see the profitability in the quarter at the operating line â operating profit line. The first question might be a kind of two-fold question or two part is, David on the $603.9 million for the current or 24 months RPO, can you kind of double-click in terms of the organic growth, and then the second part of this question is the SimpleNexus run rate. How do you think about that going into next year given the independent mortgage brokers and then the headwind there? And then I have a follow-up. Yes. On the RPO side, organically nCino grew total RPO by 18% and less than 24 months at 28% and the long term at 4%. And then on SimpleNexus run rate, we took our guidance down for SimpleNexus subscription revenues from $60 million to $59 million. So we expect to see a slight decline sequentially into Q4 for subscription revenues from SimpleNexus. I think itâs too early to look at next year given what weâre seeing in the mortgage market, itâs quite volatile right now. And so we are currently in the planning stage, and we will update you on SimpleNexus numbers for next year when we report numbers for Q4. Understood. And just a follow-up question. I donât know if this is â or who this is for, but Pierre, I really appreciate the, some of the perspective for next year, and you typically donât guide, but those are some good kind of guardrails for us. I think the 20% growth and potentially 10% EBIT margin, are any of those kind of run rate dynamics, or is that actually kind of like, that would be like for FY â24? And is it assuming that maybe you just, the seasonally strong 4Q bookings, it just doesnât play out like you typically would expect? Thank you. Yes, thanks Terry. You know itâs very early and weâre in the planning stages here. We look at SimpleNexus and Europe and those two combined make up 50% of our SAM. And if half of your market has got serious headwinds and youâve got FX on top of that, then you have to look at what that macro environment impact will be, so 50% of our SAM is impacted, as I mentioned. Our view was, weâre still in the planning stages. Weâve not finalized the plans. The fourth quarter looks great. Our pipelines are healthy. So the demand for the product is there. Deals are not going away, but they are just slower to close. We donât see a slowdown in the U.S., but we are picking up a sentiment of caution, which is different than Europe, where we clearly see a slower decision-making and just like in mortgage. So you know when you take all of that mixed bag and you put it in there, and we decided at this stage itâs wise to give an indication to our investors of how weâre thinking about next year, but its early stages in planning. Thank you. One moment for our next question. And our next question comes from the line of Brent Bracelin from Piper Sandler. Your question please. Thank you. Good afternoon. Despite the challenging macro here, it looks like organic CPR growth actually ticked up this quarter. Your Q4 guide here implies subscription growth organically will remain I think for the fourth consecutive quarter in this 28% range. So my question here is, what is resonating with the platform with banks at least willing to send money here? Is it cost savings thatâs primarily still enticing some banks to continue to lean in on the software stack? Just be curious to hear any sort of color commentary on whatâs resonating, just given the consistency that weâre seeing in subscription growth and a slight uptick in CRPO. Yes. First thing, in general Brent â thanks a lot for your question. The platform approach that we take and digital transformation in general are compelling value propositions, and itâs very interesting. The drivers of digital transformations, very slightly as you go around the world markets. As I mentioned before, when you look at Japan, thereâs some aging population and a reduction in the workforce. That is a massive issue for that economy. If you come down to Australia and New Zealand, itâs more of a modernization, profitability drive. If you go to Europe, itâs actually driven by compliance regulations, etc. and visibility into their lending practices as well as ESG. When you come to the U.S. and its profitability, market share drivers, efficiency, cost reductions and compliance. So it varies and the emphasis is just slightly different in different places. But digital transformation is here to stay. Banks know itâs not a decision anymore. Itâs actually an impediment, and then some are leaders and some are laggards. But thatâs what weâre seeing in the market in general. So the trend for us for the long-term future is fantastic and I see it in the pipeline. I just think we have to get through this slight sentiment of uncertainty as we get through the economic turmoil. Great! And then David, just a quick follow-up here. As you think about kind of 20% growth next year to 10% EBIT margins, to the extent that business maybe starts to pick up, would you look to invest towards the back half of the year in hiring capacity for the following year or how are you kind of thinking about the balancing kind of growth and profitability going forward? Yes. Our number one priority is growth. We are committed to that rule of 30 model, as weâre â because we are just starting planning now, weâve got an important Q4 in front of us, so itâs early in the process. But we are looking to make investments as the market improves. So if the mortgage market improves, if FX turns, that could change that, but for now weâre planning on 20% revenue growth, and that will be 20% subscription, 20% total and targeting that 10% margin target for the year. Thank you. One moment for our next question. And our next question comes from the line of Brad Sills from Bank of America. Your question please. Hi! This is Carly on for Brad. I just wanted to ask a follow-up on the macro. I guess itâs glad to hear that new expansion momentum remains strong. But just curious, in the U.S. I guess in particular, what have you been hearing from, you know your conversations with the CIOs with regard to their willingness to take on these, I guess new digital transformation projects for loan origination for the upcoming quarter and also on the upcoming year 2023? Yes. In the U.S. as Iâve mentioned, we still see strong demand. We see good pickup. You have to divide the U.S. in two segments. Thereâs a community regional, which had a little hangover from COVID because they were busy with PPP, plus coming back to the office, etc. We see some nice progression on that front and that market is performing well for us. On the enterprise side itâs more of a lumpy market, because its big deals and they only come so often. But if you look at overall the IT spend and the budgets weâve heard so far, it looks very positive. However, as I mentioned earlier, there is a slight sentiment of caution creeping in, where people just take a little bit longer to make a decision or scrutinize it a little bit deeper, but we feel very good about the direction of the business. I also firmly believe, in times like this that healthy companies with the benefit of being able to show they can be profitable and growing actually can keep our investment levels high on product as well as our sales and marketing. And as such, we are keeping our coverage of our SAM on a global basis in place. And as soon as these markets turn, nCino will be the brand that is known for their customer service, for the quality of innovation, as well as market coverage, and thatâs how we plan to proceed. Yes. Thank you for that, very helpful. I guess just a follow-up on the non-U.S. performance, I guess itâs really positive to see that you guys landed the deal with you know the Bank of New Zealand, and also the U.K. expansion deal seems impressive. But what are some other, I guess outperformance in Europe especially. Just any color that you could provide on the non-U.S. outperformance and any other like emerging areas, I guess? Yes. We see Asia Pacific is strong. South Africa is developing a nice market for us. Europe overall is going through a very difficult time. As you may know, the energy crisis or price increases there. The war of Ukraine is much of a real thing there. Itâs not far away from the home front when you talk to the people. So there clearly is a psychological impact. Thereâs a level of conservatism creeping in. Thereâs a different regulatory emphasis in Europe, as well as ESG has a bigger role, and so all of these different factors is putting Europe a bit more in a conservative mode as far as we can see. We have optimized our organization there. We maintain the investments to keep the market coverage as we see these deals slowly moving forward. So we are committed to the continent, and I am pleased weâve got marquee brand names there. And as that market loosens up, we will actually expand our footprint. Thank you. One moment for our next question. And our next question comes from the line of James Faucette from Morgan Stanley. Hey everyone! Itâs Michael [inaudible] for James. Thanks for taking our question. I appreciate there are a lot of moving pieces here, and youâre still a couple of months away in terms of your outlook formulation. But how should we sort of think about how conservative the directional commentary you provided on FY â24 was, particularly given it looks like loan growth is expected to decelerate from roughly 12% this year to almost half that next year? I just wanted to sort of pressure-test what youâre seeing in terms of the relationship to loan growth broadly. I can speak to that. This is Josh. Look, in most of the commercial accounts that we serve, new credit is actually not the majority of the volume that they do within the commercial bank. Most of the banks that we serve would see 50% to 75% of their loan volume would actually be renewals and modifications, and they also have to monitor that portfolio. Monitoring it is even more important with the challenging economic environment, because at the end of the day, regardless of the environment, these banks are trying to do their best to balance risk and reward while growing as much as they can. So even if growth does slow, theyâre going to want to run their banks efficiently. They are going to want to minimize risk where they can and have transparency into their portfolios and they are going to want to upside their reward as much as possible. So our nIQ offerings, pricing and profitability, our auto spreading offering obviously add a lot of value to those renewals and modifications and monitoring activities. Our portfolio analytics tool also helps with visibility into the portfolio. So weâre confident in the value that weâll provide even if loan volume does compress. Does that answer your question? Yes, thatâs great. Thanks Josh. Maybe just one other one on SimpleNexus. I think itâs pretty impressive, the sequential growth weâre seeing there, just given all the data points that weâre observing in the mortgage market sort of speak to the resilience of the model you guys have talked about previously. I just wanted to quickly hit on the composition of contract duration there. Is there any particular skew we should be aware of between one, two and three years? And then as a follow-up to that, you previously talked about you know elevated SimpleNexus churn in the back half. I was just curious how you know renewal discussions have been faring for SimpleNexus in this environment? Yes, what we see on SimpleNexus side, the contract duration, it really hasnât changed much. We see one to two years and it kind of averages about one and a half years, thatâs not really changed. We are seeing a higher level of churn though in the business on the IMB side. I mean itâs a little more volatile market for us. You know the refis happened, you know they corrected their cost structures. Now the originators are correcting their cost structures. So we would assume that churn will remain elevated for some time. Thank you. One moment for our next question. And our next question comes from the line of Alex Sklar from Raymond James. Your question, please. Great! David, some nice OpEx leverage in the model again this quarter. As your thinking about that 10% margin outlook for next year, how should we think about overall hiring plans? Do you think you can achieve kind of that level just through revenue growth and some mix improvements or is there any kind of re-evaluation on the hiring side? Yes, weâre still early in the planning process as we said earlier. Weâre looking at all costs, so itâs not just headcount. Weâre looking at non-headcount related costs as well. Weâve done a nice job this year by moderating spending and headcount ads for the year to come down to the level that weâre at. We will be looking to gain more efficiencies next year though too. Okay, great. And then Pierre or Josh, just in terms of overall deal sizes, I know youâve been talking about some of the larger digital transformation type deals that are in the pipeline, that Bank of New Zealand one. Itâs a nice one that just closed. How should we think about kind of the overall appetite though, particularly in the U.S. for some of those larger digital transformations versus kind of smaller, quicker ones. Each of our segments or deal sizes are in line with where theyâve been. As Pierre commented earlier about just the timing in the market, itâs less of a size impact than it is on a sales cycle duration impact from our perspective. Thank you. One moment for our next question. Our next question comes from the line of Bob Napoli from William Blair. Your question please. Hey! Good evening guys. This is a [inaudible] on for Bob. Our first question was on around gross margin. Could you kind of remind us and speak to your confidence of tracking towards your 70% gross margin target over time. Some of the drivers that we might see some margin expansion from. I think in the past youâve talked about international as being accretive to margins, that would be helpful. Thank you. Yes, we are still you know at kind of the long term model at 70%. We do have a product mix of benefit as we sell less to the community regional space. We have higher margin on that business, because we canât bundle sales force feed into that. Also as we expand our nIQ product offering, thatâs on AWS and that comes at a much higher gross margin. We will see efficiencies in support. Weâve made a lot of investments on the support side. And then on the professional services side you know we would expect to see margins continue to improve as we look out over the next couple years as well. Great, thank you. And just for the follow-up, could you kind of give an update on some of the competitive dynamics in retail I guess since the last quarter if theyâve changed at all meaningfully, as well as any update on cross sell of retail with commercial clients? Thanks. You know our retail count is up 30% year-over-year. The competitive landscape hasnât really changed there. Itâs a rip-and-replace market, weâre making good progress. I believe our platform story is superior and people like that. Itâs a client centric approach to banking. So we are on track there and meeting and beating our expectations. Deposit account opening is up 25% year-over-year. So that whole client centric platform story is playing well with us. We are finding our small business offerings to include a retail-like experience, as well as the low end of small business and all of those road maps, as people see what we are doing and how we are client focused helping the bank to actually get there and continue to invest in innovation. I think that innovation mindset is playing out in the market and is making us the preferred vendor, so I feel good about those new products. Also, we spoke about it in the prepared comments, but the validation points of the single platform deals, multiple community regional accounts, those are really nice accounts that came onboard with our known commercial solution, but they also rolled in retail, because they want to be able to connect with their customers, to take care of them really well across multiple products. From our perspective, thatâs a good validation point. Thank you. [Operator Instructions] And our next question comes from the line of Jason Adler from â Ader, pardon me, from MoffittNathanson SVB. Your question please. Great! Thanks. Hey guys! Thanks for taking my question. The first one is on the pipeline. Itâs like youâre kind of seeing customersâ maybe â I understand take a little bit longer to sign the deals. But do you expect when the pipeline starts to build and thereâs a little bit of a backup or a backlog in there, have you seen customers in the past be anticipatory on the other side? You know when things start to look a little bit better, do they go ahead and does the sales cycles start to actually contract or are these just conservative banks and they wait for the coast to be absolutely clear before they start resuming normal transactions again? You know I would say, remember we started the company in 2012, and so weâve been on a quite a phenomenal economic run from â12 to â22 in an interest rate environment that was very low with a roaring economy. In a previous life I have experienced going through â08, â09, â10, â11, â12 selling to banks, etc. and what youâll find is initially there will be a pause to get a full understanding of the market landscape, and then very quickly the ones who stop investing realize they are going to fall behind and then it comes back, okay. Iâve seen this in the financial crisis. I expect the same thing to happen right now, and people regret when they start putting these investments on hold, because they are competitors. People talk a lot about competition to banking coming from the outside banks and I remind bankers all the time, theyâve got a massive benefit over any other industry coming in there, because of the cost of funding, which they have to achieve deposits, and so your biggest competition in banking is another bank. And if the other bank in your town or your city is innovating and driving innovation through technology, then you better keep up. So I believe this is a short term pause year or a slowdown or a caution, which is normal, but it always comes back. Okay, all right great, thank you. And then just on the segment outlook for next year, what kind of you know mortgage banker or loan origination officer headcount growth is baked into that rule of 30? Do you expect things to get worse, better, stay the same? Yes, weâre â weâre at very early stages of planning. As you can imagine, weâre in beginning December, January. Weâre going to see how that market evolves over the next few months and we cannot comment yet whatâs going to happen to that mortgage market. You see how the market reacts just based on Colin â on Powellâs [ph] comments today. So we have to see how they develop before we finalize our plans. Thank you. One moment for our next question. And our next question comes from the line of Nick Altmann from Scotia Bank. Your question please. Great! Thanks guys. I just wanted to ask a question about the margins next year. You know over the past couple of quarters you guys have made comments around how the core nCino business is profitable today and investments in the SimpleNexus were really the drag on margins. So I guess, with that 10% target for next year in mind, is there any way to sort of parse out the margin profile between core nCino versus SimpleNexus? For next year the 10%, weâre going to look at the business as a whole and weâll make decisions as a company as a whole, not by segments. SimpleNexus did â is going to lose money this year and nCino is a profitable legacy business. If you take it like the next layer, I think SimpleNexus would have to get breakeven. I think we were greatly positioned there. We have the number one product in the space. The mortgage market will return, so we donât want to leave the market or any opportunity for the competition to catch up with us. So the idea is to maintain investments as we can and look as we start seeing the market return to normal, invest more money and just be better positioned coming out of this. Great! Thanks. And then just maybe one for Josh. Just given the challenging demand environment, how are you sort of thinking about making go-to-market tweaks heading to next year? Are there maybe plans in place to shift sales resources into the upsell side, you know given that new customer side of the equation might be a little bit more difficult or maybe kind of focused on smaller, higher velocity deals with shorter sales cycles. Just any commentary around you know go-to-market tweaks, maybe that youâre planning for heading into next year just given the macro backdrop would be really interesting. Thanks. Absolutely! And I would say â Iâll start with international. If you look at the proof points that we hit earlier, great wins in New Zealand, Go-Lives in Japan and Germany, expansion within London and Go-Lives in Canada. We are committed to the countries that weâre in. So weâre going to make sure weâre there to help those customers succeed and continue to â to continue running at the opportunity in those markets. Within the U.S., we donât do Hunter-Farmer from our perspective. It makes sense to have one account executive that covers the account for the long run, sets us up for better expansion and longer term relationships. So we donât intend to do any major changes there. Weâre going to play the long game with those accounts and ensure that just as they are going to want to come out of the other side of any headwinds stronger, weâll be there with them. Yes, I would like to emphasize that even as weâre going into a profitable growth company, our posture will always be to favor growth. We believe market share gains is important for our long term health, as well as long term profitability. When you look at our footprint in these strategic accounts, 23 of the top 50, a lot of those were conversations that have played out over time and weâre going to make sure weâre there for them. Thank you. One moment for our next question. And our next question comes from the line of Josh Beck from KeyBanc. Your question please. Thank you team for taking the question. You know I wanted just to ask a little bit the higher level about you know the visibility that you have going into the next fiscal year. Obviously you benefit from multiyear, time based milestone types of contracts. So I feel like in general that gives you pretty good visibility. However, you know the macro is very fluid. You certainly talked about European sales cycle, churn and SimpleNexus and FX. So I guess my question is like, as we go through Q4, you know what are going to be some of the really key items? You know is it U.S. sales cycles? Is it what happens with mortgage rates? You know what are going to be some of the key items that youâre tracking to kind of maybe get a little more precision about how fiscal Q2 could play out? I would say firstly, weâre in the planning stages and as you can imagine, we track all these various factors literally on a daily and a weekly basis, but the U.S. keep on performing. I would say, I would love to see FX stabilize and improve in our favor. That will be a great little bonus. Secondly, if we get any indication that mortgage rates just top out and start coming down, youâre going to see refi volumes go back up and youâre going to see people get like a new lease on life in the mortgage business and that will just rip that market open, okay? And then realizes those companies who then is going to expand by using tools like SimpleNexus will actually buy from stable financial companies thatâs profitable and has proven that they do their development and their work in the U.S. And then finally, I think the European story is a bit longer term. Weâve got some great customers there and great prospects, but I would say that is the third one that probably could be on the upside as that environment improves, but I canât see around the corners. Okay, thatâs very helpful. And then just in terms of maybe how banks are approaching, you know at least the next calendar year for them, obviously you know things like unemployment, things like credit losses have all been pretty actually encouraging thus far this calendar year. We heard from Credit Karma yesterday that banks to some degree, it may be the lower end of the market kind of near prime and below, are starting to be a little more conservative with respect to their marketing budgets, which are obviously very discretionary. So when they are maybe trying to be prepared you know letâs say, from whatever the scenarios are next year, you know where would you rank the priority around modernizing certainly some of their loan and deposit account systems, maybe versus other investment initiatives at some of the banks? As I mentioned earlier, digital transformation is an imperative long term, and most banks that we talk to do not ask us why we justify to do it anymore. They just want to know how to get there, because it is difficult you know to take out all the systems, change processes, etc. So I would say that the demand will be there, the question is whether they prioritize it. I would also tell you that whether we like it or not, the way to get inflation under control is at some point to get the labor market under control and that will impact the consumer, which will impact consumer credit. And we â I need to wait and see, because the banks we talk to will all tell you that they are well capitalized and that their credit risk is in good place, so it must be somebody else, which is of course interesting â somewhere, somebody is going to pay the price. We see some caution like I mentioned, a cautious sentiment, but I donât see in the U.S. necessarily a slowdown yet. And we just donât see a lot of banks telling us today that they want a more manual process or that they want less digital engagements with their customers. So the long run opportunity is still there. Thank you. One moment for our next question. [Operator Instructions] Our next question comes from the line of Saket Kalia from Barclays. Your question please. Hey guys! Thanks for taking my questions here and fitting me in. Pierre, maybe for you, great to see the Bank of New Zealand win. You know Iâm wondering, as youâve made more headway internationally, are you starting to see any of the changes? Are you starting to see any changes in the sales cycles and competitiveness of those deals? I guess Iâm just curious because youâve had multiple wins now in numerous international markets. So I wonder if itâs just getting easier and maybe what type of competition youâre seeing? Hey Saket! This is Josh. Yes, we see lots of banks that want to be early, but very few that are willing to be first. So getting that first press release out, getting that first Go-Live helps us go to that market with a story based on banks that look and feel a lot like our prospect being live and enjoying nCino. So it absolutely helps. Yes, and as you look at â you know these are critical mass countries, okay. If you look at New Zealand now, itâs got critical mass and then the deals come. If you look at Canada, you win one, two, three and then boom, weâve got the majority of the banks, okay. And the difference between the U.S. and internationally is I have to win each of those countries, because it only in country is referenceable. You know Australia and New Zealand may be slightly an exception, but the Germans want to see that other German banks are successful. Weâve got a great example, but now we have to get that market to accelerate. But the markets where we have that critical mass like New Zealand and Canada, absolutely. South Africa is coming around. Weâve got two, three customers there now. The U.K. is like that, but we would still like to see France, Spain, Germany, etc. Got it, got it, that makes sense. David, maybe for you for my follow-up. Can you just talk about the health of underlying bookings in the quarter? I mean clearly the visibility on revenue is super high. You gave a helpful framework for how to think about revenue growth for next year. But I'm curious, how are the leading indicators looking now qualitatively of course, for just revenue growth drivers in the future. Does it make sense? That does. And we do not disclose bookings, but I can talk about sales activity. So sales activity in the quarter despite Europe being slow, we had some FX impact and SimpleNexus, it was pretty much in line with our expectations. We talked about this earlier, about the year you know. We returned to a more normal cycle in terms of sales for the year, where the second half is higher-weighted than we saw over the last couple of years during COVID. So Q4 this year will be our biggest quarter of the year, but activity in the third quarter was pretty much in line with our expectations. Thank you. Our next question â just one moment for our final question for today. And our final question for today comes in the line of Charles Nabhan from Stephens. Your question please. Great! Good afternoon and thank you for fitting me in. So my question is on the impact of the elongated sales cycles and the delays in decision-making on your existing customer base. So I would imagine it's more pronounced on potentially new deals, but you know land and expand has been really the centerpiece of your strategy. So I'm curious, in terms of what you're seeing within your existing customer base, in terms of a reluctance or an acceptance to expand existing relationships. And I guess sort of as a follow-up to that, to put a finer point on it, I'm curious what that could potentially mean for net retention levels and ACV expansion going forward. Absolutely! And we do value those customer relationships and we're â in the nCino journey, we have seen headwinds. We find that those customer conversations are the easiest to keep going. So we continue to see ongoing success and proof points of our ability to cross-sell these solutions. We talked about adding retail and DAO into the $7 billion bank in Hawaii. We added CPP into a New Zealand enterprise account. This one we're particularly proud of. That was a competitive deal and a fantastic account. And we're also seeing, despite everything we discussed and reported, a good validation of SimpleNexus value in the bank market, right. Five cross-sales into nCino banks and credit unions and frankly, those are our larger deals that we would sell into IMBs. So we feel that is something that we'll continue to focus on, and we always aspire, because we deliver for our accounts to be continuing into those conversations from a position of success and partnership. Got it. And just as a quick follow-up, and I apologize if I missed this somewhere. But can you talk about LBA Ware and the impact or contribution that had to SimpleNexus, as well as what you're seeing in that business in terms of traction? Yes. I mean we've had some cross-sales into the base of nCino, but we don't have any more details. We're not going to break down details because that really is integrated into the SimpleNexus platform now and so that's all the detail we can give. And we also see that as a real differentiator for them. You look at six competitive takeaways. You look at the logos that they are adding, even this challenged marketing is because of that fantastic package, not just a POS but the full home buying journey and integrated tools like LBA Ware it helped them differentiate. Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pierre NaudÃ© for any further remarks. Thank you, and thank you everyone for attending today. Thank you for your support and we appreciate you attending today. You have a great day! Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day!
EarningCall_1874	Good afternoon, ladies and gentlemen! Welcome to the Empire, Second Quarter 2023 Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions]. A reminder that todayâs call is being recorded, Thursday, December 15, 2022. Thank you, Michelle. Good afternoon and thank you all for joining us for our second quarter conference call. Today we will provide summary comments on our results and then open the call for questions. This call is being recorded and the audio recording will be available on the Companyâs website at www.empireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Matt Reindel, Chief Financial Officer; Pierre St-Laurent, Chief Operating Officer. Todayâs discussion includes forward-looking statements. We caution that such statements are based on managementâs assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. Thanks Katie. Good afternoon everyone! Weâre pleased with our Q2 performance. Despite the challenging economic environment, we delivered strong financial performance with much improved same store sales, including our Full Service banners, continued improvement in our gross margins and strong execution against our strategic priorities. Today, Iâll focus on three topics: The IT Systems issues we have been dealing with, our Q2 results and the continued rollout of our Scene+ loyalty program. Let me start with the IT Systems issues. On Friday, November 4, we experienced some IT Systems issues related to a Cybersecurity Event. As soon as we became aware of the issue, we immediately implemented our incident response and business continuity plans, including the engagement of world-class experts. On the morning of Monday, November 7, we sent out a press release concerning our systems issues. Following the advice of our advisors, that release was as specific as we could make it due to security reasons. We are now in a position where we can provide more details, however, we will not elucidate further on this subject beyond these prepared remarks in our published disclosure. After discovering the intrusion we immediately began to isolate the source and shut down certain systems to prevent further spread and to protect our operations and our data. This ensured that we were able to run our stores with little disruption and with thankfully no interruption to our supply chain. But this event and our precautionary response did cause some temporary problems. For example, we shut down many of our pharmacy services, but fortunately only for four days, and some of our in store services were impacted for a very limited time in areas such as self-checkouts, gift cards and redemption of Scene+ points. Despite this, and thanks to the incredible people who run our business day in and day out, our customers would have noticed very few changes to their usual shopping experience. We have been able to fully serve customers for several weeks now and we are in a very good position to help customers celebrate the holidays. As you can appreciate, this has been a challenging time for our teams. There are a lot of workaround and in the moment solutions that carried us through, many built and implemented by our incredible frontline teams. Iâd like to thank all of our stakeholders, specifically our teammates, customers, franchisees, supplier partners and shareholders for their patients and understanding as we put this behind us. Matt will provide more details shortly, but this matter had almost no negative impact on our Q2 results, coming as late as it did in the quarter. Now on to our second quarter results. It was a good quarter. Our sales grew 4.4%, including same store sales of 3.1%, which was 440 basis points higher than last year and 270 basis points higher than Q1. As you would expect in this inflationary environment, our discount business is very strong with double digit same store sales. But what might surprise you is that our Full Service business is more than holding its own with solid and positive same store sales. Our full-service stores are satisfying the needs of the value seeking customer through an excellent assortment of Own Brands products, strong and relevant promotions, better personalized offers and great quality of service. We are seeing the positive impact that Scene+ has had on our Atlantic and Western Canada businesses already this quarter, with well over 1 million new members joining the program since we launched it. We continue to see higher transaction counts and a smaller basket size versus the prior year, but not back to pre-pandemic levels. And as customers look for value, itâs not surprising that promotional penetration increased this quarter, and we saw double digit sales growth in our own Own Brands portfolio. As well, our Longoâs banner performed very well this quarter, realizing its highest same store sales growth since our acquisition in spring 2021. Iâm pleased to see that both our discount and Own Brands businesses are outperforming the market and gaining share to deliver value to customers when they need it most. Weâve launched over 240 new private label skews in the past 12 months and have another 200 plus skews planned to launch in the next year to ensure we maintain this momentum. Overall, our e-commerce grew 4.6%. Our VoilÃ business continues to grow with comparable sales of 14.4%, driven by particularly strong growth in Toronto. VoilÃ is also performing very well in Quebec and is now materially larger than our prior IGA.net business year-over-year. Grocery Gateway is down 14.1% from last year, reflecting the lower performance of most ecommerce businesses post pandemic with the exception of VoilÃ . Having said that, Grocery Gatewayâs three year stacked sales growth is still 12.3%. Our gross margin performance continues to improve. Our margin rate grew 29 basis points and excluding fuel, it grew by 58 basis points. This growth was largely due to our Horizon initiatives, notably promotional optimization and Own Brands. Inflation actually hurt this margin number. If our full-service store can deliver positive same store sales and margin expansion as it did this quarter during these periods of high inflation, you can see why we are confident that our performance will be even stronger as inflation eases. Our team is executing consistently and weâve continued momentum as we head into the final two quarters of Horizon. Now, an update on our Scene+ loyalty program. We launched in Atlanta Canada in August, then Western Canada in September and most recently Ontario in November. We are extremely pleased with the rate the customers are signing up for the program and the week-over-week growth that we are seeing in our on-card sales penetration. Our launch in the west marked the first time that our discount banner FreshCo has had a loyalty program. Their on-card sales penetration of the gate has exceeded all of our targets. As FreshCo continues to build presence and brand equity in the market, particularly in the west, loyalty is a meaningful addition to provide our customers with even more value. Our most recent launch in Ontario was our biggest yet, including four banners and reaching over 5 million households. Although it is still early days, we have been very pleased with its performance and early customer traction. We will complete the Scene+ rollout across our remaining banners in early 2023 and look forward to offering our customers from coast-to-coast the exceptional value and benefits of this program. Before handing it over to Matt, I also want to mention that today we announced the sale of all of our retail fuel sites in Western Canada to Shell Canada for approximately $100 million. We expect this transaction to close in the first quarter of fiscal â24. In reviewing our portfolio, we determined that our fuel business in the west, which does not have a meaningful convenience store business, is not core to our offering. This sale allows us to realize the value of these assets while continuing to benefit from the foot traffic generated by these sites. Shell is a good partner and through their investment in these sites, we expect to see increased benefits to both their business and our nearby grocery stores. Thank you, Michael. Good afternoon, everyone. I will provide some additional color on our results, the Cybersecurity Event and then move on to your questions. Gross margin performance was strong again in Q2. If you remove the impact of fuel, our gross margin rates increased by 58% basis points. At the beginning of Horizon we said that the benefits would be back end loaded and we continue to see that come to fruition as the initiatives we have worked on over the past six years to Sunrises on Horizon continue to deliver expansion of both gross margin dollars and rate. As you know, we are focused on the financial sustainability of our growth initiatives. These initiatives have been embedded into the core of our business and we expect them to continue to generate growth in the years ahead. Our SG&A was 21.8% in Q2. Thatâs 59 basis points higher and $114 million higher than last year. However, it is closely aligned to our plan for fiscal â23, which includes continued investment in our key current and future initiatives. To achieve sustainable future sales, margin and profitability, we continue to invest in our growth initiatives, which requires an upfront investment in SG&A. Iâll take you through a few examples. First, our current Horizon initiatives. So since Q2 of last year we have put up 12 new FreshCo stores in the west, five new Farm Boy stores, significantly increased sales from our Toronto CFC, and started operations at our Montreal CFC. These initiatives immediately increase our SG&A dollars and our SG&A rates is adversely impacted until they ramp up the sales. Second, we are investing in new initiatives that will generate future growth such as personalization, loyalty and space productivity. These initiatives require up-front SG&A investment and will generate significant returns in the future. We are very excited for the benefits that they would deliver and weâve proven over the last six years that these type of investments provide great returns to our shareholders. Now, not all of the increase in SG&A is related to these initiatives. Like others, we are facing inflationary pressures on utility rates, particularly in Western Canada, as well as labor rates, transportation and supplies. In addition, our depreciation is higher than last year, mainly due to an increase in Rights of Use depreciation and IFRS 16, reflecting an increase in occupancy costs. But ultimately, the vast majority of the increase in SG&A is planned investments in current and future key initiatives and very much in line with our plans. Our equity earnings this quarter were higher than last year, mostly due to the higher Crombie earnings, partly offset by lower earnings from Genstar. These movements are due to the timing of property sales in both fiscal â23 and fiscal â22, which fluctuate throughout the year. So we are very pleased with our Q2 results, our earnings per share of $0.73 represents growth of 10.6% over the prior year. Our balance sheet remains strong. We renewed our credit facilities for both Sobeys and Empire for another five years, confirming our banking syndicates confidence in our business. This provides ample liquidity for our capital allocation strategy. Year-to-date we have invested $410 million in capital. This quarter we renovated 14 stores, opened our 45th Farm Boy and opened our 42nd FreshCo store in the west. With regards to our share buyback, as of this week we have repurchased approximately 4.4 million shares in fiscal â23 for a total consideration of $169 million. Now some further details on the Cybersecurity Event. As Michael noted, it had almost no impacts on our Q2 results as it happened two days before the end of the quarter. For the balance of the year, we are still assessing the impact, but we do not expect it to be material. Based on our latest assessment, we estimate that the total aggravation after insurance recoveries will be approximately $25 million. Due to the accounting rules for insurance claims, there may be some timing differences between when we record the costs and when we record the insurance recovery, that may impact Q3 and Q4. But at the end of the day, we are estimating a net impact of $25 million to net earnings. This estimate includes certain business losses such as shrink and additional labor, and then direct costs such as IT professional expenses and legal expenses. This is an early view and we will provide more details with our Q3 results. We consider this to be a one-time exceptional item and it will be excluded from our assessment of project Horizon. Looking forward operationally, our customer facing operations are back to normal. We continue to systematically bring our information and administrative systems back online in a controlled phased approach. This event has reinforced the importance of the investments already made in the Cybersecurity area, as well as our upcoming investments in our IT Systems and people. Well, we're now halfway through fiscal â23. It has been an eventful first half of the year with the launch of Scene+ and the sale of our western fuel assets, not to mention effectively managing through inflation, hurricane Fiona and this Cybersecurity Event, but regardless, we enter Q3 with strong momentum and we remain on track to hit our Horizon targets. And with that, I want to wish you all a safe and happy holiday season. Katie, I'll hand the call back to you for questions. Thank you. [Operator Instructions]. Please stand by while we compile the roaster. Your first question will come from George Doumet of Scotiabank. Please go ahead. Yeah hi! Good afternoon. I want to talk a little bit about the positive same store sales trend for our first Full Service business. If you can talk to maybe how the performance was intra-quarter and maybe some puts and takes from our areas of operation. So perhaps east versus west, maybe any color you can provide there. So I think, you know the key point for us really is the positive performance of Full Service with â I think it's very well known how well discount is performing, but we're really happy with Full Service. And the strength of Full Service again comes from within the store. So we talk about the economic conditions of consumers trading down. We see that, but we are dealing with that very well within the store, so within the Full Service store. With our great portfolio of Own Brands, our value pricing, so we're really catering well to that particular consumer. I would say our performance in Full Service is improving, certainly versus what we saw in Q1. So our momentum is improving, and then on a geographic basis we're seeing that pretty much across the board from Full Service across the country. Yeah, I pointed out in my script, but in you know the beginning part of the Atlantic and west maybe a tiny bit stronger and I think some of that was because of the same costs coming in, but it was pretty consistent across the quarter, maybe a little stronger like Matt said, as we got to the second half. But across the country there were no real â thereâs not really a â you know usually you do see some different results from the cross country was very consistent this quarter. Thank you! I appreciate it. Michael, last quarter you gave us some color on updates with I guess the negotiations with the vendors on kind of price increases. It looks like the CPI maybe has peaked, but I was just wondering if you can maybe give us an update there in terms of how it's going with vendors in on-price increases. So, good question. We continue to see price increase ask from vendors at the same level in both numbers and rate right now, so we're not seeing it slowing down. However, we are crossing high inflation period last year. So we hope that will start coming down in terms of rate, but we still have a lot of price increases. We have â our national sourcing team is doing an excellent job right now to challenge every single cost increases. We have to â it's a balance act between accepting cost increase when it justified and pushing back when we believed that that could hurt customer and it's not justified. So the team is extremely rigorous on that because we know we need to protect our relationship with vendors, at the same time we need to protect our customer. Thank you, and good afternoon. Very strong growth in the quarter at VoilÃ . Iâm wonder if you could just speak to the dynamics of the VoilÃ basket just on that broader assortment. What was the extent of the trade-down within the online basket. How are you managing it? And then, the follow up there would also be to speak to the delivery passes. How important are those in terms of managing the macro pressures and to the extent you're able or willing to comment, what is the penetration of those delivery passes or attachment of the delivery passes within the VoilÃ business. Well, with the inflation we're seeing you know a little bit of trading down, but not nearly as much in the online business as we would see in our bricks and mortar business. And what was the second part Kenric, what was the second part of your question? Just the delivery passes Michael. You know how important are they as a tool and what is the attachment of penetration. Yeah, I mean we do so many different things to be able to - and I'll give you some statistics in a second, to attract and retain customers. The delivery passes as you've seen we found is a good way to serve our customers and obviously they create a very sticky customer relationship. One, because if you're going to sign up for it, you really do love for the launch. Secondly, if youâve signed up you want to use it more, so I think we're good there. But you know, all these things together and Delivery Pass is only one of them. We're gaining about a 1000 new customers a week at VoilÃ . Our retention rates are extremely high, the highest I've ever seen in e-commerce. We have strong ratings on our products and we have more and more skews coming online as well Kenric, which is also helping. So that plus all the other good things at VoilÃ naturally has, but it's you know â people really like VoilÃ , the net promoter scores are off the chart and when they try it, they are hooked, so. But I think it's a good question by you. Like the delivery passes are a very good way to serve our customers and they create quite a good relationship. Thank you, Michael. I appreciate the color there. If I could just switch to Scene quickly. You know while your partner is carrying a lot of the costs associated with the transition, there appears to be a little to no dislocation from the early stages of transition. Can you speak to how reflective of reality that perception is and how you would expect that to evolve as the Scene offering ramps, both within the markets, it's already in, but also as a sort of ramps as a national program. The consumer response; the uncertainty, that sort of being a little court between two souls. The noise around a transitional loyalty programs that often create some dislocation. [Cross Talk] Okay. Yeah, I mean first of all this is a very â you should know that. Investors on the line is a very disciplined, process driven company you've now invested in. And we have been working on transition for years now and making plans challenging each other, and I got to point out that Pierre was especially the most challenging to all of us in terms of making sure that this was as simple a way to transition over to a new program, and is attractive a new program as we could possibly do. I'd say that we â August 11, that night when we changed over it was a long night for many of us because we want to make sure the cut over worked really well. That the stores were all ready and that all the offers were working and that worked Great Atlantic, it worked better in the west and it worked even better in Ontario. So the physical, the operational cutover was fantastic. And then the customer take-up, and we've gone through every scenario and every concern we had and tried to you know âdot every i and cross every tâ on this, and I think that our pre-work and the discipline we showed on that has really, really worked out well. And really there's not been too many hiccups. Our customers have been by every measurement have enjoyed the experience. We are tracking customer sentiment, both by survey, by social media, by sales, by every, by products, every way you can do this, and really it's exceeding all of my expectations for this program at this point. However, it is a decades long program and we're four months in. So a lot of the real strength of this program in terms of having even more loyal customers than we do today or being able to personalize offerings to customers or to be able to serve customers even better by understanding them better through the loyalty program with the use of data, are still to come. So right now we just want to throw them with the new program, give them really good offers, make it exciting, and by the way we have great partners and then we got another great partner who we are joining in this summer or next summer, so that's the way we're doing it. But you're absolutely right. Like transit any change in a retailer, especially a grocer, even in the store, when you move a product from one end to another, that causes dislocation to use your word. In this case, this is a change to customers and we treated them with respect, transparency, good communication and a great new program. Yeah, just to add to that financially. So you see the announcement that Scotiabank made in terms of how much partner support they provided to us through this transition. So to Michael's point, as we transition from one program to another, that was a significant investment in cost, in order to make sure that these transitions were effective. You will not see that impact in our P&L, because we are offsetting those investments dollar for dollar from our partner at Scotiabank. So thatâs the reason that we were able to negotiate the deal that we did, was to give us that strength of leverage during this transitional period. So it's â again, it talks to the strength of the deal and the quality of the program weâre putting in place. Yeah thanks, good afternoon. I wanted to follow up on your comments just with regards to the performance in the Full Service banners on same store sales. And you called out Longoâs specifically as sort of having, I think you said the best same-store sales result since you acquired it, and I know you don't give specifics, but hoping you could also just talk about Farm Boy and at least in the Ontario market, Sobeys, sort of the relative performance across the different banners. Yeah, your right. We don't we don't usually specify that. I gave a little bit of detail, which maybe now I won't give anymore, because then you are going to ask me more, but now I'm kidding Mark, by the way. I'd say that we're pleased with all our banners. It is Farm Boy being pretty well. It's full serve as any banner out there, and the way they conduct their business, always strong, but I called out Longoâs because that was the best quarter since they joined us. This is certainly not the best quarter of course since Farm Boy joined us, because they have been around a longer time and they put up big numbers and inflation does affect them a little bit. I think one of the great, the great success stories that we've had over the last â Pierre, you can correct me, but over the last few years is actually Sobeys Ontario, and the strength and the growth in Sobeys Ontario, both the brand strength, but especially the sales growth. So that's being good and we never talk about it, but a shout out to our teammates at Foodland and our franchisees of Foodland, which is a much stronger and larger banner than I think people know and that's partly my fault, because we don't talk about it all the time. It's just they are doing well. So Ontario market, which we really wanted to grow in, starting five and half years ago is everything's working for us right now. Much, much greater strength at Sobeys. The addition of partners like Farm Boy and Longoâs, VoilÃ and now we put the loyalty program on top of VoilÃ and with a great food land banner that we always have. So the other thing we've done too is, you know we â I think people, including us, don't talk enough about the renovations and the improvements to these key stores in the interior market and we are not done yet. But these renovations are really helping our sales and our attraction to the customers, and I didn't even mention FreshCo and FreshCo obviously its kicking it right now. You know their strongest quarters over the last couple of quarters in their history. Part of that is because people have turned to discount in the time of inflation, and part of it is just darn good execution and really and strength all over, but especially in the multicultural area. So you asked one question and you got like five answers, and Mark probably not the one you were looking for, but I hope that's helpful. It definitely was helpful and don't let a pesky little question from me to sway you from that type of disclosure. Yeah, and so I guess just following up then, on full service, do you have a view if you are gaining share within the full service channel. Iâll take this one. So obviously we won't disclose market share per banner and things like that, but the thing also we are looking at, it's their transaction count and I think we said that at the beginning where in all â our full service banner across the country, we are seeing growth in transaction counts. So customers continue to go in our stores, which is a good sign. Given some banner in the country are seeing higher household penetration. So that means for us that people like our Full Service store, they appreciate our promotion, we're doing our best with the tools we have. Own Brand is performing extremely well right now, so I think it's not true to say that customer are shifting for a format to another one. They are just shopping more store, but the good news is we remain extremely active in our Full Service banners. It's why we're very pleased with our results. Pierre, just to follow up on Mark's question, because that was a good answer, but would you say that, and seeing the statistics that you see, do you think we're losing, gaining or holding our market share in just Full Service versus Full Service? We are always comparing our number versus previous year. So if we look at our market share pre-pandemic versus now, we feel really good about our market share. Yeah. No, that definitely is helpful. I appreciate that Pierre, thank you. I guess one other one just to follow-up again also on Scene+, it would be helpful just to sort of understand maybe a little bit better about how that program is actually managed. I mean, are there sort of specific stewards, foreseen plus you know across Empire that coordinate across the banners or like is it within the banners, because you know there are sort of different approaches it seems like in the different banners. So just curious how that program actually gets managed and leveraged? Yeah, so I'll take that. Great question. So the Scene+ program is its own entity as an independent entity and then sat on top of that entity you have a management board that comprises each of the three owners of the program. So the entity runs, itâs provided guidance, itâs provided direction from that management oversight committee and that committee makes the key decisions on budgeting, points, strategy, communication, marketing and all of those types of things, so. Now that's on the Scene+ side. On internally on our side, so our marketing organization obviously has a very strong link to the Scene+ team, so that we can make sure that the program is delivering on our internal objectives in terms of marketing within our store and making sure that we have good sign-ups, making sure we have good points issuance, and ultimately good levels of points redemption. So it's a combination of the two that's the governance on top of Scene+ within our own internal resources, predominantly in marketing who really drive the program. No, that's super helpful, thank you. And yep, no, I'll get back in queue and if we don't speak again, Happy Holidays! Okay, thank you. On this gross margin performance, you know which was up about 60 basis points ex-fuel, you talked about promotional optimization and the contribution from Own Brands. Can you talk about like some of these other factors and how they would affect the margin? So for example, the trade down from conventional to discount. I would assume discount structurally has lower gross margin. Pharmacy, I would think in your pharmacy, particularly out west. I think all the Safewayâs at pharmacy front store would be very strong. And then Michael, you said something very interesting in your commentary that inflation is hurting your gross margin and what does that mean? Does that mean you're unable to pass it all through? So if you could just talk about some of these other factors. Now, I'll start and then I'm going to send it to Mark â to Matt on the other questions, just the one that I said. So, when we do our numbers and we take apart everything and take a look at it, that when we take out all the other factors and when we look and isolate what happened in terms of being able to pass on the cost and also looking at the margin and what happened there, we can't pass it all on, and we don't pass it all on. And so you start, you start knowing every quarter that our company, at least I can't speak for anybody else, that you're a little bit behind the eight ball in terms of inflation right away. And I think fortunately for us, that we had project Sunrise and we had project Horizon which we're finishing, not all of which will finish right at the year end. We have all these great initiatives and improvements in our stores that are going on, that can overcome that inflation headwind by being able to operate stores better. So that's why you know it wouldn't surprise many, but we pray for the end of inflation. One, the first reason is because it's just not good for Canadians or consumers. This is just a horrible thing. Nobody wants to pay more for anything and then weâre â then we feel that. And the second part is, it's not good for our business and so we want the end of inflation. But when you take it apart, inflation does not help our margin, it does not help our company. And then, to answer the second question Pete, you are absolutely right. So, you know when we look at our gross margin evolution, we're calling out what the two major drivers are, being promotional optimization in Own Brands, but there's many other drivers that impact margin and you're absolutely right. So the higher discount sales is diluted, because obviously FreshCo has a lower gross margin. Pharmacy is slightly higher, so that helps us. Longoâs is slightly higher, so that helps us. VoilÃ is slightly higher, so that helps us, and then we also have some hits from transportation costs that shrinked. So there's many other variables within that gross margin calculation, but two major points as we're seeing right now is from a business unit mix perspective. It's basically flat, which has not been the case in prior quarters, and all of these other factors that I just listed kind of net out. So the two major drivers for the quarter are the other two that we listed being promo optimization and Own Brands. Okay. And Matt, you obviously are seeing the asks from your CPG suppliers you know that I understand get implemented early in the New Year in February. So do you have a view on what retail food inflation, not necessarily for Empire, but just what the industry is going to be in the â you know in the first half of calendar 2023. You must have some number in mind that you use for budgeting and planning purposes. That's a great question that we had in mind all the time, but it's very tough to predict and the situation is very volatile still. But yes, because last year we had â at the same time of the year we had high inflation, we expect a lower inflation rate than the 10 weâre having right now. So probably a couple of points, maybe more lower than what with the IS [ph] we had this year. So because it's evaluating a lot, the last two quarters have been very intense. Last year, at the beginning of December, January, it's where we saw a big spike in the inflation. So by crossing it next year, we expect to see a lower inflation rate than the one we had to deal over the last couple of months. Okay, thanks Pierre. And then just my last question, just switching gears to VoilÃ in terms of the â just call it â24, look I know you're not providing any guidance, but is this the right framework to think about it in terms of the losses at VoilÃ âs that Toronto and Montreal will be ramping, so their losses will be less. But on the other hand, Calgary will be introduced. So that's â there will be losses associated with that and then they are just going to kind of net out each number and â like is that on a net basis? Is that all going to be a positive or a negative impact? Yeah. So your summation is right, we expect it to be positive for sure. The growth in sales, and as we've talked about before, that model is a top line driven model. So yes, CFC1 will continue to grow; CFC 2 will continue to grow and we'll have offsetting that the startup cost for CFC3, so yes, youâre absolutely right. It's a good try Peter. No, we're not going to comment on that at the moment. Well, we're still working on that part. Thanks and good afternoon, everyone. Just continuing the discussion around gross margin, where in the trajectory of project optimization do you think you are? I don't know Michael if you want to talk about it, and you know periods of hockey or innings of baseball or whichever sports analogy like, but really, how much more is there yet to come? You always know I'm going to answer it if youâre asking it that way. When you say that, you're talking about not just Horizon, but other initiatives that we're introducing and are going to be coming in the years ahead. Okay, thereâs some other ones that are really in the early innings that I'm pretty excited about too, but promo, what inning do you think weâre at promo Pierre. Promo optimization is, there's always continuous improvement that we will capture over time, but most of the benefit has been captured, because the system is â the tool is really â is well embedded in the daily work, but will continue because the data will continue to evolve. So the promo optimization tool will remain a good weapon for our team. So very tough to isolate promo optimization benefit going forward. We have benefit for sure versus having no tools. The team is working really well and improving their ability to play with that, but right now we need more than promo optimization, we need good professional judgment, because there's a lot of volatility in the market, itâs very tough. But the big benefit have been captured, but we expect to continue to capture additional benefit, because that tool is so well embedded and well managed and there's always opportunity to capture, to improve our performance. That's very helpful. So as I look â sort of as I look at the performance for Q2, really, so it's interesting. So the gross margin gains, it sounds as though a lot of that should be sustainable, putting aside the distortion from fuel. But yet, the OpEx rate is going up as you're investing. So is it best to kind of look at those two as one perhaps offsetting the other or you know how should we be thinking about the run rate on OpEx on a go forward basis? So, let me take that one. So I don't look at the two of them together. The growth â I think I've said many times that the gross margin is the true kind of test of our sustainable performance. We're very, very focused on gross margin rate, so you know the 58 basis points improvement is a really good testament to what we're doing there. On SG&A itâs a little bit of a different story, because you know SG&A rate is higher and as I said in my script, the dollars are higher and the vast majority of that is due to these strategic investments. We have a really very good track record of delivering great returns from these investments, so we're not going to back off on that. What we do have is strong cost control. We have to manage our costs. We're doing a good job of that. We have a good strategic sourcing team and a good real estate team that is really looking at controlling our costs and making sure that we have good cost control and a good lean mindset within the company. But the vast majority of the increase is investments that will pay dividend in the future. So we're not going to back off those investments. I think it's fair to say Matt that going forward we're looking at fewer, more impactful initiatives to drive sales and margin, and that SG&A is going to be more and more a focus of this company in the coming years as we â as we say we've been and as you know Irene as well as anyone, that this has been a company thatâs been in a six year churn rate [ph], which we're ending and that we're â where we had to invest probably more than others did in terms of getting ourselves to that place where we can really compete and put in everything we wanted to put in. That's not to say we won't invest anymore, but I think we're a much more â as we enter the seventh year of all these programs, we're a much more mature company that is going to be able to look operate and drive business through normal channels in the business and have fewer initiatives going on, while investing in our stores and our people and our supply chain more and more, but not so many of the sort of initiatives we needed to be competitive and to actually put in all the assets we have. So as we mature and we end this sort of six year turnaround period, the eye will turn to SG&A more and more and that's just to be more efficient. That I think we did a very good job in Sunrise in terms of being efficient, in terms of structure and headcount. This is to want to take some of the costs out that we've been spending in terms of on initiatives or on some consulting help that we had in other places. So that's what we're going to be even more disciplined on as we go forward over the next number of years. And what you'll see Irene from a rate perspective as these initiatives start to pay dividends in terms of increased sales, we'll get a better leverage of our sales and then you know to combine with what Michael said about cost control, that's when you'll start to see that SG&A rate start to come down. That's really helpful. And then just a couple of housekeeping questions if I might. The stores like that you sold in Western Canada, the gas stations, are those the ones who are co-located on the Safeway sites or are these others? Okay, that's great. Thank you. And then just thinking through the Cyber impact, that $25 million, I guess it'll kind of show up on most lines on the P&L in Q3 and Q4? Yeah, a good question. So it will appear in basically two lines, which is margin and SG&A. So if you think about the two buckets of costs that weâre incurring, one is business continuity type costs. So shrink a little bit of higher labor, but the shrink piece of it hits margin, and the second piece of it is direct costs. So professional fees, IT fees and they would hit SG&A. So it's going to hit both of those lines, margin and SG&A. Okay, and so I guess we'll just you know â and then you'll just call out sort of the aggregate impact and sort of what you think it was in each of those lines? Yeah, that's the intention. But as I said, it's â we'll have much more information by the time we get to Q3, but we will guide you accordingly. Hi! Thanks for taking my questions. On the $25 million impact related to the cyber-attack, that's net of insurance recoveries. But given that the insurance recoveries may or may not come in the upcoming quarter, can you also give us the gross amount or is that not available at this time? So no, we're not going to provide the gross amount, and you're right, because of the timing difference that might be applicable to us in Q3, we don't know the answer to that yet by the way. So there might be a timing difference between Q3 and Q4 in terms of when we can actually book the recovery. But no, we don't intend to share that the gross number. Okay. And just changing topics here, Michael you indicated that after this period of hind investment related to getting your business back up to the competitive level that it needs to be to compete on a sustainable basis with peers. You'll turn your eye more wholesomely at cost saving opportunities. Given that the first project Sunrise, you know there was a significant amount of cost taken out and I think you even exceeded the number that you initially provided. Wondering if you do see in the business more big buckets of cost opportunity in there and maybe if you can give us a sense of where management might be looking to get those types of savings? I think we'll give you that â that in the next six months will be able to give you more detail on that. My experience is you know you do what we did in Sunrise and then every five years or so, you got to go back and make sure that you're efficient and you're productive and that you're using resources in the best way and if you don't do that, you're silly. So it's time, it's time to do that. We're still going to invest in things that make us stronger and make our shareholders more money and thrill our customers. We're going to continue to invest in our stores and our supply chain. We have great people and we got to make sure that we are optimizing that, especially in new areas like data analytics or really strong growth kind of e-commerce businesses, but you have to go back and do that and one of the things Matt wanted to do when he was relatively early in his tenure is get to this. I mean he and some of the executives are looking at it and saying, âokay, what can we do to take,â and I don't think it's going to be a people exercise to be honest. It's going to be taking cost out of the business, where they can be taken out and really emphasizing that, even more than we do on a maybe in a pretty good cost control company over the last little while as you've seen. But now that we've got that turnaround behind us, now is the time to be mature and constantly be taking costs out and you know really great retailers grow their company and they watch their costs and we have to continue to do so. Okay, and just to follow up-on another question asked and Michael you already elaborated on this, but you know the balance between investment and that SG&A line, the sale line, you know a little bit hit to EBITDA here, and I think Matt referenced that weâll see some of that leverage starting to come through with some of those initiatives that you're working on, continue to and bear more fruit. So is this a short term timing lag or do you expect this this timing lag to persist between the hind SG&A and offsetting the good gross margin and top line performance? Well, I'll take a first pass of that. I mean, it's not something that you would expect to see a notable reduction in the next six months. I mean these projects are long-term projects when you think about Scene for example. This is a multi-year project. Same with space productivity, same with personalization. So we expect that to appear into the P&L gradually over time. I wouldn't expect to see a step change reduction. Yeah, these are long term projects. There's gradual improvement. By the way, I don't - I'm not apologizing at all for our SG&A, it didn't get away from us or anything like that. These are just, we are getting some projects are going to pay off for us in place. A couple of â some inflationary cost pressure that's affecting all retailers, let me assure you. And so I just think that there's two ways of doing this as you know Vishal better than anyone; grow your sales, take down your costs and that makes and thrill your customers at all time. It's a simple business and that's what we're going to be doing. Hi! Good afternoon. I wanted to follow-up on the OpEx. So one area that you didn't really bring out much was labor pressures and that's an area that a lot of, not just retailers, but companies in general are talking a lot about the labor wage rates, pressures, and how that's driving OpEx inflation, yet it doesn't seem like it's one of the more material ones for you. So I'm wondering, is this because of offset coming from efficiencies or are you â or is it just earlier on in the process with you and given the timing of some of your contract negotiations. Itâs a really good question. We are always looking at efficiency, so probably some improvement have been implemented. The other thing is we have to consider, yes, the rate is going up, the pressure on wages is going up. But at the same time we are facing labor shortages. So in some region of the country, we have empty roads that we are not able to full, especially in DC and in Quebec. So one in the other, it's probably a neutral right now, but yes, over time that could hurt us, but efficiency will offset those increased, that's our goal. Okay, that's interesting. Thank you, and then I noticed on the Cybersecurity impact, you called up the gross margin and the OpEx areas, but do you not expect it to have any impact, any notable impact on your revenue line? Yeah, some. Obviously there was a there was a period of time when we, our pharmacists were down for four days on an ongoing basis in Full Service during that period. Did we have the perfect mix of products in store? So it would be hard to say that it was zero, but it was, it was very, very limited I would say. Okay, and then the non-controlling interest, I'm always a little confused by how that line is working for you, but it was down 36%, which means some area of your business was down, Iâd assume in the profits as well. So yeah, I believe Longoâs and Farm Boy are in there and probably some of your franchises. So I was wondering what area was, is that â is being impacted, that's seeing their profit pushed down and showing up in a lower NCI. Yeah. Well, you know you look at our P&L in such great deal. Your exactly right, that line is lower. It's mainly due to our franchisees, so you're right, all those things are in that line. But again, if you think about the amount of profitability that were generated during COVID, so those levels of profitability are a little bit lower this year as we return to normal. So that's the main driver of that, is franchisee. Okay, that's helpful. And then just lastly, when you - in your outlook statement, it's pretty much the same as it was last quarter. I think you dropped the EPS number or EPS CAGR in the outlook statement, but you still have it there in the Horizon commentary where you're looking for your 15% CAGR. So is the difference between the two, is it simply just, you know you expect to hit your 15% EPS CAGR still, but driven by Horizon, but the Cybersecurity attack will prevent you from doing it on a consolidated basis, I guess. So, just to clarify, we haven't changed any of our outlook to do with Horizon. So we still expect to hear our Horizon numbers, including the 15% increase in in CAGR. What we have said, is that the net impact of the Cybersecurity Event, we will not include that in our assessment of Horizon. So as we said at the start Horizon, we would take significant onetime issues out. So we would not include anything to do with COVID in the final year or Longoâs, yeah exactly. So we wouldn't include Longoâs in that calculation and we will not include the cyber event. So yeah, but we have not changed the guidance on Horizon. We still expect to achieve that 15%. Okay, that's helpful. So you had a benefit in Q2 from the timing of some of the property sales at Crombie. Do you see this balancing out in the back half of the year or do you expect that there could be some benefits in the back half as well on a year-over-year basis? Yeah, I mean look, we do expect it to balance out the â itâs hard when we talk about these with Crombie and Genstar, because the nature of property sales is not as stable as food retailing would be. So it all depends on the timing of property sales, both this year and last year. Yes, in Q2 we benefited a little bit, so $0.04 I think versus last year, but on a year-to-date basis we're basically flat, and on a full year basis, it's going to be about the same. I mean we have a sustainable stream of revenue from these equity investments that we expect to continue, so. Hi! Good afternoon everyone! Hi Michael! In your opening remarks you mentioned that VoilÃ is gaining about a 1000 customers per week. I'm just curious to see, is that mainly coming from existing markets where VoilÃ has been available for some time or some of that game coming from VoilÃ expanding their service coverage. No, itâs I mean it's almost all coming, if not all coming from just new customers rather than regions. Weâve â I'm trying to think back on the quarter if we expanded into a couple of small regions, but mostly we â I don't think we did. So these are these are new customers in the same place. So for the most part what we would call, incomparable or same store, same customers regions, so that's what we're gaining. We're gaining real customers, not just regional expansion. Perfect! Okay, thatâs helpful. And then you also mentioned the VoilÃ retention rate is much better than the industry. Would you be able to share like what the industry average would be, so we can get a sense of just how good VoilÃ is performing. No, I think you can look it up, and you can also â I think others are disclosing it. So I read some of the reports from others, but I haven't â we took a look. We're pretty careful about what we say, so we're very sure weâre rights, but you ought to take a look at it yourself. Okay, no worries. And then in terms of the VoilÃ dilution for the quarter, I know you don't disclose it anymore, but just wondering, you know given the very strong sales results in the quarter, did the dilution perhaps come better than maybe your internal expectation during the quarter? Well, you're right on the first part, but we're not going to talk about quarterly dilution anymore. What I would say is, we're sticking with that same guidance that we've given earlier in the year that we expect the full year to dilution to be approximately the same as what we did last year, but we're not going to give quarterly numbers Chris. Okay, well, that's fine. And Matt. just in terms of the breakout in the cost related to Cybersecurity, would you be able to, just for modeling purposes, like how much of that would be in gross profit versus SG&A for next quarter? Is that roughly 50/50, just more for modeling purposes? So yeah, I realize you need it for modeling, but it's too early for us to really say on that. Like I said, if you know weâre still at the early stages of that assessment. So I'd rather not give a number at this point. Like I said, weâll give you much more clarity in Q3 when we know ourselves. So I'd rather do that than give you a number and have to change it. Okay, no, that's fine. And then my last question, just in terms of the proceeds from the fuel site sale. $100 million, I know is not very big number given the size of your company. Just wondering, you know what we use the proceeds for is going to be for a debt reduction, which will increase your capital return? Yeah. I mean, I think you're right; the $100 million in the scheme of things for Empire is relatively small. We said we're just going to use it for general, corporate purposes, so this which is the standard answer. But what that basically means is we're not going to specifically use that $100 million in the next quarter for x and y, it will just go into the general office. And then, I just maybe want to confirm also the sites that you have out east, they are considered a core for now, right? Is that fair? Thatâs a very different proposition in terms of how it's related to our businesses and how it's tied with our businesses. So we have no current intention of selling those assets. At this time there are no further questions. I would like to turn the call back to Katie Brine for any closing remarks. Thank you, Michelle. We appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by phone or email. We look forward to having you join us for our third quarter, fiscal 2023 conference call on March 16th. Talk soon. Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for your participating and ask you to please disconnect your lines.
EarningCall_1875	Good morning, everyone, and thanks for dialing into our quarterly conversation here. And I want to thank Dan for being our host today. I'll start off with a brief summary of where we're at, and then I'll hand it off to Dan to curate some questions from you. For those of you who haven't used the platform, feel free to submit questions ahead of the call, and we will be sure to grab them. So we appreciate the participation and engagement from all of our investors, especially people who submitted the questions via SA [ph] technology. We ended the calendar year -- or we're closing in on the end of the calendar year 2022. And I couldn't help but think that Affirm, where we were just two years ago. When we completed our IPO in January of 2021, we had a small fraction of the scale that we have today. We have more than tripled our active consumers to $14.7 million, with roughly 50% growth in frequency and nearly tripled our trailing 12-month GMV, growing it by 187%. Not only have we scaled our platform, but we've more than doubled our revenue and nearly tripled our revenue less transaction costs, growing it by 195% to $732 million. Affirm is continuing to take share, and we are well positioned for the future as a category leader in honest finance. For consumers, we responsibly increase their purchasing power and enable them to purchase the things they want and need, without late fees or hidden charges or deceptive financial products. For merchants, we enable them to convert their sales that otherwise would not happen. And amidst an increasingly volatile macroeconomic backdrop, our mission has never been more important, as we help consumers and merchants navigate inflation and the macroeconomic backdrop. Credit card debt recently increased to pre-pandemic levels and the majority of our outstanding credit card debt comes from revolvers that don't pay off their balances in full each month. With Affirm, you can't revolve and you never owe a penny more than you agree to upfront. Thanks, Michael. So with that, we'll now begin the Q&A session. Our first question is, Michael, what do you say differentiates Affirm versus other buy-now-pay-later peers? Yes. It's a -- to the question that we get a lot, I think, the first and most important thing is that we're a real technology company. And because of that technology power that we have, we're able to build a broad set of products that can address every transaction type, whether that's online or offline, whether that's low AOV, average order value, or high average order value, 0% in interest bearing. And we can do that without charging any late fees, because we have really strong underwriting capabilities. This is differentiated from both the traditional financial institutions and the BNPL companies. Thank you. That's very helpful, Michael. And now there's a question from a retail investor, via Sky Technologies [ph]. So, Corbit K [ph] asks, what are the current short-term and long-term goals for Affirm? So our long-term goals remain the same. The vision at Affirm, our mission is to build on those financial products that improve lives. And I always talk about how broad that scope is. Our vision here is to keep working on any and all financial products that are honest and straightforward for consumers, transparent and that ultimately improve lives. And that's not just good for the world, it's good for business, too. We've demonstrated that when you engage consumers with honest financial products that increases their frequency of the product and allows you to earn very healthy margins. In the near term, our goal is to achieve adjusted operating income profitability. We've talked to the market about doing that by July of 2023. And to do that, we got to scale up the existing relationships that we have and continue to add new ones. And then if you think about the financial goals longer term, we believe that the category should have very strong penetration across all of e-com and offline purchases. And so we need to continue to scale into that category that we think will be very big, and we need to deliver the unit economics that we've signed up for. And we talk about our unit economics. We talk about 3% to 4% ramping less transaction costs as a percentage of GMV. And lastly, we need to show operating leverage. That is, we need to be able to control our fixed cost investments slower than the growth in revenue. Okay. Helpful. Thank you. And we have another question that has come from Ethan H [ph] who asks, what Affirmâs plans for profitability moving forward? Yes. So as I discussed, I think, the most important thing is to get there by next year and we talked about achieving that on a sustainable basis. We've achieved profitability sporadically, meaning there's been a few quarters of profitability over the past several years. And we really hope to do that on a sustainable basis, meaning on an ongoing basis by the end of this fiscal year end. And to do that, that means the unit economics in the business, our revenue less transaction costs needs to be bigger than the rest of our operating costs. Last quarter, we had about $182 million in revenue less transaction costs to purchase about $200 million in the other adjusted costs. So you see there, there's about an $18 million gap. You know our job at Affirm is to continue to scale the units and how much margin needs those units has and have that scale faster than the operating expense investments that we make. And we make those operating expense investments in order to scale the enterprise, right? So a lot of what we spend money on is the human capital to build these honest financial products, to address the merchant and consumer needs. And that capital that we put to work in building great technology products is what enables our scale in the long run. So if we think about it, we're going to moderate in pace our investments in the scaling investments consistent with the economic output of the business our revenue less transaction costs. So the TLDR [ph] there is just grow faster than we're investing. Got it. Thank you. Very helpful. And can you maybe discuss how you manage your delinquencies and funding costs as rates continue to rise? Yes. The most important thing for investors is that our level of delinquencies and the level of credit loss in the business is a choice point. And we've been saying that for a long time now, and I think some folks have a hard time really getting their hedge on it. Let me spend a few minutes on what that means. When we think about our business model, it's very unlike traditional financial institutions. A traditional financial institution might think about extending credit for five or maybe even 30 years. The firm is extending credit for what amounts to about five months of weighted average life. So we make very short-term duration loans in the scheme of the financial services industry. And we do so with lots and lots of frequency. So we look at tens of millions of transactions every month and every quarter. Excuse me -- feedback area. We look at tens of millions of transactions. And what that allows us to do is sort the risk. We talk about our credit underwriting. What it really means is that we're sorting these transactions by their risk score. And the better we can sort that risk, the better off we are. And if we were approving only a handful of transactions with very long duration is very hard to do this. But because we're approving or underwriting millions of transactions and we do so with very short duration, it means that we can be very reactive. I talked about it as being proactive and reactive. So we can proactively predict the level of loss in the group of transactions. But just as strong as that is because of the duration and structural advantage we have, we can be very reactive. And so as the economy ebbs and flows, as unemployment ticks up or inflationary pressures, the pressures on household cash flow, we're able to change the underwriting cost of the business very, very quickly. And that stands apart from really any traditional financial institution who's sitting back and using legacy scoring systems like FICO that don't move anywhere near as quickly or adapt to the environment as our internal scoring does. And do so with multiple years' worth of weighted average life, meaning that they are taking on a lot more risk on any given credit approval decision than we are. The position, we have at the point of sale allows us to approve and deny every transaction, that's very different than any other lender out there. Got it. That makes a lot of sense. And another question from investor Matthew asks, what is the way Affirm makes money when you don't charge interest on payments? Thank you, Matthew, for the question. We have two groups of products at Affirm. We have our 0% APR products, which I think you're asking about, which do not charge interest. When we say we didn't charge interest, really, we don't charge the consumer anything. There's no interest. There's no late fees. There's no account activation fees. There's no fees of any kind for the consumer on our 0% loans. That includes both our Pay in 4 products and our longer-duration 0% loans like you might find, for example, at some of our largest merchant partners. For the 0% APR loans, we earn a merchant fee. And so the merchant pays us a fee. We call that the merchant discount rate in exchange for facilitating the transaction with the bank. For â that's roughly â that's a big part of our business, and it's been historically a big part of our business. It's not the exclusive part of our business, but we also have interest-bearing loans and interest-bearing loans are similarly no late fees and no deferred interest, but do charge the consumer, example, interest capped interest amount at the beginning of a transaction. And for those products, we earn interest income similar to the revenue models that you might see for traditional financial institution. So we're very proud that we have over 60% of US e-commerce covered with some relationship with the Affirm that's anchored with some of the largest merchants in the world like Amazon and Walmart, but also merchants like Target and of course, our partnerships with platforms like Shopify and BigCommerce give us access to wide sets of small merchants as well. And because of that strong penetration across all of e-commerce, our focus is as much on growing share with those existing partners. And one of the questions that we get a lot is just what is the maturity or what inning are we in with these partners? And I always talked about it is we're in the very early innings. A year ago, I told folks that we were still in the national anthem â and I think we're past the national anthem, but we're still in the very early innings. Because the â as you could see with the level of integration we have with some of our partners, it just takes a lot of time. These are not the kind of relationships where you flip a switch and get to full penetration overnight. These things take time to build into scale. And so we think we have a lot of runway left to continue to scale these partnerships, and help the industry achieve its penetration that we think it should have as a percentage of US e-commerce. We've talked about that being in the 10% to 20% range is very widely across the industry, but we know we have a long way to go from here to there. And given our strong relationships we have with these enterprise partners, we think that's a reasonable level for the industry to get to overall. Thanks for the question, Adam. I am personally very pleased with the level of engagement and the progress that we've made in the Amazon integration. And as I said just now, I think we have a lot of work left to do just in the US. However, we recently expanded our partnership into Canada and excited to support that business and their consumers all the way up into Canada. And we would consider any additional geographies as a great way to expand the partnership, although no specific plans to talk about. Got it. And what about some of the other -- can we touch a little bit on the other larger partnerships like Shopify. Could you discuss the relationship with Shopify? How it's ramping? And what is the future of this relationship? I'm very -- I continue to be really impressed with the depth of technical integration that we have with the Shopify team. We have an aligned set of interest in expanding Shop Pay Installments on the Shopify platform and have a really deep technical integration with the team. We added in May, a product that we call Adaptive Checkout, which brings the right kind of financial products to really any transaction type. So, you can bring the interest-bearing or paying for transactions to the merchant with really no lift on the merchant side. And so, it's a small example of the continued work that we have in front of us. This -- I think that relationship is slightly more mature, just because we've had a little bit more time at it. But again, it's still -- we still have a lot of runway left to further optimize the relationship. And when I say that, I don't mean the relationship, I should say the integration, the way in which our product shows up for merchants and the features that we're able to deliver. And lastly on that topic, like on the big partnerships, like howâs the partnership with Amazon going right now? What is most exciting for you about it? I think the most exciting is just the sheer scale of working with somebody like Amazon. They have such incredible scale behind them. And so when they point at any problem and put any effort behind it, it really is needle moving. And it's fun to work at that kind of scale with the same speed and pace that you have at smaller enterprises. And so, that makes it very fun. That means we can touch a lot of consumers' lives. We can really engage in a lot more transaction volume than we could have really otherwise before. When you're someone who's as big as I think roughly a third of US e-commerce, obviously, touching that is pretty massive in everything that we do. And maybe just qualitatively, I think the most exciting thing is just how aligned the two companies appear to be. When I talk to my counterparts over there, we have the shared vision for what we're trying to do. And it starts with the consumer, and consumer orientation is pretty rare in financial services. There's a reason why we think we're quite differentiated on things like our Net Promoter Score. And these are things that Amazon has cared a lot about. And that kind of shared in aligned vision for what we want to build is pretty rare and it's fun to build something at scale with real technologists who have that aligned consumer orientation. And if you kind of reflect back over the last few years, like what have you learned about converting consumers on checkout from what happened in the last few years. And what are the most important things that you think are needed to get conversion and how do you win versus some of the competitors out there? I'm smiling quite a bit because I feel like that's one of the true secret sauces at a firm is how you â how you actually drive the right level of positive credit selection, finding the right risk and still driving high levels of conversion. And if it were really simple and straightforward and easy, a lot of people would be able to do it. I really think that our product is differentiated because we can do that, and it's a really, really difficult problem to solve. And it's enabled by super deep integrations with the merchants, where we can see SKUs, and we can even sometimes see the channel that people come in on, and we have merchant-specific models that help us think about risk and conversion at that merchant site, enabled by some of the world's best technology. And then you bring to it a broad set of products that are built to handle multiple transaction types and you find ways to say yes to the consumer, even in these difficult macroeconomic times, you find a way to get to that approval. And when you put all that together, you just really stand out and apart from pretty much anybody else trying to do this in the space. That's very helpful. And actually, one buy now pay later operator told me that if used by buy now pay later is a countercyclical tool, i.e., that the merchants might be willing to pay higher rates to make conversions in rough times, have you seen any signs of this phenomenon at all? Yes. So I think we have a real live example of it back during COVID. And I'm going to wind the clock back because I think the history is -- it's actually kind of interesting how different it played out than we thought it was going to. But if you go back to March of 2020, when the shelter in place orders first went down, the US economy was staring down a massive surge in employment that was going to happen overnight. And of course, because we take risk management very seriously, the first thing we did was did what we needed to do with respect to credit, that's tightening approvals, making sure that we have our credit models up to date and the like. And I went to our merchant partners. And they were facing a similar set of shocks to their business models, where if you were an omni-channel merchant, you had online and offline business, your offline channel, your brick-and-mortar channel was facing a shutdown. And your whole orientation flipped on you very, very quickly. And the conversations that we had with merchants back then, which I admit weren't easy, because everybody was quite stressed about where the macroeconomic environment was going. But the conversations in those moments of stress, really, they were distilling because there logic came to play out, which is emerging partners I talked to said, I need to run my business for cash. So anything that drives incremental sales for me, that is still cash flow positive, I need to do. And what that allowed us to do is to continue to build up additional merchant fees in order to keep approvals as high as possible during this time. And you saw that actually in our data. If you look at our earnings supplement, you see the merchant fees going back to the period right after COVID took a big step up. Now we normalize that very quickly because the way a firm operates, we did that for a few months and we quickly realized that the macroeconomic environment wasn't going to be as bad as we thought, and we weren't going to take advantage of that. And I think we're in a similar position today. So while we do have, we believe pricing power with merchants, we don't intend to use it all the time. And pricing power here just means we have the ability to negotiate higher prices with merchants. And we have that ability to do so. It doesn't mean we're going to, in all cases, and it doesn't mean we need to do it yet. We've talked a lot about our long-term economic model in getting 3% to 4% revenue less transaction cost. And the question we get a lot is like, you've been above 3% to 4%. Does that mean you're going to be above always and I'm always add in that, that now 3% to 4% is the right range for this business. And if we felt like the macroeconomic conditions required higher merchant pricing to achieve that, we'll pull the lever. And if we don't, then we wonât. The other thing about the countercyclicality of the business is really important from our perspective, is consumers need this product more now, and they will need it more during a recession. And yet the ability to differentiate risk, it's harder in that time. And so think about it as the product is more valuable and the challenge for us is also more difficult. And so we believe what that means is that there's an even bigger prize to be won for those who can successfully navigate the macroeconomic conditions ahead of us. Good, thoughtful answer. Thank you. And can we maybe touch on pricing, Michael? So interest-bearing loans, can you please explain how they work and how much leverage you have to potentially raise pricing? Yes. So let me first talk a little bit about how our interest-bearing loans work. So as I talked about their -- the business model is similar to what you might see, but the way we deliver it is very differentiated. So we charge consumers a simple interest that is capped. So what that means is when you check out, you're seeing the total amount of potential interest charge that you could have. And if you prepay a loan, you pay nothing or you pay only the portion which you borrowed for. And if you're late or you miss a payment, there's no additional interest too. And so because of that, these are not revolving interest loans and consumers think less of the APR and more of the dollars that we're charging. And that's a huge differentiated component of these installment -- closed-end installment loans. It's very unlike how people think about, say, a mortgage rate or even the APR on a credit card. And as a result, what we're really doing is trying to hit a monthly payment amount and then a monthly interest charge or a total interest charge. That's the number the consumer is a lot more sensitive to. And if you think about the kind of transaction sizes that we work with, whether that's a $300 transaction for six months -- and you think about what a few points of APR embedded into a multi-payment amount shakes out for that consumer. It ends up being pretty low. And as a result, we know that the consumer doesn't have a great deal of sensitivity to that. And that's really because the APR or the interest rate isn't really the cost that most consumers see whenever they think about using a firm in comparison to credit cards. They think about the actual dollar amount because we're delivering that promise to that. That's the most you can ever eventually pay. And so today, we have the ability to go up to 36% APRs, and I think our average in the portfolio is in the high 20s. And so we have a lot of room to go for a pricing mechanism that there's not a lot of elasticity to. And so while we're going to be thoughtful about how we do it and make sure we protect the consumer, we do feel like given the rise in credit card APR, there's room to move on rates, and that should accrete to us as a result. That's actually a really interesting analysis. Can you discuss the various sources of funding on your platform? And what is their state right now? Are they trending? Yes. The word of the day is volatility for those investors on the line, I'm sure you feel that way in the equity markets, they're also volatile in the debt markets. And I think that's just the nature of the broad macroeconomic uncertainty that exists. If you look at the way the equity and debt markets react to really any macroeconomic news, it's quite remarkable. You have a -- you have a jobs report come out, which is, in a normal times, really good news that we have good, strong job growth and great employment. And its really bad news for the macroeconomist because we're worried about the impact it might have on inflation. And as you -- I talked about it as being a really tightly wound spring where really any piece of news can send it off in any one direction. And it will just swing back and forth very, very quickly. I believe the forward curve for interest rates, which just measures the future cost -- the market expectation and future cost of money moved something like 20 or 30 basis points, like two days after our earnings call in November. And that's like an incredible shift to happen over a month, let alone to happen over days. And that is the environment that we're in. It's just very, very volatile. And it impacts the three funding channels we have differently. So, we have our forward flow program in which we sell whole loans to counterparties. They take on all the risk; we service the loans. It's very balance sheet efficient because we don't have any capital out. And yet we do have to deliver a return to the partner. And so our return is lower on a percentage of GMV basis. We then have our asset-backed security channel, our ABS channel, where we create securities for investors that really structure a low-risk return profile that allows us to deliver a pool loans into a funding mechanism of really low cost. And then we have our warehouse lines. These are on-balance sheet funding channels that are bank lines of credit. And these are the least equity efficient and the most floating rate. So, they tend to have the most exposure to the volatility in the rate environment, but it's also the most in our control. And so what's happened over the past three to four months is we've reduced the expectation implied in our guidance for forward flow and ABS deals and increased the amount of warehouse capacity that we think we're going to use. And the great news is that our capital team has done a great job in funding the business. We feel very confident in our ability to continue to fund the business despite all of this volatility because we have the warehouse capacity. And yet the warehouse capacity is being used because the other channels are quite dislocated. That being said, it changes a lot. And I think if you test me in a week or two, you're going to get a different answer. So, in earlier this fiscal year, we opened up and upsized one of our earlier -- this calendar year ABS sales or 2022 deal. And that deal was really well received by the market and there's a lot of engagement, and we executed really well. It was a few short months later when the market was a lot less constructive with us. And nothing changed in a firm between those two data points, but the macroeconomic environment did shift. And so I think it's going to keep shifting. And our job is just to navigate around all of that kind of uncertain and unpredictable macroeconomic environment. Makes sense. And if you fast-forward two to three years and you think about a firm, what do you think -- what type of loan products do you think will be the most popular? And why? We love all of our children. There's not a favorite for us. And this is a really, I think, important concept that affirm. The pieces all work together in a way that's really important. We get better economics out of our interest-bearing loans and the merchants don't have to sign up for big merchant discount rates. And so as a result, the largest enterprises want to adopt those products. That gives us a great way to engage consumers and on its financial product. But short-term loans like our paid-for offerings, they allow us to drive a lot more engagement with users and keep them active on our platform in a way that's safe and good for the consumer and us. And our longer-term zero loans are the best marketing tool that a merchant can have. The dollar -- for the buck in a long-term 0% loan for higher AOE purchases just can't be matched. And these three pieces all work together. And so the popularity of them is to make sure of the merchanting question and the situation that the consumer might find themselves in, but all three are really important. Now that being said, we are right now seeing a higher mix of our interest-bearing loans as we continue to scale our largest enterprise partners who, as I said, do benefit from the economic arrangement that we have with the consumer. And that will continue to grow in the P&L. But we really believe that all three products are an incredibly important part of the total picture. And it's really difficult to pick them apart. They really work together as a complete set. And that is one of the things that's separate between us and a lot of the other buy now pay later companies. Many of them have the pay and for model. They don't have the other products. And we believe that you've got to put them all together to serve all transaction types to touch all consumers and all merchants. Got it. And if you kind of reflect back on the last 12 months, maybe a little longer, what do you think you didn't think about, say, pre-COVID about the business or even during COVID, like how is it prior -- are you surprised by the impact of the higher rates on the business? Is this something you kind of anticipated -- like this is an unprecedented time, I guess, between COVID and now, and I just want to hear when you go back home, how do you think about this every day? We do a little bit of backward looking. But one of the things that Max likes to say is we're from the future. And so we definitely spend more time thinking about the future. But that being said, things that I'm really impressed with is just how quickly we've grown our user and engagement on the platform. We talk a lot about internally, we talk about the network needs reach and frequency. And if you think about the business, we operate a network business and networks need lots of touch points and they need lots of engagement for each touch point. And I could not be more proud of the way in which we've scaled active users to a little under $15 million on the platform and frequency up to now 3.3 transactions per active user. And that 3.3 it's a bit concealing in the sense that the most recent users haven't had a chance to repeat yet. And so we expect that to continue to grow. And that is -- those two stacks, $3.3 million and $15 million are substantially higher than what we were just a year ago or two years ago. And that's a reflection of our strategy really working and working with the largest enterprises and the largest platforms to deliver a wide set of products. And I think that just can't be overstated. When we were going public, some folks gave us a lot pushback around the concentration risk we had with who has been our largest partner and that was Peloton and the pushback was around that concentration risk. And that went from being a substantial portion of our business, and really, as they went to we -- to now it's low single digits in terms of the total portion of our business. And that's because we've grown away from them and grown the platform kind of comprehensively. And that is a pretty remarkable thing to have achieved. I think that specifically with respect to rates, I feel really, really good about, how well we've predicted what the rates will do to our business. Back in February, which is way before the rate curve started moving as much as it did, we gave the market a framework for how to think about the impact of rates on our business in our February earnings call. And we've come in a little bit better than the framework we've given folks, but it's been a really good way to think about it. In the super near term, there's less impact, because we have less exposure to floating rate debt. But in the longer term, we have some gross exposure that it's our job to mitigate. And I feel really proud about our ability to manage and navigate through that. And yet the challenges are by no means behind us. We still have a lot of work to do to continue to navigate what are, like you say, unprecedented economic times. Thank you. That's good reflection. And let's end with a few final questions from Say Technology. So Nicholas P asks, as a firm considered a stock buyback is Max, buying the stock and stock trading under $13 is about 70% below IPO price by the shares here in resale when the firm is over $50 per share. Yes. So let me start with making sure every investor, especially those who are here on the Say Technology platforms, understand that we care an awful lot about the shareholder. We are all very aligned in trying to deliver total shareholder return. That's really important to all of us. It's important to all of us because that's how we're wired. But it's also important to us, because that's where we have a significant portion of our personal accounts. I think Max has about a 10% economic stake in a firm. So there's very few people who are less exposed than he is. In fact, I'm positive that he's the most exposed person to the share price. And so, he has a lot of reasons to care, and that's true for our whole management team, where we care about the delivering shareholder return. That being said, we are very long term in how we think about it. We are building an enterprise here that we believe has substantial value. And what we don't want to do is, do anything short term that jeopardize that. So, when we think about commitments like we have to get into profitability, those have to be viewed to the context of what's healthy for building a large valuable enterprise, not trying to achieve some short-term trading value. And I know that can be disappointing to folks, but what that means is that, we're trying to build something that should be very rewarding to shareholders over the long term. And we've said that for a very long time. That's not a recent statement from us. That's the statement we've made all throughout the time when we were private and even early in our public time periods. And so, as we think about things like, stock buybacks and other uses of capital, we have to evaluate that use of capital against the use of capital and scaling our enterprise. And we ultimately conclude we can create more shareholder value by continuing to scale the enterprise than we can in the short-term action of just buying back stock. And that's where we're going to remain focused. All that said, of course, we look at it, we evaluate that all the time. We're looking at where the stock is at. And we're looking at how much capital we have. And we think our uses of capital are going forward. Understood. And maybe potentially the last question here. Nicolas P [ph] again, asks other buy-now-pay-later peers inquired on buying Affirm, combining with or partnering with Affirm because the stock seems way undervalued. Just for investors, these are good questions. I think the shortest answer is it's a very competitive space that has seen a re-rating across the board. The entire growth sector has obviously had a substantial reduction in value. And so as much as we feel like, we are undervalued in this market. I think a lot of folks feel the same way. So I don't know that the price movement is as instigating as folks might think in stimulating M&A activity. I also think the opposite is true, where in the -- for private companies who are potential targets of companies like Affirm, I don't know that they've really come to terms yet with the kind of change in regime and change in prices and valuation multiples to expect. And both those two things point to, I think this -- I think time needs to play out a little bit before there's any meaningful pickup in M&A activity. That being said, we really like our hand. And we're focused on delivering the most value we can, and winning the way we have. And we really feel like we have a market leadership position in everything that we do, and feel like that will continue to play out on the organic path even if we're unable to be acquisitive here. Okay, very helpful. Thank you for that. Are there any other questions? I think there were maybe one or two questions on your e-mail, but not necessarily if not, we can wrap it up here. Okay. Perfect. Well, thank you so much, Michael. Thank you for the team. Always a pleasure to speak with you and I definitely learned a lot today. So thank you for that.
EarningCall_1876	Ladies and gentlemen, good afternoon. My name is Foe and Iâll be your conference operator for todayâs call. At time this, I would like to welcome everyone to the ChargePoint Third Quarter Fiscal 2023 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to Patrick Hamer, ChargePointâs Vice President of Capital Markets and Investor Relations. Patrick, please go ahead. Good afternoon and thank you for joining us on todayâs conference call to discuss ChargePointâs third quarter fiscal 2023 results. The call is being webcast and can be accessed on the Investors section of our website at investors.chargepoint.com. With me on todayâs call are Pasquale Romano, our Chief Executive Officer and Rex Jackson, our Chief Financial Officer. This afternoon, we issued our press release announcing results for the quarter, which can also be found on the website. We would like to remind you that during the conference call management will be making forward-looking statements, including our fiscal fourth quarter and full fiscal year 2023 outlook. These forward-looking statements involve risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from our expectations. These forward-looking statements apply as of today and we undertake no obligation to update these statements after the call. For a more detailed description of certain factors that could cause actual results to differ, please refer to our Form 10-Q filed with the SEC on September 8, 2022 and our earnings release posted today on our website and filed with the SEC on Form 8-K. Also, please note that we use certain non-GAAP financial measures on this call, which we reconcile to GAAP in our earnings release and for historical periods and the investor presentation posted on the Investors section of our website. And finally, we will be posting the transcript of this call to our Investor Relations website under the Quarterly Results section. Thank you, Patrick and thank you everyone for joining our eighth earnings call as a public company. We had another record quarter with strong growth yielding $125 million in revenue, at the low end of our guidance range, up 93% year-over-year and 16% sequentially. The difference between $125 million in revenue and our guidance midpoint was largely made up of production constraints on our most mature AC product as a result of supply-driven redesign. The delay in shipping this high-margin product held our margin improvement for the quarter to 1 point and we have now shipped the shortfall and more in November. Demand again exceeded supply for the quarter, resulting in additional growth in backlog. We are on track to [retrieve] (ph) our revenue target for the year and Rex will provide more color on revenue and particularly on gross margin in his comments. As we manage the revenue and gross margin challenges presented by supply chain constraints, logistics disruptions and new product introductions, Iâd like to comment on operating expenses. As our OpEx this year shows, we have significantly slowed our operating expense trajectory. We are managing OpEx as a key driver of turning cash flow positive in the fourth quarter of calendar 2024 and think we have made and are making the right choices and investing to achieve our market position. As we have commented previously, we have invested ahead of the market for many years and our revenue growth has been and continues to be correlated with the availability of electric vehicles. With the continuing announcements by manufacturers of new EVs for consumers and fleets, we believe the global vehicle industry has passed the point of no return. Spending ahead of revenue has enabled us to engage across our key verticals in North America and increasingly in Europe. Our spending has enabled us to build out a broad product portfolio and core functions within the company to support those product lines in our geographies. And though we have the typical challenges ahead to scale rapidly, we expect to grow operating expenses opportunistically and thus to continue to show improved operating leverage as we have done this year. Focusing for a moment on R&D, ChargePoint believes a broad product portfolio is essential, because you have to be everywhere drivers go to be relevant. We have achieved major recent releases of our highly modular Express Plus DC product line, which powers our global fleet and passenger car fast-charge solutions and introduced the CP6000, our newest commercial and AC fleet product line, expanding our capabilities in the geographies we serve. With these products in production, we expect to shift a higher percentage of R&D spend to evolutions of our platforms and to continue investments in our cloud software, which comprehensively drives our entire ecosystem for drivers, commercial station owners, fleets and the large array of ecosystem partners. Given our pace of growth, we will of course continue our investments in sales and in our channel relationships, which combined give us industry leading reach. A useful growth indicator in this area is the number of bookings in a quarter that exceed $1 million. Last year, we averaged one booking over $1 million per quarter. This year, we have seen steady increases in the number of bookings exceeding $1 million within a quarter which is a reinforcing trend supporting our land-and-expand strategy. In the third quarter alone, we had 11 bookings to end customers of over $1 million. We continue to add customers at a rapid clip. Our consistent expansion within existing customers was over 65% of our billings for the quarter, consistent with historical trends and we now account 80% of the 2021 Fortune 50 as customers and [24%] (ph) of the 2021 Fortune 500. Lastly, on investment in support of the remarkably increasing scale of the business, we will be adjusting spend proportions in favor of business systems, sales automation, customer lifecycle management, support operations tools and installer and channel partner platforms. We believe that the breadth of our product lines backed by the right systems infrastructure, are significant competitive advantages. In Rexâs commentary, he will address billings by vertical, but I wanted to comment briefly on some of the progress in European fleet, two key enablers, we believe critical to ChargePointâs revenue growth outpacing North American consumer EV arrival rates. In Europe, we have been acutely supply constrained. Until the introduction of the CP6000, we did not have our own AC products for most countries. Despite the limitation, we have been winning logos at an impressive rate and are encouraged by the reception of the new solution. In fleet, the demand has been strong, but the market has been vehicle limited. We are seeing impressive growth in fleet where vehicles are being delivered and in scenarios where customers are anticipating deliveries. For example, short-haul and last-mile billings are up over 475% year-over-year and transit is up 180% year-on-year. Our installed base of network ports under management grew to over 210,000, a year-over-year increase of 30% and sequential increase of 6%. Of those, over 65,000 are in Europe and over 16,700 are DC fast, an increase of more than 1,000 DC fast ports quarter-over-quarter. I will remind you that ports under management is one way to track progress in our commercial and fleet verticals as this represents the installed base generating an annual software subscription. As a reminder, we do not include home chargers for single-family residences in our network port count, but we continue to see strong demand for residential. Complementing this, our roaming reach is now over 400,000 ports in North America and Europe. Combined, thatâs over 600,000 ports available through our platform. Rex will elaborate on guidance, but in short, the breadth and scale of our business model combined with accelerating driver demand for EVs, has allowed us to narrow our annual revenue guidance range with a higher midpoint than we gave in March and reiterated at each quarterly call. This growth is despite persistent supply chain headwinds. While these headwinds continue, we are seeing signs of freight cost decline and component shortages concentrating. Looking at some of the environmental statistics that are so critical to all of us, we estimate that our network has now fueled approximately 5 billion electric miles to-date. We estimate the drivers utilizing our network have avoided approximately 200 million cumulative gallons of gasoline and over 940,000 metric tons of greenhouse gas emissions. In conclusion, we continue to focus on execution. We strongly believe we have the right products and the right business model. We are growing rapidly across our three verticals in two geographies, so we simply need to do everything bigger and better to maximize our opportunities and generate maximum returns for our shareholders. We believe that with each passing quarter, we add to the remarkable technology team, customer relationships, channel structure and other competitive advantages we have been building over the 15-year history of the company. Thanks, Pasquale and good afternoon everyone. A quick reminder, as in previous calls, my comments are non-GAAP, where we principally exclude stock-based compensation, amortization of intangible assets and non-recurring costs related to restructuring and acquisitions. Please see our earnings release for our non-GAAP to GAAP reconciliations. For Q3, revenue was $125 million, up 93% year-on-year and 16% sequentially at the low end of our guidance range of $125 million to $135 million. As Pat mentioned, the difference between our results and the midpoint of our guidance was largely due to shipments of AC units delayed beyond quarter close, all of which shipped in November. As we have for multiple quarters running, we fundamentally ship what we could build and book more than we could ship. So we worked down a meaningful percentage of our existing backlog during the quarter, a good thing since much of our backlog was at older and thus lower pricing, our ending backlog increased. Network Charging Systems revenue at $98 million was 78% of Q3 revenue, up 105% year-on-year and 16% sequentially. Subscription revenue at $22 million was 17% of total revenue, up 62% year-on-year and 7% sequentially. Other revenue of $6 million and 5% of total revenue increased 47% year-on-year and 56% sequentially. Our deferred revenue, which is future recurring subscription revenue, principally from existing customer commitments and payments for our cloud software and Assure warranty coverages, continues to grow, finishing the quarter at $175 million, up from $168 million at the end of Q2. Turning to verticals, as you know, we report them from a billings perspective, which approximate the revenue split. Q3 billings percentages were commercial 69%, fleet 18%, residential 12% and other 1%, representing a slight shift in favor of fleet. Residential contribution was strong, but on a percentage basis was impacted by supply shortages. From a geographic perspective, North America Q3 revenue was 86% and Europe was 14%. In the third quarter, Europe delivered $17 million in revenue and grew 145% year-over-year. Europe revenue was essentially flat sequentially due to product availability, but from a bookings and backlog perspective, Europe had a record quarter. Turning to gross margin. Non-GAAP gross margin for Q3 was 20%, up 1 percentage point from Q2âs 19%. ASPs in the quarter improved. We saw that half of the June price increase flow through in Q3 as we continue to work off backlog generated prior to the price increase. However, that impact was partially offset by $7 million or 5 points of purchase price variances and elevated logistics costs, the margin impact of a heavier DC mix due to AC supply shortages and $3 million or 2 points in product transition charges. Non-GAAP operating expenses for Q3 were $79 million, a year-on-year increase of 26% and down 1% from Q2. We are pleased to see OpEx, as a percentage of revenue, dropped from over 100% in Q1 to 74% in the second quarter and to 63% in the third quarter. This progression is a critical component of the combination of revenue growth, margin expansion and OpEx leverage improvement necessary to reach our stated goal of generating free cash flow by the fourth quarter of calendar 2024. We do not expect OpEx to drop in dollar terms as we go forward, but expect leverage to continue to improve, especially given that we have now released a number of core products that have taken years to develop. Stock-based compensation in Q3 was $26 million, essentially flat from Q2. Recall our stock-based compensation typically stair steps each Q2 due to the timing of annual grants to our employees. Looking at cash, we finished the quarter with $398 million in cash and short-term investments. We had approximately 342 million shares outstanding as of October 31, 2022. Turning to guidance, for the fourth quarter of fiscal 2023, we expect revenue to be $160 million to $170 million, up 108% year-on-year and up 32% sequentially at the midpoint. This translates to annual revenue guidance of $475 million to $485 million slightly above the midpoint we have had all year and doubling year-on-year. For the fourth quarter, we expect non-GAAP gross margin to again improve sequentially, but for the year to be below the 22% to 26% range we previously targeted. With our continued focus on OpEx, we are lowering our annual guidance for non-GAAP operating expenses to $325 million to $335 million down from our prior guidance of the lower end of $350 million to $370 million. Thank you very much. [Operator Instructions] And we will take our first question this afternoon from James West of Evercore ISI. Pat, on the fleet side of the business, which obviously is a huge opportunity, I know we are still a bit vehicle constrained, but every kind of quarter we get closer to that constraint coming down. Are you starting to see urgency building within your customer base as we get closer to this kind of unleashing of vehicles in the market? Yes. I mean the urgency has been there. So, I donât see a change in urgency, because the â I mean, I think there has been a lot of pent-up demand for vehicles, because they just pencil. What you are seeing, Iâll just draw your attention to a couple of comments that I made, large growth rates year-on-year in both the kind of midsized logistics, short-haul vehicles, because you are starting to see more supply come online. And then you are also seeing which is a disproportionately mature transit industry, so effectively buses, where because there are plenty of manufacturers that have maturing products, products that have actually seen more than one generation, you are seeing that growth rate as well. We expect this to â that trend to manifest the minute vehicle availability kind of percolates to all the other sub-verticals. Okay, okay. Thatâs helpful. And then on the production constraints or logistics and supply chain constraints that you guys are still experiencing, are those easing at this point or are they similar to maybe last quarter? So, I made â I had some specific comments in my remarks on that. The components that are continuing to be on the problem list are narrowing. So the list is narrowing. And I made a similar comment in answer to a question, I believe, last earnings Q&A. And so thatâs continuing. The freight and logistics, we got headlights into that, starting to normalize. And so thatâs moving in the right direction for sure. And just to kind of a little bit more color on kind of what held us up a bit this quarter on the revenue side, we made a supply-driven design update effectively of one of our AC platforms that was planned. And as a result of components coming in a bit late and a very complicated transition in what is a kind of mature product in the factory, just didnât get it all built in time. So as Rex pointed out in his comments, I think I made it in mine as well we cleared all that and shipped it. We just shipped it on the wrong side of the quarter boundary. So thatâs all the stuff is all out and we are continuing to build down the factory on that front. Thanks. Couple of questions. I want to put just a finer point on the supply chain side of things. In an unconstrained supply chain environment, what would revenue have looked like in Q3 and what could it look like in Q4? Thatâs a good question, one I canât directly answer, but we have been building backlog, as we have said, at a rapid rate this year. I think the only thing to say is it would be substantially higher, but I just canât give that out. But anyway, the other thing I was thinking is and listening to the question from James West and how we are handling things, we have supply chain constraints, but our growth rate is fairly astounding. So I think we are banging through this pretty well. And then I would expect from a backlog burn off perspective next year for that to be a nice boost to â or maybe a boost or a sustainer of growth rates, right. It will help us get â keep the engine running. I donât know how fast we will burn out, but I donât see it as being blood-ish. And then to your point, Rex, in your prepared remarks, you called out $7 million in purchase price variance, $3 million in product transition costs. How much of that goes away â outright goes away in Q4? How much lingers into Q4? And when will you be 100% â when will you be receiving 100% of the benefit from the pricing actions youâve taken? Will that be in Q4? Will that not be until Q1 of next year? Thank you. Yes. So if you are focused on the price increase, as we said, weâve got about half of it in Q3, I would expect to get most of it â most of the rest in Q4. Itâs really dependent on how fast we burn the backlog off and there are different components to backlog and some stuff will ship and some stuff wonât. But I would expect us to be â hit 100% by Q1. Iâd be surprised if that didnât happen. And then in terms of the variances and whatnot, as Pat mentioned just a moment ago, the logistics side of the house is turning around pretty well. And I think logistics have pretty well normalized and look a lot like they should going forward. So I would expect a benefit there. As far as the PPV, itâs more isolated. It used to be pretty much across everything, and now itâs more isolated components, and then I would see that coming down nicely over the next couple of quarters. Canât forecast when it goes away entirely, but I do think it would be on a downward trajectory, maybe not in Q4 because a lot of things are baked in, but certainly as we go into next year. And then one thing you should know â in terms of getting to 100% of price increases, make sure you understand where they apply, they apply mostly to North America â hardware in North America. We did a price increase on software earlier last year. And it will â if youâre doing a model, it will apply â when we get to 100%, it wonât be 100% because we have contracts with major customers that wonât let us do that everywhere. But the impact is certainly a meaningful and positive as we saw in Q3, and we expect to see in Q4. Yes. Hi, thanks for taking my questions. I guess as we look into next year â thanks for the color on how you are prioritizing OpEx. But I guess, what opportunities are you expecting to show the most growth and, thus, where are you trying to prioritize your OpEx? I mean, if you could stack right between things like fleet or commercial work, some of the applications, where are you really focusing the resources as we look into next year? Itâs â I mean, weâre continuing to focus in a balanced way across all the verticals, and we will continue to do so. Weâre not going to overweight one. We will make the necessary operating expansion on the sales and marketing side as kind of demand dictates essentially by sub-vertical. So itâs just how historically weâve performed. We havenât steered it unnaturally in any one given direction. I want to just make sure that we reinforce a point in â that I was making in my prepared remarks, in that when we decided to really escalate our spend rate relative to where the market was even before we went public, that was essentially to intersect with the growth models that we have put together for EV installed base effectively. Where â the reason that things have leveled off quite a bit with respect to OpEx expansion, and as Rex mentioned, it doesnât mean itâs going to go down, itâs just weâre controlling that trajectory now, is because weâve built out most of the functions substantively necessary to support the verticals and the geographies. There will be continued investments as we flesh things out and as certain verticals unwind from vehicle shortages, but I donât expect us to unnaturally overweight anything and leave another vertical uncovered. Itâs just not how weâve operated historically. Okay. Thanks for that color. For my second question, Iâd like to ask where service attach rates are trending, like where is it today? What has been the trend? Has it sustained as a percentage of installed base? Has it gone up? Obviously, there is a lot of new EV drivers out there and that could also kind of create friction and service networks donât work properly, but what is your team doing to, I guess, to try to drive that higher as we look ahead? Yes. So just to make sure I am referring to the right thing certainly from a software perspective, which is one of the things we supply that with call service. Attach rates are always 100% out of the gate. And our renewal rates have been very solid and weâve said on multiple calls that our loss rate there is extremely low. As far as our Assure Warranty program, we put a lot of energy into increasing the attach rates on that over the last couple of years. So they are healthy. They are not 100%, but they are very healthy and they are not trending down, they are trending slightly up, and we would expect that to continue. Big swing on that is, there are some customers who canât buy it because they want to self-serve and then obviously, we have to work successfully with our extensive channel network to drive short through that, and weâre working on that steadily, but â yes, Assure is in a great place. And we havenât seen any downward trends on either. Thanks. Good afternoon, everybody. Thanks for all the prepared remarks. Pasquale, you talked about demand trends and â you talked about fleet, particularly in Europe, but Iâm just curious if you can maybe talk a little bit about commercial and within commercial, whatâs maybe â what youâre seeing there? Whatâs the largest source of demand, I guess, at this point within that channel? And then also just mix it, so I just mix it on a product basis? Like is the â should we expect over time that DC will continue to grow, particularly as the NEVI program kicks off? So I know there is a lot in there, but... Yes, there is a lot to unpack here, Gabe, but we will â letâs see if we can take them in order. So the first one regarding hot or cold spots in commercial, Iâll shorthand your question that way. Weâre not â weâve been serving literally every type of parking lot and every type of business since â for the foreseeable history of the company. And so there is no major hot or cold spots in that. As Rex has mentioned, I think on a few earnings calls, the workplace component, while itâs there and continues to be vibrant is muted a little bit relative to what it would be if people were in the office 5 days a week, 100% of the previous workforce that was in office have returned to office. Thatâs largely offset by the growth rate of EVs in the installed base of cars. So we just kind of view that as a delay in workplace. And even relative to the previous answer that I gave to one of the questions today, it stresses why you have to be everywhere drivers go. You lose your network effect if youâre not everywhere and in every parking lot that they may encounter a charger. So we lose our network effect advantage to businesses if we were to see a focus on one sub-vertical versus another, thatâs why we donât do it. But most importantly, when we see unforeseen macro trends that will change traffic patterns and driving patterns, if youâre in every vertical, youâve been insulated from that. And thatâs â youâve seen us despite a lot of supply chain constraints, etcetera, effectively doubling the business. And that is largely due to the fact that weâre a bit insulated from mix shifts due to grant programs, things like that, because as things bubble up in one vertical and maybe bubble down in another, the put offsets the takes and you wind up having a fairly predictable steady and healthy growth rate. So that packs into the NEVI program. I want to make one comment. We donât see a mix shift in port count to DC. From an ASP perspective, itâs so much higher on an ASP basis. Thatâs why you see it outsized from a percent of revenue relative to the port count percentage it represents. So if you look at the active ports under management, which is a reasonable a reasonable view because we do represent a network that is virtually every use case driver might encounter publicly, youâll see a fairly steady port percentage of DC. Now specifically with NEVI, you may see some pull forward there. You may see some. Iâll remind you that in the inner years â because it is a 5-year program, in the inner years, that will be a bigger percentage of the overall DC requirement in the United States. But in the outer years, that â because the amount of grant money per quarter there is constant, but the market will be so much bigger, it will get more diluted. It will still do its job, but it will get more diluted. Iâll also remind you that weâre operating in two geographies, and that phenomenon does not exist in Europe. And then as fleet unwinds, from a vehicle supply perspective, that will start to build. And one of the biggest shortages in vehicle supply on fleet is light commercial fleet and as light commercial fleet starts to come up the chain. That will move around ASPs a bit in the fleet segment. Right now, fleet is very heavily DC-oriented because so much of it is transit and mid-sized trucking, etcetera, so hard to call the fleet impact on this whole thing. But again, the DC mix is much more of an ASP ratio problem or not a problem, but phenomena than it is a port count shift or a demand shift. And Iâll remind you that regardless of port, there is a recurring software license attached to it. Yes, got it. Got it. Okay. Thatâs really helpful. Thanks, Pasquale. Sorry, again, for all the multiple questions and then one. But Iâll just quickly follow-up with one last one on the supply chain front. Could you just talk about the â what some of the component shortages are at this point? I know last year it was maybe more of a whack a mole. Maybe this year, itâs just more of a chip issue. And so just any color on that? And then if you look into your crystal ball, like when do you think this all kind of eases? Thanks, guys. Well, one of the â like, Gabe, one of the things Iâve learned over my career is using a crystal ball is probably not a great way to run a business when something is driving the financials as hard as supply chain is. So I canât â life has more imagination than we do. So I donât know what the hell is going to happen in the macro that could potentially stop the recovery thatâs happening in the â on the supply chain side, but something could happen thatâs unforeseen. So itâs just too difficult to call. We are seeing, as weâve reported now for several quarters, the concentration on the material side that is concentrated largely in ICs. In the long-term, if, and itâs a big if, the macro starts to significantly pull back demand for consumer electronics that use common ICs that would be prevalent in chargers, we would see that segment of the IC shortages clear up substantially. We do see some of that now, hard to call how long itâs going to take to fully kind of fully relieve itself there. And then in the long-term, we expect that power semiconductors will likely continue to be in demand because they are used across the energy transition. So weâre going to have to be very strategic with respect to power semis and how we manage that in our supply chain. And obviously, because I just said that, you know that thatâs something that our supply chain team is working on continuously. Thatâs nothing new. Thatâs known in the industry for quite a long time. So thatâs sort of how it naturally funnels down. But again, anything can happen in the macro as we all know. So we are trying to be exceedingly careful. I think weâve done a good job really building a lot of products and supporting the growth of the company and what is the situation Iâve never seen before in my entire 30-some-odd year career of building products. So weâre welcoming a relaxation of these trends. Thanks so much. Given the diversity requirements across geographies, could you talk a little bit about what youâre seeing on the standard development side and the potential to move increasingly towards standard hardware with dynamically contributable software from a single SKU potentially? Yes. I mean, look, the fast charge product line that weâve been kind of grooming and expanding, that is a product line â it shifts everywhere now. It may â because everything has been designed to be a fairly Lego-block whether we have a European standard cable or a U.S. standard cable attached, it doesnât change the fundamental electronics of the core or the software. The software just wakes up and understands what itâs in and what country itâs in. And it just does the right stuff and then make sure that everything is set up in accordance with all the local guidelines and local standards. The hardware remains configurable and that mention, we launched the CP6000 thatâs up and running and in manufacturing and shipping now. And that one there is a global AC platform, so it can do the entire power range as well as single or three-phase. It does all the metering required for the entire world that we can see from a meter standards perspective, and weâre systematically going through all the incremental certification processes to cover the globe there. We havenât gotten through 100% of everything in every corner of the markets that we serve, but weâre making steady progress and that will wrap up in the not-too-distant future. So it is possible to build something. Iâll point to a specific example. Itâs completely modular with respect to whether itâs socketed or cable attached. Some European countries require socketed in some scenarios where the driver brings their own cable you can dynamically change the unit from socketed to cable attached, and you can meet all of the shuttered not socket requirements all over Europe with the same platform. So again, from a manufacturing velocity standpoint and ability to deal with demand, instantaneous kind of mix issues, which always happen, like the long-term trends we can predict pretty well. But instantaneously within a quarter, especially as you get close to the end, you could get deals that come in that move things around locally really quickly. Itâs nice having the ability to have a product that is built that way because you can satisfy demand from what is a manageable number of subassemblies and inventory. So thatâs why we do it that way. Perfect. Thatâs helpful. And then I guess the second question is really around the advantages of slowing some of the growth. You guys have done a very admirable job of growing the team. It is actively to have, but with some of that growth slowing and the ability to have a more cohesive team, can you talk about some of the efficiencies youâre expecting to get and what youâre seeing from a culture perspective as you start to see this group be a little bit closer and get some incremental leverage from an operating perspective? I think there is two big things to highlight that may or may not come to mind immediately when people listen to your question. We had to go through two acquisitions and integrate them. And I couldnât be happier with how the teams have come together in both those acquisitions, they are fully integrated. Many of the folks that came in from the acquisitions have senior positions within technical and other and sales leadership within ChargePoint. So it was a really great add from a talent perspective. And weâve kind of culturally all â weâve learned a lot from those folks, and they have, I think, learned a lot from us. And together, I think weâre better than we were before all three of those companies came together on the technical side and on the sales side. So we are really happy with that. I think the bigger impact is how many people weâve added since COVID because that forced us into a remote environment like any other company for so many years. And if you look at how many â if you look at the historical headcount of the company, kind of pre-COVID then you â we were still private, right, and going public and now being public for nearly 2 years, 2 years in March, most of our workforce â not most, but a substantial percentage of our workforce that has been hired since COVID have not had the benefit of a great amount of personal interaction just because itâs been constrained. Now thatâs coming back and weâre doing a lot of things to make sure we actively get people collaborating and being very careful by the way, to make sure that we embrace the flexibility that todayâs workforce sort of demand. So we are trying to make sure that we donât culturally slow down the integration, but that we also donât throw cold water on peopleâs expectations of slightly more flexible work environment. So I think weâve managed it incredibly well. Feedback we have gotten as people are adapting and they are coming back together now since the restrictions have lifted. So, culturally, itâs gelling really well. We are also looking internally because of all the shift to now we know what this looks like at scale. So, now we know what to invest in from customer onboarding tools and automation, sales force automation, business process, reengineering internally to support what â you think you know what itâs going to look like and then you really know what itâs going to look like when itâs upon you. So, there is a ton of that stuff going on cross-functionally inside the company. And I think itâs going about as well as it can which doesnât mean itâs going bad. Itâs going actually quite well. It will take time to come to complete fruition because we are also trying to run a business while we are doing that, but I am very happy with how our team has come together. Hi. Good evening and thank you for taking my questions. Pasquale, I share your preference for performance indicators over Fortune telling with a crystal ball and that being said, you have the largest business development team in the industry and have a very interesting way of managing that team making them compete for resources. Can you maybe update us â you were appropriately conservative on the funding from the Infrastructure Bill and said that this is really going to be a â23 benefit. Can you maybe update us on what you see as a potential timeline for different states to disperse that money in a meaningful way? And is there anything else in NEVI that you are more optimistic about in the short to medium-term that might have a bigger impact on the overall levels of market activity? Well, I mean I donât think we have a shortage of market activity. And I am not trying to be â and with respect to NEVI, I am not disappointed. As you mentioned, we have been very consistent. We didnât expect anything to happen before 2023. And if you want to update, as you asked, I expect something to happen in the front half of the year, but not a lot. There will be some things that happen in the front half of the year for sure on NEVI. And it will grow. It wonât be a cliff, but it will grow through the year. And I think you will start to see quite a bit of activity in the back half of the year in 2023, and that if things continue on the current trend. I mean thatâs our current visibility. I will also point out that we donât engineer things like that into our models specifically as we are managing the company because we look to be conservative with respect to the dynamics that can happen as well in programs like that now. And maybe we are dealing with governments and it just moves at the pace of government. And so if you are in our position and you are betting on something on an optimistic side or you are betting on something at all until it materializes, it really undermines your ability to be predictable as a public company. Itâs a bit reckless. So, when we start to see it ramp and we start to see what our win rate will be, we will be able to make further comments. Hey guys. Thanks for having me on. Just one other one for me and I am just curious if you can comment, I know itâs relatively fresh. But just on this e-RINs news that came out today, just curious if you can kind of clarify how you guys are positioned around that, what you expect. I know the details are very, very fresh. But just curious any color you can offer at this point? So, I havenât had a chance, given that we have been a bit pre-occupied with the goings on of this call today to really circle with our program people here to get a full impact statement. But what I can say is that the current LCFS program credit that we take advantage of or the proportions that we can take advantage of that we share with certain customers, thatâs in the other line, on the revenue line. And where e-RINs will show up for us will be in that line if we can take advantage â in the scenarios where we can take advantage of it. I will remind you that we are not a station owner in general. There are occasions we are, but itâs not material or our business model. And so we have to analyze the scenarios and where that â where those credits go, whether â what percentage you are going to go to us, what that will look like in the long-term, and how much we will administer on behalf of our customers, but largely benefit our station on our customers, so too early to give you a full answer. But if you look at the other line, you will get a pretty good indicator of what LCFS has done. Hi, good afternoon. Just had a couple of quick questions on gross margins. One, you mentioned how your â some of your backlog is still on old pricing versus new pricing. Whatâs the difference in sort of the expected margin on the backlog thatâs sort of more favorable versus less favorable? And then I just want to make sure I am clear on the gross margins going forward. With the full year guidance, are you implying that the gross margins for Q4 might be down from Q3 or just that you are going to be below the full year guidance? Thanks. Yes. So, let me take the second one first. The â what we expect to have happen is continued sequential improvement. So, if you look at the years so far, we have gone â17, â19, â20. And so for Q4, we think we will improve on â20 given mix and the other things that we have to wrestle with on PPV and that sort of thing, itâs getting hard to put ranges on it. But we definitely see that going up in Q4. But we did want to let people know, being transparent, that the â22 to â26, which we thought we could get to is not mathematically likely, so we are taking that off the table. We do expect to get better Q3 to Q4. And then as far as the backlog is concerned, we burn off a significant amount of backlog every quarter, so itâs reloading. So, we did our price increases in June. And as you can imagine, that takes a while to work through the system in terms of you have got a bunch of quotes out there and now you have to go when you are doing new quotes and you put the new pricing in, so it takes a while for that to go through the system. It always related to hardware in North America, keep that in mind. And so we are rolling through the older commitments. And as I have said earlier, I think we will probably bang through the older pricing over the next couple of quarters, Q4, Q1, so that will be fully on the new pricing. In terms of how the margins improve there, we havenât given out a figure on what the price increase level was, but it was significant, right. And so, it will have a very, very nice impact on margins when we roll that through increasingly through the next six months. Hey. Thanks for taking the question. Just clarifying the previous comment, you talked about transitioning to new pricing over the next six months or the next two quarters by Q2 of next fiscal year. And second question, just on OpEx. How should we think about that you were able to reduce it a little bit for this year? Going forward, should we expect somewhat flattish at these levels or, obviously, slower growth than revenue growth, but how should we â just any clarifications or clarity on that would be appreciated? Thanks. Yes. So, on the pricing front, again, if you think about â if you announce a price increase, you got to get it out to channel, you got to get it out to sales. It impacts only new deals that are not already quoted. Then you have to get those deals closed. As you know, we have been building backlog all year. So, then you got to cycle it through your backlog. So, it takes â you do a June price increase, it fully see that roll through, you are looking at nine months at a minimum, just the way it works, right. Good news is we are four months through. And so we are well underway, and we did see some nice impact from that in the third quarter. But I think we just have to be patient there as that works its way through the system over the next several months. And then as far as operating expense trajectory is concerned, I think if you look at our OpEx for Qs one, two and three on a non-GAAP basis, which I would encourage you to do, even though we all look out. You will get to see the actual trajectory of the company. And itâs been very steady this year, and thatâs very purposeful. There is some â the nice thing as we look forward, our new product introduction expenses that hit OpEx will be many of which were in this past year will be substantially reduced. We are going to be intelligent on hiring. But as I have said in my prepared remarks, I do think OpEx will go up, but I think itâs going to go up in a very measured way in the near-term and a substantially reduced rate relative to our revenue increase. And then frankly, if you were to look back 2 years from now â 2 years ago, what was the OpEx rate of increase percentage-wise, nobody expects us to be below that. So, the rate of increase is going to go down. Great. Thanks so much for taking my question. I just wanted to maybe come back to the margin and just as we are thinking about the prior guide, I think it was indicating somewhere around 25% or 26% for the back half. It sounds like itâs going to be more like in the low-20s now. I understand some of that is related to some of the ongoing supply chain issues. But maybe can you help us reconcile the missing piece â the pieces there thatâs kind of resulting in the margin softness? Yes. So, the number â so, if you go through our last two calls and this one, what you will see is the PPV/logistics side of the house, when we had some effort charges this quarter. And then we had â twice we have had stuff not get out of the dock from an AC, which is a higher-margin product perspective. So, there have been 6 points to 8 points, even 9 points in each quarter that doesnât have anything to do with our business model. It doesnât have anything to do with the products. It doesnât have anything to do â well, it may be a little bit with mix but not really. Itâs sort of points lost on the shop floor. And so our thoughts on trying to recover to get to our annual guidance coming out of Q2 and guiding to the low end of that range was dependent upon some of that stuff cleared up. And as lot would have it, as we said, Q3 was another quarter where we just couldnât get enough product out, especially from an AC perspective. So, when we look at that going forward, itâs a pretty simple question of when the external environment eases so that we get those points back, thatâs a pretty easy fix. Then we have I think we have announced our new Head of Operations. We are attacking the op side of the house, both from a scaling perspective and a cost reduction perspective with the vengeance [ph]. So, I think there is cause to look forward with gross margin go, I see how this can improve. So, we know the recipe. We have just got to get it out of the kitchen. Hi. This is Gavin Kennedy on for David Kelley. Thanks for taking my question. One of your competitors called out installation issues with DC fast chargers, which stemmed from both labor shortages and transformer supply chain constraints. Is that something that your team has seen and if so, any thoughts on the magnitude and timetable of that disruption? Whatever you do in construction, especially when it involves electrical upgrades things take â you are into construction permitting and utility interconnect, so things take a while. But I will point you â the easiest way I can kind of help you understand it from our perspective anyway, is we added over 1,000 DC fast charger ports to our active ports under management count. Now, that means those products have been â that were sold through in the past, went through site design, construction, permitting, all the usual stuff, utility, interconnect, and were activated. But it gives you a flavor for the fact that if you have a pipeline, a proper pipeline, the delays essentially pipeline away, so â and the delays arenât there everywhere. They are there for certain â literally certain physical locations where the electrical â the utility infrastructure at those particular locations may require an upgrade to deal with the power levels that are required for that use case at that site. So, we do see some hotspots. But again, the business is very broad here. And we have a continuous engagement pipeline thatâs feeding the top of the funnel. So, in this quarter alone, you are seeing that 1,000 come out, which is a pretty big number. So, I just think as long as you are feeding the top of the funnel, a business like ours, and also because of our diversity of the verticals we are in and geographies, itâs a bit more muted for us. Great. Thanks. Good evening everyone. Just one quick question on the subscription gross margin, I think it kind of came in at below 40% in the quarter, kind of flat from last quarter. How should we think about that going forward? Is there any price increases being implemented there? Just kind of curious on the puts and takes in the quarter and the forward outlook. So, I am so mired in non-GAAP. I have â I got surprised by the question. Itâs a fair question from a GAAP perspective. But â so on a non-GAAP basis, our subscription margin actually moved up nicely in Q3 to the extent that itâs â if you go to GAAP, obviously, we are growing with the team. We are investing heavily, frankly, doing some pre-investing in that space, just because we see good customer support. Itâs a huge differentiator for the company and the way you win. So, obviously, those people live in that line item and the costs are allocated accordingly. So, by the way, but net-net, our subscription gross margin went north and frankly, we are putting a lot of energy to make sure that continues. Yes. Good afternoon. Thanks very much for taking the question. When you think about the pricing and what that means for margins, do you think you need to do another round of price increases in order to reach your longer term margin targets, or do you feel with the pricing you have already done and potential for some of these other impacts to perhaps things like supply chain that you can â you get that continue done or are you going to be around? Thanks. Sorry, I didnât catch the tail end of the question due to the reception, but on the basic question of are we anticipating further price increases, I think the answer to that is TBD with a shading in the direction of not in the near-term because we just did â we did one early last calendar year and then we did another one that was larger, but North America hardware solution specific in June. And we are seeing the impact of that begin to roll through. We have seen about half of it in Q3. We would like to see the rest of it in Q4 and Q1. And so we think that will have a beneficial impact on our gross margins. And then beyond that, we have got a lot of operational improvements that we are doing is the PPV and the PPV and logistics situations ease. I think we can get where we need to be through more traditional means, right, just improving our costs and improving our expenses, etcetera, versus going for further price increases. We do like most software companies. We do have an automatic increase situation on software. So, there is a built an escalator there. But in terms of broad-based price increases, I donât see one on the table in the near-term. Thank you. And that concludes our question-and-answer session this afternoon. Mr. Romano, I will hand things back to you for any closing comments. Well, I just wanted to say, first of all, thank you for everyone for the thoughtful questions. I appreciate it very much. I want to reiterate my usual thanks for our team here at ChargePoint. They had to work very, very hard to pull off the quarterly results. I know they are all very proud of their accomplishments and are looking forward to not only wrapping the year up in Q4, but to the road ahead in 2023 for us. I think itâs really, as I have said in my remarks, the number of makes and models across the board in both passenger cars and the fleet segment really â itâs a really stark difference than it has been even a year ago in terms of availability. And as those things reach some reasonable level of manufacturing maturity, I think you will â we will all be very pleasantly surprised with the pace of adoption and relative to the installed base in this market. So, we are very, very excited about the future. And again, thank you all. We will see you at our last earnings call of the year next time, and we will sign off for now. Thank you, Mr. Romano. Ladies and gentlemen, that will conclude ChargePoint third quarter fiscal 2023 earnings conference call. We would like to thank you all so much for joining us and wish you all a great evening. Goodbye.
EarningCall_1877	Very happy for our next session. I have Western Digital. And with WD, we have Dr. Siva Sivaram, who is the President of Technology and Strategy at WD, and we also have Peter Andrew, who runs IR at WD. Peter is going to read a statement, and then we'll get it to Q&A. Yes. First, Tim, thank you for having us here today. During this presentation today, we may make forward-looking statements, and I ask that you refer to our SEC filings for the risks associated with these statements. In addition, we might make references to non-GAAP financial measures and a reconciliation of our GAAP to non-GAAP financial measures can be found on our website. So, let me pass the mic back to you. Perfect. Well, Dr. Sivaram, there is -- you're a technologist, so maybe I'll lead with a technology question. There's quite a debate, I would say, on the HDD side in terms of technology and who's in the lead, who's not. There's a lot of interesting things happening and the potential for the -- to look different when we come out of this downturn. So, maybe in a loaded question, can you sort of go into your technology position in HDD? Yes, thank you for having us here, Tim. I know that you said there's a lot of debate. In our minds, there is no debate here, right, as you would expect me to say. In May of this year, we made the announcements on our 22-terabytes CMR and the 26-terabyte SMR drives. We also showed a roadmap, making sure that our energy-enhanced PMR drives continue on a roadmap to 30-plus terabytes. We are shipping these products. We are qualifying these products at all the hyperscale customers. We are qualifying SMR at a rate that we will be shipping over 25% of our volume this quarter at SMR. In -- by the time we finished our fiscal year in June, we'll be shipping well over 40% of our capacity enterprise shipments to hyperscalers be in SMR. So, we are very, very well positioned with a very strong roadmap with technologies that are already proven. Technologies that you can touch and hold and run today and a roadmap that enhances on them. Just SMR uplift of over 20% from a 22-terabyte CMR to go get 26-terabytes of SMR, there is no one in the competition that can do it. And the fact that our customers, two major hyperscale customers are going exclusively into SMR. This kind of result shows where we are in the marketplace. Even our last quarter results show where we are in the marketplace with respective technologies. So, when the market does turn around, we expect to be in a very, very strong position. Great. And let's sort of dovetail into some share dynamics and maybe what the industry could look like in terms of gross margin coming out of this. It used to be that you and your competitors used to have 40%, 45% share, and it used to oscillate back and forth. And the third -- and the third party would have roughly 10% and the customers would want them to always be in the game because it would keep the triumvirate versus a duopoly. But now the technology seems to be moving so fast that it really is becoming more of a duopoly. So, can you talk about how that and other factors, just simply how you're now -- you've been on the cusp of a CapEx cycle. There aren't any more client bits left to basically replace and migrate over to nearline. So, as the cloud continues to demand more bits and there is more CapEx that you and your competitors need to throw at it, they are going to probably be pretty reticent after what's happened to spend money out of this downturn. So, to me, it sort of argues that we can see a pretty strong ramp in gross margin out to the other side of the cycle. So, you said it very nicely, Tim. The marketplace has always been tough. It is a competitive marketplace. We have had three players that do truly compete in the marketplace. We have established -- we have put some space between us and the rest with the respective technology. We have products on the marketplace that we are buying. And as you said, this is no longer going to be a share gain game. That is not something that we are trying to go gain share by giving up on margins. We are going to be looking at value creation, how do we make sure we get the value that -- that as our customers gain more from the drive that we create, how do we get our fair share. And this downturn in particular, and in general, we have become very, very careful with capacity as you just mentioned. There is no longer the client drives that you just go take that capacity and convert that into nearline capacity. There's no more of that. That conversion for both us and our competition is completed. Any new capacity has to involve spending additional capital. We are being very, very prudent with our deployment of capital right now, and we'll continue to be in the future. So, coming out, given our technology leadership, given the insatiable demand for bits, given that HDD is still the biggest storage for the cloud, and given our carefulness with capital, we do expect our margins to rebound to the kind of levels that you would all expect in the mid to high 30%-s before we get too far. In the short-term, as you would expect, given the underutilization, margins are going to be under pressure because of the absorption charges that you would have in the short-term. But in the long-term, when we recover out of it, we do expect HDD margins to be getting up into the mid to high 30%-s. So, I guess -- I mean, you're a technologist. What do you think -- do you think mid to high 30%-s or even 40% gross margin, that's the technology you bring to the market, is it a high 30%-s, 40% gross margin business? You know the level of complexity of this business, the amount of technology investment that goes into it, the amount of brain power that you need. This is not something that you turn the crank and get done. Magnetic recording may go from perpendicular magnetic recording to the new features we are adding with respect to new error correction schemes with respect to the flash integration and what we've done with OptiNAND with respect to the additional energy enhancement schemes with getting the ePMR roadmap pushed forward with triple stage actuators. With all of these putting together, there is a lot of value being added. And with the ability to provide in the same 1-inch form factor, in the last 10 years, they've gone from 14-terabyte and now we are talking about 26-, 30-terabyte roadmap, lot of complexity. And as data gets stored, that's how our customers get their value. They do get a lot of value out of these hard drives. And it is only natural that, going forward, we would expect our fair share of that value being created. And clearly, any number starting with four is a good place to go and set as a target. So, let's talk about HAMR for a moment, and sort of the interplay and the conversion between SMR and HAMR. HAMR -- I think, the first patent on HAMR was, what, maybe 20 years ago. I mean, it's been out there for a long time. Your competitors beginning to ship next year. What sort of -- can you talk about how you think SMR can compete with HAMR drives in the marketplace? I mean, obviously, HAMR allows you to scale and it has cost benefits, but just talk about SMR versus HAMR. Yes. They are not competing technologies. Whatever we do with the recording technologies, these SMR and these enhancements will go on top of them. So, surely, when we introduce HAMR, we are going to have a SMR HAMR. That uplift will be there. What HAMR allows us to do is to extend the roadmap. The roadmap is currently very strong. We have very clear line of sight with respect to 10, 11, 12 disks, and we are adding the OptiNAND enhancements, the SMR enhancements, put them all together, with the aerial density improvements we are seeing just on energy enhanced all the way to 30-plus SMR on top. When HAMR proves out to be both reliability and cost competitive, with this established technology in our hand, the incumbent technology, the nice thing about it is customers have used it. They have installed a lot and run this over time. Any new technology like HAMR is going to need to prove that before it becomes massed up. When that happens, we'll also have OptiNAND on top of it, SMR on top of it. So, we expect to have a very strong HDD roadmap even going forward after HAMR gets it. We are not forcing HAMR. We are letting HAMR come to us at the right time when the cost crossover happens, reliability crossover happens. So, let's talk about cost curve in HDD versus [SSD] (ph), which is a NAND. In some ways, you're reaching the -- I don't want to say diminishing returns in NAND cost, but the scaling was you got massive benefits initially 64, 128, now we're doing string stacking. So, the big jumps in cost start to go down a little bit. Whereas in HDD, you could argue that the cost curve has just become a lot more extendable with HAMR. So, can you talk about the relative cost curve between NAND and between -- now this is not as big of a deal for you because you sell them both, but can you talk about the relative cost curve between HDD and NAND and the potential over time for NAND to start to more meaningfully displace these larger capacity markets? In our minds, this model of HDD displacing NAND -- I'm sorry, NAND displacing HDD came in in the prior client cases in the PCs where they are -- they have [overturned them] (ph). That model doesn't quite hold true in the data center space. In the data center space, given a fixed form factor how higher capacity can I do so that the customer can fit more data and grow, there HDD is going gangbusters. In that same 1-inch form factor, we have already taken 2x capacity into them without increasing -- with the cost curve going down on top of it. So, they get the double benefit of the cost going down and the capacity increasing in the same form factor. The amount of data that is coming in and that needs to be stored over for the long-term, what we call cooler or cold data, is ballooning. That needs to be long-term store in HDD. Flash has its own unique use case. When it is fast data that needs to be accessed and processed, the example I'm often using is, when you are driving an autonomous car and you see a few headlights coming at you, you want that data processed instantaneously so that the car can make a decision. There, it will always be in SSD that is used in that situation. And I want to make sure, as that grows, that has its own unique places where it gets grows. These two tracks are in parallel. The fact that one is getting per bit cost lower is not going to make a big impact for a long time more. Even if the bit cost reduction on one is 15% or 16% in the flash case and, in the HDD case, maybe in the teens, that's not the one that is going to make the biggest impact in -- this is not a replacement. These two tracks will run parallel for the foreseeable future. Now is there going to be a major breakthrough in one or the other? Like you said, maybe we don't just do string stacking. We could do some new things in flash. Of course, we want those to happen. That's why we run on both sides of these [on the experiment] (ph). So, let's talk about NAND. So, you -- I always characterize your approach as brownfield versus the peers are more greenfield. You're very capital efficient. And you've proven that out over the years and your cost downs are very, very similar, if not better than your peers. So, can we just talk about what's happening there? BiCS5 today, I think, is 80%, 85% of your wafers. You would normally be ramping BiCS6 right now. You are not skipping BiCS6, but ramping BiCS6 in particular markets. You are not going to ramp it as completely as you would have if the market was better. So, can you talk about just what that does to your cost curve? Obviously, there is going to be a blip in the curve; it won't be 15%. But can you still cost down while this is happening, and how? Yes. So, two sides to the equation. On a technology sense, we look for [an output] (ph). When BiCS4 or BiCS5 or BiCS6 or BiCS8 is done, we don't know what the market is going to be. So, you determine the technology strategy well ahead of time. You are trying to form for the long term. So, when I'm now designing whatever BiCS9, BiCS10, we are thinking about what happens four, five years from now. When we implement it, the only weapon we have at that time is what percentage of the capacity I may want to convert into that technology. So, we said BiCS5 is now running -- 85%, 90% of our wafers running on BiCS5. BiCS6, we may not take it. We'll take only, let's say, 25%, 30% of our capacity may go into BiCS6, whereas BiCs8, we may take into higher. That level, I still have real time as they go along. So, longer term, our focus on minimizing capital spend, the metric you want to measure is how much capital do I spend per 1% reduction in bit cost, that metric will still be very valuable. Because I have to make two levers to go increase in amount of bits, both by the technology and in the amount that they convert, whereas reduction in cost is the one that will drive everything. In the short term, you're right, we are only operationally gaining efficiency. BiCS5 is going to run. We gained by improving yield, improving back-end costs, improving supply chain efficiency, those kind of things. That will not give you 15% cost reduction, but it will still give you cost reduction. BiCS6 will give you a cost reduction. BiCS8, when we ramp, will give you -- get back the curve much stronger. And how is your road map going to be impacted by your JV partner not having a great liquidity position? Does that have any impact on your road map? I mean at the end of the day, you're in a JV, and you're in some ways -- I mean, yes, you have your own development, but in some ways, in terms of the JV, you're only as good as your JV partner. So, we've had a 22-year life together as a married couple. We have been together making wafers and bits for a very long time. Both of us have gone through tough times and good times. They have been a very good partner to us. They have managed their business the way they like. They emphasize on the kind of markets that they want to ship. We have chosen this vertical integration profile, where we spend not just on the development, we spend a lot more on engineering, customizing products to our customer needs, then delivering it as a fully finished system. With this in mind, despite all this, we have done very well. R&D goes on as planned, both of us talk a lot together, communicate a lot together, so that we can plan our capacity expansion, no hurdle in transitions. We have done that very well over there, and we'll continue to do that. Having said that, the current actions that they are taking versus what you are taking are actually quite different, because they are actually cutting negotiation, they're cutting start-ups, you're not doing that. So, the under-absorption cost of the fab are being absorbed by them, not by you. Now, there are the times where the opposite has been the case. So, can you talk a little bit about that? Is that more because of the end markets that you're choosing to serve? Exactly, precisely correct. This also shows the resiliency of the JV. The JV's resiliency allows each of us enough room to maneuver. We have enough individual freedom that I can ramp a certain node and not that node. I can allow for underutilization and one as opposed to the other. We can keep our costs very clear. We know what each cost are attributable to whom, and we make sure we divide up fairly. In this case, given our markets, we play with a bunch of our bits going into client where we see a small uptick in demand, we want to make sure that we are able to meet that. We have our consumer business that seems to have bottomed out. And even if it is not going up, it is at least we know where we can place bits and what kind of revenue we can get out of it. We are able to make those decisions. Now, none of this is cast in stone. We talk weekly. We talk all the time whether I want to underutilize, you want to underutilize, I want to ramp here. We do that all the time. No decision is one that is irreversible. They have made the call in September to take their demand down by 30% their underutilization. We are doing it by reduction in CapEx and pushing out BiCS8 -- BiCS6 ramp. Between us, we will continue to talk and know what is prudent for our end markets. So, can you talk through the logistics of that? Nick and I were talking about this earlier, not today, but previously. So, I mean, there are the JV fabs. So, the fabs themselves run underutilized, but you take the same number of wafers that you had committed to. They are the ones who are taking less wafers, therefore, they are the ones to absorb the underutilization. That is exactly correct. So, model the fabs. The JV fabs, as much as you allowed to say, we have 40% of the output, they have 60% of output. But you can never go point to a tool and say, âHey, that tool is mine and not yours.â Everything is intermingled. So, what you do is, hey, moderate as if it is 100% loaded. That's when we get our 40% cost, you get 60% cost. Now, if it is more, okay, you get to bear the extra cost. Got it. Let's kind of talk about the end markets that you choose to serve. I mean, you have an unmatched consumer brand, great brand. Not to compare you to that, but they've got a great client presence. You tend to focus on the high-end smartphone. One comment that I think youâve made publicly is you talked about as the demand dynamic has progressed through the past couple of months, there was a period where a lot of your consumer customers, particularly PC customers, just literally bought nothing for months at a time to clear out inventory. But now we're hearing bit-by-bit drips and drabs of PC customers saying, âHey, our component procurement is kind of back to -- I mean, it's not great, but we're procuring components again.â And this is the first time in 10, 12 months where the component procurement actually is up. So, would you -- can you sort of characterize like where you see your shipments versus demand? Are you shipping now to consumption, whereas before you were massively under-shipping consumption? Yes. So, let's split the markets up one at a time. The consumer market, our bread and butter, we have a premier position, we upsell in that marketplace. We saw the consumer business starting to take a dip immediately after the war started in Europe. In the March, April time period, we saw the weakening. That was the first indication of the market going down. The PC marketplace, as we were talking about, started dropping in the May, June time period, where, as you said, some of our OEM customers literally stopped buying overnight to clear out their inventory. The mobile marketplace has been sort of muddling along as long as the shutdowns in China have been happening, and China demand has been weak in mobile phone. We don't play a lot in that marketplace. At the high end, it's still good, but we watch the overall industry bit shipments, whatâs going on. Over the last several weeks, later in the fall, we started seeing enterprise and data center customers go very, very sharp in inventory correction. We expect that these -- the recovery is also not going to follow a similar path. That consumer demand, we probably will get to see it -- because we are going into a strong seasonal quarter. And all the way through Chinese New Year, we'll see what's going on in the consumer business. PC business, I was just talking about as the first small, small green shoot are starting to see with respect to demand. Even if pricing is not up, we're starting to see some demand going up. The hyperscale business is still several quarters away. It is quarters away. Let me not say -- put any number on it, quarters away before we think it will come back up. Got it. Then can we talk about just the long-term supply-demand dynamic in NAND? We've had the consolidation -- well, we've had a consolidation of one, and we've had export restrictions that are -- bring us another of the formerly six players. So, can you talk about sort of the supply-demand dynamic? You do have -- well, two large Korean competitors. You have one that is talking like they want to exploit the downturn to potentially spend a good amount of money. So, can you just talk about sort of how you assess the supply-demand dynamic as we kind of come out of this in NAND? Each player behaves independently on their own with their own motivation. So, I wouldn't want to talk to what people think and talk and what they say in public, et cetera. All I can go by is their actions and we do watch that action very, very carefully. Another factor that you didn't mention is it's not just the U.S. government restrictions on exports into China not just effect on Chinese player, even the Korean players have fabs in China that they need to figure out what to do with -- the one-year license that has been granted, what do they do afterwards, they have to do. So, when it comes out -- then you have a pool of capital that you being -- all of us being public companies do have to be prudent in the way we deploy the capital. We need to watch where the capital goes. Whether the capital goes, number one, into NAND or in DRAM or into foundry? If it goes into NAND, do you put it in greenfield or do you put it in some conversion? If it is, are you just expanding existing products or are you going into the newer nodes? These kinds of decisions are going to be dynamic. For our part, we are very, very clear. Our clarity in thought is we are not just trying to grow bits for the sake of growing bits. For us, cost reduction comes first, cost reduction is driven by capital spending. We want to keep that as our North Star when we do the development and planning. We want to make sure we spend the money in a way that we grow our bits with the lowest cost in the industry. We'll continue to do that going forward. Yes. I mean there has actually been fairly for all the bluster sometimes from some of your competitors, but it's been fairly disciplined spending actually over the past five, six, seven, eight years, right? And now, the elimination of potential longer-term disruptor ought to be good for the longer-term profitability of the business, which I guess brings me to my next question. So, you said that or you suggested that the HDD business is a high 30%-s, potentially, gross margin business over time. What do you think is the profitability that -- and it's not entirely in your control in NAND, whereas it is more in your control in HDD, but what is the long-term profitability in NAND that you think you can -- that the industry can ultimately achieve? So, we have talked about this at length in our Investor Day. We actually showed a curve as to through cycle, how do you want to think about it? Cycle being the cycle, you want to make sure our troughs are higher than our competition's troughs. We want to make sure that through cycle basis, 34% to 37% gross margin and improve from there. And the way we improve that is through several well-designed fashions. One, obviously improves operational efficiency, that's one. But second, portfolio management to make sure we are allocating our precious bits into those businesses that are going to be sustained more profitable than the others, making sure that we have well-defined share targets in individual businesses. As for example, we want to achieve the high teens in the enterprise data center drives. We want to make sure we maintain our 20 share in clients, et cetera, making sure they are all directed at the higher profitability. So, net-net, we do expect that the mid- to high-30%-s as a target for through cycle profitability. It can be much higher during a constrained period. It could be lower during trough period like we are now. But on an average, on a through cycle, that's what is needed for us to maintain the level of capital spending and continue to grow and deliver the value to the customers. We treat these two businesses separately. And HDD business is on its own. We want to go take it as higher profitability as possible. The NAND business has different dynamics with a number of players in it. So, that's where I put these numbers where they are. Got it. And is it fair to say -- Nick and I talk about this a lot, but is it fair to say that given the severity of this downturn and how the cloud customers in particular have pushed pricing much lower, I mean, so low, is it fair to say that -- and you can only speak to yourself, but is it fair to say that you and probably your peers are going to be a little more hesitant to expand CapEx out of this downturn because you felt some pain for the customers and maybe it's time for you to recapture some of the economics as you sort of come out of the downturn? So, in general, as you said, we have to act for ourselves and everybody else has to act on their best interest. We have become, in overtime, pretty cautious about our CapEx investment. We don't compete to go get share. We don't put capital in just that I want to gain share. We want to maintain our share position that we have talked about all the time, because we want to have a certain position in the marketplace, but we are not trying to invest to go gain share. We want to make sure that any capital investment I make is going to result in true differentiated profitability. You're absolutely right, our customers have consolidated. In the consolidation of our customers, the buying power on the true hyperscalers is very, very high. We are going through some serious pain. This has been a demand-driven downcycle where the fall in prices have been quite dramatic. Coming out of it, there are lessons for the longer term that we want to make sure we are able to do our part in making the supply-demand balance, right, because supply-demand does everything for our pricing. We want to make sure we invest our capital carefully so that we can get our value out of it. So, I wanted to go back, I was just thinking about your comments about the long-term profitability in NAND. And at the time, I mean, I think some of us had a sense that the U.S. government would become a little more draconian toward your Chinese -- your emerging Chinese peer, but at this time, that hadn't happened. So, does the comment that you think you can get to high-30%-s, that's the long-term profitability that you think that you can manage to, is that assuming -- or was that assuming that they keep growing? Or does now the handicapping of them as a longer-term competitor, does that potentially make that better? Look, in NAND, we have to live and die by what we, right? That overhang was always there. We were wondering about that company that may not be emphasizing profitability, but just be going on share. We were watching that. And the only solution we had of that is run faster. We had to make sure our technology was getting better all the time. We now have not changed our posture in terms of you need to run fast, because it's not like the rest of the competition is standing still either. It is not an easy -- I mean, as you know, NAND marketplace is not for the weak of heart. It is not for someone who is not just running all the time on technology innovation. So, we are watching that. Yes, the U.S. government actions have handicapped certain players in China, but we are not taking anything for granted. And I guess, Peter, I'd be remiss if I didn't ask about the strategic review. I know that you can't say much about it, but I'd be remiss if I didn't ask about it. My -- knowing that you have an NDA there, I mean no news, maybe it's good news, I don't know. But how do you kind of characterize the status of that? There are multiple things you're evaluating, obviously? Yeah. I mean, the key thing is, number one, we are out there talking to a number of different parties. I know some have been very public in terms of their involvement in the process, but there are others involved also beyond that. Number two is, whenever you talk of interested parties, thereâre also adviser. So, it's fair to assume that there's tons of eyes, tons of parties that we're involved with, where the issue is and we -- I think you were touching upon the timing, is with all these different eyes on it, there's different scenarios, there's different complexities, there's different things you need to consider. And so, that's where we are in the process right now. We're going through all of it. We're trying to go through it expeditiously. But also, we know we're going through this once, so we want to make sure it's being done right. That's really about as far as we can go right now, because, as you mentioned, you start off the question, we are still under an NDA, so we've got to be a little bit more circumspect in terms of what we say. Okay. Just back to the question about overall demand. So, we talked about consumer. You talked about there being some potential green shoots. We're hearing about that elsewhere in the PC market. You're seeing some resumption of some normalcy, let's say. David and I were talking about this earlier, you're seeing some resumption of normalcy in that market, even as demand will get worse next year. But what about the cloud? These are very sophisticated buyers, I mean, some of the most sophisticated companies on the planet. And they understand the dynamics of your business. I mean, I finally understand the dynamics of the memory business better than we as analysts do. And they're very smart about how they buy the product and when they buy product. And it seems fairly obvious to us that there's a potential in both your HDD business and in your NAND business that when you get into the late part of 2023 and particularly into â24, that this could be a really big upturn in terms of pricing, really big. And I'm sure that they see the same thing. So, I understand that right now, China cloud is weak and U.S. is going through some digestion. Predominantly, it seems like a second derivative. CapEx is growing this much and that CapEx is growing as much. So, there's an envelope there that they need to digest. But at the end of the day, they see what's happening. Do you see signs when you talk to them that they're going to come back to the table maybe pretty quickly because they don't want to risk waiting too late to next year and getting on the wrong side of this? Tim, we talk to them continuously, all level. There is a constant conversation that happens at all levels. There are products being qualified, so technology guys are talking to each other. These guys are talking to their counterparts and architecture and trying to figure things out. Procurement guys are talking with procurement guys all the time. The one message that we constantly get both from our side and their side is that these are not ordinary times. It's been a while since big hyperscalers were laying off people. Big hyperscalers are cutting down costs everywhere. Big hyperscale are saying no travel, no hiring, let things go. Right now, things are not being run by individual groups, but at a corporate financial level. They're saying, âYou have inventory, thou shall not buy anymore.â It's not done by procurement specialists coming in and saying, âHey, let me game this system for the longer term.â None of that is happening right now. From our side and on their side, we see corporate controls starting to kick in. We'll come out of this -- this too, as we have seen in all of our cyclical businesses shall pass. When that happens, as you said, that engagement, the level of discussions will pick up very, very fast, as we start the fall for the next set of drives that need to go in, or components that need to be bought to make drives, they are going to see this. And we expect that the trouble is none of us quantify the timing with which this is going to turn. That I am not yet ready to speculate on when this going to. Great. I guess, maybe with the last two minutes left in the session, your stock is obviously -- it doesn't take a rocket scientist to take what your peer trades at and take a discount to their market cap and apply it to your HDD sales, and you're not left with very much for your NAND business, that is not rocket science. But at the same time, something has to happen to unlock that value. So, with that as a lead-in, what do you think -- I mean, you sit there and watch your stock all day, and you're obviously probably frustrated where it trades at. But what are the key messages that you think investors are missing or the key attributes of the company that you think of that are missing given where the stock is trading? So, I will leave the stock trading question to Peter. But I'll tell you, from a corporate perspective, the big messages. On the HDD side, clear technology leadership. We are executing a lot better. We have a sizable quantifiable lead in technology. These are being -- products being qualified as we come out of it. As we come out of our current downturn, we're going to be in a very, very well positioned way to grow the HDD business. So, HDD business, there should be no discount to start with. On the flash side, we have not changed our philosophy, our philosophy of making sure we are being the most capital efficient on all sides. The JV allows us to reduce our R&D spending. We share R&D spending. That's already an advantage. Capital efficiency and thinking about the road map long and about, we have done this a long time. We know how to do this. We will always have the best cost structure in the industry. That allows us to go with this idea of having -- making customer-specific products in the broadest channels to market that anyone has in the industry. Those are strong points for the flash industry coming out, when we come out of this downturn and back up.
EarningCall_1878	So Iâm delighted to welcome our next speaker, who is Jane Fraser, CEO of Citigroup. Jane, I think has been at Citigroup for 18 years, is that correct? 18 years? I was going to say how long you have been in the banking industry, but I wonât. And sheâs been the CEO since March of 2021. This is the first time that Jane has presented at this conference. So weâre delighted to have you. Hopefully, you will be the first for many. No, so itâs a pleasure. And weâve got a lot to talk about. So, weâre starting with the same question pretty much for everyone. But you obviously have a unique picture on whatâs happening with the global economy just given your footprint. So maybe you can talk a little bit about what youâre seeing maybe focus on some of the key geographies that you operate in, and maybe just talk broadly about what you're expecting around the macroeconomic picture for next year. And how much of a divergence you think you could see between some of the regions that you operate in? Yes. So I actually think this year from a macro perspective played out largely as we had anticipated as we talked about different earnings calls. So we're now in a phase of rolling country recessions rather than everyone coming at the same time. And I think that's a good thing. If we look around the world, let's start with Europe because that's where we're in, in the UK and Europe a recession right now. We believe -- and you've got the convergence of all of the stresses on the energy front together, obviously, driven by the war in Ukraine, red hot inflation. And it would be fine, but what I think we're worried about for Europe, in particular, I think UK, Germany, Eastern Europe, in particular, and Italy is we're starting to see a more structural energy cost impact. So we're thinking that we may well be seeing a decline in competitiveness for Europe because of the impact they're talking about '25, '26 now before the power situation is really properly resolved, and that's going to drive some more of the production to Asia and to the states. So good news for us here. So that's one of the dynamics I think we're a bit more worried about is that this is getting some more competitiveness impact for Europe. When you go to the states, it's - compared to elsewhere in the world, it is good to be American, and I think we've seen the resiliency in the economy. Obviously, things are softening, but when we're looking at the two most important pieces of data, which is services inflation, our economist puts it, I think, very nicely, which is it is painfully persistent. And that's obviously linked into the strength in the job market, which, again, we're still seeing that resiliency and strength there. So we're anticipating that the Chairman power is going to have the rights. While they show, they're going to be higher than the market would like for sure and for longer. And that, that's, therefore, more likely to be a recession in sometime in the second half of next year. But all else being equal, and that means no one does anything naughty on the geopolitical front that then looks like a fairly moderate one because banks are in good shape, corporates are very healthy, consumers are healthy as we'll talk about. Then when we look at Asia, it's interesting because it's China that is the weaker one in all of Asia. We're seeing the rest of Asia performing pretty strongly that we're seeing mobility again, people back traveling, they're back out and about. And so the Asian consumer is coming back online in a more meaningful way. India is a particular bright spot that we get quite excited about. They've got a 7%, 8% growth rate there going to have more people than China next year, and they've got a bit of swagger about them these days. And the entrepreneurship is just a living well there, itâs China. And we are worried on China. And itâs just a psychological impact, we see it from our people on the ground there, this long of the lockdowns has an impact, we think, on the consumer behavior. So the fact we're seeing them looking at some opening up is a good thing, but I think this one is going to be -- this is going to be a bump reopening. And you look at ESOL employment, you look at low labor force participation by women, you look at the aging of the population is in their housing market. Iâm not sure this comes roaring back the way that some people hope it will. Okay. So a couple of questions. The first is what are the risks that you are most concerned about outside of credit normalization? And then I guess linked to that, how do you best prepare Citigroup for the economic outlook that you had, especially in the short term? Yes. So I think the risk we're seeing right now is much less on the credit side. And I look at our own loan portfolio, our corporate loan portfolio over the last two quarters that we announced. We had $22 million of losses over the portfolio, it is a few hundred billion. I mean they just don't. And now that is also testimony to the quality of the corporate client base that we have, and it's obviously develop well focused. But we're more worried about market liquidity and we're more worried about some of the counterparties so that we saw that with the metal exchanges. We saw it with London LDIs where is it that these different things pop up. So what's the collateral like? Because there's a lot of non-regulated financial players out there sitting on a lot of assets and they're pretty opaque. Yes. There are a lot of it just being very, very sensible around your client due diligence in the first place, which I think is one of the areas you've seen. I don't want to tempt fate, but we've not been involved in many of the issues. Iâm sure that didnât go unnoticed, and thatâs good judgment on client selection. And the second piece is just being on top of where issues come up or where we see stresses acting swiftly, decisively and managing the risk. I know, as we did with Russia, for example, too. Okay. So before we go into the strategy, maybe we can talk a little bit about the current environment. Maybe you can talk about the fourth quarter, how that's looking and other things that we should be aware of? Well, Mark and I laid out a set of different expectations for the year at Investor Day back in March and it's very important for us that we deliver what we say we will do and we have this year. So for this year, we're looking at revenues for the full year coming in, in low single digits ex the impact to the divestitures, the same for the expense guidance despite everything that's going on in the world, we said 7% to 8% for this year â divestiture impacts and we will be delivering that as well. At the same time, as we've obviously had to increase capital and you would have seen we grew our CET1 by 90 basis points in two quarters. So we're pretty disciplined around what we say we do, we will do. So if we look at the fourth quarter in that respect, how is it going? So we're a little nervous answering that question, right, to the beginning of December, given what the lovely month of December always proves to be though. With that caveat, if we look at the trading side, for example. So October, November were good months in terms of trading activities. So with the caveat of December is always an interesting month in the market, particularly one where liquidity is where it is, we would expect to be at sort of the 10% mark in terms of revenue growth for this quarter in markets. Investment banking, theyâve had a tougher go there and I don't -- we have not seen the wallet recover in the capital markets, the way I think some of us had hoped we might in the fourth quarter. So all eyes will turn to the first. And there, we expect to be roughly in line with where the wallet is and weâre just down sort of 60% or so from pretty extraordinary highs last year, it feels long time ago. And then expenses as I say, will be in line with what we said. And on the credit side, which I think has got a lot of attention on that one. You've got a few different things going on. Weâre seeing the normalization of credit, and that is happening, albeit at levels that are well below the pre-COVID level. So the â really, the only area that we're really seeing the movement in our consumer credit portfolios is in CRS, where itâs starting to normalize, I would say, retail services. And where it is that it tends to be in the lowest FICOs and in some of the areas which is the newer vintages that we're seeing it, but again, well below the levels. And on the corporate side itâs more anticipating where things go. So youâve got that normalizing. You've also got the volume growth, as people are borrowing and we've seen the demand on the corporate side for the lending books because the capital markets are shut as well and very robust growth in trade as well. So that put all that together into CECL models and scenarios that we're expecting the total cost of credit for the fourth quarter probably to be in the 17, 19 range. And again, I will caveat that that we're still expecting more data to come through in December. And some of those data flows are quite material ones. So that number could change, but that's what we're looking at on total cost of credit. And I think that puts us I feel very, very comfortable with the quality of our portfolios, and I feel very comfortable with the quality of the reserve we're doing. And the fact, we've been very conservative around this. So hope to give it back. Yes. I just came back to Europe and they hate us there, because they say youâre American because we have a demand problem and Europe has this, they do not have a demand problem. They have not seen spending levels and other pieces return to the pre-COVID levels, whereas in the states, itâs still firing pretty strongly. So softening. If we look at the consumer first, we still see very strong growth in terms of our core portfolios like the Walmart, some activity itâs being strongly seen in the markets. I look at Costco, I look at American, the travel sectors at rest. The consumer is still spending heavily there, less spending in the luxury segments, less spending in some of the home entertainment, and I think there was a cupboard left in America that's got room to put more of that equipment. So you get a differentiated story as to where the spend is and isnât, but our spend is very robust. Payment rates are very strong still. They're coming off a bit, as I said, in Citi retail services. But the branded card side, we'd like to see it come off a little bit more. And then on the corporate side, as I talked about, we've seen pretty strong growth on the demand, on the lending side. Trade, in particular, because I hear a lot of people say, oh is trade really happening? Yes, it is happening. There's a lot of flows there and capital market is being shut I think is driving demand for corporate lending, too. So it's quite great, it's softening, but it's pretty robust out there. And the deposit side as well, I think we expect to be flat year-over-year, both the consumer and on the wholesale side. Wholesale, we were -- I mean, the deposits weren't - the betas weren't moving the way we thought they would. And I can suspect they will catch up faster now that that â because of the speed of the rate increase, but we feel very comfortable there. And on the consumer side, it's really at the higher end, but more of the wealth clients are moving into some of the higher returning product suite within fixed income and cash. Weâre seeing those movements, but - yes feeling pretty healthy. All right. So letâs move from the shorter terms of the longer-term, and I know you had your first Investor Day after five years in March. I was thinking it was like a [Indiscernible] but a lot has changed since then. So maybe you can talk a little bit about the progress that you've made since becoming CEO. And maybe look, if you were to give yourself a scorecard, so far what would it look like? Yes. So letâs get through a few things. First of all, I'm really pleased with the progress we've made. And I think, again, that theme of -- we feel very strongly we have to -- we've laid out a number of different drivers of the strategy. We've laid out a number of different targets, guidance and the like. And this year, we deliver against them. And that's something that discipline of what we say we do, we do that. And this year, we have -- we've certainly done that on multiple different dimensions of what we said at Investor Day. If we pass it apart, I think we've laid out a very clear strategy for the firm based on five interconnected businesses. And we deliberately put a strategy together that would withstand all sorts of macro conditions and geopolitical ones and it has. Iâm delighted to say, and well weâve seen that in the results so far this year because different businesses provide diversification amongst them as well as being interconnected. We feel very good, we feel good about the strategy and how that's progressing. If I look at some of the areas in terms of that progression, transaction services and the security services that really -- they're firing on all cylinders. Both helped by the rates environment, but the drivers of growth there are particularly strong. And they're ahead of the plan that we expected commercial banks and another one ahead of the plan. On the flip side, wealth and the investment banking wallets, particularly Investment Banking one is further behind. So we've been repacing some of the investments there, as youâd expect us to, but we donât really make quite a few investments. And we've seen those really paying off with client acquisition, new advisers and talent that we brought him. So, you'd love a different macro environment there, but I am happy that progressed. Marketâs doing a good job there in terms of the capital allocation, whilst making sure that we're still very focused around the core client base that we serve and taking the client lens to how we think about returns rather than just the product lens, but very good progress on the revenue to RWA, which is kind of the marker we use. And COGS is itâs as I say, it's nice to see people borrowing again and actually some credit normalization is good for our business there. And there's some really good innovation that's happened thatâs driving, that driving that franchise forward. And we've got to move on with divestitures. They've really -- that one has been head down, get those things done and so happy there. So from the strategic perspective, I think we're all pleased with the progress and how we're beginning to see some of the early results come through in the data. The most important piece, I think though is that we are running this firm very differently from how it was run in the last couple of years? We're very mindful that we have to address the issues that have held us back in the past and at the same time, make sure that our people have embraced not just the new strategy, but also a new way of working. And that tone has been set at the top myself and the management team. So we are -- I'd say the difference is how we're doing, it's very hands on in terms of the management approach. I mean it sleeves rolled up, and it is there in the details, making sure things are getting executed. We have a very, very rigorous and disciplined approach to how we're looking at how investments are being made, whether are they being made in the right places, they did over what they should be, if they're not, what we do about them simply with the transformation. Are we getting the outcomes that we're expecting from it? Are the resources in the right place? Are they delivering what it should be, if not, how do we get different. Different elements moved around so that we're really executing well or blockages out the way. Similarly, with the other -- the day-to-day running of the bank. So it's the hands on management team, itâs enterprise-wide. And that's another big difference. Everyone is getting in the room together. So when we're going through the data plans and what we're putting in place there, you have risk, you have finance, you have the institutional business. You have the technology team. You have the data team there. They are all in the rooms together, working together, putting horizontal plans together and holding each other to account. That silo braking is really different from how we used to operate before, which was much more down in individual swim lanes. So the operating rhythm of the bank is sleeves rolled up, hands on from the management team. We're in the details, and we're micromanaging this to drive the changes in how the place works. Third piece, very important is the culture. Is culture of excellence and accountability? And there in terms of the progress we â while I was chatting with Mark earlier, our voice of employee results this quarter for the last year are outstanding, I mean really, really strong. And that's a reflection of a few different pieces. It's telling us our people embrace the strategy. They're probably our toughest critics. Our investors are very tough critics, but our toughest critics are our people. If this place, this bank isnât simpler, they're letting us now, if things are moving faster, they are letting us know about it. And we can see that the organization is getting nimbler and more agile addressing the different issues and the simplification agenda is coming through. And the talent we bought in is just spectacular. I mean, I like shopping, but I mean we brought in some really great, thereâs no time for any day job, just saying am I not contributing to GDP this year. But the â itâs weâve really got strong talent and I looked down the three layers beneath me, nearly the majority of people are new enrolled. Many of them are new to the bank or other people that we've moved around. Attrition is way down again. And I think that side of things, this culture of excellence, of accountability, but also getting behind delivering for clients, delivering to the regulators on the risk control, delivering for the shareholders. This buy-in in the organization momentum you can feel that behind us. So it's a long answer to question because it's a really important question that for us, we are absolutely determined that we will be addressing the issues that held us back in the past. We are excited by the strategy, and we are running the place very differently in how we're executing so that we're really delivering on everything that we say that we will do, and this is and what gets us up every day is this for our clients, this is for the safety â of the bank and this is ultimately for the shareholders, because we're all shareholders and we want that price to book ratio very differently from where it is today and we are determined to make sure that you will buy into this and get behind it, too. So let me ask you on two pieces of the strategy. The first is the divestiture. You mentioned that and you've actually done quite a lot this year. So I think it strike a lot. So Australia, Philippines, Malaysia and Thailand. You're Bahrain, youâre winding down career. Bahrain just now. Well itâs just ahead of plan, and we just were closing this week the sale of the Hill [Ph] portfolio, which is the majority of the credit and non-Russia too. So I guess the question specifically is look, has any of the macroeconomic uncertainty or just the volatility we've seen in markets impacting your ability? Yes, Iâm glad weâve got to move on. That's for sure. We have got about $3 billion of capital that we have contributing divestitures this year. And then the wind downs are going, you never expect to say the winddowns are going faster than planning in Korea, but they're going fast in planning Korea. And I have to say the team has done an outstanding job in Russia. It's doing well, and we look to next year. Weâve got a lot on the plate as well for next year, but we feel good about it. Okay. And then on the risk control side, I know it's difficult to talk about some of these things because a lot of it is confidential supervisory information, but maybe you can just update us on where you've got to on the transformation part of the strategy and just talk about how the work is progressing from your perspective? And again, I think the importantly, we think of the transformation, not just a consent order, it's the broader modernization of the bank. And if we look at what -- where we've underinvested in the past, frankly, around some of the operational and other areas. So we -- where are we. The first phase of work that you do is we lay out the target date of when that we want to be for each of the different strands of the bank. And that's one where we have our target state for technology. We have it for data as well as the different risk and control, finance other areas. Then you put the plan together through the different phases of its multiyear for what are the different paces of work? And then -- that first phase took quite a few consultants. And then it was also a phase where you then build the execution capacity to do, so you are bringing in more heads. A lot of that. We got about 10,000 or so people focused on the transformation alone in addition to the BAU teams that are working as well around it. A lot of the headcount is ops and take. It's about -- we probably had about 6,000 incremental technologies this year, for example. Then that, thatâs got done and now as we work through the different phases of execution, we update the plans as we go, we get input from the regulators as we go, which we incorporate and we learn. And new technologies, new pieces come in. So itâs sort of living, this is a living transformation rather than something stuck in a point in time. And the next phases of work will be replacing people with the technology. So as we are automating processes as we're automating controls, then that replaces means people who are doing the make a checker roles for example, things like that. So we're at the beginning of that phase, that's a big wave of execution where youâre literally rolling through different data sets in the bank, and it's we call it a wash win through peak process of just making this almost industrialize as to how do we go through the data, get onto the new technology platforms, integrate multiple platforms into one, sometimes new ones and simplify the bank and it's just -- it's multiyear, but head down, get on that. That's where we are. So let's talk about expenses in that context. I think you mentioned you're on track for the 7% to 8% expense growth ex-divestitures for this year. Look I think one of the bigger questions investors have is whatâs the longer-term trajectory for the efficiency ratio for the firm? What are the efficiency initiatives that you think that you can pursue longer term? And -- but when that does that actually start to show up in terms of number, especially in an environment where inflation is running at high single digit? Yes. And again, we didn't think inflation would be where it was, and we're delivering expense target we said at the beginning of the year. So of the different environment, we're very disciplined around this. We will, of course, give guidance in Q4 around what we look at for the next year for 2023. So I won't be commenting on that. But if you break down what happens to our expense base. As we say, in the near term, so we laid out the near term and medium term, 3 to 5 years and then the longer term at Investor Day. In the near term, the expense base plateaus. And then it begins to arc down and there are a few different dimensions to that. First of all, is the investment. So you can imagine if you're investing in technology, you'll have -- you're keeping the old existing platforms running while you're migrating on to the new one, and then you start shutting the old ones down. You're investing in the technology teams who are automating processes and then you're able to take the expenses down. So there is a natural arc to the investments that we're making that will drive the expense base down in the medium term. And we'll see signs of that in the near term as well, it will plateau. Then you've also got divestitures. So we are making good progress. And that one's both the costs you sell, then you have the TSA because some of the costs that they buy us pay you full while you go through the migration process, so that's the nice news is that gets compensated for. And then you have some stranded expense. That can be at a country that can be at the regional level that can be at the global level. And that's the expense that we have micro plans for how do we eliminate it. And to start off with this year, it's mainly been getting rid of the expenses in the countries and at the region level for the divestitures we've made. But we will be selling approximately 25% of our employee base. That's 10% of the revenues of the bank. That affords us that statement alone should show you the simplification opportunity ahead, right? So no, if this bank will say, when I say this bank will be simpler once you've got more of the divestitures done, that is the case that we'll be focusing on more of the organizational and operational simplification that will also bring the headcount down. In the meantime, we're being microscopic and disciplined about making sure any money is spent is being done robustly. And then as you say, recessions coming will also be pacing investment sensibly and we'll be taking managing expenses the right way. So let's talk about some of your individual businesses, let's start off with the services business because that's been a real bright spot, and that's obviously the TTS business new security services business. You made a big investment in that business, but it's also been a great environment for that business. So maybe you can just parse out how the strategy there is progressing? How much of the growth that we've seen this year is market share gains just versus the environment? And how sustainable is that growth rate as we think about the next few years? Itâs interesting is one of the areas, a lot of investors, I think you're trying to get their arms around what is TTS and why does it have such an enduring competitive advantage because we're obviously seeing the benefit of rates. But this thing is really, really growing of the core drivers of talent and technology investments made over the last few years. Itâs capturing share versus the competition. And we're also getting very good client acquisition where we are a year ahead for a plan, for example, with the commercial bank, which is bringing a lot of mid-market companies. So maybe if I just spend a minute on, let me take a client example. So I am thinking of a very large technology firm presence in over 60 countries. And this is -- yes, this type of client we'll be making well over $100 million of revenues from just in TTS. They have 1,000 accounts in 60 different countries around the world with this. We do all of their payments and their receivables. We do their liquidity management. We do all their supplier and procurement and value chain. We do all their payroll around the place and we do there yes, the commercial cards in there, so it's everything in working capital and into running the guts of really running the institutions. So if we're not there, they don't open. And it's the breadth and depth [Ph] of that relationship and those capabilities throughout the treasury suites and broader in so many countries the data that affords and how that platform all comes together to enable a treasurer, a CFO, sometimes business development actually operate their institution. That is insanely sticky. And this takes more than five root canals to get that out of there. It's growing enormously because we've seen the numbers in terms of the cross-border flows. What's happening with trade, all these pieces, they're changing in there, they're changing around different parts of the world, but we're everywhere. So it's not that you lose it in one place, but you're growing it somewhere else in the network. And you add up for 5,000 multinationals that constitutes $4 trillion worth of volume every single day. We moved German's GDP daily, just 4,000, 5,000 multinationals around the world. And we're often in countries that nobody else is in. That is an unsalable advantage. And that's why the fintechs love working with us. So when we look at this, this is growing from -- we tend -- we're getting a very high win rate. In this type of global environment, you want somebody who understands everything that is happening in all these different geographies, and we know how to manage the risk and help them with it. So a lot of new client acquisition, a lot of wallet deepening and then obviously, the rates employment is helping us. So this thing, when I say -- this is the hidden gem of Citi, this thing extraordinary and it swipes the marginal strategy behind it. And then â if I didnât mention that we've had $1 trillion of new assets on the costs and assets on the management that we've unboarded this year in security services. So that's another pretty extraordinary platform. So yes, I'm excited about those ones. So let me ask you a couple of questions about capital and also about just the value proposition of the Citigroup, because I think we've got a few minutes left. But on CET1, obviously, there's been a significant increase in the requirement over the course of the year. I think you're targeting 13% now. Maybe you can talk a little bit about how you're thinking about capital returns when you get to that level. There's also a lot of uncertainty around where capital requirements could go because uncertainty about the macro environment. So when you get to that level, are you going to revisit and say, look, should we keep some of that capital just because of the uncertainty of the requirement over the environment? Soâ¦ Look, I think, as Mark said, we're going to -- you take it -- we have a very clear plan and direction and target on capital, but we take it quarter by quarter when it comes to the buybacks. I would point out, it was we've grown our capital by 90 basis points in 2 quarters. So when we say we're going to do something, we put heads down, get it done. We've set a target of 13%, which includes 100 basis points of management buffer, which we're looking at probably in the second -- in the end of the second quarter. I will check with Mark, I've got that one right, for next year. And we are extremely focused about making sure that we get capital back into our shareholders' hands. But we're just not going to cut corners, right? I think you're seeing us. We'll take the tough decisions, we'll get things done, we get things executed and we just make steady progress and move forward. So our commitment is to get as much capital as we can to our shareholders. But in meantime, we're just -- we're building. We've got some divestitures next year, one of which we'll have some CTAs associated with it and weâre building all these things into the plan. But I feel very good about the earnings power of the bank and everything else that we've got behind it. It's really just a question of time. So let me ask you then from your perspective, when you think about the path for Citigroup, when you think about the valuation, I mean what do you think the market is missing? I mean what do you think is the most underappreciated part of the Citigroup story from your perspective, when we talk to investors? So I would think it's bad to say from my perspective because I've whatâs relevant is the investors' perspective. So what am I hearing from our investors about when they look at us? I mean we have pretty candid discussions, as you can imagine. What I hear the first piece is I think people are comfortable with the strategy that we've laid out, but we're hearing that this makes sense, the five interconnected businesses that will drive us to better returning mix, address the business mix. And the reset that we did at Investor Day about these â Citi is that, I think, is well understood. The two bits in that, I'd say that I would highlight that we just talked about TTS. I think investors don't fully appreciate on quite that enduring competitive advantage there. And the growth potential and how sticky that is for our deposits, a range of other things and the growth. The second bit I'd say is there's also a tendency to equate our global footprint with where we take credit risk, do not. We do not do that. We take our credit mix. When we look at our corporate loan portfolio, over 80% of that is investment grade. It is heavily in those 5,000 multinationals that we talked about. And I think, again, I'd point to $22 million of credit actual credit losses in a sorry, $18 million, my apologies of actual credit losses in a 2-quarter period. In this type of bumpy macro and geopolitical environment, where there's all hell breaking news in various parts of the world, I think takes some comfort around the quality of that credit portfolio. Then the other piece which I think is I totally appreciate the proof is going to be in the pudding for Citi in terms of our execution. The management team, we are fully aware of that. I am fully aware of it. We are trying to demonstrate that pudding in terms of we deliver what we say we will do. We're making progress with urgency around simplifying the bank around, getting the strategy executed, running the bank differently from before changing the culture, and we're trying to make sure that you can see as we go, that while this is multi-year, well this is not a linear journey that you can see that this is a management team that is building the credibility and the execution around it. So I think the under appreciation, I don't know if I call it under appreciation of that, but I think we are very aware that we have to deliver, and it's been a good year. So I think we're out of time, but just 1 very quick clarification question just been asked on the trading in New York banks that's a year-on-year? Year-over-year. So as we say, we're hoping 10% in our market based on what we've seen in October, November and on the Investment Banking side, the year-over-year the wallet street is down about 60%. We expect to be roughly in line.
EarningCall_1879	Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the AZEK Fourth Quarter and Full Year 2022 Earnings 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 and good afternoon, everyone. We issued our earnings press release and a supplemental earnings presentation this afternoon to the investor relations portion of our website at investors.azekco.com. The earnings press release was also furnished via 8-K on the SEC's website. I'm joined today by Jesse Singh, our Chief Executive Officer; and Peter Clifford, our Chief Financial Officer. I would like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meaning of federal securities laws, including remarks about future expectations, beliefs, estimates, forecasts, plans and prospects. Such statements are subject to a variety of risks and uncertainties as described in our periodic reports filed with the Securities and Exchange Commission that could cause actual results to differ materially. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call we will discuss non-GAAP financial measures, which we believe can be useful in evaluating performance. These non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of such non-GAAP measures can be found in our earnings press release, which is posted on our website. Good afternoon and thank you for joining today's call. We hope everyone had everlasting Thanksgiving and we appreciate you taking the time to join us. The AZEK team delivered solid fourth quarter performance and despite a challenging macro environment, we delivered strong growth in revenue and adjusted EBITDA for fiscal 2022. I'm proud of what the entire AZEK team has been able to accomplish as we navigated through a constantly changing external environment, while continuing to provide strong service to our customers and drive meaningful innovation in the marketplace. During our Investor Day in June of this year, we highlighted that we play in large growing and resilient markets with strong tailwinds, operate leading brands with category leadership and have multiple levers to drive growth and margin expansion. We remain confident about our markets, our strategy and our ability to deliver on our long-term objectives and goals. As we enter fiscal 2023, we believe that our business is well positioned to navigate through any macroeconomic situation and to continue the next phase of our strategic growth and margin expansion plan. For the fiscal year, we delivered $1.36 billion in net sales, generated $301 million in adjusted EBITDA, representing increases of 15% and 10% year-over-year and delivered $0.97 in adjusted diluted earnings per share. Our fiscal fourth quarter results and execution are all in line with our guidance and expectations share the last time we spoke. As previously highlighted, we expect that our Q4 to be meaningfully impacted by the lapping of inventory build 2021 and significant channel inventory drawdown. Q4 was consistent with our expectations with customer demand remaining steady and the channel drawing down inventory levels. The destocking we saw in the channel was primarily in our deck rail and accessories business, where we generally saw consistent positive sell through growth on a dollar basis and modest declines on a unit basis. This resulted in a meaningful drop in our net sales to our channel partners. We were able to hold our balance sheet inventory steady by lowering production levels in Q4 to the levels required to meaningfully draw down the necessary inventory from the channel. We have plans for continued lower production volumes in fiscal Q1, 2023, before we expect to increase our production levels starting in fiscal Q2. Because of our aggressive actions to move quickly past this period of under-utilization, we expect to see the greatest financial impact in Q1 and early Q2. From a demand indicator perspective, our recent contract survey highlighted continued backlogs for the remainder of the year with many of our contractors booking into 2023. However, over the last few quarters their concerns have shifted away from material availability toward economic uncertainty and labor availability. We also saw consistent consumer engagement with leads and samples continuing to show year-over-year growth within the quarter and a continued modest year-over-year decline in web traffic. Our strategic initiatives are on track with strong growth in new products, pro-dealer channel expansion and positive retail channel point of sale trends. Our recycling expansion continues to progress as expected and we exited Q4 having achieved a key milestone in our expanded use of recycled PVC for our advanced PVC decking lines. These decking products are now made up approximately 60% recycled materials, an increase from approximately 55% at the beginning of fiscal 2022. We also saw strong performance from our commercial segment with sales and segment adjusted EBITDA growth driven by the combination of net price realization and operational discipline. In fiscal 2022, the rapid increase in inflation during the year created a lag in our ability to deliver desired margin and deferred our margin expansion as pricing lagged raw materials. As highlighted on our last quarterly earnings call, our price cost margin coverage has moved to a net benefit and we have been running with higher recycled rates, which will provide us a cost benefit as we move through coming quarters. We have also taken steps over the last two quarters to bring down our overall SG&A expenses, while continuing to invest in customer activity and market expansion. And we have made the conscious decision to prioritize certain customer investments in Q1, while reducing activity in Q2. As we look back on the quarter and the fiscal year, we have made significant progress in executing against the plan we laid out at the beginning of the year and against our long-term goals that we highlighted at our Investor Day in June of 2022. We operate with a clear strategy to drive above market growth through market conversion, new product innovation, multichannel expansion and a best-in-class customer journey and market expansion through adjacencies. We have a clear operational strategy of expanding the use of recycle and leveraging our AIMS program to drive increased profitability. And our focus on ESG is a core part of how we operate and who we are. We once again received multiple awards for our culture and focus on ESG. Most notably, we were recognized by CohnReznick in their inaugural Gamechangers in ESG award, highlighting AZEK's leadership in driving positive change for our people, our customers, our communities through ESG. We are also proud to be need to the list of America's most trusted companies by Newsweek based on fair treatment of employees, opportunities for career development and employee compensation and trust in the company's values, leadership and customer facing communications. In addition, we continued our history of innovation in new product development by launching multiple new products in the year. In our exteriors segment we took home the HBSDealer Golden Hammer Award for AZEK's Exteriors Captivate, Prefinished Siding and Trim for its innovation and value. In decking, we received Architizer A Plus product award for TimberTech's Landmark Collection for decking in the sustainable design category. Finally at our acquired structure business unit, we are proud to have officially launched Cabana X, a non-permanent, high quality, high-tech cabana to AZEK's pro channel and to commercial applications. This new product expands structures already robust product portfolio. Moving to our outlook. Our business is overwhelmingly focused on the repair and remodel market, with strong long-term tailwinds driven by the combination of favorable demographic trends and an aging housing stock. AZEK is also experiencing the positive impact of a sustained focus on outdoor living in a material replacement from traditional wood products towards our long lasting and sustainable products. Industry data suggests that there are around $60 million decks in the US and approximately half are estimated to be beyond their useful life. A meaningful part of our decking business is driven by this need to replace wood decks. The large installed base and natural obsolescence for materials such as wood, helps drive our material conversion opportunity. These strong tailwinds combined with company-specific strengths around new product innovation, portfolio breadth and best-in-classes esthetics, collectively, we believe AZEK is positioned to drive above market growth and margin improvement. While we continue to see solid contractor demand and continued interest in our category. We expect the macro-economic environment will likely impact our business in 2023. For planning purposes, we are assuming that approximately 50% of our business that is new construction focus will see high teens decline from a volume perspective. We are also assuming repair and remodel activity will be down mid to high single digits. These assumptions are based on a number of industry projections that include the impact of recent interest rate moves on new construction and the broader economy. The combined impact of new construction and R&R leads to our planning assumption of a 10% decline in volume excluding the contribution from acquisitions and pricing in fiscal 2023. Using this assumption, we would expect to deliver $250 million to $265 million of adjusted EBITDA in fiscal year 2023. As a reminder, we are exiting 2022 with a number of positives on the margin front, including positive price, recycled benefit, productivity and a moderating raw material environment. We expect the majority of our underutilization to impact Q1 and part of Q2. In fiscal 2023, we expect an approximately $8 million impact from an update to the process by which we estimate the value of our inventory. This incorporates our increased use of recycle materials. A significant part of the impact is expected to occur in Q1 and early Q2. We expect to see the benefit of our margin and sourcing programs in Q3, as we work our way through higher cost inventory in the first half of 2023. Our assumptions for the back half of the year include continued price realization, commodity deflation that we are already experiencing, completed productivity actions and our current recycle rates. Pete will provide more detail in a moment, but with the visibility we have in our costs in the balance of the fiscal year, we are confident that we are in a strong position to navigate the next few quarters and expand our margins as we move past the first quarter. We're also confident in our ability to execute our business model to drive incremental market penetration and growth. Thanks Jesse and good afternoon everyone. As Eric highlighted upfront, we have uploaded a supplemental earnings presentation on the Investor Relations portion of our website. First, I wanted to provide some color on the operating environment during the quarter. As Jesse mentioned, the demand environment has remained relatively stable. The sell through profile was positive on a dollar basis and modestly negative on a unit volume basis. This backdrop has allowed us to make real progress in taking inventory out of the channel with our partners. The 4Q inventory reduction in the channel was in line with expectations. From an operating perspective, the focal points for 4Q were around getting our conversion costs down as much as possible to match the significant drop in production levels without hurting the future. It is important to note that we held our balance sheet inventory levels flat, sequentially quarter-to-quarter. Production levels were down more than 40% in the period. On the commodities front, we saw the bulk of our purchases portfolio remained stable in the quarter, with the exception of PVC resin, which saw a decline during the last 10 days of September. Since the close of 4Q, we've also seen softening in other key commodity inputs. This is a positive news for the business in the long run as it sets us up to recapture lost margin during 2022, while we were playing catch up on inflation versus pricing. There is an approximately a 4.5 month lag on purchase price variance positively impacting our income statement. Therefore, we will not fully realize the impact of that deflation until late 2Q and into the second half of 2023. For the full year fiscal 2022, I'd like to reiterate Jesse's point that we're proud of the results we delivered in a very disruptive environment. To quickly recap, full year net sales were $1.356 billion, up 15% year-over-year, while our adjusted EBITDA was $301 million, up 10% year-over-year. For the fourth quarter of 2022, we saw net sales of $305 million, modestly above our guidance. Net sales declined 12% year-over-year, driven by the previously communicated channel inventory reduction and we are well on track to achieving normalized channel inventory levels by the end of the current quarter. During the quarter, we updated our process by which we estimate the value of our inventory. The primary update was made to include more consistent and predictable recycling introduction rates into our inventory valuation. The resulting impact reduced our inventory valuation by $19.3 million during the quarter. It is important for us to do this given the significant progress we've made in our recycling introduction rates, which are now more consistent and the stability of our operations has made delivering the impact more predictable over time. Our business will benefit from the improved clarity and predictability around our margins. 4Q '22 gross profit decreased by $40.4 million or 36% year-over-year to $71.9 million inclusive of the previously mentioned update and process, by which we value our inventory. 4Q '22 adjusted gross profit decreased by $16.2 million or 12% down year-over-year to $114.2 million. The adjusted gross profit drop was in line with the decline in net sales. Note, there is approximately at two-month lag on our labor and overhead, which will push some of the cost pressure into fiscal 1Q '23. Selling and general administrative expenses increased by $7 million to $67.5 million or approximately 22.2% of net sales. The bulk of the year-over-year increase was the impact from the contribution from acquisitions and transaction related expenses, partially offset by one-time lower incentive compensation as a result of the reduced outlook in fiscal 2022. Adjusted EBITDA for the fourth quarter was $65.1 million, in line with guidance. Adjusted EBITDA declined 20% year-over-year, driven by lost volume leverage with the decline in both production and net sales levels. Net income for the quarter was a loss of $4.8 million or approximately negative $0.03 per share driven by the previously mentioned inventory valuation process update. Adjusted net income for the quarter was $24.5 million for adjusted diluted EPS of $0.16 per share. Note that our effective income tax rate in fiscal 2022 was negatively impacted by increased state tax expense recognized in the current period, which reduced our earnings per share by approximately $0.02. Now turning to our segment results, residential segment net sales for the quarter were $254 million, down 16.7% year-over-year, driven by the previously mentioned channel inventory calibration impact, which was largely in our deck, rail and accessories business. The exteriors business saw positive growth year-over-year and the acquisition of structure contributed approximately $24 million in the fourth quarter. Residential segment adjusted EBITDA for the quarter came in at $64.5 million, which was down 30% year-over-year. Commercial segment net sales for the quarter were $50.4 million, up 23% year-over-year. We saw double-digit growth at both our Vycom and Scranton Products businesses. Commercial segment adjusted EBITDA for the quarter came in at $14.6 million, an increase of $8.5 million year-over-year. Margin expansion was driven by favorable price commodity coupled with productivity. The Commercial segment team continues to exceed expectations. From a balance sheet cash flow perspective, we ended the quarter with cash and cash equivalents of $120.8 million and approximately $147.2 million available for future borrowings under our revolving credit facility. Working capital defined as current assets minus current liabilities was $348.1 million. We ended the quarter with gross debt of $678.1 million, which included approximately $78.1 million financial leases. Net debt was $557.3 million and our net leverage ratio stood at 1.9 times at the end of the fourth quarter. Net cash from operating activities was $40.1 million during the quarter versus net cash from operating activities of $89 million in the prior year period. Capital expenditures for the quarter were approximately $31 million. During the quarter, we executed share repurchases of $23 million or $1.1 million shares. The remaining authorization under our share repurchase program is approximately $319 million and we will continue to look to act opportunistically to make repurchases. Our capital allocation priorities remain the same, as we previously communicated. As we turn to the outlook, let me provide some context and color on what we are seeing and assuming for the balance of the fiscal year. Let me first take you back to our Investor Day back in June 2022. We articulated a sensitivity analysis in June that if our volumes were down approximately 5% in 2023, we can hold our adjusted EBITDA approximately flat on a dollar basis. The outlook that we're providing today has two specific adjustments to the sensitivity shared at our Investor Day in June. First, our fiscal year 2023 planning assumption is volume down 10%. Second, on the incremental 5% volume drop from the 5% to 10%, we are assuming 50% decrementals driven by the first half of the year. The planning assumptions we are providing on this call should not be considered formal guidance. We are simply being transparent on our assumptions that we are planning the business around. Our planning assumption of a 10% decline in volume, drives us to a target range of approximately $250 million to $265 million of adjusted EBITDA for the full year fiscal 2023. A few other planning assumptions to share, we expect lower capital expenditure spending in fiscal 2023 in the range of approximately $70 million to $80 million, which is approximately $100 million less than fiscal 2022 as we enter a period of more normalized capital spending. Similarly, we expect to generate significant year-over-year free cash flow in fiscal 2023. The strong free cash flow defined as operating cash flow, less capital expenditures will allow us to support our repurchase program in 2023. Additionally, we expect full year SG&A, excluding the carryover impact from acquisitions and more normalized management incentive compensation will be flat to down year-over-year. For additional planning assumptions to assist with modeling full-year 2023, please refer to the supplemental earnings presentation that we posted on our Investor Relations website. Before we turn our guide for the first quarter, I wanted to provide context for the operating environment that we expect in fiscal 1Q 2023. Sales volume is expected to be down approximately $85 million in volume year-over-year or a 30% plus decline in sales volume driven by an inventory correction in the channel and the lapping of inventory fill from 1Q '22. This has affected landline with what we highlighted on our last earnings call. We are well on our way to achieving normalized channel inventory levels at the end of the quarter. Similarly, production volumes are expected to be down approximately 30% year-over-year. Just to reinforce these factors, we are making intentional decisions to deal with the impact of right sizing our channel inventory and lower production volumes in the near term. As a result we will have under-utilization flowing through in both 1Q and 2Q and labor and overhead. During the quarter, we will continue to burn through our higher cost inventory layers and we are lapping the impact from recycled costs being period expense in the prior year to being capitalized in 1Q 2023. Within SG&A, we have prioritized investments in certain sales and marketing activities in 1Q that will not reoccur and the balance of the year. For 1Q 2023, we expect consolidated net sales between $200 million to $215 million. We expect adjusted EBITDA between $8 million to $12 million. In closing, it's important to highlight some of the key elements that our implied outlook for the balance of 2023 between 2Q and 4Q, which include channel inventory normalization of 4Q, 2022 and 1Q, 2023 will be behind us. We had material input cost deflating in 1Q '23 that will impact our results meaningfully in the third quarter post our lag. We expect production volumes to normalize in the second half, positively impacting utilization and setting the stage for productivity. We anticipate sales volumes will recover significantly from the 1Q 2023 seasonally low and channel inventory impacted profile. We expect the whole price in our core markets. And lastly, given the environment we think that we might see more commodity started to play. Thanks, Pete. I would like to take a moment to thank our dedicated team members, channel and supplier partners and contractors that support the AZEK company. Thank you once again for your continued focus, dedication and your contribution to the results in the fourth quarter and for all of 2022. The fundamentals of our business are strong as is our confidence in the future. We are well on our way to restoring normalized channel inventory levels and the actions we have taken position us well to realize the benefits of our recycling and sourcing initiatives late in Q2 and into Q3. Given our visibility to cost, we are in a strong position to navigate the next few quarters and expand our margins as we move past our fiscal first quarter. Our award winning new product not only solidify our position in the core, but give us an opportunity to continue to drive material replacement. Our acquisitions, our expanded exteriors line and our constant innovation and decking and rail have put us in a position to continue to gain market presence and share. We have a clear strategy an AZEK-specific initiatives to drive above market growth and we believe that we are well positioned to win and deliver on our long-term goals. Thank you. [Operator Instructions] Your first question comes from the line of Keith Hughes with Truist Securities. Your line is now open. Thank you. First question on the raw material commentary helping out in the second half of fiscal year, can you give us any sort of indication how big a number this is playing in the EBITDA guidance for the year highlighted earlier? Yes, Keith, this is Peter. I think I'll start just generically on how we're thinking about deflation. First and foremost, we're comfortable and confident that we can start to recapture some of the margin that was delayed last year, what the price commodity lag starting in 2Q 2023. As far as what we're seeing so far quarter-to-date in 1Q 2023, as I mentioned in my prepared remarks, we are seeing significant lower purchase input costs in 1Q, 2023. Keep in mind with our balance sheet lag of the 4.5 months, some of that won't start to roll off until March of 2023. But obviously that implies and means that we will also have some carryover deflation into 2024. From an assumption perspective of what's embedded, the way we're thinking about and how you should think about, what's embedded in the EBITDA profile as we expected about $50 million of annualized deflation, of which about $30 million of that will actually hit fiscal 2023 EBITDA with the remainder being a carryover favorable deflation to 2024. And to be clear that $30 million assist here in '23 just said is that, is that based on what you've seen so far, are you assuming some more deflation? I think what gives us a lot of confidence is based upon the prices were seeing quarter-to-date 1Q. We don't need prices to go down much further to support the $50 million and the $30 million. So obviously if the commodity markets to continue to turn in our favor, then obviously there's potentially some upside. And then one final thing to this, I assume in the guidance you're assuming selling prices for products remain flat other than the roll through pricing actions you did this calendar year, is that correct? Hey, good evening, everyone. Thanks for taking the questions. So given the guidance for margins, you've alluded to for Q1 and then the step up beyond Q1. I mean it sounds like you pointed to a few things, the production levels should increase, you're burning through some of the higher cost inventory. I mean, should we think that the cadence of margins is going to be kind of consistent in terms of that sequential increase beyond Q1 or is there going to be a more meaningful step up in the second half. Just given where you're starting in Q1, it'd be helpful if you kind of walk us to some kind of framework for the second quarter there? Thank you. Yeah, at a really high level, Matt is, look, we'll obviously see sequential improvement from 1Q to 2Q. We still have a little bit of pressure in 2Q. As you are aware, our labor and overhead lag is about two months. So some of the inefficiency in 1Q will push to 2Q, but our production levels, we really expect to start to normalize in the back half of the second quarter and recover to a much healthier level. And then we would expect an even more meaningful step up from 2Q to 3Q and that again probably a more modest step up from 3Q to 4Q. So obviously with 1Q guide and the full-year outlook, you get back into the nine-month profile. And again the second quarter will be below that average and the third and fourth quarter would be above that, if that helps give some context. Yeah, Matt, this is Jesse. If I could just add one other component. The challenge we have -- clearly, we are -- we've got a number of components that hit Q1, some of the change in process that we talked about that will primarily be Q1, a lot of our year-over-year inventory decline will be focused in Q1 and a lot of our under-utilization, a disproportionate percentage impact will be in Q1. And that's really against our lowest quarter. So the good news is, we get a lot of that behind us as we work through Q1. So part of the margin impact as we go into subsequent quarters is getting some of these things behind us. The other aspect of it is, typically, the other quarters are meaningfully larger as we flow through. Typically, our first quarter is give or take 17% and 18% of our volume for the year and so having those impacts in Q1, just it naturally has a different impact as we flow through in addition to all the tailwinds that we talked about. Got you. Okay. No, that's really helpful. Thanks for that guys. And then second one on the volume outlook, just trying to put the pieces together. So the market planning assumption is down 10. I guess my question is just how does AZEK's growth compare versus that? Is there an assumption of share gains we should be making? And I think about Q1, where you talked about the $85 million volume decline, which I assume includes destocking and so maybe that I don't know how that compares with the 10%, if it kind of ends up, such that they offset each other in AZEK's volumes end up looking like the market volumes and not to put words in your mouth, but just how should we think about AZEK's growth relative to the market? Thanks. Yeah, let me take the first piece on just sort of help and give some color on sort of the 1Q geography from a sales perspective. So the way you want to think about the $85 million of volume reduction is about $70 million to $75 million of that is the channel inventory recalibration. That small difference between the $75 million and the $85 million is really to sell through that we've talked about that we've seen positive on a dollar basis, but modestly negative on a unit volume basis. And just one other point on it, as it relates to the first quarter and the $85 million, that's up almost half of the entire year down 10%. And then, relative to your question on initiatives, clearly we -- we believe in what we're doing and the ability for the initiatives I laid out earlier in the call to impact what we're doing. Take that for us is we reviewing that as a way to give us increased confidence for us to manage through a potentially more volatile environment than even what our scenario would have been. And so the way to think of it is, it's not as simple to add on top of what's there. It really depends on the macro, but we are certainly expecting a benefit from our initiatives. But what we've laid out is kind of market-oriented adjustments to volume. Thank you very much. I appreciate that. First question I wanted to break down a little bit was the organic decline in 4Q. On the residential side, you said that it's about $24 million of contribution from the acquisition, so that puts you down organically about down 25%. And I think it looks like it might be a similar type of rate that you are looking in plus or minus for the first quarter. So you compare that to your largest competitor with a guidance of revenue down, plus or minus 40%. And I was hoping to get any insights from you around what the difference could be and perhaps breaking out decking rail and accessories versus exteriors, if that might explain some of the differential, given that you're a little more -- you have exposure on the exterior side, what might be driving, what appears to be a pretty big difference? Yeah, I think if you just -- and I can't speak specifically to what other players are experiencing in the market, although, we're close to the market and we might have an opinion. Let me give you a couple of just basic data points, right. One is the way to think of our residential business is, it's about two-thirds deck, rail and accessories and one-third exteriors. I'm giving you rough numbers, on average, it'll vary quarter-to-quarter. And against that. I think what we mentioned in our prepared remarks was that, in effect all of the inventory correction that we are going through is within deck rail and accessories. And so we believe that what we're going through is appropriate for where we are now. I think when you do calculation, so if you look at our fiscal and calendar 2022, and then you start to consider our fiscal and calendar guide for 2023, I think the math would tell you is that from a revenue standpoint, we are doing pretty well compared to other players in the marketplace. And Mike, just to help a little bit, 4Q kind of came in line with what we talked on our last earnings call for the full year as well. You should think of the fourth quarter price as kind of low teens M&A, call it, approximately 7%. The inventory destock was about 25% headwind, which kind of leaves the normalized unit volume kind of down low single digits, again kind of consistent with how we've been thinking about sell-through as kind of positive on dollars and modestly negative on units. Thank you, Pete. That's very helpful and Jesse. I guess secondly, looking at the EBITDA guidance for the first quarter and apologies if I missed all of these different numbers earlier from your prepared remarks. But I believe you mentioned 50% decremental if I heard right for the first half of the year, when you look at your first quarter '22, you did about $60 million -- $59 million of EBITDA. And so, if you're talking about roughly $50 million less revenue in first quarter '23, you've added 50% decremental $25 million, what's the gap between that decremental and some of the other variables that gets you down to your guidance. I know you mentioned the $8 million of inventory flow through, if there's any other kind of drivers that we should be thinking about? Yeah, the way I described Mike is, look, first quarter, we'll have kind of mid-single digits pricing right that's been kind of announced as carryover. You're going to have a similar profile for M&A, which again supports and points of that kind of $85 million in volume impact and that's where we're saying that $85 million is really not flowing through it, maybe traditional 38%, it's closer to 50%. Because of the dynamic that Jesse mentioned that not only is that our smallest quarter from a sales perspective, but we're also down even more on a production basis than we are on a volume basis is we're trying to prevent building higher cost inventory. We want to get that out of the way. So that dilution of that under-utilization and the plant is skewed into 1Q and again any dollars that we're taking there is on a much smaller base, so it's causing that quality of earnings in 1Q to be pressured. Yeah, and just to put a little sense on that. We -- just to reiterate what we said in the prepared remarks, we are intentionally scaling down our factory. We scaled it down in Q4. We scaled it down in Q1 and it's at or below the level of sales specifically in the area where we're having the biggest adjustments, which is in deck rail and accessories. And so -- and then we'll start to bring it back up as volumes normalize. There is a large benefit to that and that it tends to concentrate some of the under-utilization into -- in the potentially the first quarter, not all of it, but let's call it about half of the underutilization impact that we thought out for the entire year will be concentrated give or take in -- in Q1. And once again that is intentional rather than level loading because we don't want to make products with higher cost materials and when we start making products at appropriate levels, we'll be making it using lower cost materials. Yes. Maybe just on Jesse, just your feedback or the conversations you're having with your distributors. How are they expecting to kind of think about or how are they thinking about kind of the normal seasonal ramp of kind of taking inventory going into a season? I don't know if you want to compare and contrast that versus like a normal year. But what have you kind of heard in terms of that kind of March, June kind of load-in effect that you would kind of normally see from the channel? Yeah. Yeah, it's a good question and I'll answer it generally. And what I would tell you is that it really varies by channel -- by channel partner, I should say depending on their business model. So I think number one is, they will be entering -- all of our channels will be entering Q2 in a good inventory position that is lower than where they were a year before on a days on hand. So that's kind of key point number one, which that means that they naturally need to re-inflate that inventory to meet demand. I think in general without getting too specific, they're kind of either act or a little lower in terms of mindset than the year before and once again it varies. Some of our channel partners will be right up, some of them will be lower and some of them will be above at a distribution level. At a dealer level, I think it similarly has the potential to vary, where some -- some dealers feel good about their markets and they would expect to take almost as much as last year and other dealer are more conservative relative to their markets and might take a little less. So if you add all that up, it's probably safe to assume as we look at Q2, which is calendar Q1 that it would be logical that it would potentially be a modestly slower ramp, although will guide Q2 when we get there, but that is logical to assume that it would be a slower ramp that it was in prior year. Now what that does is, it really sets up Q3 and Q4 to not have -- first, we won't have the same types of inventory corrections, but it also sets us up to have more seasonally oriented demand rather than kind of perfectly trying to -- trying to land the plane relative to the right amount of inventory in the system. So hopefully that gives you a general. And then as we get to Q4, obviously, we're lapping -- we are lapping what we just talked about, which is a very large inventory correction in the channel. And at that point, your -- yourself who is in a good position and you just want to make sure that you're -- you got the right amount of inventory in the channel. Okay. Okay. that sounds good. And I mean that's -- that's kind of the thinking that you are incorporating in the commentary around guidance, right. Just kind of what you talked about? Yeah. Well, once again, we're not guiding Q2, I think it's important that what I think Pete's referring to is the subsequent three quarters, right. We know we're getting a lot behind us in Q1. And we have estimates that we talked about, of the market being down 10 -- the aggregate market being down 10 as -- unit volume basis, as we work our way through those final three quarters. And then based on that, it's really a discussion of geography and clearly, we'll give you clarity on that. But I think the takeaway here is that we're very confident in our ability to deliver those three quarters and manage through that given the margin tailwinds that start to come in as we lap our way through more expensive inventory. Okay. Okay, good. And then -- and then I guess as a follow-up, what is the pricing carryover that you're assuming for '23? Kind of mid-single digits, low-to-mid single digits for the year. Obviously all of its really in the first half of the year, but the full-year impact is kind of low single digits. Hey, guys, I appreciate all the color, not easy in this environment. I guess the first question I have is the destock and production curtailment impact is obviously give be more heavily weighted in 1Q, anyway to size up the split between 1Q versus 2Q? And should we expect EBITDA to be at least flat in 2Q on a year-over-year basis? Yeah, I think we're going to steer clear of kind of formal guidance on 2Q. I think we want to get closer to that. I'm highly confident we can say we expect the quality of earnings to sequentially meaningfully improve from 1Q to 2Q and that's I think about as much as we probably can responsibly say. Yeah. And maybe another kind of way to help me out on that is -- we're saying that there is a fair amount that's going to impact you one, there's certainly going to be some that impacts Q2, although not pronounced at the same level, so we need to work our way through to see how that flows through and we need to see what the revenue was. Got you. Okay, that's helpful. Pete, I think last quarter you were talking about a $30 million price cost, potential tailwind for 2023. You threw out a few numbers today, $30 million for 2023, on an annualized basis $50 million. Does this $30 million compared to last quarter $30 or doesn't just because some of the timing difference. Because since you've given that guidance to your point, some of the inputs have fallen and certainly PVC prices have fallen pretty meaningfully from the peak levels that I think was embedded in that $30 million number, that you called out last quarter? Yeah, I mean part of it is the 4.5 month lag of the timing of it. Some of it moving to 2024 and the other piece to a smaller extent is look stint is, look, we've had some other overhead type inflation in 2023, that's kind of new on the horizon and it's really kind of two -- two things specifically. One, our energy costs have moved up pretty substantially. And then secondarily our property insurance -- the property insurance markets have been pretty brutal last two years and we've seen significant inflation there as well. Yeah, but to answer -- but -- to answer your question, what -- the way to think of it is, it's the $30 million plus -- what Pete is highlighting which is $50 million on a -- on an annualized basis, right. So there are two different elements. One is the price raw material carryover that we've talked about a $30 and what we're talking about is additional cost in sourcing actions that add up to that $50 from where we sit now. And then, as Pete pointed out some of that will get consumed with certain elements of inflation, but it's additive. Hey guys, good afternoon. This is actually Spencer Kaufman on for John. Thank you for the questions. Maybe the first one, what gives you guys have confidence that the inventory adjustment will be done by the end of the first quarter? And do you think that maybe price can become more of a lever for the composite decking manufacturers either gain share, just maintain reasonable volume levels? Yeah, so let me take the latter and I'll have Pete take the former. Just as a reminder of the structure of the market, we've got good, better, best, premium. We strongly believe that we have the right portfolio and the best way for us to gain market share is to show the value of our offering and to drive material conversion in each of the segments that we play in and to either expand position or to continue to drive conversion. So that's expanding position with contractors and dealers and retailers. And then continuing to drive conversion at both the contractor and the consumer level. In doing that you need the right products for the right segment and we don't believe lowering price is a -- is a good strategy nor that we would consider executing as we move forward. And I'll let Peter take the front part of that. Yeah, and just add on, I mean, I think what gives us confidence is we were planning on seeing more of the destock happening in the fourth quarter, which we did see happen. Two, as you know, we have about a one-month lag on sort of getting data from our channel partners to really dial in inventory. So we've been kind of staying close to that obviously each month and we see the data real time. And then lastly, I think prudently with our view of demand and unit volume being down 10%, which is 5% incrementally lower than what we were thinking or suggesting last time. One of the consequences of that is, it does drive us to take out more inventory to get to a lower level on both dollars and days and we think being conservative on inventory right now, reduces the risk for the full year. Okay. I appreciate all the color there guys. As my follow-up question, just on the share repo you guys obviously repurchased some shares in the quarter, but I guess why not being more aggressive here, especially with kind of CapEx coming down and the stock under pressure? Yeah, look, I think the thing that excites us about '23 is look, one thing we know for certain is that our CapEx profile for '23 is going to be meaningfully down. We think it'll be down close to $100 million sequentially from '22 to '23 as we've talked about and some of the pain we experienced in 1Q and really part of 4Q of not building inventory. As we know, we have the opportunity to take some cash off the balance sheet with working capital. So our goal is to continue to support the share repurchase program and I think the strength of the free cash flow in 2023 allows us to do that, while maintaining a responsible net leverage ratio. That as we've said, you're not going to see us go far outside of the bounds of the 2 times to 2.5 times leverage that we've talked about historically. Hey everyone, thanks for taking the question. I just wanted to start off with a clarification question. It sounds like you're not really [indiscernible] this quarter, but for planning purposes do you think by 2Q volumes to be down 10%, did I have that right? Yeah, it sounds like you're not seeing unit sell through really slow yet in 1Q, but for planning purposes you think by 2Q volumes are down 10%. Just wanted to make sure I had that right? Yeah, I -- we are -- we are seeing consistent -- consistent patterns right now that we've seen over the last few months, which is positive dollar sales and modestly negative unit volume. Now it varies by -- it varies by kind of geography and channel and product, but in general that's what we're seeing. I think what were challenges from a planning assumption standpoint, given the market indicators that are out there, that people are chatting about, we think it's fair to assume for the year, it would be down 10% on our core volume. So, how that flows through? Obviously, we just told you the inventory correction that were taken in Q1, if you just do the math is half -- more than half of -- of kind of that correction. And then -- and then we see the benefit of that on our Q4. Exactly when it manifests and how it manifest. We'll see, but we're just telling you it's a planning assumption. Yeah. Okay that makes sense. My follow-up, Jesse are you seeing any signs that wood conversion is slowing or is it steady as she goes? Yeah, you know the wood conversion data can -- can get noisy. What I would say is in the customer sets that we deal with, we continue to see a focus on more composites, not less, right. So we haven't -- which to us shows that that conversion continues to sustain and we see it in our mix. We see it in -- like the pattern that we've seen continues. And once again, we talked about how that's a long-term effect of people getting the right visuals, the network effect, all those other elements that layer in converting contractors, converting architects, all that right and we continue to see that flow. Okay, sorry about that. The first question is just around the mix. As you talk to customers, are you hearing about any shift or any move down in products or is it more of just an overall delay as the market kind of recovers from the level of demand we saw in the last two years or so? Yeah. So as you as you think about the market, it's very similar to what we said on the last call, which is in effect our core contractors and the core participants in the market continue to operate for, right. They still have backlogs, they're still busy. Their crews are still busy. All of that is there. I think some of what you've seen in fiscal 2022, as we've move through it, some of what you've seen as kind of a modest, if we talk about single digit kind of unit declines is more of the intermittent participants, people there may do bathrooms, they may do general projects, they come in and they do -- they do a few decks and then they do whatever, right. Some of that has left the system, and -- but in general, we continue to see with our core contractor base very much business as usual in general. Yeah, look you can talk to someone and they may have had someone switch from the most premium line to one of our other markets. But in general, if you just look at the data and our conversations, it has very much been business as usual with our core contractor set. Okay. And then following up, Pete, you talked a little bit about working capital and the ability to generate cash. As we think about the initiatives on inventories and some of the companies specifics on recycling in those types of things, any additional thoughts on how we should be thinking about the ability of the business to generate cash and how that could potentially compare to more recent history or even what you would think of as a more normalized level of generation? Yeah, I mean I think again, we feel comfortable that we could support our repurchase program in a similar fashion. And that's really going to come from the fact that we think we can generate our traditional cash from operations plus $100 million less of CapEx. And we haven't really formalized the target externally for working capital, but we know that over the last year, year and a half, we probably put $40 million to $45 million inventory on the balance sheet that we'd like to eventually over the next four quarter or five quarters get off. Good afternoon and thanks for taking my questions. I just wanted to come back to the 2023 EBITDA bridge. So if I add up all the big pieces, right, we've got $30 million of positive price, we've got $30 million of cost deflation, we had the benefit on the M&A side and the startup costs that will not occur again in 2023. And then we've got more recycled PVC and kind of more LDP, all these -- if I just add up these pieces that gets us sort of positive call it trough numbers $80 million, $90 million and then we've got the offset on the volume side, and you talk about the detrimental margins. What is the other big piece that I'm missing, because that still does not get me sort of close to that $250 million, $265 million number that you've got out here? Just looking at sort of top high level numbers? Yeah, high-level numbers. I mean obviously, you can do the math on the volume and the under-utilization. I think in that bucket for people and overhead inflation, look, you should think about $8 million of energy inflation and about $5 million of property insurance. And then on the all-other, you're really dealing with the update and the change in process on inventory, coupled with the change in SG&A. Yeah, I think Ketan -- I think the other key component here, and it starts to get kind of -- I think we'll probably add a little bit where we started. You can start to see why we feel confident about our ability to manage as we move into the back half of the year. I -- your comments related to some of the positives that we have are all there. I think the challenge we have with those positive, not challenge, there is a timing component, right. So if you think about the introduction of recycle and you think about the opportunity we have with meaningful a stabilization in our raw material pricing that we talked about, there's a 4.5 month lag on those components, which is why we're talking about sometime during Q2 as we move into Q3, you start to see the profile of the business to reflect some of these components that you're talking about. So the way -- the component, I would add on top of that is, there's a timing component where you've got some components that have a 4.5 month delay. Got it. That's helpful. And then can you talk a little bit about the trends that you're seeing on the exteriors business? Yeah, the exterior side of the business, it has been steady, consistent with what we've described, which is modestly negative unit volume and positive dollar, as we've gone through. We've continued to launch new products. We continue to drive penetration, which has hit of a buffer against modest changes in the market. I think on the exteriors business, when we talk about our exposure to new construction, the exteriors business has some exposure to new construction and so as we extrapolate out, once again we feel really good about our ability to continue to drive market penetration and wood conversion and new products between our Versatex and our AZEK business there. But as new housing starts start to slow down, a portion of that business will be impacted and so if there is a slowdown on exteriors, we would probably expect to see it sometime as we move through the second and third quarter. Thank you all once again for taking the time this evening to have a dialog with us. We look forward to both the follow up questions and sessions and also to chatting with you again early next year. Thanks and have a great evening.
EarningCall_1880	I am very pleased to have with us Luminar. Great. And I think we are live. Welcome as we continue the Barclays Global Automotive and Mobility Tech Conference. My name is Dan Levy. I lead autos research coverage at Barclays. I am very pleased to have with us Luminar, one of the new mobility entrants focused on LiDAR key sensor and automotive and industrial applications, I am going to more focused on the automotive side. Very pleased to have with us Tom Fennimore, the companyâs CFO. Also in the background Trey Campbell and Tushar Jain from -- who lead the companyâs IR efforts. Should Thomas be very insightful. Tom, thank you so much for joining. Great. So I think a good place to start is, I want to touch on something that was mentioned on the last earnings call. And if we -- as we think about the journey of Luminar thus far, you were previously in a phase where you are working on sort of early commercialization. Now you are nearing the start of series production. So maybe you could just zoom out a bit and help the audience understand the transition to this next phase, what it entails and how this looks up like from a 30,000 foot view? Sure. And when you think about the journey of Luminar over the last 10 years, really the first stage was developing the tech that we believe was the right solution for the automotive industry to enable safe autonomy. The next stage after that would be to convince an initial automotive customer to actually buy that technology, not to test on a bench somewhere, which they are going to have to do, but to ultimately make the conscious decision to put that technology and integrate it into vehicles that they are going to sell to the consumer. In 2020, we won our first customer, which was Volvo for series production. And really, over the last two plus or minus years, we have been working around the clock to get ready for that start of production, actually taking that technology we have developed and getting it to the stage where not only it meets the specs and the quality, but the automotive customer is confident to put that on the vehicles that they are going to sell to the consumer. I am pleased to reiterate what we announced on our earnings call, but we crossed that goal a few weeks ago. Right now, in China, you can buy a R7, which is Shanghai Auto, the largest automotive company and the largest automotive market in China, they have their flagship electric vehicle, which is the R7, which they are producing. Itâs a model thatâs competing against the Tesla Model 3 and Model Y. You can buy that vehicle now in China with our technology on it and thereâs actual vehicles on the road driven by real people like you and me with Luminarâs technology. So that was a very important goal. Also, whatâs happened over the last few weeks is Polestar announced with the Polestar 3 that they are going to be selling vehicles shortly with our technology on it. Volvo, I was actually in Sweden a couple of weeks ago for the launch of their next-generation SUV, the EX90, where our technology is going to be standard on it. And so we are really going from -- we are making the transition from the company that has good technology, but still some lingering investor questions about whether or not you guys can actually make these things and put them on vehicles, we are now at the stage where we are making these and putting them on vehicle, albeit, I went in, say, in big scale now. And really what we are focusing on over the next year or so is going from start of production where that boxes ticked to really scaling that start of production. And so we are going to have site. We are going to have Polestar. We are going to have Volvo. We are going to have Mobileye. We are going to have all those really coming together. We are building out our new dedicated facility, which we expect to come online in the second half of next year. So we are going from proven we can make these things to making them in real scale. Thatâs the focus of Luminor now. The team has done a great job of getting us to this point and now we are focused on taking it to the next level. Great. Letâs unpack some of those customer engagements. We will talk in a bit about how the scaling process. So maybe letâs start with Volvo, because I think one of the first announcements that you had in the past year and a half that generated some excitement about the potential to scale this technology was with Volvo on EX90 with the point -- at that time with the electric version of XC90. Itâs standard-fit. What is the path to cascading a standard-fit technology to other vehicles in the Volvo lineup? Right. And let me talk a little bit and for those that arenât well versed in the automotive industry, what the benefit of standard-fit is and why this is a big deal. What we are doing now for the site R7 is we are an option on it. And so when a consumer buys an R7, they have to make the election at the time they purchase the vehicle, whether they want Luminar LiDAR on it. And not only when you think about the volume assumptions that we built into our production forecast, not only do we need to make an assumption around how many R7s are going to be building. You can look at what the customer is telling you what IHS, which is a third-party industry is saying to get how many total R7s, but you need to make an assumption on called the take rate, which is what percentage of customers are actually going to select that. And thereâs some uncertainty because thereâs never been a LiDAR like ours put on a vehicle. We have built into our forecast very conservative assumptions. Right now, look, itâs very early. We are actually seeing the actual take rates exceed whatâs been in our model by a fair amount. But when you are standard, you are on every vehicle that is made and so for the Volvo EX90, we are really only taking the volume risk over how many of them are made. And if they are made, thereâs Luminar LiDAR on it. We are not taking take rate risk. What that allows us to do, and Volvo has said publicly that, ultimately, their goal is to standardize our technology not only on the EX90, but every vehicle that they may. But the more that we get in there on the EX90, the more that we perform and deliver, the more that Volvo develops their autonomous system, their algorithms, their software around our technology. And assuming that works and thereâs a lot of receptivity from the consumer, it makes it easier for Volvo to roll us out across the rest of their vehicle platforms. Volvo CEO, Jim Rowan at his launch event for the EX90, he stated that this technology is going to significantly improve the safety of a Volvo vehicle significantly reduce the number of collisions on the vehicle, significantly reduce, even if there is an accident with our technology, you are going to mitigate the crash, slow down the vehicle, do other ways to mitigate it. And so itâs -- the more that our technology performs the way that we expect it to, the way that Volvo expects it to and the more that the consumers see the benefits of that, that is going to be helpful to demonstrate to Volvo, as well as other customers the real value proposition that our technology delivers to the OEM, as well as to the consumer. Just a follow-up on Volvo. Another thing that you have been working on with them was the software offering. I think your software is being packaged into Zenseact. Maybe you can give us some sense of sort of the early take rates on software within EX90, and again, how does that cascade to the rest of the Volvo lineup? Yeah. Itâs too early to say, once again, we are going to be standard there. We are working with Zenseact to really get the software system ready to go for the vehicle, not only to enable that enhanced ADAS or safety, but ultimately, to enable that highway autonomy package that Volvo has talked about. We havenât seen any data yet in terms of the take rates on the consumer side around that. So I canât really comment on that. But the team is working real-time with Zenseact make sure that, that software package is ready to go. Great. You mentioned Polestar, I think we know thereâs a broader family as well. Is there any potential that what you are doing with Volvo and Polestar also gets adopted by Geely? Absolutely. We are very close, as you know, with Volvo and Polestar that has given us relationships with the broader Geely family. One of the things we did earlier this year is there is the technology arm at least as I view them the technology arm of the Geely family called ECARX. Itâs a company thatâs actually in the stage of going private -- of going public. We have entered into a strategic partnership with them. We are investing in them. Itâs really kind of like a stock swap but across ownership there. And the point of our strategic partnership is to take our technology integrated with the ECARX technology and develop a system that is designed for the Geely family of brands, particularly in China that can be rolled out across the broader Geely family of vehicles. Thatâs not only Geely, but they now have Lotus and Zeekr and Link and a handful of other brands. And so Volvo and Polestar were our foothold into the broader Geely family of organization. We have multiple relationships within that family and we think that that is going to prove fruitful in terms of more business here in the future. Great. Letâs talk about another one of those customer engagements. You mentioned you just launched or you just started selling into SAIC for the R7. You can now buy an R7 that has our LiDAR and those are on the road today. I donât know if thereâs any -- maybe any early learnings or early takes on how that rollout has gone. And again, I would ask the same question, starting with the R7, is there potential to roll this out to the broader SAIC lineup, which I think is interesting, especially given thatâs probably a more price-sensitive automaker given whatâs going on in China? Yeah. Absolutely. Itâs -- we learned -- we built a very good relationship with SAIC and particularly those that are working on the R-TECH brand. We are going to use those relationships to try to expand the business that we have with them. The team over -- where we have built out our team over in China. We hired a person earlier this year, a gentleman by the name of Jackie Chan, not the actor, but he used to run Scheffler and Harmanâs China business. And so heâs out there. Heâs building a team for us. As I mentioned, we are using what we are doing with SAIC. We are using what we are doing with Volvo and Polestar, which have great brand names in China and the fact that we are working with a company like Volvo to implement cutting-edge safety systems carries a lot of weight, not only in China, but globally, we talked about our relationship with ECARX and what our goal is with that partnership. And so we do see a lot of opportunity in front of us in China, not only with SAIC where we already have a good piece of business and hopefully more, but with other OEMs. What I would say is for some of our other customers, I mentioned Volvo and Polestar, but when you look at a company like Mercedes-Benz, a good chunk of Mercedes-Benz existing volume is over in China as well. I forget what the exact number is, but I think itâs on the order of magnitude of about 30% to 40% of their units sold each year are over in China. And so we need to have a good presence over in China not only to serve our local customers on the ground there, but itâs also an important region for our global customers as well. We will get to a competitive environment in a bit, but just on the topic of China, is it a different competitive environment for you versusâ¦ It is. There are, I would say, a few LiDAR companies over in China, whether itâs in the SAIC or RoboSense, which have come out with a solution and have made some traction there. But there LiDAR, itâs more of a 905 LiDAR. Itâs a much lower cost version of ours, but it has a lot less functionality and robustness than ours. And so thereâs going to be a segment of the car market in China where there are some government regulations in China that are encouraged LiDAR adoption, but if you have a low-priced vehicle taking a Luminar LiDAR, which caused them the order of magnitude of about $1,000 plus or minus today, we are going to bring that cost down over time, particularly in scale with our customers or a few hundred dollar 905 solution. And so, in China, we do see some locally priced LiDARs that compete on price at the lower end of the segment that we donât necessarily see globally. Okay. Also on the topic of cost, we have seen an interesting development on your end with Nissan that you are going to be in our model by mid-decade and I believe you noted it deployed in virtually every new model by 2030. Maybe you can give us a sense of where this collaboration stands? Is the award firmly secured? Could it be dual-sourced? And then maybe you could just give us a sense, like, Volvo we associate with luxury or premium brand, meaning a much higher price point, so they can afford a higher level of your content. Nissan is generally lower-priced vehicles. Soâ¦ â¦ what does that imply in terms of -- what you have to achieve in terms of BOM reduction and types to ASPs? Yeah. So when you step back and look at the big picture, Austin, our CEO and Founder, set a goal at the beginning of the year that over the next 100 years he wants to -- he wants our technology to save 100 million lives and 100 trillion hours of productivity. 100 years seems like a long time. But when you have a CEO, a founder and largest shareholder thatâs 27, you can enjoy the benefit of setting 100-year plans. But when we look at the technology and the safety improvements that our technology enables, we want to democratize safety. It canât only be available to people who can afford a $80,000, $100,000 luxury vehicle. We need to bring this technology to every brand name at every price point. Nissan is, as you highlighted, our first mass market win, where we are explicitly is they are developing their next-generation safety system with our LiDAR technology incorporated. They announced this in April and made a presentation describing that system, including the vetting they did of the entire LiDAR industry and why they selected our technology to include in their development system. Their plan is to start rolling this out in the middle part of the decade, while Nissan has a lot of mass market brands, they do have some higher end vehicle platforms where it probably makes sense for that to start first. And then their goal, as you mentioned, is by the end of the decade to put this on virtually every part they make and they make 4 million plus or minus vehicles a year. And so we are very excited about that win. We do need to bring -- we are getting this pressure not only from Nissan, but from all our OEMs is that $1,000 ASP that we have now, thatâs based on a product where our target is a $500 BOM and $100 plus or minus conversion cost. Our goal is to ultimately bring our BOM down from that $500 to a longer term target of 100%. The good news is, is that, we have the plan in place. We have made some acquisitions recently, particularly with OptoGration, which is our chip company, as well as Freedom Photonics, which is our laser company that allows us to get there. But bringing down our price point, which -- and our BOM allows us to do without sacrificing margin allows us to really create that much stronger value proposition to put this on more of the mass market vehicles and really democratize safety, which is an important objective of ours. Great. Maybe you could just give a comment briefly on non-auto. You have a few or at least non-ADAS, I know you have a few different engagements there as it relates to Pony, Airbus. Are those still in focus or have those moved a bit more to the back burner as you are focusing more on scale production? Yeah. Those are still a focus of ours. They have -- some of them had different launch times SOP dates than the Volvo, Polestar, Mobileye and SAIC, which are kind of those first phases of launches. Particularly with Airbus, thereâs a real opportunity here to put our technology on helicopters. I didnât really. Somebody told me a stat, actually yesterday, but I didnât realize this, but about 75% of all helicopter accidents are caused by the failure to see power lines or other obstacles like trees or understanding exactly where the ground is. If you take our technology, we really highlight where those power lines are. There is a video shown of black power lines in a dark green field or trees and you just canât see them as a pilot even in the bright daylight. So thereâs an opportunity there to significantly reduce the number of helicopter accidents by introducing our technology to that. Airbus sees it, other operators in the space see it. And so thatâs an area where we are looking at. Is that as big as the passenger vehicle market? No. But itâs very -- our technology is very applicable to that and finding the right partners like Airbus to help us sell through that space is important to us. Last year, we partnered with a company called Robotic Research. We kind of did a small cross ownership swap with them. They are very good in the government vehicle space. And so that, once again, an opportunity where our technology can be very applicable, not as big as the passenger vehicle market, but partnering with the right car company to help apply our technology in there, I think, is very helpful as well. Pony, while we have a general point of view at Luminar that robotaxis are still relatively far out. Itâs more an end of the decade type proposition where that is really going to scale. We believe that Pony is one of the leaders in this space. And in particular, going back to the China team, they have a very strong presence in China. Dan, I lived in China for three years. And one of the things -- one of the stats that jumped out to me is in the U.S., there are about 1.1 vehicles on the road for every license driver. Most people ever drivers license in the U.S. unless you live in New York City, own a vehicle. And some people are more than one vehicle. In China, itâs actually the reverse. Thereâs about three license drivers in each city for each vehicle owned. If you go to some of the major cities in China like a Shanghai or Beijing, the car ownership rate is about 20% to 25%, compared to about 70%, 80% in the U.S. and Europe. And Shanghai and Beijing in the major cities in China are already limiting number of vehicles that can be sold each month, because the roads are too crowded. And so there is a much bigger demand for shared mobility in China and robotaxis, we think, is going to be a great solution to that problem and which is why we think the adoption rate in China could be higher than it is elsewhere in the world. And so we are focusing most of the internal resources at Luminar on that passenger vehicle and commercial truck market, because, man, if you win a Volvo, itâs easy to scale that technology and get a ton of volume from it. There are other end-use markets where our technology is applicable. It can be profitable for us, great ROIC, but the volume just isnât as high as it is on the passenger vehicle side. And so in those end-use markets, in the near-term, we are going to partner with who we think are companies that can take our technology and really disseminate that in that specific market and be the right partner for us. Great. Letâs pivot broadly to the competitive environment. I want to start with understanding the bidding environment. One of your competitors has noted that the bidding environment right now is quite robust. Decisions are being made over the next, call it, six months to 12 months that will impact the flow of product over the next handful of years. So thereâs a lot thatâs sort of in the pipeline. Maybe you could just give us a sense of what you are seeing in the bidding pipeline and should we expect in the next six months to 12 months, further color or further insight on the commercial opportunities that have? Absolutely. We are seeing -- we are very confident in the Luminar commercial outlook here in the near-term over -- whether itâs over the next three months to 12 months. And when we think about the bidding environment, I want to divide it in the two. One is thereâs the bang environment where there is competition, right? Thereâs -- the OEM hasnât made the decision about which LiDAR they want to use and itâs kind of open game for what they are going to use. And there are a number of opportunities out there that we are focused on. But at the same time, we have such fertile ground in front of us is what really distinguishes Luminar is that long-range LiDAR. The ability to see 250 meters out, we believe we are the only company that can meet all the specs that are required to deliver that type of functionality for highway autonomy and next-generation proactive safety. If you want to deliver a traffic jam pilot or a moderate improvement to our ADAS systems, our LiDAR can do that, but quite frankly, there are other LiDAR companies that can do that as well. And in fact, you can probably design a good enough system without a LiDAR to do it. And so there are going to be certain RFQ processes where we kind of look at it, and say, you are not maximizing the benefit of our LiDAR. The functionality you are trying to enable isnât really unique to our technology. And so those are some of the RFQ processes where we will deemphasize those. On the other hand, there are certain processes that we are in where itâs more lesson learns [ph]. And what we try to do is get in early with our customers. Some of them are new, some of them are the existing ones where we have already built them a good track record and reputation. We work with them to explain what are the functionalities that our LiDAR are -- is actually -- can enable highway autonomy proactive safety and thereâs some great value proposition from working those two together. And those are the ones where our technology is unique. Itâs the only LiDAR that can deliver it. And we are going to focus our resources on those type of situations. We think ultimately, the former ones, where they are just trying to get to the traffic jam pilot. They are ultimately going to migrate to highway autonomy and the next level of autonomy. They are going to need a long-range LiDAR and so thereâs going to be a second bite to the apple for some of the RFQs, which we kind of deprioritized. How would you characterize the set of LiDAR companies out there right now. We saw one LiDAR company close shop a few months ago. We know that thereâs already been a fair amount of pivot from full autonomy to advanced ADAS. But Argo, I think, just begs the question, anyone who is focused on advanced autonomy that shutdown, begs question of how you move going forward. So is there more consolidation required? I donât know if consolidation is the right word, Dan, I think, itâs rationalization. We track the publicly traded companies and their cash balances and their cash burns and many of them are going to start running into issues in the second half of next year. I think you saw the Argo news, there was a European later company, which recently filed for the German equivalent of bankruptcies. We are getting more and more calls in terms of companies that are running out of options and looking to do things. There are too many LiDAR companies. We are now at the stage where a very small number of us have one real business. I think those companies have a higher chance of surviving. But you also need the balance sheet and the team in place to get to basically work through this current storm that we are in. I think thereâs going to be rationalization in the LiDAR space over the next 12 months to 18 months. Some of that would be actual consolidation and some companies coming together, and I think, you have seen the early stages of that. I think some of it is just going to be some of these companies going away. What we have said publicly on our M&A strategy, we have done vertical integration. And I think that, thatâs something that will continue to be on our radar. But I would -- the three most critical components, the laser, the ASIC and the chip we brought in-house. So our top priority is we have already vertically integrated. Software, we think there are some interesting add-on opportunities. But once again, we are going to do it opportunistically. These are going to be small deals. And I think there could be some interesting stuff we can discuss around that at some point in the future. I think the bar is going to be extremely high for us to buy another LiDAR company outside of maybe an acqui-hire opportunity where we can bring on a good team to help support the growth that we have. I donât want to never say never, we would never do it, but itâs going to be an extremely high bar here for us. Great. Letâs wrap with the manufacturing side supply chain and then we will get into the financials. So you are -- as you get into scaling your commercialization and the ramp on series production, you talked about on the recent earnings call that you are creating a new facility in Mexico and this opens in the back half of 2023, 250,000 units of initial capacity. Maybe you can give us a sense of the benefits of moving to your own facility, what the shape of the ramp looks like and then what is the path to expanding that capacity? Yeah. I think the benefit is, we are just out of room in our existing shared facility in Celestica. We will be out of room in the second half of next year. And specifically, when we went from being an option to standard on the EX90, it just increased what our -- the volume demands were going to be from our customers. And so we decided with Celestica to build our own dedicated facility right down the street from Celesticaâs existing facility in Monterrey, Mexico. Itâs going to be a facility operated by Celestica. We are building it out and itâs going to be only Luminar products made at this facility. Right now, our products are being made by Celestica in their big manufacturing complex amount of rig where they make not only products for Luminar, but several other companies as well. That plant will have a capacity of about 250,000 units on an annual basis. By the time we get to 2025, we are probably going to be full there and so we are going to need more capacity. And thereâs a couple of ways that we can get that. One is we can expand at the existing facility in Mexico that we build out and we have built that facility and we have designed it, so itâs scalable. Or does it make sense for us to open a second factory somewhere else in the world and get a little bit more of geographic diversity. And so thatâs something we are thinking for now and once we make a decision, we will share with our shareholders of what exactly that plan is going to be. Great. And as you ramp on capacity and as you go into scaling your commercialization, maybe you can give us a sense of the trends on spend. Generally, we see other suppliers that as you ramp on commercialization the spend actually increases. Should we expect OpEx to run higher as you get deeper into commercialization or is there some offset? Have you already incurred some of that spend, maybe you can give us a sense of what the spend patterns look like? Yeah. So we -- what we really focus on, Dan, in the current time in -- right now is what our net cash spend is or free cash flow burn. Thatâs what we are focused on. The thing about the automotive industry is you got to put all that investment upfront before you launch. So you got to bring on the engineers to help do the engineering work. You got to invest in the new manufacturing facility. You got to buy the equipment and you got to ramp up your suppliers. You got to pay for some of their tolling CapEx. And so we are now in what I would say the peak investment stage. Once you get to SOP, thatâs when you start to get the real revenue come in and that starts to offset some of that net cash spend. And so we will give more guidance for what we expect our 2023 spend, and as well as our future spend when we do Luminar Day here in February. But I think itâs fair to say that 2022 is going to be pretty close, if not the peak year in terms of our net cash spend. Is the shutdown capital market at all risk to or you have, I think, a little over $0.5 billion of cash on hand. Is that more than enough to get you throughâ¦ Itâs more than enough plus a healthy cushion to get us to profitability and work through this ramp. Look, I think, like every other company in corporate America, itâs been a tough year for us in the stock market and a lot of that is outside of our control with whatâs going on in inflation and what the Fed is doing and all the geopolitical tension. So a lot of those factors are outside of our control. And so while we were wishful for a better stock market, given our strong balance sheet and the fact that we are launching all this, have started to launch and we will launch more business here over the next few quarters, on a relative basis we are in a very strong position. And so we -- about a year ago in December of 2021, we did a large capital raise and so we kind of built our storm shelter before the storm hit. And I talked about before with other autonomous software companies, as well as other publicly traded LiDAR companies. They are going to be running out of cash soon and they are not in a public markets that are going to be receptive to them raising new capital. And so, I think, this tough market is really going to hurt a lot of other companies in the space, but from a Luminar perspective given our strong balance sheet itâs going to hurt us a lot less, if at all. Great. I think we are at time. I would ask what to expect at CES for Luminar Day, but I think you would probably just leave us in suspense. I am not going to give you any Easter eggs or hints, but we are pretty excited about what we are going to show off at CES, as well as what we are going to show off at Luminar Day. So more to come in January and February here at Luminar. Leaving us in suspense. All right. Great. Well, thank you, Tom. Very insightful and thanks as well to Trey and Tushar. We really appreciate the time. We look forward to seeing the narrative further evolve.
EarningCall_1881	All right. Hey, welcome to our lunch session. I hope you are enjoying lunch. I am really happy to have a very distinguished speaker here today and I have all these questions prepared for you, Brian. But I need to ask you, first, given current events, like, how do you feel? You still here, thatâs good. Itâs more -- and itâs more whatâs the -- we had the news around departures. Maybe you can shed some light on there in terms of whatâs the kind of more official version, because like we are kind of getting like, everyone has theories, but it would be nice to hear from you in terms of like Bretâs departureâ¦ Sure. Yeah, obviously, a pretty big surprise for us, a shock for the organization, pretty sad for me personally, Bretâs a good friend and has been a mentor, a great guy to work with. For me, though, I have been at the company now for 23 years. I have seen a lot of executives come and go. Sort of shed a tear and we have a business to run, is sort of how I think about it. Bretâs going to go pursue what he wants to pursue. We have a great opportunity ahead of us to go accelerate this business, and so, obviously, disappointed. Love him. He will remain a friend. We actually live in the same neighborhood. I will see him personally. But we have got a plan. The plan is not owned by Bret. Itâs owned by the company and the executive leadership teamâ¦ â¦ an executive leadership team that is very, very strong right now. And so I feel very comfortable with where we are and hate to see him go, but looking forward to the future. Okay, perfect. And then to start maybe a little bit, Brian, you have been in the company for quite a while. Has been a hell of a run for me and most of my career at Salesforce has been on the sales side, sort of 18 years of various roles within the sales organization, ran the Americas business for our Commercial division, then ran that globally. Came back to the Americas when we regionalized our go-to-market strategy, ran all of the Americas. And then I think in maybe 2018, stepped away for a six-month sabbatical, take a breather, and then came back and ran all of our success operation and that includes our professional services organization, our support operation, our partner and alliance channel and our success motion. It was great to get to see the other side of this. Marc came, asked me to go run it, because I have always believed deeply in sort of our North Star of customer success. And he said, I really would like you to go run this organization and transform it. You have seen the numbers on the attrition side, something thatâs really important to me is thatâ¦ â¦ we continue to invest in our customer success, the value they are getting from our platform has been a big area of focus for me. Fast forward in August, by the way, in the middle of the pandemic, I was asked to take over all the sales organization. For me personally, it was not a time that I was willing to go do the job, because I had some younger kids that were still around and I want to make sure I saw them off to college. That is now done and I am now sitting squarely in the seat, running all of sales and all of our success motion globally. Yeah. And a couple of weeks ago, you had -- no, it was last week actually, timeâs flying, like, you hadâ¦ â¦and everyone has -- the Bret news kind of had overshade that a little bit. Can you talk a little bit about what you saw in Q3? Yeah. A solid quarter for us, particularly given the macro headwinds, double-digit growth on top line and bottom line, $7.84 billion, which is a solid revenue number, 22.7% in op margin, which is a record for us and showing our commitment to operating margin improvement at the company level and we raised the full year guidance. Still committed to all the customer initiatives that we have, very focused on customer success, gave back a little bit to our shareholders on $1.7 billion share repurchase, which was great in the quarter. So a lot of really positive signs in the quarter, solid performance as an organization. And from you, like, kind of talking with the fields leaders during the quarter, et cetera, how does Q3 feel compared to Q2? Yeah, good question, Raimo. I -- we -- as we talked in Investor Day at Dreamforce, we started to feel the impact of some economic headwinds really in July. They are sort of starting to happen, but really felt them increase in July. We are seeing that increase in Q3. We really felt like this pressure from our customers about deep inspection on every transaction that we are trying to get done with them. We saw compression in deal size of our largest deals sort of getting smaller, multiple layers of approvals, which was unique to us. I was telling the team, some surprises had happened in the quarter. We had a CEO who was going to purchase and had purchased previously same product, just an expansion of the same-size transaction. We thought we checked every box with them and turns out the Board had to approve it this time and they delayed the deal. So just in -- just incremental layers of approvals that are happening out there, and certainly, elongating sales cycles, our customers are really putting us through incremental processes to get deals done today and we, as an organization, need to pivot there. We need to make sure our people really understand how to navigate the new environment we are in. All about value selling, ensuring that every customer understands the benefits that they are going to get back from the technology they purchase and how quickly they are going to get there is really important to us, too. And so a big effort on the enablement side, too, to pivot away from what was, not completely away, but a messaging around growth for the past couple of years really needs to be about cost efficiencies, about productivity, about automation and about value saved, sort of value delivered against dollars saved in the business. And the -- just one last question on that one and I promise to kind of move on, then the -- like when you said July, you got -- you saw it in July and it was kind of -- is it kind of on that level? Or do you think it got a little bit weaker from that? But then sort of like as we think about the future, we are sort of on that same trajectory as July. Challenging times for us to go get deals done. And the -- I mean thereâs -- what, like, everyone is kind of working in this environment where deals are more scrutinized, et cetera, and like you have to live with that and customers have to do whatâs best for them. But they are same for you the stuff that you can control, likeâ¦ â¦ and thatâs -- and you started talking a little bit about value selling as well. I can imagine as a lot of your sales guys have never probably seen anything like this and et cetera. So what are the -- you mentioned a little bit the value selling, but like what does that concrete mean for you guys to in the organization to kind of switch it a little bit up and just kind of sell differently now? Well, first, itâs all -- we are really going back to pivoting our product marketing messaging to this value orientation. A deep investment in enablement right now, if any of you are on the all-hands calls, sorry, on our earnings call, you may have heard I sort of disagreed with our CEOâs stance that we donât all need to be back in the office. I believe deeply that my organization needs to be back in the office. We need to be learning from each other and doing stand-in delivers and practicing these pitches. So that we can be better in front of our customers that we can pick apart whatâs working and whatâs not. Thereâs learning that happens on the floors, the networking that happens in the connections. I really want to make sure that we are back in the office. So I will pivot a little bit back to the office. I want to make sure that we are back in front of our customers. I know that it sounds like this is the first time you guys have been back together in a couple of years and that feeling of being back together I think is really important. It can be a differentiator for us as a business as we get out in front of our customers and go do this work. I also believe deeply in performance management and operational excellence. Itâs sort of one of my trademarks as a leader in the Salesforce world for the past 23 years is I want to drive performance management in the organization. And maybe we didnât do as much of that during the pandemic, maybe it was sort of maybe a softer approach, just peopleâ¦ â¦ working from home and yeah -- appropriately, I think. As we get out of the backside of that and you look at sort of these headwinds, I am very much about how do we make sure that we are asking our employees to do the work, our account executives to deliver the numbers. And frankly, when they donât, we are going to have to find ways to move them out of the business. You saw some of the action that we took in November. We move some people out of the business. And while it was sort of newsworthy, it really shouldnât be as we sort of get into this rhythm as we ask our employees to deliver the numbers. And then on the operational excellence side, a big pivot for us is sort of deep inspection. I -- in these times, we have to make sure every deal is being managed the right way. On our pipeline coverage, for example, I have a strong belief that, as we face these headwinds, I think, we need twice as much pipeline. If we are going to get to the numbers that we expect to get, we will be better. If the close rates are dropping a little bit, they are elongating a little bit, we better make sure that we have more pipeline as we enter these quarters to make sure we are delivering the numbers. So operational excellence, some performance management, obviously, a big investment in our enablement efforts or repositioning of our product and our technology in C360, I feel very lucky that we have a broad portfolio of products that we can go out and talk to our customers about and that we can talk to them about cost savings and we can talk to them about efficiencies gains and productivity gains in the organization. So I am excited about going in and accelerating that motion with our customers to make our numbers. Yeah. And when you joined in August, like usually you come in -- as a new leader, you come in and you take stock and then you kind of saying, okay, this one [ph]. The point that you just mentioned, was that kind of what you had in mind when you kind of started in August or has the pandemic or all the trouble that kind of started then kind of changed that a little bit? Yeah. I mean, I have always had this mindset, as I said, around, hey, I want the performance manage the teams. And so I looked at the numbers and certainly looked at the results in the second quarter and said, hey, are there pockets of performance that we can manage? I love that you said, hey, there are things that you canât control and there are things that can control. Execution is something that we can control. And so my philosophy is lean in on the things that you can control. You are not going to change the economy. You are not going to be the one that goes out and changes currency. Go fix the things that you can in your organization. Thatâs really been my mindset since I have taken over the organization. Yeah. And then, like, as a leader, you kind of have to kind of start looking forward a little bit as well. If you -- and you mentioned a great -- the broad product portfolio, like, if you think about the drivers of growth in the future, I mean, itâs going to be a bigger organization. Law of large numbers is coming your way or is the -- against you, like, how do you think about like Salesforce sales motion going forward in terms of positioning the product, positioning their clients? Yeah. Itâs a broad portfolio and our -- Marc does not believe that the law of large number apply to us. So he still expects the growth rates to be where they should be and I want to sort of embrace that. We have a big portfolio. We have a lot of organic products that we deliver to the market. Genie is an incredible innovation that we can start talking to, to our customers. We do have to be thoughtful about how much a single salesperson can know in that broad portfolio. And itâs always a conundrum of like, hey, how do you not hire so many people that sell individual products, but also being expert in each of these areas as you go to market. I want to make sure we bring the specialization we need to go win the deals and differentiate from our competition, but also not show up with the bus of people. And one of the ways that we are talking about doing that is bundling products together. We have done a really nice job in the last year putting products together, like, revenue intelligence, the Sales Cloud products connected and bundled together and fully integrated with our Tableau product and go sell that SKU. So you are bringing more product together, so itâs easier to sell and solving problems for our customers in that context. We announced today at World Tour in New York a new product called Tableau Genie, again, fully integrated Tableau with our Genie technology. So more products brought together make it easier for our account executives to sell that technology in the market. And then the -- I mean, the one success -- not the one, we have like many, but like the one that kind of caught my attention most was the Sales Cloud evolution over the last few years. Because it was, I remember, like a few years back, it kind of law of large numbers, although it doesnât exist and decelerate into high single and then you changed the approach in terms of packaging it kind of creating bundles, et cetera. Is that kind of a playbook for the whole organization a little bit? Is that kind of what you can... Itâs exactly what we think about. I mean, the -- when we looked at what we call the OG cloud, the Sales Cloud and at Salesforce, we didnât like those growth numbers going to single digits. Surrounding that technology with new offerings really an important strategy for us, how we bundle those products together really an important strategy for us. We always look at TAMs. I always talk about the TAM for Salesforce automation. When I started this company, it was like $2 billion I think. And now our cloud is almost $7 billion and growing at double-digit rates. It shows you sort of what the opportunity is ahead. We do not believe that we are hitting any diminishing returns there. I think thereâs a lot of opportunity for us to accelerate that. How do we do that for every single cloud as we think about sort of the expansion of our opportunity in these areas? Also tell you, Sales Cloud is, in difficult times, it is the one that I think our customers lean on the most. Whereâs my pipeline? How deep is my customer relationship? How do I make sure that we are closing every deal thatâs out there? And so we see sort of this renewed interest in Sales Cloud when the economy gets a little tough. We saw it back â actually back in 2001, 2002. We actually got pulled up into the enterprise space at that time, because people couldnât wait for their deployments. They really needed to see their pipelines. And so Sales Cloud is becoming a horse for us again in the growth rate showed. Is that in a way also the one thing that should give investor confidence, because if you can take the sales cost [Technical Difficulty] and just kind of, through your own action kind of accelerate the growth against to some really, really healthy numbers, well, you just have to do it for the other clouds, which are less mature and hence you should be able to do it there. Itâs a great playbook for us, absolutely. And you think about Service Cloud, which is our largest cloud now. I will give you an example, Slack, fully integrated to do case swarming for our customers. That should be a bundle that we go to market with and expand the opportunity for the total addressable market for Service Cloud. Marketing Cloud has always been that way, a core e-mail engine, but adding a lot of functionality associated with that as well. We have offered our customers incremental product around MuleSoft as an example as well. So this is a play that we need to go around and continue to accelerate the growth of each of these clouds. And then like more going back to your position, like, thereâs the product side and you need to kind of work on that, like, but the other thing is like, how do you get it into the market? And there, you need to think about sales, sales enablement, like do you split your Salesforce into kind of experts, like, how many people are touching on an account? Yeah. Progress, no doubt about it. We are seeing progress in this area. I think if you talk to some of our larger customers, they would say, it feels like a lot of people showing up and selling products. Itâs one way to ensure that you get growth by products. Dedicate a Salesforce to it and you will get the growth of that product. At the same time, itâs not the most efficient model and so how do we bring these things together as we think about our go-to-market strategies as we launch into February 1 into next year? Some of it is bundling in the technology, but also itâs some of the way we put our people in the market and go after the opportunities out there. I think thereâs some real efficiencies gained as we think about our acquired companies, how do we bring in these sales teams into the core, bring them into our core sales offerings and make sure that we are going to market not as separate organizations, but one organization to solve our customerâs problem and drive value with that. And then on that note, like, how -- is then like Customer 360, Genie, et cetera, not like, but especially Customer 360, the one ring that binds them all in a way? And then from that perspective, is -- can you then sell it more top down in terms of like account management kind of Customer 360, you need to bring it all together or you need all the other products around it? I think the vision is really important though, Raimo. I think you have to go paint the vision for whatâs possible and then if you need to spill in some of the products over time, I think, thatâs fine. We want to be the single source of truth for our customers. We want all customer data flowing to our data lake, Genie, and then making excellent decisions as a sales leader or a head of marketing or head of service based on this data that is flowing in from every source, both internally within your company or externally from the website. How does all that data inform you to make better decisions about the way you support your customers, how you sell to them and how you market to them. G&A, maybe I can cut a little bit, not me. Sales and marketing is the one area and kind of -- you were kind of far, I know, and the right part of that, like how do you think about that? Yeah. Itâs a good question. The way I think about it is I am fully accountable to delivering against the plan that we have. We -- I think we told you at Investor Day, we would be sub 35% cost of revenue in the S&M, sales and marketing world. We have some plans, we are going to go look at every aspect of our business and make sure that we are more cost effective and more efficient in the way that we operate. I will give you some examples. Self-service is a play for us that many other companies do a lot better than we do. Slack is an example of a company that has an excellent self-service motion that we are learning from. We think we can serve the bottom end of our market very well with a self-service motion. We can also serve other large enterprises who want to interact with us in that way, everyone sort of thinks about self-service being SMB motion, it actually is how many large customers want to add licenses. They want to just add a few licenses. They donât want to talk to a salespersonâ¦ â¦ and then get the quote back and very manual in process. They want to just transact with us. Indirect channels is another area where I think we can drive some cost down. As we think about the very interesting opportunity, we have to increase the amount of revenue coming from our international markets. We donât always have to go direct. We can look at ways to leverage in indirect channel and drive our cost down a little bit in markets where reach is probably better through an indirect channel. There are other areas I am certainly looking at, all the cost structure of my sales organization. If you think about all the ratios in the organization, we -- that support our sale -- selling motion. Have those gotten out of whack and could we go back and look at those layers of managementâ¦ â¦ within the organization, can we look at that, and certainly, the acquired companies, are there ways to bring them in and drive some cost efficiencies and accelerate the business. Itâs not just about taking cost out. Itâs also about driving topline growth as well. And so nothing is -- let me put it, everything is on the table as we look at sort of our cost structures here. And a big focus of mine -- I didnât mention it, but my background was finance and so I startedâ¦ â¦ my career in finance, so I have a -- I managed P&Ls for a very long time and so I am going to look at every aspect of our business to make sure we are driving costs out of it. And I am telling you like the comment you get from everyone is, like that everyone quotes is like, well, Marc Benioff famously said, 2008 biggest mistake, not investing in the downturnâ¦ â¦ and I am very focused on that right now. As I think about our enablement efforts and where I want to dedicate resources. I feel good about our -- the number of people we have on the sales organization. The capacity is solid. We have hired a lot of people over the last couple of years. I feel like we can go deliver the results with the capacity we have. I want to drive the productivity number as well. I want to make sure that we are enabled and we are selling or managing our people and thatâs a number that I look at when I talk about performance management. What is the productivity per rep and if you are below a certain threshold, itâs not really what we want in the business. We expect better results from you and so productivity is a driver for our business. Capacity certainly is too, but so is productivity and that will be the investment in enablement and deep inspection in our business will drive higher productivity and drive the results for the company. Yeah. As part of that, it is also the action you took on headcounts like a while ago, little bit part of that is like, look, I am going to work in investment bank. There was always that 5% rule at the end of the year. In sales for sure, that was always a rule. Absolutely right. And as I said, it shouldnât have been newsworthy, because this is the way we should be running our businessâ¦ â¦ all the time, which is you are constantly looking at underperforming people and treat them with grace and dignity, but you have to move them out if they are not performing and thatâs always been our culture. We want to make sure the best of the best are sitting in those seats and we pay them well and we expect them to go deliver and when they donât, we want to help them find other roles, even in within the company or outside the company, thatâs fine. But we need to deliver the results and some of that is take that capacity, we take some out and make sure that we are driving better topline growth. And remind us like how much of this is an organizational thing, like, you probably know our side, like, the investors think or now we have Amy, sheâs poor woman is in charge, everyone else is still out and partying. Itâs our plan, collectively. We all think about it. You asked me about the driving the cost down in sales and marketing. That is my job. I own a big chunk of the headcount in the business right now. How am I going to go deliver and help Amy talk to all of you about better results on op margin? But she also owns G&A and sheâs going to drive that cost out. Our product teams are under David Schmaier and he has to go drive costs out. Our marketing organization is looking at all the things that we do and spend money on, and Sarah Franklin as our CMO, is going to take cost out. So this isnât an Amy plan. This is a company plan. And by the way, you will notice Marc Benioff is also very much on this journey with us right now and talking a lot about better op margin for the company. Okay. And another factor on that is like, and you touched on it a little bit, is like how do we think about the acquisitions like a MuleSoft, like a Tableau, like a Slack now and getting the value out of that? Like the setup that you have at the moment, is that kind of or you kind of, are you happy with that, like, what are you thinking about like those assets in the future? I think itâs a big opportunity for us. We are looking at this for next year. We have already started some of the experiments of ways that we can drive more efficiencies. I will give you an example. In our Japan business, we have moved those sellers from Slack, from Tableau and from MuleSoft, now work for that country leader. Itâs no longer a global structure. Those teams now work for Kodison [ph]. We expect better growth that way, more ownership of the growth of those productsâ¦ â¦ because itâs owned by that individual in that market and there should be some efficiencies in headcount they are getting in the back. There should be some efficiencies in the headcount as we think about driving those results for the organization. Can we take out some layers of management? We put teams together that sell higher price tags per transaction, because they are including more of our, recall the Customer 360 in every transaction? Yeah. And then where are we on the terms of kind of bringing, like, MuleSoft, Tableau were kind of more on-premise solutions for a while. Yeah. Thereâs an active migration. We are really trying to push every net new sale to be cloud for both of those products, but also helping our customers, their customers, our customers jointly move to the cloud offerings. We like our cloud model. And I think we better support our customers when we know more about them, when they are in cloud, we can see how they are using the technology with adoption they are getting from the clouds that they have. And so itâs a big strategy for us to continue to migrate the on-premise customers and products. Those that are -- customers that are using those products, but making sure the net new products are all cloud basedâ¦ And then the other last acquisition is obviously Slack and then we just had the news there, like how -- like, obviously, itâs a loss to you kind of have Stuart and team kind of move. But on the other hand, you owned the asset for a whileâ¦ â¦ so thatâs kind of a normal natural reaction, like how integrated is Slack now and how much of a kind of path ahead do you still have for that one? And Slack, sorry, Stuartâs departure from Slack was not a surprise. We had a successor that was ready to go and Lidiane is an amazing leader and really excited that we have taken someone from our core business at Salesforce and put them over the top of Slack and it will be an accelerator on the integration. As you probably know, Raimo, the majority of their existing customers sort of sit in the product and dev world, a place where Salesforce traditionally has not played. So when you think about an integrated Slack to Sales Cloud or Service Cloud or Marketing Cloud, itâs all upside for us. And so how do we go faster on those integrations is absolutely part of our strategy when you think about rolling into next year and Lidiane will be a huge partner in that as we drive that forward. Okay. Perfect. And I see my time is almost up. Like maybe one last question on, as we think about 2023, you are not going to guide for me here on stage, itâs fine. But like what are the factors that you are thinking about like to kind of run the business and kind of work... Yeah. Some of them are ones I mentioned, performance management, operational excellence. I really want to lean into that into next year. We didnât talk a lot about our industry plays and we think thereâs a huge opportunity for us to go faster on industries. We saw seven of our 15 industry clouds grew greater than 50% in our third quarter. Customers want you to show up with relevant products that get me to value faster and thatâs the industry cloud, speak their language, understand how we are going to go drive that forward. International, despite the currency headwinds, will continue to be a strategy for us. Currencies will come back and we want to own those markets and so we want to go fast in that area. I still believe we have a massive opportunity to expand our footprint in every customer. We have seen many customers saying to us, hey, I want to consolidate all these products that I have and put it on the Customer 360 platform. Make us a deal and we will move and migrate those -- migrate away from those technologies. And so those are the strategies we want to go run. I am excited about the huge TAMs that we have, incredible portfolio, killer culture, happy customer base. We think the future is very bright.
EarningCall_1882	Good morning, ladies and gentlemen and welcome to Medicureâs Earnings Conference Call for the Quarter Ended September 30, 2022. My name is Michelle and Iâll be your operator for todayâs call. At this time, all participants are in listen-only mode. Before we proceed, I would like to remind everyone that this presentation contains forward-looking statements relating to future results, events and expectations, which are made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the Companyâs actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, those described in the Companyâs most recent annual information form and Form 20-F. Later, we will conduct a question-and-answer session. I would now like to turn the conference call over to Dr. Albert Friesen, Chief Executive Officer of Medicure Inc. Please go ahead, Dr. Friesen. Joining me today on this Q3 2022 financial statements call is Dr. Neil Owens, President and Chief Operating Officer; and Haaris Uddin, Medicureâs Chief Financial Officer. Weâre pleased to report that net income for the quarter increased significantly from the previous quarter, with net revenue remaining steady. Net income for the quarter ended September 30, 2022, was $1.1 million or $0.11 per share and EBITDA was $1.4 million. AGGRASTAT sales remained steady, ZYPITAMAG sales increased steadily, and the Marley Drug business provides a diversified revenue and helps grow our ZYPITAMAG sales and profit. With the acquisition of Marley Drug and the online pharmacy continue -- and the online pharmacy continues to provide steady growth. Medicureâs business focus is on the following growth and development initiatives: one, continued sales and profits from AGGRASTAT; growing -- two, growing ZYPITAMAG revenue and profit; three, developing Marley Drug online presence; and four, the MC-1 development for PNPO deficiency. One of the reasons we acquired Marley Drug, a pharmacy uniquely positioned to dispense medications to all Americans in all 50 states and territories through mail, was to expand our sales reach for ZYPITAMAG. We believe the best way to do this is through a direct-to-consumer approach via an e-commerce platform coupled with our existing infrastructure. The goal of the platform is to bypass the traditional framework run by health insurers and pharmacy benefit managers that has made access to affordable medications too expensive for many Americans, including both generic and branded products such as ZYPITAMAG. This past few months, Medicure celebrated its 25th anniversary. For 25 years, our mission has been to serve patients by delivering safe and efficacious, life-changing medicines at affordable prices. Capitalizing our strength in cardiovascular therapy and knowledge of the ever-changing U.S. market, weâre excited to continue working our mission over the next 25 years and more. We believe the investments and experience over the past 25 years positions Medicure on a steady path to continued success. It takes time and persistence, and weâve demonstrated that. Now, Iâd like to turn the call over to our CFO, Haaris Uddin, to review and provide some color on our financial results for Q3. A couple of quick items to note before I start. All dollar figures are in Canadian dollars unless otherwise noted by each presenter. And as a reminder, you will be able to obtain a complete copy of our financial statements for the quarter ended September 30, 2022, by the end of the day today, along with previous financial statements on the Investors page of our website. Alternatively, a copy of all financial statements, and management discussion and analysis can be obtained immediately from sedar.com. I will now provide some key highlights of our financial performance for the quarter ended September 30, 2022. Total revenues for the three-month period ended September 30, 2022, were $5.3 million compared to $4.9 million for the quarter ended September 30, 2021. Net revenues from AGGRASTAT for the period ended September 30, 2022, totaled $3.1 million, an increase from the prior year, where net revenue from AGGRASTAT was $2.9 million. The increase in AGGRASTAT revenue during the current year is a result of a higher volume of units sold. The Company earned net revenues from ZYPITAMAG in Q3 of 2022 of $434,000, which is an increase in the net revenues earned during the same period in the prior year of $388,000. The company continues to focus on ZYPITAMAG and expects revenues to continue to grow throughout the remainder of 2022 and beyond. The Company earned net revenues from Marley Drug in Q3 of 2022 of $1.8 million, which is an increase from the net revenues earned from Marley Drug during Q3 of 2021 of $1.6 million. The increase in net revenue earned from Marley Drug is a result of an increased volume of sales, including sales through the Marley Drug e-commerce platform, which launched during the current year. Turning to cost of goods sold. AGGRASTAT cost of goods sold for the three-month period ended September 30, 2022, totaled $477,000. Cost of goods sold for AGGRASTAT consisted of finished products sold that was delivered to customers. ZYPITAMAG cost of goods sold for the three-month period ended September 30, 2022, totaled $363,000 and includes $153,000 relating to products sold to customers, $148,000 from amortization of the ZYPITAMAG intangible assets and $62,000 relating to royalties on the sale of ZYPITAMAG, resulting from the acquisition of the product in September of 2019. Marley Drug had cost of goods sold of $551,000 during the three-month period ended September 30, 2022, and this pertains to the cost of products sold by Marley Drugâs in-store and mail order pharmaceutical business, which also included sales through the Marley Drug e-commerce platform. Selling expenses totaled $1.7 million for the three-month period ended September 30, 2022, in comparison to $2.6 million for the three-month period ended September 30, 2021. Selling expenses decreased in the current period as a result of the Companyâs implementing cost-saving measures of Marley Drug, in addition to the Company reclassifying certain expenses as general and administrative expenses based on their nature. General and administrative expenses totaled $1 million for the quarter ended September 30, 2022, in comparison to $538,000 during the period ended September 30, 2021. The increase in general and administrative expenses primarily related to professional fees incurred during the current period as the Company continues to improve its e-commerce platform, partially offset by lower legal costs and a reclassification of certain expenses from selling to general and administrative, based on their nature. Research and development expenses for the three-month period ended September 30, 2022, totaled $314,000 compared to $468,000 during the three-month period ended September 30, 2021. This decrease during the current period is primarily due to the timing of research and development expenditures relating to each development project and a declining research and development budget. The Company recorded finance expense of $33,000 during the three-month period ended September 30, 2022. The finance expense recorded during the period consisted primarily of accretion on the ZYPITAMAG acquisition payable, bank charges incurred and finance expense of the Companyâs lease obligations, partially offset by interest income earned during the current period. The Company recorded a foreign exchange gain during the three-month period ended September 30, 2022, of $10,000 compared to a foreign exchange loss of $226,000 during the three-month period ended September 30, 2021. The change relates to changes in the U.S. dollar exchange rate during the respective periods, which led to a favorable foreign exchange gain during the current period. Adjusted EBITDA for the three-month period ended September 30, 2022 was $1.4 million compared to an adjusted EBITDA of $282,000 during the three-month period ended September 30, 2021. The increase in adjusted EBITDA for the three-month period ended September 30, 2022, is a result of a lower research and development costs, lower general administrative costs relating to improvements on the Marley Drug e-commerce platform in addition to higher revenues in the current period when compared to the same period in the last year. As at September 30, 2022, the Company had cash totaling approximately $4.5 million, an increase from the $3.7 million of cash held at December 31, 2021. The Company does not have any debt on its books. I want to remind you all, there will be an opportunity at the end of todayâs call for you to ask questions regarding the financial results of the Company, as a whole. And with that, I would like to hand the call over to our President and Chief Operating Officer, Dr. Neil Owens, for some additional commentary regarding our operations. A few updates I can provide. First, we are pleased to report that AGGRASTAT provided 6% higher net revenue in Q3 compared to Q2. This is despite the fact that a lower number of units were sold in Q3, which reflects improvements in our contracting and fewer product returns. Our goal is to be as efficient as possible with marketing and account support to reinforce our brand into 2023. The first licensed generic of AGGRASTAT was granted for November for one format. However, to our knowledge, it has not yet been made available. Regarding ZYPITAMAG, we continue to see consistent growth in prescriptions filled through Marley Drug, including a 4% increase in units dispensed in Q3 compared to Q2. There was some impact from Hurricane Ian Q3 on patients being able to see their physician, which resulted in a decrease in fills in the Florida, Georgia and North Carolina in September. Net revenue was impacted by timing of PBM rebates through our insured sales, which decreased our net revenue in Q3 compared to Q2. Net sales for the 3- and 9-month periods ended September 30, 2022, were $434,000 and $2.57 million, respectively, compared to $338,000 and $941,000 in the same period in the previous year. We continue to build brand awareness through efforts of our sales and marketing team. Overall, ZYPITAMAG sales through Marley Drug continues to demonstrate growth, lower returns and fees to wholesalers and reduced fees to pharmacy benefit managers. This is why weâve received attention from other manufacturers who are interested in our approach and Medicure plans to provide through a fee-based approach other innovative brand medications that have a clear clinical advantage at a cash price through Marley Drug. The Marley Drug pharmacy business generated sales of $1.8 million in Q3, which is similar to Q2. Through our sales team and marketing efforts, weâve seen increased sales of generic and branded medications, website traffic and specifically sales through our e-commerce platform. Weâve also been able to implement free shipping across the U.S. on all orders, in part through improvements in our shipping costs. This has been offset by decreased sales of a few specific high-margin generic medications due to increased competition. Overall, the pharmacy provides consistent revenue and an opportunity to better market ZYPITAMAG and other branded medications as the Company does plan to further invest in this area through 2023. Our Phase 3 study to find the first FDA-approved therapy for patients with PNPO deficiency, which is a rare pediatric disease leading to seizures and is ultimately fatal if untreated, is planned to begin in Q1 of 2023. It was slightly delayed due to study site start-up timing. This is an exciting moment for Medicure as well as the clinicians and families waiting to see the study begin. If successful, use of Medicureâs legacy product MC-1 could lead to a priority review voucher, which can be redeemed or sold and provides significant value. This study currently represents the major R&D investment for the Company. Due to improvements in our revenue and controlling spending, we are pleased to report a positive adjusted EBITDA in Q3 of $1.4 million as well as net income of $1.1 million or $0.11 per share. Our team wants our investors to know that we are driven and dedicated to growing revenue, controlling our costs and making Medicure a long-term success. Thereâs been considerable learning in the last few years and Medicureâs also adopted to the COVID environment, and during this time, achieved significant developments, including the acquisition of Marley Drug and expanding this online pharmacy with e-commerce. We think this approach strongly complements Medicureâs overall business, including sales and marketing of ZYPITAMAG. Weâre thankful for the continued strength in AGGRASTAT and a strong balance sheet. Weâre still focusing on growing the business with a pipeline of products, including cardiovasculars, which further diversify our revenue and asset base, carefully investing to grow our future profitability. My goal and that of our Board, management and staff is to continue to build this business with a stable, long-term outlook to generating value for shareholders. And as always, I want to express my appreciation for the outstanding Medicure team weâve been blessed with. Thank you, our shareholders, for your continued support and interest. Good. Thanks. So a question on ZYPITAMAG, are you thinking in the current quarter, youâre back to a run rate closer to Q2, around $1 million a quarter, or what -- is there something else up there? Yes. Sales -- I mean, sales through the insured channels are impacted more by those PBM rebates, which tend to have some delayed impact on our net revenue. But those have been very consistent. So sales through the insured channels and then Marley Drug, overall, are actually growing. It just comes down to those PBM rebates that are sometimes not in the same quarter. So, we do expect a return to consistent revenue into Q4. Okay, great. And then PNPO, if Iâm getting that right, when would we see any indications of how thatâs going? Is that a year from now, or whatâs kind of -- from an investor standpoint, when would we see something, whether we know it may be working or not? Well, we -- the trial is with 10 patients. There is very small number of patients in the world. So itâs been challenging to find the patients. That actually took us well over a year -- few years. When we discovered this or became aware of this disease, I think there was only 20 or 25 patients known worldwide. So part of the challenge, although a 10-patient trial was pretty easy, you would think there arenât many patients. And the treatment protocols for 12 months, although we do have a six-month look. So weâll see what the six-month look is. Enrolling the 10 will take a bit of time. So, thereâs several months with roll-in or several -- not maybe several, but three or four months to roll in. Thereâs six months to look and then a 12-month look. So -- and weâre predicting itâs 2025. No, it would be -- well, in beginning of â24, but then -- I would say, itâs the first time weâll have a look. I was just looking to see if thereâs -- you could update us a little bit on the Sensible Medical investment. I believe it was 7.7%. I was curious if that remains 7.7%. And if you could provide maybe a general update on maybe potentially the value of that, or if not that, at least an update on how Sensible Medical is doing in general, in the short term? We have written down the investment to a $1. Itâs a long story, but Iâll try to be precise and in a reasonable amount of time. The product is -- as we introduced it into the U.S. market, that was our role. Thereâs reasonably good reception. It is a change of practice. So, that takes a bit of time. But I would say still the product was reasonable. And I think weâve made this public to the Sensible board. We felt that they were spending too much money in R&D. They did require additional financing, which we didnât participate in, which caused dilution. And we pulled out of marketing because the cost of marketing and the return for us on the margins were very small, and thatâs what weâve pressed release prior -- previously. So long term, there had been refinancing, which has created a significant dilution. At the present time, our interest is -- probably remains about 1.5%. Now, that has the -- according to the investors, the value of the corporation has gone up quite a bit. But I wanted to present the fact that there still remains a challenge of introducing the sales. They have grown, but slowly. Theyâve grown mainly outside of the U.S., and that has grown fairly steadily and significantly. And the new investor group includes China. And so, their hope is to gain significant growth in the next couple of years in China, in addition to outside the U.S. But COVID was really also a factor because they had to visit hospitals. Itâs a capital budget item. So, you introduce it to the hospital, there was interest. They have to wait sometimes for their annual budgets -- to put it on their budget. So, we just felt that for us our energy and dollars invested in AGGRASTAT, ZYPITAMAG and products that we own and actually have margins in the 80% versus that margin was more like 30% or 40%. So, that gives you sort of a color on our -- so we have the investment. At some point, we hope we can liquidate. It might be -- as I said -- as weâve said, weâve written it down to $1. But right now, the value is potentially greater than that. All right. Thank you very much on that. I had one other question. I was just curious as far as the marketing of Marley Drug. If -- kind of what the plan was as far as marketing that as far as name recognition nationally going forward, if there was any plans for infomercials, anything such as that? Yes. Itâs a great question and something we talk about every day. And itâs always a balance of investing in a wise way to ensure that weâre still profitable. So, the goal is really to focus on markets where we think we can have an impact. Weâve got some focus groups and thereâs a clear interest in home delivery of medications. Thereâs also been some competitors who brought some attention to the idea of home delivery of medications and low-cost generics. So, weâre really focused on patients who are generally in the age of 50 to 70 who donât necessarily have great insurance coverage who are looking for some better costs on their medication. So, weâre actually trying many -- or using many different media to reach those patients. And we havenât done any infomercials per se, but we have done a lot of TV, radio, digital advertising, and weâre focused on where weâre getting the best ROI from those. So, weâre very much interested in expanding our marketing reach. But weâre just trying to do it in a smart way. Thank you, Michelle, and thank you for all that attended the call. We welcome your questions, appreciate that and your interest and look forward to connecting again with the next financial report. Thank you. Ladies and gentlemen, that does conclude the conference call for this morning. We would like to thank everybody for participating and ask you to kindly disconnect your lines.
EarningCall_1883	Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Third Quarter 2023 Earnings Call. Today is Thursday, December 1, 2022, [Operator Instructions]. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now I'd like to turn the conference over to Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may now start your conference. Thank you, and good morning, everyone. On the call with me today are Jeff Owen, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com, under News and Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2021 Form 10-K filed on March 18, 2022, and any later filed periodic report, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. At the end of our prepared remarks, we will open the call up for your questions. [Operator Instructions] Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our entire team for their ongoing commitment to serving our customers, communities and each other. The quarter was highlighted by strong performance on the top line, led by comp sales growth of 6.8% and included increases in traffic and in market share of both consumable and non-consumable product sales. During the quarter, we experienced significantly higher-than-anticipated cost pressures, including challenges within our internal supply chain, sales mix pressures and higher inventory damages and shrink, all of which impacted gross margin. We will elaborate more on these cost pressures in a bit. But despite these challenges, we delivered a double-digit increase in diluted earnings per share, along with strong same-store sales growth. As the economic environment continued to evolve during the quarter, we remain focused on serving the needs of our core customer. We continue to see customer behaviors in Q3 that we believe indicate they are feeling increased financial pressure, including reductions in the number of items purchased per basket and in discretionary spending, which was softer than anticipated during the quarter. Customers also continued to shift spending to more affordable options, such as items that are dollar price point and private brands, while also shopping closer to payday at the first of the month. Importantly, we are growing more productive with our core customer, as well as seeing an increase in customers with annual household incomes up to $100,000. This growth underscores our belief that our value and convenience proposition resonates with a broad spectrum of customers and will continue to be important to all customers in this challenging economic environment. In turn, we remain focused on delivering value and convenience and continue to feel good about our pricing position relative to competitors and other classes of trade. Further, we remain committed to offering products at the $1 price point, and we're pleased with the strong comp sales performance of these products during Q3, as they collectively outperformed the chain average. With nearly 19,000 stores, located within 5 miles of about 75% of the U.S. population, we believe we are well-positioned to support our customers even in a challenging economic environment. Building on this foundation, I'm excited to share our real estate growth plans for next year. In fiscal 2023, we plan to execute approximately 3,170 projects in the United States, including 1,050 new store openings as we continue to lay and strengthen the foundation for future growth. I'll share more details on these plans in just a few minutes, along with an update on our plans for our supply chain as we continue to support our significant growth, but first, let me recap some additional financial results for the third quarter. Our strong comp sales performance helped drive a net sales increase of 11.1% to $9.5 billion. From a monthly cadence perspective, the comp sales momentum we saw building in Q2 continued into all 3 months of Q3, with September being our strongest month of performance. And I'm pleased to note that Q4 sales are off to a strong start as well. Our Q3 comp sales were primarily driven by an increase in average transaction amount, largely driven by inflation. And as we would expect during a more challenging economic environment, average units per basket were down. As I mentioned earlier, we were excited to see a second consecutive quarter of increasing customer traffic contribute to the growth. With regards to the supply chain cost pressures I mentioned earlier, I want to touch on what happened and the actions we have taken to address these challenges. As a reminder, since the early days of the pandemic over 2 years ago, we have seen demand and sales grow at a robust pace. In addition, the overall mix of products we are shipping has evolved significantly with the growth of our non-consumable initiative in pOpshelf. As our distribution needs grew and evolved, we strategically designed permanent warehouse capacity solutions to support our growth. We plan for them to be operational starting in the back half of this year while making greater use of temporary storage facilities in the near-term. However, as we move through Q3, we experienced unexpected delays in opening additional temporary storage facilities, primarily due to external challenges such as permitting. At the same time, seasonal goods came in earlier than anticipated. The resulting constraints from these factors led to more than $40 million and additional supply chain costs in Q3 compared to what we had previously expected. These costs included retention fees incurred for delays in returning shipping containers. Costs associated with inefficiencies in moving freight within our distribution centers and higher transportation costs as a result of servicing stores from less-than-optimal distribution center alignments. While these issues have resulted in a gross margin headwind in the back half of this year, the team has worked hard to move past these delays with the opening of additional storage and warehouse facilities, which have already begun to relieve some of the capacity pressures. In fact, within the past few weeks, we increased capacity by more than 2 million square feet with the opening of 2 new permanent regional distribution hubs in Georgia and Texas, which will serve as intermediary facilities between import points and the rest of our distribution centers. With the opening of both the temporary and permanent facilities, we believe we are well positioned to drive continued improvement as we move ahead, as we better optimize store alignment with distribution centers, lower capacity utilization within our existing footprint and improve the overall flow of goods. Of note, these regional hubs will be followed by the opening of our new combination distribution center in Nebraska, which is scheduled to begin shipping by the end of this fiscal year. In addition, our previously announced facilities in Arkansas, Colorado, and Oregon are expected to come online over the next 18 months. Collectively, all of these new distribution centers will ultimately result in a more than 20% increase in total capacity and position us well to support continued growth in the years to come. Overall, while internal supply chain challenges have impacted our EPS outlook for 2022, we believe the significant growth in demand that contributed to these challenges is a testament to the growing relevance of Dollar General. And we are confident in our plans to support this growth going forward. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives from a position of strength, as we continue to distance and differentiate Dollar General from the rest of the retail landscape. We continue to operate in one of the most attractive sectors in retail. And as a mature retailer in growth mode, our transformational strategic actions have positioned us well for continued success, while supporting long-term shareholder value creation. Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter, let me take you through some of its important financial details, beginning with gross profit. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year. For Q3, gross profit as a percentage of sales was 30.5%, a decrease of 27 basis points. This decrease was primarily attributable to a higher LIFO provision, a greater proportion of sales coming from the consumable category, as well as increases in distribution costs, markdowns, inventory shrink and damages partially offset by higher inventory markups. Of note, product cost inflation was greater than anticipated, resulting in a LIFO provision of approximately $148 million during the quarter. And while we believe cost increases are beginning to moderate, we anticipate LIFO will continue to pressure Q4 as well. SG&A as a percentage of sales was 22.7%, a decrease of 23 basis points. This decrease was driven by expenses that were lower as a percentage of sales, the most significant of which were retail labor, incentive compensation, hurricane-related disaster expenses and occupancy costs. These were partially offset by expenses that were greater as a percentage of sales, including utilities, repairs and maintenance, and travel and training costs. Moving down the income statement. Operating profit for the third quarter increased 10.5% to $736 million. As a percentage of sales, operating profit was 7.8%, a decrease of 4 basis points. Our effective tax rate for the quarter was 22.8% and compares to 22.2% in the third quarter last year. Finally, EPS for the third quarter increased 12% to $2.33. Turning now to our balance sheet and cash flow, which remains strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders. Merchandise inventories were $7.1 billion at the end of the third quarter, an increase of 34.8% overall and 28.4% on a per store basis. Similar to the first half of the year, this increase primarily reflects the impact of product cost inflation, a greater mix of higher-value products, particularly in the home and seasonal categories, primarily due to the continued rollout of our non-consumables' initiative, and the early receipt of seasonal goods. Importantly, we continue to believe the quality of our inventory is in good shape, and we anticipate that we will begin to see lower levels of inventory growth beginning in Q4. Moving down the balance sheet. We issued $2.3 billion of senior notes during Q3, and we now expect to incur total interest expense of approximately $210 million for the full year, an increase of approximately $53 million over the prior year. Turning to cash flow. Year-to-date through Q3, the business generated cash flows from operations totaling $1.2 billion, a decrease of 44%, primarily due to higher inventory purchases. Total capital expenditures through Q3 were $1.1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to the strategic initiatives. During the quarter, we repurchased 2.3 million shares of our common stock for $546 million and paid a quarterly cash dividend of $0.55 per common share outstanding for a total payout of $123 million. At the end of Q3, the remaining share repurchase authorization was $2.5 billion. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders, to anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3x adjusted debt to EBITDAR. Moving to an update on our financial outlook for fiscal 2022. As a result of our strong year-to-date sales performance and our expectations for the remainder of Q4, we are reiterating our fiscal 2022 full year expectations for net sales growth of approximately 11%, including an estimated benefit of approximately 2 percentage points from the 53rd week, and we are updating our expectation for same-store sales growth for Q4, which we expect same-store sales growth in the range of 6% to 7%, which would result in growth toward the upper end of our previous range of approximately 4% to 4.5%. Turning to gross margin. We've experienced many challenges over the course of this year, including those related to product cost inflation, supply chain dynamics, and the evolution of consumer spending. Since our last update and like many retailers, we have seen an increased headwind from lower-margin consumables, sales mix as customers face growing financial pressure. We expect this headwind to grow in Q4 as our guidance assumes customers continue to feel financial pressures and shift more of their spending to consumable items. And while we are making good progress toward resolving our storage capacity constraints, we expect some of the cost pressures we have experienced as a result of the delays will carry over into Q4, but will be largely resolved by Q1 of next year. Finally, we are seeing a greater headwind from inventory shrink and damages than we anticipated for the back half of this year. Overall, while we are confident in the actions, we are taking to address our supply chain challenges, we anticipate the total headwind to gross margin in Q4 from all of these factors will be higher than what we previously contemplated within our financial guidance. With all this in mind, we are updating our EPS guidance. For the fourth quarter, we now expect to deliver EPS in the range of $3.15 to $3.30, which would result in a growth for the full year of approximately 7% to 8%. This is compared to our previous expectation of 12% to 14% EPS for the full year. Both the current and previous ranges include an estimated benefit of approximately 4 percentage points from the 53rd week. And our EPS outlook now assumes an effective tax rate toward the upper end of the previously provided range of 22% to 22.5%. We now expect capital spending for 2022 to be approximately $1.5 billion, which is at the top end of our previously stated range. Finally, our expectations for share repurchases remain unchanged from what we stated in our Q2 earnings release on August 25, 2022. Overall, despite the near-term challenges, we are confident in the business and our outlook for the remainder of the year. While we plan to share 2023 guidance on the Q4 call, we feel good about the sales momentum going into next year, coupled with moderating cost pressures. Let me provide some additional context as it relates to our Q4 outlook. As a reminder, we expect to continue realizing benefits from our initiatives, including DG Fresh and NCI through the remainder of the year. In addition, we expect the significant expansion of our private fleet, will drive additional benefits going forward despite anticipated continued internal supply chain pressures in the near-term. With regards to SG&A, we expect continued investments in our strategic initiatives as we further the rollouts. However, in aggregate, we continue to expect these initiatives will positively contribute to operating profit margin in 2022, as we expect their benefits to gross margin will more than offset the associated SG&A expense. Consistent with Q2 and Q3, our outlook includes continued investments to further enhance the customer experience, primarily toward incremental labor hours to drive continued improvement in overall in-stock levels and customer experience. Finally, we also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track and are seeing savings in 2022, offsetting a portion of wage inflation. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long-term. We're working hard to address the near-term challenges, most of which we believe will be behind us as we enter 2023. Importantly, we remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value. Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. We are continuing to make significant progress executing against our robust portfolio of initiatives. Let me take you through some of the recent highlights. Starting with our non-consumable initiative, or NCI, which was available in more than 16,000 stores at the end of the third quarter. With over 75% of the assortment at $5 or less, this treasure hunt offering continues to resonate with customers who are seeking value. We continue to be pleased with the sales and margin performance we are seeing from our NCI offering, including market share growth in non-consumable product categories. Looking ahead, we expect to realize ongoing benefits from this initiative throughout the remainder of the year and remain on track to complete the rollout across nearly the entire chain by year-end. Moving to our pOpshelf store concept, which further builds on our success and learnings with NCI. As a reminder, pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less. We recently celebrated the 2-year anniversary of the first pOpshelf store, along with our 100th store opening. And we are pleased to see the concept continuing to resonate with customers. During the quarter, we opened 23 new pOpshelf locations, bringing the total number of stores to 103 located within 9 states. Additionally, we opened 15 new store-within-a-store concepts during Q3, bringing the total number of Dollar General market stores with a smaller footprint pOpshelf store included to a total of 40. We remain on track to nearly triple the stand-alone pOpshelf store count this year, which would bring us to a total of nearly 150 stand-alone pOpshelf locations by year-end. Looking ahead, we plan to nearly double the pOpshelf store count next year, as our real estate plans for 2023 include opening approximately 150 additional locations, bringing the total number of pOpshelf stores to about 300 by the end of 2023. Overall, we remain excited about the pOpshelf concept and our goal of approximately 1,000 locations by year-end 2025. Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods along with a focus on driving continued sales growth in these areas. As a reminder, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to nearly 19,000 stores from 12 facilities. The initial objective of DG Fresh was to reduce product cost on our frozen and refrigerated items, and we continue to be very pleased with the savings we are seeing. Another important goal of DG Fresh is to increase sales in frozen and refrigerated categories. We are pleased with the performance on this front including enhanced product offerings in stores and strong performance from our perishable department. Going forward, we expect to realize additional benefits from DG Fresh, as we continue to optimize our network further leverage our scale, deliver an even wider product selection and build on our multi-year track record of growth in cooler doors and associated sales. And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. To that end, we offered Fresh produce in more than 3,000 stores at the end of Q3. And looking ahead, plan to add produce in approximately 2,000 stores in 2023, for a total of approximately 5,000 stores by the end of next year. Finally, DG Fresh has also extended the reach of our cooler expansion program. During Q3, we added more than 17,000 cooler doors across our store base, and we are on track to install more than 65,000 cooler doors in 2022. Importantly, despite the meaningful improvements we have made to date as a result of DG Fresh, we believe we still have significant incremental opportunity to drive additional returns with this initiative in the years ahead. Turning now to an update on our health initiative, branded as DG Wellbeing. The initial focus of this project is an expanded health offering, which consists of approximately 30% more feet of selling space and up to 400 additional items as compared to our standard offering. This offering was available in more than 3,200 stores at the end of Q3, and we plan to expand to a total of more than 4,000 stores by the end of 2022. As we seek to further connect customers with our expanded health offering, we have recently launched a partnership with a third-party payment platform to allow customers to use health plan supplemental benefits to purchase various health and wellness-related items in their local Dollar General stores. And most recently, I'm excited to announce that we launched a pilot of a mobile health clinic provided by DocGo On-Demand to provide basic preventative and urgent care services at a small number of stores in Q3. We plan to test this offering in select stores over the next few months as we continue to work with customers on how to help bring affordable health and wellness closer to home, while further establishing Dollar General as a trusted health partner in the local community. In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink and damage reduction. Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business. In the third quarter, we completed a total of 798 real estate projects, including 268 new stores, 485 remodels and 45 relocations. For 2022, we now plan to execute approximately 2,945 real estate projects in total, including 1,025 new stores, 1,795 remodels and approximately 125 store relocations. Looking ahead, as I mentioned earlier, we plan to execute approximately 3,170 projects in the United States in 2023 across our Dollar General and pOpshelf banners, including 1,050 new stores, 2,000 remodels and 120 relocations. Our ability to innovate our store formats continues to be an important strength of the business, and I want to take a moment to provide some additional color on our 2023 real estate strategy. Approximately 80% of our new stores and nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional box. With regards to remodels, approximately 80% will be in our DGTP format, which will provide the opportunity for a significant increase in cooler count as well as the ability to add Fresh produce in many stores. In addition to our planned Dollar General and pOpshelf growth, we are very excited about our plans to expand internationally, and our goal is to open our first store in Mexico by the end of this fiscal year. As a reminder, these stores, which will be branded under the name [MeSuper] Dollar General will be located in underserved communities in Northern Mexico. Looking ahead, we plan to have up to 35 stores open in Mexico by the end of 2023, as we look to extend our value and convenience proposition to a customer base that is similar to our core customer in the United States. These stores will be incremental to our planned 1,050 new store openings. As we head into 2023, our real estate pipeline remains robust. We see more than 16,000 total opportunities for small box retail stores in the United States, including more than 12,000 for Dollar General stores, approximately 3,000 for pOpshelf and approximately 1,000 for DGX. With these opportunities and our existing footprint of more U.S. brick-and-mortar stores than any other retailer, we are excited about our ability to capture significant growth opportunities in the years ahead. Next, our digital initiative, which is an important complement to our physical footprint, as we continue to deploy and leverage technology to further enhance convenience and access for customers. Our efforts remain centered around creating a digital front porch for our customers, as we look to continue building engagement across our digital properties, including our mobile app. We ended Q3 with over 4.5 million monthly active users on the app, and expect this number to grow as we look to further enhance our digital offerings. Our partnership with DoorDash continues to resonate with both new and existing customers as we look to extend the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less. This offering was available in more than 13,000 stores at the end of Q3, and we are very pleased with the year-to-date sales results. In addition, we are excited about the continued growth of our DG Media Network. We are seeing significant interest and participation from CPG companies and brands, who are seeking to connect with our more than 90 million unique profiles, especially our rural customers, who represent about 30% of the U.S. After establishing the foundation over the last few years, we are beginning to meaningfully grow this business. As we expand the program and enhance the value proposition for both customers and brand partners, while increasing the overall net financial benefit for the business. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. And we are pleased with the growing engagement we are seeing across our digital properties. Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This approach, internally branded as Save to Serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach, where our current goals include increasing labor productivity in our stores and enhancing customer convenience. The current focus of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates. Self-checkout was available in more than 10,500 stores at the end of Q3, and we continue to be pleased with our results, including strong customer adoption rates. We are also excited about our pilot in select stores, which provides customers the option to utilize self-checkout in all lanes, but also choose a staff register, if preferred. We believe this full self-checkout option could further enhance our convenience proposition, while enabling store teams to dedicate even more time to serving customers. We are currently testing this layout in approximately 250 stores and are pleased with the early customer and associate response. Looking ahead, we are on track to expand our self-checkout offering to a total of up to 11,000 stores by the end of 2022, as we look to further extend our position as an innovative leader in small-box discount retail. Moving forward, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders. When combined with our data-driven inventory management, we believe these efforts will reduce store workload and drive greater efficiencies for our retail leaders and their teams. We also continue to reduce costs through the expansion of our private fleet, which consisted of more than 1,300 tractors at the end of Q3. As a reminder, we have been focused on significantly expanding our private fleet in 2022, as we plan to more than double the number of tractors from 2021, which we expect will account for approximately 40% of our outbound transportation fleet by the end of the year. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we continue to create new jobs and opportunities for personal and professional development and ultimately, career advancement. Our internal promotion pipeline remains robust as evidenced by the more than 70% of our store employees at or above the lead sales associate position who were placed from within. In addition, approximately 15% of our growing private fleet team began their careers with us in either a store or distribution center. We are pleased with our turnover trends and staffing levels. And applicant flow continues to be strong, further validating our confidence that we are taking the right actions to attract and retain talent. Ultimately, we believe the opportunity to develop a career with a growing and purpose-driven company is a unique, competitive advantage and remains our greatest currency in attracting and retaining talent. We also recently completed our annual Community Giving Campaign, where our employees came together to raise funds for a variety of important causes. And I was once again inspired by the generosity and compassion of our people. We continue to add incredible talent across the organization in our stores, distribution centers, private fleet and at our store support center. As this new talent joins our tremendous team, I am continually reminded that the people of Dollar General are our greatest strength. In closing, I am excited about the future as we continue to make great progress against our operating priorities and strategic initiatives, with the number of initiatives we have in place and a unique and strong strategic planning process, we are confident in our plans to drive long-term sustainable growth, while creating meaningful shareholder value. Finally, as we are in the midst of our busy holiday season, I want to thank our approximately 173,000 employees for their commitment every day to serve our customers. I am excited about our work together as we head into the final weeks of our year. Great. So Jeff, maybe first, could you elaborate on what you think is driving the sequential acceleration in same-store sales? I think traffic has now sequentially improved for the second straight quarter. What are you seeing across the income cohorts? And then maybe just looking back at past periods of consumer pressure, how sustainable do you see the market share opportunity in front of us? Thanks, Matt. We are very pleased with our 6.8% comp sales increase. And as you mentioned, seeing traffic accelerate again for the second consecutive quarter was very nice to see, and also continuing to grow market share. We grew market share in our consumables and our non-consumable business. And so when you think about that, our outperformance on sales really was driven in the consumables business, and it really is a testament to our going where the customer wants us to go. And that is something we've always done here at Dollar General. And I think it's a testament to the relevance of our box. When you think about our box and how we've continued to make it a fuller fill in shop, it really speaks to our ability to serve a broad spectrum of customers. And as you mentioned, with customers â our core customer, one thing that is encouraging to see is she's still gainfully employed. And we've long said that is the single greatest factor in her economic health. So, it's encouraging to see that, and it's encouraging to see us grow productivity and share with her. And also, the encouraging thing we saw this quarter is we grew share in all income levels. And so that's particularly good to see when you think about the higher income levels. One of the things we've been very pleased at is our ability to retain that COVID customer higher than we expected to over the course of several quarters, and we continue to see that here. And we also saw us grow share and customers in the $100,000 income level. So, when you step back and think about it, it again just points to our ability to serve multiple income cohorts. And that will set us up extremely well as we look to the future and our ability to not only make our core customer more productive, but also the ability to retain these new customers. So, we feel real good about that. And as I mentioned around the consumable business, we're pleased with the performance there. And I think the thing to keep in mind, as you step back and you think about where Dollar General is today, our consumable business is a much different business from a profitability standpoint due to our strategic initiatives. When you think about NCI, our health offering, DG Fresh, it really has made that business a different business from a profitability standpoint. In fact, in the third quarter, our gross margin is 100 basis points higher than it was in 2019, just to give you a little bit of color there. So, again, we feel good about the top line. And as we look forward, we feel we're really well positioned to serve a multiple cohorts of customers in this economic environment. And I'd also say that we're excited to deliver more real estate projects in 2023 than we've ever done at Dollar General. And I think it's a testament to the robust pipeline and then also the strategic initiatives. So, I feel real good about where we are from a sales standpoint and our position to be able to serve our broad customer base as we look forward. That's great. And then maybe, John, on gross margin and just to break down some of the components. So, do you see these warehouse costs and supply chain efficiency is more transitory and contained to the fourth quarter? Help us to think about LIFO going forward relative to the material gross margin headwind this year, should we anticipate transportation as a tailwind now from here? And just what inning do you see the drivers of inventory markup in today? Sure, Matt. I'll start with the question around the supply chain costs. And as we called out versus previous expectations, the supply chain costs were a significant headwind more than $40 million above our previous expectations for Q3. And we do see this as near-term. And we're making very good progress toward resolving our storage capacity constraints as more capacity comes online. And we do believe some of these cost pressures, nonetheless, will carry over into Q4. However, we do expect this will largely be resolved in Q1 of next year. So, as we look ahead, we anticipate supply chain costs, both internal and external in 2023 to be down quite a bit. We're obviously seeing it improving as others market for carrier costs as well. And so that as a potential tailwind going forward. And then LIFO as well. We're seeing the pace that while it will continue to pressure, Q4, we are seeing the pace of cost increases continue to moderate. And as we look at next year, we'd expect less pressure from LIFO. So, certainly, some near-term pressures between LIFO between the supply chain cost. We also mentioned the sales mix shift and shrink and damages. But as we look to 2023 and beyond, we feel good about, as Jeff mentioned, one, the sales momentum in the business; but also moderating product cost and inflation, particularly around supply chain and LIFO. And as you look at the initiatives, we have that continue to contribute the other levers we have, not to mention our scale and where we're at in price, we don't see a need to invest. We feel that we're very well positioned as we look ahead to the future to continue expanding gross margin over the long-term. You asked about markdowns as well. I didn't want to miss that question. As you look at markdown risk, while up from the unusually low levels last year, markdowns are still well below pre-pandemic levels. If you look at the majority of the inventory growth, it's really driven by inflation. The team has done a good job anticipating the mix shift in consumer demand and has proactively been adjusting orders. And as a result, we feel very good about the quality of the inventory, ability to mitigate the markdown risk. As always, we've set aside, what we believe is an appropriate markdown level for the upcoming Christmas season. And of course, this is all reflected in our guidance. I think a follow-up, John, for you. So, this year, you were going to grow earnings, sort of in line with [indiscernible] excluding the 53rd week, and now it's going to be below and yet you're doing more sales. So, there's clearly something coiled up here in the model. I know you're not going to guide next year, but the theoretical framework is there should be some recapture. If there is recapture, are you inclined to let that flow? Or do you manage â do you think the business just manages towards [indiscernible] and I don't know if it's to reinvest or maybe we don't see all the recapture that I'm hinting at? Sure. So, as you mentioned, we won't be giving specific guidance on this call. We'll certainly share that on the March call. But I'll just start by reiterating that we feel great about the fundamentals of the business, the sales momentum, coupled with the moderating cost pressures that I just articulated. And as you called out, it is a 1 less week next year that's important to bear in mind. But again, as you look at the fundamentals of the business, they're very strong. We continue to see ourselves as 10% EPS growers over the long-term. Now we will always balance that with investing back in the business for the long-term, but feel we're very well positioned. And more to come for next year, but feel great about the momentum of the business fundamentals. Okay. And maybe, my follow-up, maybe sticking with you on fourth quarter gross margin. I guess, we're trying to build to the pieces, supply chain, mix, shrink. And we're having trouble getting to the entire magnitude. Are you willing to share a little more magnitude by item, by driver? Because it doesn't feel like the consumables mix goes up enough to justify the mix. So, there seems like there's something like markdown in there as well. So, as you look at the drivers of the additional pressure on Q4, it's the same drivers as Q3, the order is a little bit different. As you look at what we anticipate as the key pressures on Q4 margins is still healthy flow-through, but less than previously expected. The big difference is, first the mix shift. We did see a mix shift in the consumables as customers face financial pressures. We want to go where the customer goes, and like the sales we're seeing, but it does pressure your margin a little bit with the mix of the sales. The other piece â we did see â we mentioned as we progressed through Q3 is a greater headwind from inventory shrink and damages. And that shrink can have a tail to that. Rest assured, the team knows how to deal with this and is taking actions to address it. But it does have a tail to it. And then while we are making good progress resolving our storage capacity constraints with the capacity online, we do believe, as we mentioned, that some of this will carry over into Q4, but be largely resolved by Q1. So that's the big 3 versus our previous expectations. Obviously, the other big one is LIFO. As you look at LIFO, we called out $148 million in Q3, while we believe the product cost headwind is beginning to moderate. The prior cost increases will continue to pressure Q4 LIFO, and you could do the math as you do â as you spread that across the year. So, that's really the key drivers. But again, I'll just reiterate, many of these are transitory in nature. And as we look ahead to the future, we feel we're well positioned to resume growing our gross margin over the long-term with the initiatives, the levers, our scale and the pricing position we're in. Congrats on the continued top line momentum and share gains that you've witnessed. So with that in mind, maybe could you parse out a little bit what you're seeing in terms of how the customer is behaving because it's clear that traffic is up. The customer is visiting the store more and should â maybe shifting a little bit into private label. Could you talk a little bit about what you're seeing in that regard and how you're investing to continue to support the growth in that segment? And then secondarily, as you see that mix shift happen more to the consumable side, how do you marry that with the continued growth that you're likely to see in NCI, which should actually help to underpin, I would say, better profitability as we look ahead? Corey, this is Jeff. Thank you for your question. And I'll start with the customer. I'll reiterate the fact that her gainfully being employed is, again, a very important factor to economic health. And so when we talk to our customers, and I feel like our teams do that better than just about anybody. What we hear is she's feeling the pressure of energy prices and fuel and just the everyday needs are â it's hard to â for her to make ends meet. And so she's behaving pretty much exactly the way we would expect her to in times like this. So what we're seeing from her is, as you alluded to, she's coming to us more often. She's buying fewer items on each occasion. And one of the things that we're very pleased is we're being able to help serve her needs through affordability. And our leaning into the dollar price point, our customer is responding incredibly well to that. And I just â a testament to our team and to our ability to go where the customer wants us to around our $1 price point and affordability. But when you think about the consumable business, as you mentioned before, you got again, really step back and think about the strategic initiatives and how that has allowed us to really have a more profitable business there. And we've long used consumables to drive traffic and non-consumables to build the basket. And so as we think about our â excuse me, the non-consumable, as you mentioned, certainly, we continue to be pleased with what we're seeing on NCI, and its ability to really provide that value. When you think about NCI, 80% of the items are $5 or less. And so when you think about our ability to drive traffic through consumables, and then also see a little bit of our ability to rotate the product, the treasure hunt, our breadth strategy. We feel real good about our ability to help that customer continue to get the things they need and the things that they want. One last thing I'll say around private brand. I mean, we continue to be very pleased with what we're seeing on penetration. But the other thing you got to keep in mind is our customer, again, she's very brand-focused as well. And it's very important to her. And that's where it's important to really lean into our scale. As John mentioned earlier, the ability of Dollar General and a limited SKU retailer to be able to trade out brands, if necessary for our customer is a really, really powerful way for us to serve for better. And we've said this before, but our customer treats a brand as a brand. And so it gives us the ability to make sure that we're providing her with the value she needs. And our merchant team does that probably better than anybody in retail, in my view. So as you step back and think about it, we feel we're well positioned and really excited about our ability to continue to listen to our customer go where she wants us to go. And you combine that with the more profitable consumable business and our strategic initiatives and really set up nicely for us to continue to serve her, as we've done for many, many years in all economic cycles. That's great. And then thanks for laying out the new store plans for next year. I think that helps to really provide a little bit more color as to the predictability and stability that we should expect ahead. Could you talk a little bit more about the strong returns that you're continuing to see on those new stores? And what we should expect more so from a continued ROIC standpoint as it relates to some of these new stores as we look ahead? Yes, Corey, I'll start and then I'll let John fill in on some of your questions around returns. But our real estate model continues to be a huge strength of this business. I mean the low-risk and high-return model is incredibly powerful. And when you think about the retail landscape today, when you think about some of the challenges other retailers have talked about on the real estate front, I'm just very, very excited and proud of the fact that we're going to deliver more projects than we ever have at Dollar General in 2023. And with 1,050 new stores, it continues to just highlight our ability to serve the customer and our ability through format innovation, our real estate model, our technology, we're able to go where the customer needs us to go. And so feel great about that. And really pleased at the fact, through format innovation, this larger store we're opening, our new store performance has been incredibly positive. And I'm very, very pleased at our ability to exceed our pro formaâs, and we continue to see that. So that larger store format is continuing to deliver higher sales per square foot, which is excited. And as you know, the large majority of our openings are in that larger footprint. But as you think about the next year in the future, I think the other thing that excites us here is the pipeline that we have. And on the U.S. alone, we have 16,000 additional opportunities, and we feel great about our ability to capture those. And certainly, our fair share, which we've certainly demonstrated, but 12,000 additional for DG, 3,000 for pOpshelf and then 1,000 for DGX. So stepping back, you can probably hear in my excitement about the real estate and our ability to continue to grow here. And we feel like we're being very prudent in this environment, I'm very, very pleased with the team's performance here. So I'll kick it over to John for your return question. Yes. And just â echoing Jeff's comments, we're very pleased with the results we're seeing. As he mentioned, we're above pro forma in sales, which puts us ahead of schedule in terms of the IRRs. Again, we target a 20% to 22% after-tax IRR based on the sales. And as we outperform in sales, that puts us a little ahead on the returns as well. And feel not only great about the â and again, it's always important to bear in mind that it includes the impact of cannibalization, which is very minimal, has been very consistent, just given the localized nature of the shop. We continue to see paybacks less than 2 years. So it continues to be a fantastic investment that we continue to hit the gas on. And we're also really pleased with returns we get on our remodels as well, and we're doing not only a record number of overall projects this year, but a record number of remodels, which really helps drive the comp. John, I want to hopefully get some frame of reference on 2 factors that are impacting the gross margin. So, a, you mentioned $40 million of supply chain costs that are above and beyond what you expected, does that go to $30 million in the fourth quarter? And if that's in the right ballpark, you used the term of beat, which you can interpret a lot of different ways. I think what most of the market wants to know is, does abate mean you're going to incur $70 million this year that will go away because those are extraordinary costs next year? And as part of that, the other piece of it is the LIFO, which the LIFO headwind because that's needs to be $450 million or so if we just add $100 million for the fourth quarter. If there's a linear path of this inflation, meaning it goes from 9, 8, 7, 6 so forth, would that LIFO headwind that's going to be, call it, $450 million this year, be like $300 million next year, so you get a $150 million benefit? Sorry for so many numbers and so much confusion. No. No. Thank you, Michael. I'll try and tackle each of these. In terms of the carryover impact of the supply chain costs. We didn't give a specific number on that. It will be less, but still a meaningful impact to us. In terms of LIFO, the way to think about that is even though we don't anticipate â we anticipate a slowdown in the number of price increases. The way you do that number is at a point in time, we project the full year impact of all the price increases we're aware of, and we spread that across the year. So that gets you in the game of what Q4 looks like. And as we look ahead to next year, it remains to be seen, but would anticipate a considerable reduction to that LIFO number. So as you look at â as I mentioned, as you look ahead to next year, we think the supply chain costs will be down considerably because we won't have these near-term onetime costs, we don't anticipate because we think that will be resolved in Q1. And then the market is favorable in terms of just overall transportation costs, both foreign and domestic. And of course, we continue to stand up our private fleet, which we're going to â every time we convert, we take 20% out and we're going to double that in size this year. So that's certainly a significant savings driver for us as well. And so as you look ahead to next year, I think it's safe to assume that there's a number of tailwinds. There's certainly some headwinds we mentioned. We'll have to wait and see what the mix does. We want to be there for the customer, and we'll go where she goes. So we have to see where that goes. As we said, shrink has a tail to it. And we're all over it. We know how to attack that, but it does have a bit of a tail. So as you look ahead to next year, there's some puts and takes. But again, we feel like there's a lot of tailwinds when you think of LIFO, when you think of the supply chain costs and all the other levers that we've talked about, not to mention the initiatives. Okay. My follow-up question will be less a bit picky. I'm sorry. We've seen now some cost pressure at Dollar General. This follows a significant decline in profitability your largest competitor. Should we take these as onetime event? Or is there anything to say that just the overall profitability of the small box value convenience sector is permanently under pressure or long-lasting under pressure because of some of the competitive dynamics? Because of the shift to consumables and other factors or would you expect that this is not a trend that's going to be long lasting? Yes. I'll just reiterate, we see most of the pressures as transitory. When you look at the LIFO, when you look at the supply chain, we see that as transitory. We still feel very good about our non-consumable products, and see this more as a transitory macro pressure. Again, we're growing share. We're just kind of following the market trend, which people are just shopping more toward consumables versus discretionary items. But we're taking share and feel that will certainly do very well there as the economy improves. And just structurally, we feel we're well positioned in terms of â as we look at wages, we feel we're well positioned in terms of applicant flow and staffing levels. We feel we're investing appropriately in the business. We feel that our pricing is very appropriate. And again, I think it's important to mention that as you look at Q3, yes, we were down 27 basis points in gross margin, but we're still about 1 point above pre-pandemic levels despite all these transitory pressures I mentioned, we're still a point above where we were back in 2019 and Q3. Curious on the storage capacity and supply chain inefficiencies. If there was a sales impact during the quarter, as well as the cost impact that you talked about, maybe if you could frame that, also, same question, if you expect there to be a sales impact in 4Q? And related to that, was the pressure any region in particular where you saw the cost and/or sales impact? And how much of a differential was there in terms of the performance of that region versus your others? Yes. Thanks. I'll tell you, as we said before, the delays of our temporary storage facilities, certainly, that unexpected delay did impact the quarter from a profitability standpoint. But again, I reiterate how pleased we were with the strong sales performance we saw. And the nice thing is like it normally is at DG, it's pretty broad-based. And so, I think, again, that goes to the consistency of our ability to serve a customer across, not only a broad swath of the United States, but also around the income levels I mentioned earlier. And we're very pleased and excited that our temporary storage facilities are now online. We're also excited that our 2 new permanent regional hubs that are going to serve us extremely well. As we look to the future, they're also online. And of course, those things will take some time to get fully productive and to allow us to catch-up. So, again, I would also mention we're pleased that we had in stock improvement year-over-year in Q3. So again, when you kind of bundle it all together, I think the team did a nice job of overcoming some of these challenges, to deliver for the customer, go where she wants us to go. I think that translated into our strong comp, our strong market share gains in both consumables and non-consumables and a second consecutive quarter of sequential traffic increases. So again, feel pleased about the top line and feel pleased about where we have opened up our capacity. And finally, I'll just mention, as you look forward over the next 18 months, bringing on 4 permanent facilities, that will increase our capacity by 20%. It is something we factored into our strategic plan and feel great about how that's going to serve us well and allow us to continue to grow this business in the years ahead. So, just going back to your commentary on shrink. I was curious if you can provide more color in terms of what's driving the higher shrink lately opportunities you guys see to reduce that going forward? If there's any way to quantify how you think about the headwind for Q4 or even what you saw in Q3? Yes. So, as we mentioned, we saw increased shrink later in Q3. We believe this is largely â Rupesh, largely attributable to the inflationary environment, coupled with higher inventory levels. Overall, as you know, retail is seeing higher shrink in this environment. Now this can have a tail. So we did say we expect this to carry over into Q4. I think it's instructive as we listed out the gross margin drivers, I think that was the last on the list of drivers for Q3. But bear in mind, that was later in Q3. So, we anticipate a larger â probably a larger impact if you have a full quarter of that in Q4. But in Q3, it was the smallest of the items we called out. But again, we've done this drill many times. If you look at our shrink levels, they're still very low from a historical perspective, just not quite as low as we were at record levels recently. But the team knows how to execute against this, and I think we're putting the right tactics in place to address it. We're increasing the amount of tagging with â for our EAS units. We're leveraging technology like exception-based reporting, and we have very good process rigor and focus on this to tame it. But we'll have a little bit of tail until these actions take hold. Great. And then maybe just one quick follow-up question. So just on trade-in, I know your team expect to trade in to continue into Q3, and I believe Q4 as well. At this point, the trade-in that you're seeing, is that consistent with what you'd see in a recession? Or is it â would you say it still below what you typically see in downturn? Yes. Rupesh, as I said earlier, we're very pleased to be able to see that we're growing share in customers across all income levels. So that's encouraging. And really, again, I go back to the relevance of our brand of our box and our tremendous ability to listen and respond to what our customers are looking for. And certainly, I would tell you, the core customer is certainly behaving the way we expected her to. And also, as you think about it, one of the things that we continue to be pleased with is the fact that when we were introduced to that new customer during COVID, we continue to retain her at higher-than-expected levels. So, I would say that as we sit here today, we feel real good about what we're seeing across all the income brackets. We feel real good about seeing the growth there. And I think we're very well positioned to continue to serve them. And I think if you step back and think about Dollar General, we're an all-weather brand, and we've been doing this for many, many years, and we continue to do that. And so â and we will continue to do that. We'll go where the customer wants us to go, which we did this quarter. And we're also positioned to continue to do that as we move forward and continue to deliver on our strategic initiatives that really makes a more well-rounded shop and a greater appeal for a broad swath of customers. We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Jeff Owen for closing comments. Well, thank you for all the questions and your continued interest in Dollar General. I just wanted to wrap up with 3 points. First, while we had some unanticipated challenges within our supply chain during the quarter, we're confident in the actions we've taken to address these near-term issues and expect continued improvement as we move through Q4 and into next year. Second, we believe we are well positioned to keep growing market share, especially in an environment where customers are even more focused on value. And third, we believe our strong value and convenience proposition combined with our robust portfolio of strategic initiatives sets us up for a very long runway of growth. And we couldn't be more excited about where the future is headed. I want to thank you again for listening, and I hope you have a great day.
EarningCall_1884	Credit Suisse Semiconductor Analyst. Our next presentation is ON Semiconductor. Itâs a home game for you guys, just down the block. With us for ON -- from ON is Hassane El-Khoury, CEO; and Thad Trent, CFO. So, gentlemen, thanks for attending. So, I thought maybe to start and ONâs been a company thatâs been in a bit of transition, and thus far, that transition seems like itâs worked out pretty well with how the stock has reacted and how the fundamentals have reacted. So maybe a minute to kind of describe that transformation and how the strategy of the company has changed. Yeah. Look, at a high level, when I walked into the company, I could see from a technology with any semiconductor company, you have to have the value in the baseline technology before you can talk about what do you do for a strategy. So the company has very solid and broad-based technology components that we were able to take and through a portfolio rationalization, reinvigorate the strategy of auto and industrial, but more importantly, focus on power and sensing as the go-to-market and that allowed us to then tack on to a lot of the megatrends that are in automotive like electrification, allowed us to double down on silicon carbide, you have seen a lot of that investment, whether itâs CapEx or R&D. We repositioned our R&D investments into those high growth areas. Meaning we reduced the distractions that was part of the restructuring that we have done in the beginning of 2021 and along the way, we had to fix the business. So as we invest in the future and we over index to the growing megatrends in auto and industrial, we had to fix the baseline through price to value discrepancies, where we have had components or we have had products that were priced below market, even below our own similar products between markets or customers. So there were what we call value leakage that we were able to also bridge and close that gap over the last couple of years. And what you have seen is obviously an expansion in our gross margin, which was every quarter record high. Our growth has been sustained with the growth that we are seeing in the electrification of the vehicle and the factory automation and renewable energy. And really a more sustainable financial model that is, obviously, starting to get exercised as we look into 2023 and thatâs, again, the sustainability of the model that we have been working on in two years is to make sure that we have a model that we can get through good or bad times. Right. Right. And I mean, right now, and obviously, in the mind of everyone right now is sort of the transition thatâs going on in the industry because of the macro, where thereâs some areas of weakness, but then some areas which seem like they are pretty rock solid in auto, industrial, and the previous speakers we have had, and of course, through earnings season, it seems to be a consensus view among the companies we cover as those sectors have held up very well. And I guess the pushback from investors we just rolled out coverage recently is that, in every other cycle, itâs just kind of a question of not if it slows, but when and interested in your perspective on that. And both the -- if and when and then what ON does if that happens, if industrial should weaken because of macro concerns? Yeah. Look, I donât look at the market at that level, because if you look at it at that level, you are going to miss a lot of the nuances that are driving the growth. Unless you can peg and put your finger on exactly what is causing the growth. You are going to get sucked into the cycle and the macro which is historical. I donât think -- I think everybody will agree, we are in no way shape or form going to be pegged on any industrial type or any historical type market, because there are a lot of megatrends. There are a lot of in the road that we have seen and we will see more. So if you take it on a market-by-market, consumer and compute great last few years, everybody wanted multiple PCs at home. You had a lot of that the softness we started -- we started taking down our wafer starts to get ahead of it from an inventory back in the second quarter before anybody was talking about the softness in those markets, because in the backlog. People ask, oh, my God, did you see cancellations and push up? Well, the answer is no. What we saw is a slowing down of layering of new backlog, so almost a second derivative of the backlog. Because, look, the backlog is what it is. Do you trust it? Do you not? Itâs way above what we can supply, so it doesnât really matter. So you want to make sure you move your allocation to where you can make an impact on the end demand. So we started taking that and we start seeing -- we continue to see that softness and we are managing through it through making sure we get ahead of it from this inventory is at an all-time low for us. So we are managing stay ahead of that and our utilization is already baked into our number back to the resilience of our model. So we got ahead of all out of that. You go to the industrial. Industrial is holding up. And again, but you have to look within industrial, what is holding up. Energy storage, renewable energy, energy generation, energy distribution, chargers, solar, wind and energy storage. Factory automation remains strong, because what drove that strength is the fact that people couldnât get labor and social distancing, which reduced the throughput. So company started investing and accelerating their CapEx for factory automation, thatâs not going to slowdown. Once you get started, you have to go through the whole. Some areas in industrial, like, for example, the things that are closer to the consumer like power tools and that is going to -- thatâs softening. Thatâs expected because itâs stacked to the consumer and the demand. So that, again, we are planning for that, and with that, you can see the resilience of our model through that. Automotive is actually remains strong and itâs going to grow into 2023. Now what is that growth driven by? Again, you have to go, you can double click on automotive, you have industrial or you have and you have ICE engines. So if you look at the three numbers that people need to watch for, you have the 2022 number of vehicles, you have the 2023 demand from OEM and then you have the 2023 supply that semiconductor companies are going to ship and those numbers are stacked that way. Our ability to supply is not going to match the demand. We are still going to be supply constrained in automotive in 2023. So even if the demand kind of fluctuates, itâs not the supply boundary and that supply that we are -- as the semiconductor industry, we are going to be shipping into 2023 is higher than what we shipped in 2022. So itâs going to be a growth year, even if you are going to see fluctuation on the SAAR. Why? Because no matter what happens, OEMs are going to ship and manufacture electric vehicles, even if itâs at the expense of an ICE engine -- ICE car. If you get one part whether itâs power semiconductor or mixed signal analog, and you only get one, I guarantee you the OEM is going to put it in to make one more EV versus one more ICE car. That is going to fuel the growth, because for us, specifically at onsemi, the content is about a $50 content in an ICE for powertrain going to 750 in an EV when you do the silicon carbide and all the power semiconductors that go with it. That delta is going to fuel the growth net of whatever the SAAR and the units are going to do. Right. Right. So that in the constrained environment, the ability to produce EVs is so far below what they want to do, that EV growth will continue. That makes sense. What about the fungibility of supply, though, and for your own business, there is some fungibility between whatâs happening in some of the consumer-oriented sectors in industrial and automotive. Has that allowed you to reallocate your production to those areas, and of course, you are deemphasizing some of those non-core businesses? Yeah. So both of those obviously played a big role. So we have been on a trajectory for going to a fab-lighter strategy, which is resizing our manufacturing footprint for where we want to be as far as mix. But over the last few years, obviously, with supply constrained, we did prioritize our auto and industrial customers ahead of our non-core markets and that allowed us. We just reported a 68% auto and industrial as a percent of revenue and thatâs been kind of increasing. That of course helped with our mix that was accretive to margin as well. So itâs a double positive where you are now exposed to high growth macro markets and you have a better margin mix. So we are -- we have used the last few years of supply constrained to move more and more supply. Not every -- itâs not 100% fungibility. Thatâs why I mentioned earlier that we took down wafer starts. Those technologies we canât just move to automotive. But to the extent we can, we have. But nevertheless, as a company, when I talk about we have to be -- have a sustainable financial results in good and bad times, you have to work with utilization versus just build inventory to keep the fab full. That used to be the old ON Semiconductor. We are not in a fab filler product. We donât do fab filler. To the matter of fact, we are walking away from a lot of that business. We have more to walk away from. But we will take utilization down before we burn cash on the balance sheet with inventory. Right. We pivot a bit to one of the drivers, obviously, a big part of the story is silicon carbide and maybe you could speak to that, and I think you have already kind of spoken to why electric vehicles will continue to grow regardless of what happens with SAAR. What about ONâs own competitive advantage in that space? So whatâs your secret sauce in silicon carbide allows you to win? So a couple of things. Obviously, we have been in the power semiconductor for over two decades. We have been -- we are a big worldwide player with IGBT, which gave us a very strong pedigree in both technology and packaging. So when you talk about 300 kilowatts, 400 kilowatts, 500 kilowatts with a die size that is shrinking and shrinking, how are you going to get that heat out. So packaging is actually a very big competitive advantage we have. When combined with a very good technology from Audi Essence or whatever spec you want to talk about, you have to have both. Because if you have the best device and you put it in a less than optimal package, you are not going to get the efficiency. You end up paying for silicon carbide, which is more and you are not going to get the benefit because the heat is trapped in. So packaging and device are very important. Thatâs where we win business. Now what we have done also strategically is we have acquired GTAT in -- itâs been a year now. October was the one-year milestone in order to also extend the vertical integration from packaging device all the way to substrate in order to get that supply assurance, which is very critical. If you look at where the market is going and the ramp and the speed of adoption that we are seeing in automotive and in industrial, that market is going to be constrained for probably the next decade. So having supply assurance that a customer can visit the site, touch and feel the capacity thatâs being installed and get that confidence that as they ramp, we are able to ramp them. Thereâs no dependency that I have to go and hope that somebody is able to ramp. That goes away. So that vertical integration translates into supply assurance is another angle of not just why we win, why we win a lot of the majority shares at the big accounts and that translates into the $4 billion of committed revenue under long-term supply agreements that customer has signed up for. Right. So as you look at silicon carbide and I think you talked about $1 billion run rate by the end of next year. Whatâs the constraint? Is it actually a substrate that is constraining your ability of supply, I mean, it doesnât sound like electric vehicle demand is a constraint? Itâs -- at this point, itâs execution. It starts with the substrates. I talked about -- since the acquisition of GTAT, our -- we have -- we will have end of this year, which four weeks left, 5x the number of furnaces installed that will be online. So from our capacity and our ability to add capacity, we are on track. Like I said, we have four weeks left. I am not worried about it anymore. I donât sleep on do we have enough furnaces installed. Right now, itâs the ramp, which when you do a 5x ramp in the 12-month period. I can tell you if somebody is doing that and sleeps good at night, they are missing it. Thatâs where a lot of my focus is and the teams focus day-to-day is making sure that every issue you have doesnât become systemic, the blocking and tackling, which again, yeah, itâs silicon carbide, itâs very difficult. But the process of a ramp, we have been doing for decades on ramping fabs and ramping manufacturing even in power. So from that, we already expanded capacity on wafering and EPI. So once you get the boule you have to be able to make the wafers and put EPI on it. We expanded that capacity that we have and then the fab, we have doubled the capacity in 2022 from last year. We will double that again next year and that the equipment. So I want to say itâs all execution, itâs all planned. The question is until everything is in-house and I put my finger on it, I am going to keep managing it day-to-day. â¦ the silicon carbide for the next several quarters, year, year and a half, two years, itâs really in your control in terms of your execution and getting the product out? Let me pivot a little bit to pricing, which has been a good story for the industry and for yourselves as well for much of last year. Maybe you could speak to two things with that. One is whatâs happening within the non-core segment with pricing and I suppose thatâs one of the reasons why you are exiting some of the businesses that you have been talking about exiting for a while. And then, secondly, what about in the core businesses, and if there is price pressure in compute and consumer, does that leak its way into industrial and automotive at some point? Yeah. So let me take it in two sections. So the non-core business, a lot of the revenue or the business that we have said we are going to walk away from. We have walked away from about $270 million at an average of 25% margin in a good pricing environment. So I wouldnât call a good pricing environment. That is somewhere that I am high flying about it. Itâs better than it was, but itâs still dilutive. So we walked away from that. Where we are today? We talked about another $400 million to $450 million that we are going to exit in 2023. Thatâs going to be market dependent. If a customer is able to get it somewhere else cheaper, you are welcome, go for it. We are not going to chase it down to kind of single-digit margin that it used to be. So from that perspective, we donât see -- we are not going to be under any pricing pressure. As a matter of fact, as we lose this business, itâs going to be accretive to margin, because itâs below the corporate average. So from that perspective, itâs actually going to be a good thing for us. So softness in that market may accelerate us losing that business. I will be honest with you, by now, I thought we would be done with it. But itâs going slower, because they canât get it anywhere else. We expect that to change. Now on the core business, specifically on auto and industrial, we heard, you heard me talk about LTSAs. Just to remind you, LTSAs are multiyear in nature. We have LTSAs that go four years, five years, some of them are seven years, eight years that have both volume and pricing in it. So in core businesses where we are investing, thereâs not a conversation about pricing. The conversation about pricing has already occurred. Right now itâs just making sure that we ramp, because we have been very consistent and transparent about the fact that we are only adding capacity where we have LTSAs. So for us now is making sure that the LTSAs are what the customers need and that we are getting ahead of it by adding capacity to support those LTSAs. But call it whatever the demand does, thereâs not going to be a pricing conversation. It may be a volume conversation, but itâs not going to be a, hey, I can get it somewhere else cheaper, well, at that point, the LTSA is a legally binding agreement. â¦is LTSAs, businesses where we are adding capacity are 100% on LTSA. We are not going to add -- we are not going to invest in CapEx unless thereâs a signed LTSA. So to a first order between LTSAs and NCR 2023, I mean, we are sold out already. So that gives you kind of an idea of the -- itâs a big percent in the shorter term and thenâ¦ So in 2023, our CapEx is going, obviously, silicon carbide, but also a 300-millimeter fab. So we will close the East Fishkill, 300-millimeter fab acquisition end of this year, called December 31st. We will be owners of the fab on January 1st. So that -- we are converting that fab into a power discrete and logic fab. So the second CapEx, call it, intensity is going into that fab. Because as -- if you track the story, we have been -- I referred to the fab-lighter. We have divested or announced divestiture of four fabs. We closed three of them already. One, we have announced the agreement when we expect to close in the fourth quarter. So by the end of this year, we would have exited four fabs of our fab network. Our capacity, when we put East Fishkill online, we will actually increase. So, net-net, we are adding capacity, but we are adding capacity at scale and we are divesting the sub-scale fabs. So those are the two, I would say, components that are -- where a majority of our CapEx is going. Great. I will pause for a second and see if thereâs any questions from the audience before I continue. Go ahead, Rob? Thanks. Appreciate it. I think one point of differentiation on your SiC strategy has been your investment in the AEHR wafer-level burn-in systems. I think your competitors have not been public with such investments. Can you explain how, if at all, this is adding your success in winning kind of SiC business? Well, I donât know what they are doing. I look at it. I donât think wafer-level burn-in is anything new in the industry. Any new industry -- any new technology as you get to maturity and you flush out a lot of the stuff, you have to get a wafer-level burn-in and you have to get out of some burn-in, some technologies will remain. So I canât comment at that level because thatâs not really where competitive advantage comes. Wafer-level burn-in is a quality in PPM [ph]. It is not -- we are not going to win, because we have wafer-level burn-in. I will go back to -- you have to have the best devices and you have to have the best packaging. Those are the two key items why a company -- why we are winning. I can talk specifically for us. How we manufacture, how you improve all of that stuff, the manufacturing cost and manufacture the baseline has a lot of things between test, the burn-in and all of that. Thad, maybe I will direct the next one on you with regard to margins and there are some puts and takes on the gross margins right now, where, again, the -- whatâs happening with Fishkill, with -- whatâs happening with silicon carbide. Maybe you can walk us through what the puts and takes are and itâs my perception that the headwinds that you face on gross margins sort of peak toward the end of the year. So maybe you can confirm that and kind of, like, put the roadmap in front of us? Yeah. So let me start off by just calibrating where we are on margins. So we started with margins down in the 33% range, right? We pushed them up pretty close to 50%. Now what you are referring to as we are going forward is we have two major headwinds in margins and we have been very clear about these for a long time. We have got about 100 basis points to 200 basis points of headwind with the silicon carbide ramp. So we have all start-up costs with silicon carbide. That will basically be there for through 2023. We think by the time we exit 2023, we are about at the corporate average on silicon carbide once we ramp. So we have always said thatâs about scaling. We donât exclude the start-up cost out of our non-GAAP numbers. So thatâs one element. The other element is the East Fishkill. So as we take over the fab as this onset, in January, we are going to be providing foundry services to GLOBALFOUNDRIES for three years. So next year, we will have about 40% of capacity and it steps up and as GLOBALFOUNDRIES steps down over three years. So for next year, itâs about 40 basis points to 70 basis points of headwind, which that steps down again over in 2024 and 2025. So those are the two main elements and then, obviously, depending on what the market does, there may be some underutilization, but thatâs going to be macro driven. Now as we go forward to 2024, we have got a couple of tailwinds coming as well. So Hassane talked about the four fabs that we are exiting. Thereâs about $160 million of annualized fixed costs that come off of the gross margin line as we exit. [Audio Gap] dilutive toâ¦ â¦ our financials. Meaning if we have under loading because of it, then customers are going to have to offset that if they donât want to take the product. So our goal is not to blindly shove inventory into the customer. Because you just pushed the problem down the road. So we are not focused on short-term kind of benefit had a long-term impact. We want the long-term stability of our go-to-market and our revenue and our margin. But it can be margin dilutive, because historically, we are left holding the back, backlog and disappear in 30 days before. Back to that point, we are going to get a call six months in advance when thereâs a problem, which gives us a lot more time to manage it as a win-win with the customer. â¦ for quite some time. I guess one last one, just carrying this back to cash flow. And thereâs still some investment. You are still in investment mode right now, particularly in silicon carbide and other. At what point does some of that capacity addition, the spend start to moderate and you start to generate stronger cash flow on some of those investments? So this is not a build capacity and hope to fill it, right? So we are not going back to that fab filler strategy where we would be forced to go into. So on the last call, we said that, our CapEx intensity in 2023 would go up into the high-teens, right, from about 12%. Thatâs all to support the incremental LTSA revenue that we are locking up. Most of that, you can think about is being silicon carbide. Look, I think, that starts to subside, if it doesnât, itâs because we have incremental LTSA revenue over the long-term. Thatâs what would keep that at a higher level, but we do expect it to come back into a normal range. Okay. Well, lots to talk about. Unfortunately, we are out of time. So we will continue this conversation. But gentleman, thanks for your time.
EarningCall_1885	Good evening, everyone, and thank you for joining the Thai Beverage FY 2022 Results Call. All participants have been placed in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I will now hand over the call to the presenters, Ms. Namfon Aungsutornrungsi, ThaiBev's Head of Investor Relations; and the members of ThaiBev's senior management team. Thank you. Please go ahead. Good evening, ladies and gentlemen. Welcome to ThaiBev's fiscal year 2022 ended 30th of September 2022 financial results conference call. I am Namfon Aungsutornrungsi, Head of Investor Relations. For the conference call tonight, I will start with a summary of the full year results, then we will open the line for a Q&A session with our management team here. For the summary of the full year results, total sales revenue of the company for the year ended 30th September 2022 was Baht 272,359 million, an increase of 13.2% when compared to last year. This was due to an increase in sales revenue of our business segment. Net profit was Baht 34,505 million, an increase of 26.2% year-on-year. This was due to an increase in net profit of beer business, non-alcoholic beverages business, food business and associated companies, although there was a slight decrease in net profit of spirits business. The Board of Directors has proposed to issue a dividend of Baht 15,072 million or Baht 0.6 per share, which is higher than Baht 0.5 per share of last year. The payout ratio for 2022 dividend is 50.1% payout ratio. Please note that the interim dividend was paid in June 2022 at Baht 0.15 per share, and the final dividend will be Baht 0.45 per share. In 2022, the company's spirits business generated sales revenue of Baht 116,177 million, a 1% increase year-on-year while total sales volume increased 0.1% year-on-year. The spirits business reported net profit of Baht 21,902 million, a decrease of 1.1% year-on-year due to change in product mix and higher packaging costs, although molasses costs started to come down in the third quarter 2022. To mitigate the impact, the company made appropriate price adjustments. The company's beer business recorded sales revenue of Baht 122,489 million in 2022, a 23.5% increase compared to the previous year, in view of higher beer sales volume following the relaxation of COVID-19 control measures in Thailand and Vietnam. Total sales volume increased 14.5% year-on-year when including SABECOâs sales and increased 3.7% year-on-year when excluding SABECOâs sales. Net profit showed a satisfactory increase of 143.6% year-on-year to Baht 7,597 million. The company's non-alcoholic beverage business generated sales revenue of Baht 17,432 billion, up 14.6% year-on-year. Total sales volume increased 10.9% year-on-year mainly driven by higher demand for our drinking water, carbonated soft drink and ready-to-drink tea products. Although there was an increase in materials cost, the non-alcohol beverage business reported net profit amounting to Baht 586 million, increased 27.8% year-on-year, mainly due to the improvement of production efficiency and the cost saving initiatives. The company's food business recorded sales revenue of Baht 16,433 million in 2022, a 45.7% increase year-on-year, following the resumption of dine-in services. Net profit increased significantly by 177.1% year-on-year to Baht 376 million. This was mainly due to an increase in sales as well as the prudent management of distribution costs and administrative expenses. The company's international business recorded sales revenue of Baht 78,872 million in 2022, a 37% increase year-on-year. The increase was mainly due to a 46% increase in beer sales revenue from SABECO in line with Vietnamâs strong reopening momentum. Sales revenue was further boosted by a 7% increase in revenue generated by the international spirits sales on the back of higher contribution from Grand Royal Group in Myanmar as well as from the Scotch whiskey sales and the sale of Chinese spirits. That is the summary of our full year 2022 financial results. Now we will open the line for any questions on our results. Operator, please help open the line for our Q&A. Sorry about it. Thank you for the patience. The first question I have is on pricing. Can we try to understand this year how many times has Chang Beer raised prices? I understand there was a price increase in the first quarter, sometime in March. Has there been any price increase subsequently after that? And will management be planning any in FY '23? Yes. Okay. Horng Han, yes, we did a price increase across the entire portfolio of brands and all SKUs in the first quarter of this calendar year. We haven't -- we -- for the rest of the financial year, we did not make another price increase, although there are plans in the works for another one within the financial year. Sure. Sorry, maybe I didn't hear you clearly, sir. You mentioned that next financial year, FY '23, you may have some plans to raise prices again, right? Yes. Correct. Because these are forward-looking statements, so I cannot give you a clear definition. But yes, it's within the plan for this financial year that we will do another price increase. Okay, sure. I understand. And the second question I have is on the inventory. With regards to the beer business, can we try to understand in terms of the procurement for your raw materials? How much has it changed compared to a year ago when you were buying letâs say in December, November in 2021 versus now in November, December 2022. Can you give us some sense in terms of the increase? Don't worry, we have already secured our malt for -- I mean, through the end of this year production at a lower price than market and also for the next half year -- next year, we have already secured our malt price. I think, it will be higher than this yearâ¦ It will be higher than this year but itâs still significantly lower than the market price now, which is above EUR 800 a tonne. But we have secured. Yes. Okay. Please go ahead, ask me. Okay. Sorry, I think your voice was breaking out a little bit. I think what I hear is that the price that you are buying now is higher than last year, but it's a lot lower than market price. Am I correct? Yes, you are correct. But we have already booked for the next half year. The price of next half year will be higher than average of this year but still lower than the market price. We are so lucky that we have booked it ahead of the game. Okay. Okay. And is -- can we try to understand how much lower is the competitive prices? Is it like a 5% lower or is it like 10%, 15% lower than market price compared to the industry peers? Higher than that, higher than 5% for sure. Much more than 5%. You will be surprised. But the -- people tell me because otherwise, for the average cost of this year, extremely lower than the market price. Next year will be higher than this year, but still cheaper than the market price because we move ahead of the game. And the inventory will be at leastâ¦ I was just trying to understand what's the price difference between your buying, what you bought last year? Is it like 20%, 30% more? Is there some kind of guidance you can give, sir? Horng Han, I'm afraid this one is kind of forward-looking because if we tell you how much we -- itâs more than you can guess the number, sorry about that. Thanks for some of the inputs. Any comments on the outlook of molasses? And just how will you plan to tackle the packaging costs? I suspect the packaging cost has increased a lot as aluminum. Is that right? Okay. On molasses, which is related more of the spirit in Thailand we use molasses that is input cost, packaging wide we use glass bottle. So aluminum can will probably be more related to the beer business in Vietnam because using a lot more aluminum can than the beer business in Thailand, which is mostly glass bottle. Okay. On molasses wise, last crop as reported in previous meeting that price has been better than the year before, and we are now expecting a much higher sugarcane crop this year, should be expecting to retain which should start harvesting in middle of December, we are -- based on the government forecast, it's been that at least 15% to 20% upward in terms of output. So with that, it should allow for more molasses in the market. And that will allow us to acquire more molasses. Pricing-wise, we see quite stable pricing due to recent baht weaknesses have caused some of molasses price to stay firm into export price. So that's where we are. Relating baht, Thai baht has strengthening back. So when the crop start harvesting and the product is available to purchase, we are expecting that price will be softened. Then currently thatâs where I am on molasses. On aluminum cans, I will let my colleague to answer. The alu can, the price comes down already, and we enjoy it also. That's what I can say. The price of the alu can come down quite significantly from its peaks. Got it. And just on domestic spirit, the sales volume growth seems quite apt this year, and I understand that's because of the brown spirit as Thailand continues to reopen, tourists continues to come. I know spirits generally -- or tourism doesn't really benefit spirits too much. But as the economy reopens, how should we think about the spirits volume consumption? Will it recover further? And what's the reason behind the relatively rapid increase for this fiscal year? Okay. In terms of brown spirit, we have started to see in our last quarter, July, August, September, the higher increase in consumption and even the latest number in October, and this is not our number, this is third-party, the big company, third-party market research that the -- those -- acquire those data. The consumption for brown spirit in Thailand has increased. I think last quarter, over 20% and the latest number in October, I've also seen the number at 20%, this is third-party data. So that's in line with the level we are selling in. This is the baseline. Last year may be a bit low because of highlighted tail end of COVID with the social distancing and all that. So I think we're looking very positive with the recovery of the brown spirit consumption. In terms of profit-wise, actually Thailand representing about, say, 90%, 92% of those numbers. There's some -- the part about 8% coming from Myanmar. Myanmar wise, we are doing very well for higher volumes as well. In terms of Myanmar chart, everyone knows the currency has been weakened rapidly due to change in the political environment there. And -- so with that, the profit that came in although actually our business in Myanmar made record profits in local currency. But in baht, when we translate back to our reporting currency, the profit declined. So that's in line with that. In terms of spirits Thailand last year is the cost structure, that cost of raw material and packaging that we have to deal with, we have some price increase, but not offsetting the overall increase in structuring cost -- structure costs on the input. So that's why we show slightly lower number. Understood. But what about the top line? Because the top line grew only by 1%. So just wondering what's the driver? Because back in FY '21, I think, it was better, right? Yes. I think overall, I would say, blame on economy. I think we were quite large in terms of the volumes, and these are our number based out of what the economy would generate. And this past year, like again, the tail end of those COVID and the government's income support and the general economy started to soften quite sharply. But again, toward the last quarter, we started to see a lot of better size in terms of recovery in spending by the consumer. There's no excise tax increase at the moment. It's unlikely at this point. We have the new government according to the government term, the new election should be called by the full year parliament terms ending in March. So between now and then, there should be a new government. And therefore, quite any excise tax changes will probably be the policy of the new government. Got it. And have a good evening, and of course, best of luck for the first quarter of the fiscal year '23. Really appreciate it. Two questions from me. The first question is just on the spirits margins. Can you help us understand why the spirit margins at the operating level are much weaker than what we saw in the first half of this year? So we are seeing about a 200 basis points lower margin in the second half versus the first half; and even versus last year, it's down about 50 basis points. So while I understand the raw material side, the gross margins are actually still higher, but it's the operating margin, which is lower. So I just wanted to understand what SG&A increases are you really seeing on the spirit side? That's the first question. And the second question is if you can comment on the law on the Progressive Liquor Law that's been debated in Thailand now. Based on the bill that's been passed the changes that you see, I mean, what do you expect -- how do you expect that to impact the business? I'll take the new law first. The new law actually passed by the government under Ministry, the law. So that allows for home brew. I mean, people can brew beer and drink at home, people can spirit -- distill spirit and drink at home, brewed at home, personal consumptions, we do not -- but they are not allowed to sell distilled spirit outside of their premises. And there are limit to how much they can actually produce for their own use for the month. So sorry for my voice I am having this bad cold, supposed to be going away. So the -- so with that law, the change in that law and some additional products, that the smaller -- they call it village products have allowed -- being allowed to increase the capacity. Those products, that goes to part of the home consumptions. And do you thing at home consumption, it's not going to -- we do not see as it's going to change the landscape of the consumer because I think home consumption or home doing has always been there, whether regulate, not regulate, which is being regulated properly and people have to have a license to do that. And distilling your own spirit, it also comes with a lot of risk in terms of quality. So those are something that we do not support their thinking because it's just -- it's too risky for the consumer, but we don't see it's going to change the landscape of the competition. As for the additional clarity from the low-cost spirit, potentially will increase the competition of that low price spirit, that low price spirit has always been in a space where tax collection has not been effective. So I think it's a question of the government trying to collect tax as the producer showing that to size their capacity increase, although the capacity probably always increase from the beginning, but they're not quite regulated and support by law. So I think these two parts, the law actually been out there to regulate what had been reached of the law. So I don't -- we don't see that as much changes to the way we deal with the business, because our product price -- although product price, we call it low price, but the low price that didn't stand out mass market. These products we are talking about in the capacity, priced much lower, and again, add lower quality. Okay. Back to the gross margin, operating margin, can you ask me that question again because I wasn't sure what you're asking? I understand.... Sure. So what I was saying is that in terms of the spirits margin, like I understand that at the gross profit level, the margins have actually been better on a year-on-year basis in the second half of this year. But what we've seen is that the SG&A spends have gone up quite a bit and -- in the second half of this year. So if I look at the SG&A spend, it's the reason why the operating margins are actually lower year-on-year. Trying to understand where the pressures have been on the SG&A spend? And are there any one-offs? Or do you expect these kind of margins to persist because the spirits margins are now below 21% in the second half? Yes. I think this is -- we don't break down into different countries, but I think most of it you see is in Thailand. The -- what happened really on the product mix, we have a lot of price rate mix at the beginning of the year. So that from the volume perspective, it might be a help supporting that baseline when you calculate the margin back. In second half, the price rate, volumes are much lower than the normal half because we did price increase in the first half, so a lot of volume is loaded upfront. And in the fourth quarter, as the brown spirit start to return with increasing growth, we also have to increase our spending at the -- on the brown spirit. So that's been increasing in every station of malt sale in Q1 and Q2. So I think with that mix, it's probably -- you see maybe a shift of margin erosion, but I think it just has to do with the mix of where we cut the first half and second half. I wouldn't put much weight onto that change. Got it. But basically, marketing spend is what you're seeing have been increased in the second half to support the brown spirits business as you have more on-trade come back? And just my last question is on beer market share in the domestic side. Could you help us understand -- like it seems to be that the volume growth in the second half has been 3%, 4%. How have your market shares trended in beer within Thailand? Divya, hi, this is Lester here. Our market share has been climbing. In fact, by the end of September, the gap between our competitors and ourselves was the smallest in the last 13 years. So our share continues to grow. It's been trending up since the market opened, in fact, even during the COVID period. So trending upwards, although we're not #1 yet, but we're getting there. Well, again, Lester here. And before we continue, I just wanted to go back to the question that Horng Han raised earlier about price increases. I mentioned that we had plans in the pipeline. Actually, we did a price increase in October already. It is public information. Therefore, I can share it with you. I thought that we're not supposed to talk about FY '23. But because it's public information, we did do another round of price increases in October already. So just a clarification on this. So the price increase in October was for the Chang Beer operating in Thailand. But can I ask for -- is that -- was there any price increases for the -- in Vietnam for the product launch in Vietnam? Yes. For Vietnam SABECO, we -- this is also public knowledge. We have increased our price in October as well across most of the products. Lester, on the October price hike, just was curious to know if you can share how much has the price been increased and if competition has followed in line? And what is the current price gap between Leo and Chang? Divya, as usual, we're not allowed to give you the number, but it was a different percentages across the different SKUs. But for now, it was a low single-digit increase, and the gap right now, we're pretty close to Leo already. We still have a ways to go in terms of on a per carton basis, but we're pretty close. Got it. And just an overall question on the outlook for next year. I mean, it's an election year. Typically, there is a little bit more cash floating around. I mean, can you maybe comment on what you expect on overall consumption trends for next year for both spirits and beer for the domestic business for Thailand particularly? Yes, and I'm just saying it's an election year, so does that kind of play into the consumption outlook? Or you think it's... Yes. I think Divya, you've been -- follow us for the last 10 years, you know every time we have elections, I think business -- our business is doing very good because it seemed to be a lot of drinking, a lot of free beer, free spirit. Yes, we expect it to have some good impact in Thailand. Both beers and spirits though, both beer and spirit. Sorry, sorry, I was on mute. No, I said so compared to this year, spirits was actually weak. You do expect a bounce back in volumes for next year given you'll have the additional catalyst of the election? Yes, we hope so. I think we always expect for the best or better. It's going to be good. It's going to be good. I guess just now we touched on election. But I guess there's a near-term event, FIFA World Cup. Can you comment a bit about the mood in Thailand right now since FIFA World Cup, I guess the timing is quite favourable? Are we seeing pretty strong sentiment? And how does it compare to the last round of World Cup? Okay. Well, the World Cup has just only started. And unfortunately, I wasn't in the beer business four years ago. So I can't really -- I don't have a basis for comparison. But I was walking around in Chiang Mai over the weekend, watching all the preparations for the first game -- sorry, the second day of games. And I can say that at least in the market in Chiang Mai and in Bangkok, you see that a lot of -- there's a lot of -- not high, but a lot of energy surrounding the World Cup. So a lot of interest there. We also will be having viewing tents -- the beer viewing tents around Bangkok and a couple of other cities to tap on this towards the end of the tournament where the bigger matches will be played. So I can say for now that as the market reopens, we're starting to see a new energy and World Cup is helping with that. Let me add because -- this year, there's four games from 5:00 o'clock -- I think 5:00 o'clock, 7:00 o'clock, 11:00 o'clock and then late night. This -- the first three games is very good for drinking. So we have long, long drinking hours. I mean compared to last time, it's not like this, but I have to remind you that we just come back from the COVID incident. So it's right now, must be about 80% of the on-trade is open, but a lot of people during the game start from early evening until about midnight. So I guess, good that you increase the price of your beer before the World Cup. Can you confirm that the price hike is only for the beer? Have you adjusted the pricing on spirit side recently? Got it. Last one is more of a housekeeping question. I'm not sure -- if you can break down the mix for your spirits business say, brown versus white in terms of revenue contribution. How is it like in third quarter and fourth quarter of this financial year? And how does that compare with pre-COVID levels? No. No, we don't. That's the way this -- the way we disclose is Thailand representing about 90%, 92%, and 8% coming out from Myanmar and then 1% to 2% coming out from other international market. That's how we disclose the number. I just have two questions related to the beer business. The first one is to either Bennett or Alan. Alan is also on the line. There's been a worry about the bond market in Vietnam and SABECO has some VND 20.6 trillion in terms of short-term financial investments. According to the notes, it's all term deposits. I just want to confirm that you don't have any exposure to the bond market in Vietnam? I can take that. Yes. So a quick answer to that is they are all short-term deposits, fixed deposits with the bank. And these are our panel banks and have pretty good credit strength in the market. That's encouraging to hear. And then the second question is in relation to the beer marketing spend plan in Thailand as the economy fully reopens as Thailand reopens. How should we think about marketing expenses going forward in fiscal year 2023? Should it be an increase on a year-on-year basis? What kind of sort of advertising to sales ratio that we should think about, particularly coming out of Thailand in terms of marketing spend? This is Lester here. I think to compare year-on-year against last year would be an unfair comparison because it was COVID for the entire year. So definitely, marketing expenses will be going up. What we've seen in the last quarter, when the market opened in July, what we saw in the last quarter of the financial year was that our marketing expenses went up. But compared to 2019, the last -- the year before COVID hit us, our spend on a baht per liter basis continues to be lower than 2019, and we intend to keep it that way moving forward. Sorry, my question was going back. I couldnât -- I didn't catch the question about the price increase for the spirit. So Iâd just like to clarify one final clarification. Was there a price increase level? Was it hand-in-hand with beer? Sorry about that -- to make you repeat the answer. Yes, several I said. That's what I say. We do have a price increase plan -- in fact, in October, we increased some of the SKU. Sure. Thank you very much for the opportunity management, and thank you very much for the presentation. I have a follow-up question with regards to the earlier comments around advertising spend. And this question is probably directed to Lester as well as Bennett. How are you observing your competitors behaving in terms of their marketing spend? Are they -- do you have the sense that they are spending less than they did in 2019 in Thailand and Vietnam as well? How -- can you speak also about qualitatively how their behaviors have changed this time around versus, let's say, in 2019? Hi, Selviana. Lester here. I will start with Thailand, and then I'll pass it on to Bennett after this. I think that because for Thailand, the market only reopened in July, so fairly recently only, we have not come back to the types of levels that we saw prior to COVID hitting us in 2019. So -- but I'm saying that I'm seeing the trend starting to pick up. We start to see more and more activities in the market. We also have had some big events happening. So like the MotoGP, which is an international race coming to Thailand. You had the APEC meetings just last week as well. And then now you have the World Cup. So we see more and more opportunities for marketing activities to take place. So therefore, the trend will be continuing to pick up. But in terms of have we reached 2019 levels yet? I don't think we've reached that level yet. It may come during the financial year. But on our end, we're looking to control it. So that -- like I said, on a baht per liter basis, we continue to be lower than 2019. Okay. So Vietnam, I think our main competitors have increased their spend, particularly so this year because last year, the Southern core businesses were locked down. And I think they are very strong in the South, so they lost quite a lot of volume last year. So they are trying to regain share this year, so they are spending a lot more. And also, I think there are more brands now they have to -- they have to take their marketing budget to spend over more brands. And I think that is going to be tough moving forward. But for us, I think we've been managing our spend, although absolutely increasing. But Lester has said, we're trying to manage it on a unit basis to remain -- or lower if we can over the coming years. But we expect the marketing activities to be very aggressive in the next months and years. But we will prevail, so we will be more efficient.
EarningCall_1886	Hello, and welcome to the Genius Group Third Quarter 2022 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. Hi, everyone, and thank you for joining our third quarter 2022 earnings conference call. With me today is Roger Hamilton, Genius Group's Chief Executive Officer and Erez Simha, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our press release, including financial table was issued pre-market opening and is posted on our Investor Relations website located at ir.geniusgroup.net where this call is being simultaneously webcast and where versions of our prepared remarks and supplemental slides are available. During this call, we will present both IFRS and non-IFRS financial measures. Please note that all growth percentages refer to year-over-year change unless otherwise specified. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations. These forward-looking statements include, but are not limited to, statements regarding trends and their potential impact on our industry and our business, our ecosystem, platform, content, and partner relationships, our strategy and priorities, and our business model, mission, opportunities, outlook, and long-term financial framework. Actual results and events could differ materially from projections due to a number of risks and uncertainties discussed in our press release, SEC filings, and supplemental materials. These forward-looking statements are not guarantees of future performance and plans and investors should not place undue reliance on them. We assume no obligation to update our forward-looking statements. First, I'd like to welcome two senior hires that we made recently. Our first appointment is Saranjit Sagar, as the Chief Executive Officer for GeniusU. Saranjit was the CEO and Director of upGrad EMEA, where she led strategic business development in Africa, the UAE and also U.K., and diversified the business by introducing new products and developed a team of 144 employees. She also has experienced in other high growth tech companies such as Grab, where she launched grab kitchens in multiple countries and Honestbee, where she managed global cross functional teams to drive product strategies and streamline operations. So we're thrilled to have Saranjit join our global team and lead GeniusU. She has the right experience to boost the growth of our Edtech platform and improve customer experience and increase efficiencies. Our second appointment is Dr. Tracy Lynn West as the President of our University and which is the University of Antelope Valley. Dr. West has more than 17-years of experience in the higher education field with the most recent role being the Campus President of Concorde Career College, where she led more than 600 students and over 85 faculty and staff members. During her tenure, she helped students realize and achieve their aspirations of becoming successful healthcare professionals. And prior to this, she worked as an associate professor of the DeVry University and an adjunct professor at the University of Redlands, where she taught graduate courses in the Master of Science in Organizational Leisure Programs. Dr. West is a transformational leader, who helps students harness their strengths and capabilities, allowing them to advance their full professional potential. Vast leadership experience will be extremely valuable to running the University of Antelope Valley in California. We will continue on the topic about subsidiary, the UAV. We completed the acquisition of the University in July 2022. UAV is an Accredited University in California that offers career focused on-campus and online programs at the masters, bachelor's and associate degree level, as well as certificate and continuing education programs in several high demand sectors. The university has been built to-date with strong community links and an excellent reputation in athletics and academics. Since the completion of the acquisition, we have undertaken multiple steps to promote growth. On the August 1st 2022, we launched a $1 million scholarship contribution for UAV students. This scholarship program is designed to make entrepreneur education more accessible and affordable for prospective students and to empower students, who are living in the Lancaster area to not only improve their socioeconomic conditions, but to also gain a qualification in a new field and to find a rewarding career path. This scholarship program was available to students enrolling in a range of undergraduate, graduate degrees and vocational certifications such as business administration, criminal justice, nursing and more. As the university built for the 21st Century, we wanted to welcome and support leaders of the future, whatever their socioeconomic status and this offering has been the first step in making that goal a reality. Our second milestone was to introduce a NASA Technology Transfer Program at UAV. We partnered with NASA to create a unique learning opportunity for engineering and business students. And this program connects universities with NASA developed technology to give students the opportunity to work with federal government research, innovations and technology. Student entrepreneurs built case studies with NASA's patent portfolio, while learning about commercialization and licensing opportunities. Also, students who want to take their ideas beyond the classroom can utilize startup NASA a special program designed to help early stage startups, commercialize NASA technology. This partnership is a natural match for UAV, with the Antelope Valley being a local hub for some of the world's aeronautical leaders, including NASA, Boeing, Lockheed Martin, Northrop Grumman and the UASF Plant 42 to name a few. And looking to the future, we plan to continue on this partnership growth strategy to keep building out our new high-tech online programs in SpaceX, FinTech, MedTech and GreenTech and allow our students to have highly specialized degrees. Our second growth strategy for UAV is to build a digital twin of the university online to deliver tertiary education globally in an immersive and engaging way allowing students from all around the world to gain access to accredited U.S. curriculum and degrees. Accretion of this online platform will combine in the future Metaverse, including gamified learning, a digital credit system and virtual reality and will include the 21st Century curriculum, faculty, campuses and Edtech platform for university students. Our plan is to extend courses and programs to online learning environments with students and faculty connecting and learning in global classrooms and virtual environments around the world. We are building six campuses, each with a vibrant community, lead mentors and course content to service six types of members and partners on GeniusU. We also plan to integrate each student's AI-based virtual system as 3D virtual systems that accompany each student on their personalized journey. Moreover, student credits earned on the platform will also be integrated into the Metaverse, so that students can spend them on products and services within GeniusU, as well as counting towards their certifications. Considering our mission is to develop an entrepreneur education system that prepares students for the 21st Century, we believe that Webtree and the Metaverse will provide students and teachers with an enhanced way to interact and learn in a global classroom. The goal is to develop a blended solution of real life online and virtual learning to gamify learning and make it far more engaging upon working students in real time around the world. We explained on our previous earnings call that our gross model is through a four step approach, which is acquisition, integration, digitization and distribution. So we've acquired five companies since going IPO in April 2022, Education Angel, E-Squared Education Enterprises, the University of Antelope Valley, Property Investment Networks and Revealed Films Inc. We have now started our process of integrating our five acquisitions focusing on products community and revenue synergies. This integration process is expected to take several months as our strategy is to ensure that each company is integrated into Genius Group, while operating separately. We're redesigning ore processes to make sure they are consistent and that we're learning best practices from each other implementing the most successful one in each of our portfolio companies. So for example, we developed a Genius formula as a proven customer acquisition strategy and marketing pathway that enable partners to build their global classrooms on GeniusU. We are therefore currently implementing this Genius formula within all of the Genius Group companies to ensure we have the same marketing pathway and that the customer experience is consistent across the board. By ensuring that customer funnel and definition of visitors, leads and customers are consistent in each of the companies. This will simplify our reporting process, allow for consistent customer data and as a result will help us improve our operational metrics. However, we are centralizing certain company functions such as strategy and business development to ensure we maximize efficiencies and generate both revenue and cost synergies across the board. So for example, a centralized business development function will understand the needs and growth strategies of each of the portfolio companies and will be better placed to find synergies and partnerships that would benefit multiple portfolio companies than having multiple single business development functions. And once those five companies are fully integrated to our Genius Group family and business culture, we will be combining each company's courses and products into Curriculum and GeniusU, Edtech platform and tailor them to the needs of our students and expand our offering from current local communities to our global one. We believe this will increase the lifetime value of our students and reduce the student and partner acquisition costs for each level of our curriculum. By digitizing the courses and products for online delivery, we aim to scale each company's product offerings globally. The integration of these companies to GeniusU will help accelerate their speed, size and scale and increase their enrollments and capacity to deliver courses and increase their student retention through personalized education pathways. Our second organic growth is to focus on partnerships with thought leaders and companies that align to our mission that bring with them new students and course content and may lead to potential acquisitions in the future. During our Impact Investor Festival November, we partnered with popular educators, including Brian Jung and Jaspreet Singh, both investor educators, each with over 1 million subscribers on YouTube. This led to us having more than 20,000 registered students in the event. We're expecting the same traction for our global entrepreneurs summit in December as we partnered with futurist Peter Diamandis Co-Founder of Singularity University and The XPRIZE; Slim Ismail, Author of Exponential Organizations and Founder of OpenExO; and Verne Harnish, Founder of the Young Entrepreneurs' Organization, CEO and Co-Founder of Scaling Up. We're expecting to also have more than 20,000 participants at this event. And similarly, our latest acquisition, Revealed Films, attracts viewers and students through their library of documentaries featuring well known entrepreneur and investor educators, including New York Times best selling authors, Robert Kiyosaki, James Rickards and Garrett Gunderson. We plan on continuing this organic growth strategy by organizing multiple events in 2023 and attracting thought leaders, best selling authors, YouTubers and influencers into our faculty and GeniusU platform. I'll focus on constantly creating new partnerships and leveraging such events for organic growth is reflecting in our operating statistics as the number of students and partners on our platform have been growing steadily over time. At the end of September 2022, we had 3.01 million students on the GeniusU platform with approximately 9,000 new students joining each week in 2022. This represents a 17.2% annualized growth rate since December 2021. And similarly, our paying students grew to 41,282 in the past nine months, a 40% annualized growth rate. These two numbers are prior to the integration of our IPO acquisition companies with GeniusU. On a pro forma basis, Genius Group has a student base now of 4.35 million at the end of September 2022. The number of partners on GeniusU grew to 10,751 since December 2021, a 7% annualized growth rate and on a pro forma basis we now have 12,521 partners on GeniusU. We expect to increase both the number of students and partners to grow over time as we step up our organic growth efforts by mainly increasing marketing spend and improving our customer experience and continue our inorganic growth by making further acquisitions. We believe that our free student community represents a significant business opportunity for us to bring them in and through the personalized pay path. During this quarter, we also released a new version of one of our main products, Wealth Dynamics 5.0. This product is a stepping stone of the journey that our students take when joining the Genius Group community. As soon as they join our Edtech platform, students have the opportunity to take the Wealth Dynamics test to discover which of the eight entrepreneurial types they are, and once they learn more about what their natural talent is, they unlock a whole new way of accessing flow, productivity, creating attraction, building the right team and speeding up their results. Wealth Dynamics is already a world's leading entrepreneur tool for finding your flow and building your wealth, used by 1,000s entrepreneurs worldwide, enables them to significantly grow their business results and do the work they love to do. We upgraded our product with new content, new stories, and detailed definitions on how to be a 5.0 entrepreneur in the digital aid or based on different entrepreneur profiles. This update allows our product to further resonate with students as all the profiles are based on some of the most successful business people and entrepreneurs of the decade such as Elon Musk, Cathie Wood, [indiscernible], Kevin O'Leary and many others. With this upgrade, we are planning to continue growing our student base and being the world's leading entrepreneurial pool -- entrepreneur tool. In terms of achievements in Q3, I'm proud to say that GeniuU, the Edtech Arm of Genius Group, has become named as Singapore top 10 Emerging Giant in the KPMG and HSBC, Emerging Giants in Asia Pacific 2022 report. The businesses listed in the report have been identified as those that will be making a lasting impact on the global business landscape over the next decade. The joint study by KPMG and HSBC covers the Asia Pacific's technology focused startup landscape and identifies businesses that are the emerging giants in the region. It has listed the top ten companies in various locations from Malaysia, Japan, Indonesia, India, Hong Kong and Singapore. And GeniusU was listed as one of the top 10 in the Singapore region. We're delighted to have been recognized as an emerging giant and this is a testament of our continued growth and global impact. I'd also like to that we have recently retained two law firms to investigate our recent market activity after carefully reviewing the recent trading history of our ordinary shares we believe that we may have been the target of a market manipulation scheme that has been adversely affecting our share price. We have retained Christian Levine Law Group and Warshaw Burstein, LLP two law firms that have successfully prosecuted and collected millions of dollars in damages on behalf of their clients from broker dealerâs, markmakers, hedge funds and asset based lenders, who have engaged in market manipulation schemes. Now I would like to turn it over to Erez, so that he can give an overview of our financial performance. Thank you, Roger, and good morning, everyone. We continue to demonstrate strong growth across our platform, expanding the number of students, as well as the number of partners and this is reflected in our financials for the nine months ended September 30, 2022. For the nine months ended September 2022, Genius Group revenues on a standalone basis grew by 16.68% year-over-year to $14.42 million. This internal growth was driven by 24% increase in our digital education revenue and a 46% increase in campus revenue. The strong growth in campus revenue was due to an increased demand as a result of gradual lifting of COVID-19 restrictions. Our revenue on a pro forma basis reached $24.67 million in year-to-date September â22. The group gross margin had increased to 33.96% in year-to-date September â22. Our group margin has increased due to improved results from our campus business, which had a higher gross margin. To-date, we have been maintaining a balance between growth and a positive gross margin in which we are not being overly aggressive in our marketing spend and this is reflected in our current gross margin. Genius Group pro forma gross margin is 47.33% by owning the majority of our curriculum and courses, because all companies and acquisitions we are focused on maintaining low cost of content and high gross margin. The cost of revenue that we do incur is mainly our customer acquisition costs and our faculty costs. In the future, we will continue to focus on further improving our gross margins to synergies and higher efficiency. The Group had net operating expenses of $10.85 million and $17.5 million on a pro forma basis. Approximately 60% of our operating expenses is our start up with the remaining in development, marketing, rental and general expenses. The increase in our operating expenses is the result of the growth in our operations, acquisition of companies, the expansion of our core recurring and preparation for IPO and listing. As with our cost of goods sold, we have been managing our overhead to maintain a sustainable growth rate and have additional funds to invest in acquisition. The Group had a negative adjusted EBITDA of $3.89 million in year-to-date September â22, compared to a negative of $1.59 million, year-to-date September â21. On a pro forma basis, our negative adjusted EBITDA was $2.99 million year-to-date September â22. This negative adjusted EBITDA is due to an increased investment made in infrastructure and marketing and senior levels of leadership position. We will continue to maintain a delicate balance growth between growth and infrastructure and aim to improve our operating leverage as we grow. Turning now to cash performance and the balance sheet. The Group current asset increased to $36.23 million, the largest current asset type in our Group, our restricted cash of $11.33 million. Can and cash equivalents of $8.97 million. Accounts receivable of $7.87 million. Our Group and business model is the short-term cash generating business with customers payment made at the time of enrollment and often in advance, which is also reflected below in our deferred revenue. The exception to this is our annual membership and education programs. The payment is mainly the installments. Genius Group pro forma total current asset in September â22 was $33.96 million. The Group non-current assets grew to $46.97 million, mainly due to the acquisition of PIN, Education Angels and E-Square and the investment in University of Antelope Valley. On a pro forma basis, Genius Group non-current asset was $57.98 million. The non-current assets are largely the result of intangible assets and goodwill related to the acquisitions. The group current liabilities increased to $16.22 million with the largest item being deffered revenue, which grew to $5.94 million and the convertible note, which increased to $4.19 million. Genius Group pro forma total account liabilities in September â22 was [$17.8] (ph) million. The Group non-current liability increased to $14.16 million with the largest items being $7.61 million in right of use liabilities of which $7.2 million, which is an adjustment due to the GAAP to IFRS adjustment for the University of Antelope Valley. On its operating lease liability, the additional increase was due to convertible loan issuance in August â22 of $17 million with a net increase of $3.29 million under non-current liabilities. The pro forma non-current liabilities was $14.3 million. The group's shareholders' equity grew to $52.83 million in September â22, which reflects management's strategy to grow through acquisitions and organic growth. During this period, the company issued a convertible note of $17 million and accounted for $8.58 million to equity for the potential conversion of debt to equity. The company also issued GeniusU Limited ordinary shares with a value of $2,556,739 dollars in exchange for cash and also $7 million -- $3,763,636 as a part of its published listing in New York Stock Exchange, and we see the total FPL net proceeds of $18.06 million. During the period ended September 30, 2022, the company closed four acquisitions and issued shares for the consideration of $27.05 million. Genius Group pro forma legacy shareholders equity was $60.25 million, which includes the issuance of shares for the acquisition of Revealed Films of $7 million. We also saw the senior secured convertible note at the end of August to an institutional investor for a purchase price of $17 million of which $1.67 million was received in September â22 and the balance of $11.33 million is held in those ticket cash accounts. The note has a 30-month maturity conversion price of $5.17 per ordinary shares for voluntary conversion of the note and build interest [Technical Difficulty] 5%. We intend to use the net proceeds for general corporate purposes and for acquisition to the extent permitted under the business agreement. Overall, we are very happy with the Genius Group development year-to-date. We have grown our revenue by 16.68%, which is much faster than both the global education market growth of 4.3% and the global Edtech market growth of 16.3%, which demonstrate the strength of our Edtech platform and the growing interest in entrepreneurs education. We have also increased our gross margin to 33.96% and 47.33% on a pro forma basis, which transpired our efficiency and growing operational efforts. With regard to our 2022 guidance, we are maintaining our pro forma revenue guidance between $35 million and $38 million and revising our 2022 adjusted EBITDA guidance to a loss between $4 million to $5 million, due to higher planned investment in our Education segment to be able to capture short-term opportunities, specifically in recent acquisitions, we expect EBITDA to normalize in early 2023. So with that, we thank you for joining the call today, and I would like to open it up for questions. Operator? Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Hunter Diamond from Diamond Equity. Your line is now live. Hi, everyone. Congratulations on the results. I wanted to get a little color on how to think about the conversion rate of the number of students, the number of paying students and how -- ways the company is exploring to increase that rate? Hi, Brad. Sorry, hi Hunter. Good to have you on the call. And I would say that our biggest areas of focus at the moment is that first of all, when we are bringing people onto the platform and they are stepping into one of our campuses. We are doing a really good job right now of being able to take them through a segmentation process, where we know exactly what stage of their education pathway they run or they a student of the university student, exactly if they have a business, what size business it is as well. And one of the big things has happened over the last quarter is that we have become much better and then engaging each of those different avatars or our different student base in a way that then is bring them into additional programs as we go. Plus on top of that, the ways that we are developing the pathways for those students is part of what I was mentioning earlier in terms of the Genius formula. So I'll give you an example of that, when you actually look at the number of students that are applying at the university, for example, and the cost of acquisition of these students given that the very first step in terms of what they can actually purchase is the actual university degree itself, which is obviously extremely expensive and a very big life decision. What we're doing is actually now applying the same pathways that we're already finding work very, very well within our adult learning campuses, where the very first thing they're doing after they've actually had a number of free workshops is going to be something which is at an entry level of more like a $300 workshop or like a $1,500 membership program, because by coming into something at that level, they can then build trust, they can see exactly what's the pathway they should be following, and a very big part of what we're doing is the high-tech part where effectively for those that actually are at the high level, those conversations we have with them can start earlier as well. So we're tracking and like all the way through from not just the number of students joining, but from those students joining, what are the effective engagement levels that someone is going through from joining to then actually be becoming -- considering coming on to other programs and then actually deciding to actually make that first purchase. We now know something which we didn't know a year ago, which is it takes about 3.5 contact points in terms of free programs or experiences they're having on our platform before they then choose to actually become a buying customer. And so we are actually really tracking that on a much tighter scale now and then looking to see how that very first step to actually get them to that first purchase can actually evolve and grow as well. And obviously from those numbers, you can see with 90% of people, who are on for free our ability to then actually build up that premium model and actually see a very big difference in our revenues is a big focus for us this coming year as well. So that would be kind of key focus that we've got within that first step towards that first purchase. No, it makes perfect sense. Thank you for the additional color. And I guess just going on that point, how do you kind of view marketing spend going forward, high level? I know a lot of the growth has been organic. Do you think investors should consider the company would use a lot of paid marketing, try to get paying students or non-paying students on the platform? Or do you view it, kind of, more word-of-mouth as it's been historical going forward? Yes, it's a very good point, because we're actually seeing at the moment just how challenging it can be for any, kind of, company with a network effect to survive on marketing alone, right? Or actually to be dependent on the ads that are being run. And I think that a lot of the companies in the industry that are relying on digital advertising or paid ads are seeing the challenges that are happening not only in terms of the actual cost of acquisition of a customer becoming much higher, as customers have more and more choice, but also obviously the platforms themselves coming under scrutiny in terms of how they're tracking data and how they're managing privacy as well. So we've seen many companies that are education companies that before relied very much on Facebook ads, Google ads, YouTube ads, that simply can't do that anymore. They come to our model and they see that because we have such a high amount of number one word-of-mouth. And number two, pathways in which people are able to come and join us without that traditional ad spend, so two big areas. One is when we bring the new partner on board they're already coming with the trusted community. That entire trusted community comes and joins our platform. And we don't have to pay anything for them. In fact, we get paid because now we have a partner on board as well. So that is a really powerful way for us to actually bring trusted communities into our platform without having to rely on advertising at all. And the second thing that happens, which is a very big part of our personalization, is the assessments we do. If I see an ad for a course is very unlikely, I'm going to go and share that with my friends, my family, my staff, unless it happens to be a very compelling course. But when I go and I do an assessment, which is a passion test, which teaches me about my passions, or I do a genius test, which teaches me about my talents, then it's a very natural thing for me to go share that together with my staff or with even with my family, and we're seeing that happen a lot, which means that we're getting the halo effect of one person choosing to do this and then through sharing with others. So it is more powerful than word-of-mouth, because it's an incentivized reward in that there's a network effect, the more people that actually take the assessment you just talk, the more value will become for you as well. Those two main areas we see continuing to drive forward and I think a really important part of our metrics going forward is being able to track just how much we are getting an increase virally, because this is where the viral growth really comes in from those things which are not actually paid advertising. It doesn't mean we're not going to do pay advertising, we're seeing the biggest success still in the companies that actually are investing properly within their marketing, so we want to do that wisely. But it is really important to distinguish the unique benefits we have, which is how we can bring the cost of acquisition of every student down as low as we do at the moment. No, that makes perfect sense, in terms of growth for the company. That's all I have in terms of questions. Again congratulations to the whole team on those strong results. Thanks very much for that, Hunter. And if I could just add one extra thing in before we come to any other questions, it's the rationale of even the purchase, the most recent purchase of Revealed Films. Revealed Films is a perfect example of an education company that is reaching 100s of 1,000s in fact, they've got like well over a million on their database of students that are wanting to learn through documentaries, through high quality production, more than simply basically just like learning from a teacher or a lecturer in front of a hall. And the power of that is that again the shareability and also the cost of acquisition that they have for every student they've been working on for many years and they're really perfected. They've done a really good job of that. So there's a whole series of learning where obviously the two things I just mentioned, which was assessments or partners coming on board with their students, when you bring on documentaries with the star power that documentaries have and all those students come on board as well, that gives us another pathway of actually attracting students in that are coming for the right reason in exactly the same way that many of the YouTubers that we see out there. The influencers have got much, much bigger audiences that they're teaching to than even the best lecturer at university. But they obviously are part of a curriculum program, the way that we can develop a curriculum program. So there is a real, like power in the fact that by bringing onboard documentary company and then being able to actually link that as a front end that then leads into people then being able to then join the community and then go on to their additional learning at whatever level it happens to be, can actually be building through the documentary series as well. So I just want to share that as an additional way that we're thinking about where students actually are going, so that we're not having to chase students, but more they're the ones that are doing up to join us. Yes, thank you. Thanks for taking the questions, and great results and congratulations. And actually, it's just on what you were just talking about, itâs like you could just give some thoughts on what's your thinking about acquisitions going forward, that's obviously been a big part of your strategy in the past year? Are you -- is there a hole that you're looking to fill? Or are aggressively looking at more acquisitions? Or are you more concentrated on integrating the existing acquisitions at this point? Yes, great question, because absolutely at the time of the IPO, we had a kind of a two-pronged strategy, which was obviously our organic growth and then the growth through acquisitions. And we've always had our internal targets of how we grow split between those two areas. Obviously, the markets have changed now and so we're in a position right now where it is a biased market when it comes to acquisitions and that there are universities out there, schools out there, that have certification programs already that are up for sale. There is the additional complexity at the moment as well, which is that because of the way the markets are, where things might be in six months, 12-months and what our cash requirements might be in terms of acquisitions. I think that will change as well. So weâre taking a cautious approach, our very, very first focus given that the market is moving this way, is to make sure that we are positive EBITDA and that we are not overstretching ourselves plus we are proving out the model of the acquisitions where we are creating some really, really great synergies with the current company that we have as well. So yes, we are still going to be continuing on the part of acquisitions. However, we are already seeing, which is good news, a whole way of growing that was not part of our main focus before, which was the number of partners that are now gravitating to us, who really want to use our platform and can be generating significant revenues without all the cost and complexities of acquisitions as well, where they actually are seeing us as their solution to how they can create a global classroom. So this coming year as we start providing guidance by the end of the year into next year of our growth, we certainly are looking at more of a three-pronged approach now. Why? Yes, there's going to be the organic growth we're going to have there's going to be also acquisitions that we will be looking at, very specifically around where we can be buying over entities, organizations that have certification programs that we can be adding in. And then thirdly, there is a whole area around the partner growth and how we actually are going to be growing by attracting those partners. And I think most who've been following us at some time will know, that pretty much every one of the different companies maybe with the exception of university were our partners beforehand. In fact, Revealed Films has been a partner of ours for several years before they even became potential acquisition for us as well. So we have a whole pipeline of not just acquisitions, but partners that are actually looking to do more with us. We see that as being a really, really big part of our growth going forward. If there was one additional thing that I'd say in terms of our main focus on the acquisition side, obviously, all the acquisitions that we have done so far, all five acquisitions are very education focused in terms of them already delivering their education and now being able to do that with our Edtech and our technology expertise. With the latest Saranjit, who's come and joined us as CEO of GeniuU, she from UpGrad, which is already a multiple billion dollar business, has seen growth that they have done. Yes, on the one hand, by acquiring education companies, but on the other hand, acquiring Edtech companies themselves, right? So basically buying over companies that have got a lot of technology expertise that have got great engineers and have got already great platforms or add-ons to our current technology that we can add in as well, so whereas we weren't looking at those companies so much a year ago, because they were pretty much overpriced, right? All tech companies were very, very highly valued a year ago. We're now seeing that the actual price of potential acquisitions of technology companies that fit enough model is not only much more attractive, but in some cases, because of their model where they're burning through cash, it actually could fit much, much better in terms of us being potentially an acquirer of some of those as well. So we'll be looking at both those two areas, both education companies and technology companies that fit into our mission for the future. Alright. Thank you. That's very helpful. And, yes, more strategic and, yes the market definitely is coming around to that. So thank you very much. Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. 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_1887	Well, good morning, everybody or good afternoon if you're on the East Coast. I appreciate everybody joining us this morning. My name is Gary Mobley. I'm one of the semiconductor analyst here at Wells Fargo Securities. With us today we have the CEO of NXP Semiconductor, Kurt Sievers and Bill Betz was supposed to join us, he is the CFO. In his place, we have the Head of Investor Relations, Jeff Palmer, who many of you may know a very seasoned guy has been in NXP for a number of years. So we're certainly glad to have both of you up here today. But to lay the foundation for our discussions that are line of questioning today, Kurt, or Jeff, I was hoping that maybe you can just give us a broad overview of the different product buckets or end market buckets to -- then we just double click from there. Yes. Thanks, Gary. Thanks for having us. And yes, let me start about the macro. Because everybody, I mean, all our meetings, it's always the first question is, where are you and what does it mean to your sector exposure, et cetera. We use this nice language of dichotomy in our earnings call a few weeks back, and that still really holds. So we do clearly see the weakness and softness in the Android world and in all the consumer business we have, which in our case is actually the IoT business, which is about 40% of our industrial IoT segments. Weakness means a significant drop in demand. And you've also seen how we managed this. We try to avoid by all means to trim the channel. So we stick in a draconian way, I would almost say, to our 1.6 months of distribution inventory, just to be sure that we don't ship in more than they can sell out. At the same time and that's the dichotomy, we do continue to see very, very resilient demands in the automotive and core industrial. Now, core industrial, industrial IoT, that's all a bit confusing. Another way to look at it is the core industrial is really the business-to-business industrial markets. There the IoT is more than the business to consumer markets, very resilient in core industrial and automotive means, we continue to have demand, which is surpassing our supply capability, which has become better and better and better over all of the past quarters. But we are still sold out with the amount of NCNR orders in automotive and industrial, which we have on the books for next year with very select specific customers, we enter into these relationships. We also have to face the fact that we continue to be sold out for next year. So we have about 85% supply coverage of demand for next year. And in my view, while the macro might certainly have negative impact on the SAR, we do believe that the fundamental drivers for demand in automotive should stand very strong because that demand has not been driven by the working from home through the pandemic, which I believe was really the driver for the consumer markets and PC markets and mobile markets. But it's a much more secular trend, which comes from electrification and other content increased trends in automotive. So what I tried to say is within the semi market, one sector is really not like the other one, because the fundamental drivers for demand were different ones. And in our view, the ones for automotive and pretty similar in core industrial, should stand strong. While of course we stay also very cautious in this environment. I mean, it's not an environment where you push the pedal, but we just see more signs for actually pretty positive development going forward rather than a drop in automotive. Okay. Appreciate that overview. That sounds very consistent with what you highlighted on your recent earnings call, correct me if I'm wrong, or has there been a change on the margin? No, no change. I mean, we really, I think this environment and this dichotomy is just the same as it was. So we also today, if you'd asked me, do you see constellations or push-offs in automotive industrial? No, we don't. That's the same as a few weeks ago. But at the same time, the softness in IoT and Android also persists. I mean, that hasn't got better, while the others haven't got worse. Got it. I went back in preparation for this fireside chat. I went back to your Analyst Day from November of last year. And the quote that stood out to me in review was, 60% of your revenue is generated from markets in which you have a leading market position, maybe for the audience. And to further a discussion you can lay out in which end markets, do you have that leading position in which end markets are you trying to catch up to the challenger? Yes, Gary. So I'm glad that stick because it is part of the philosophy and the principle, how we run the company. It's about relative market share. We are big believers in how scale comes to work for margin revenue growth. And we think if we have this relative market share leadership of one and a half or bigger, we are ultimately in a position to out innovate our competitors. I mean, in the end, we all have about the same R&D percentages. But if you have 50% more absolute dollars in revenue, you can spend 50% more R&D dollars in the same space, which should give you then a better roadmap, and that should create more traction going forward. I mean, that's the underlying principle why we are so obsessed about that. We have those leadership positions across our segments, I mean, famous examples are, in mobile, we have the mobile wallet, where I think we have a relative market share of eight. So here, it's really at work, we drive the penetration, that's an example which is on the far end here. Then you have situations like our radar business, in automotive, where I think we guided to 20% to 25% growth over three years, will be like $1.1 billion, $1.2 billion in 2024. So it's a sizable part. Now we are number one, but we don't have yet a RMS of 1.5. So we are somewhere between 1.0 and 1.5. So I'd say on the expansion path. So more work to do, but I think well underway. And then you also have more embryonic businesses where we just got started. There, we don't have that leadership yet. And the good example is probably Battery Management in automotive, which really writes the wave of the content increases from electrification. But we all know that ADI after the acquisition of Maxim is actually ahead of us. So we have an RMS, which is less than one, but I think was the dynamic and the momentum we have in design wins, we are also on the way. So it's not like the whole company is on 1.5. It is 60%, as you say, it also cannot be because we constantly have to invest in new businesses. And I mean, you can't start on such a high level. So it's a machine which is ever evolving. But we believe if we stay in the 60% to 70% level of the total portfolio we have about the right size. Okay. This is certainly not your father's NXP. What I mean by that is, if you go back in time, 2016 to 2019, the revenue didn't really grow. But what is clear in the last few years is, you've outperformed the growth rate of the market, you laid out at your Analyst Day the idea that you can be an outperformer relative to the rest of the chip industry, what is structurally changed, or is this new paradigm a function of your high automotive end market exposure explicitly? Yes. Look, I mean, first of all, not my father's NXP. I'm a proud founding member of NXP. So I was actually part of the company when we did the divestment from Philips back in 2006. And we've been architecting this company to have a large exposure to automotive and industrial end markets. I mean, that's really been something which I would say since 2015, when we did the acquisition of Freescale. The focus has been on that, in the belief that those two sectors automotive and industrial would be the more fast-growing sectors in the semiconductor market. And from anything I've seen over the past two years, people very much agree that very likely automotive and industrial will be the two fastest growing sub segments of the semiconductor market through the next 10 years. So one answer to your question is yes, we have the right exposure, which took a while to rearchitect the portfolio and actually get us into the place. The other one, however, is that clearly between 2016 and 2020, we've been just very busy with portfolio changes in M&A. I mean we had the acquisition of Freescale. We had the failed acquisition by Qualcomm. We acquired the connectivity assets from Marvell, and we did divest our standard products business. So when you look at growth over the period, I mean, it's a bit lumpy because we sold stuff. We were busy with M&A. I think now the company for the past one and a half, two years, is really exercising its muscle, the portfolio is where we wanted it to be. There is stability. So we start to outperform. So it's not just that we ride a wave of fast growing markets. But I dare to say, and it becomes pretty visible over the past two years, we gain market share. So that growth is not just being on the wave, but actually being ahead of the wave because we grow market share in those core markets. And I see no reason that would change going forward. So we have this year, and we don't publish the number but the design win size, which we have achieved this year. Also, given a lot of new customer relationships out of the supply crisis is ever than it has -- is higher than it has ever been before. I mean, that's for us the best proxy for how the growth should go over the next couple of years. So it will continue to be not our father's NXP. It's a different one. And I will add to that. The decisions occurred in the management team made back in that 2016-17 period with the merger of Freescale those decisions only yielded benefits in the last few years, right, our business is a long R&D design and then designed to revenue cycle business. In automotive, it takes anywhere from two to three years to go from a design award to you actually seeing revenue. So decisions you made in '16 and then the revenue associated with it, you're just starting to get the fruition of that today. Got it. And to be clear for the audience. I believe your long-term revenue growth forecast is 8% to 12% on a blended basis. And then related to that at your Analyst Day specifically on Slide 12, you highlighted an expectation of $15 billion in revenue in fiscal year 24. Now the current consensus view hovers a more modest $14 billion. I know you don't shape that consensus number have any input on that. But in your view, has anything changed since November of last year, or has the market softness that we're currently seeing changed that view. And I think to that specific slide now that I clear, puts into it. Here's another key point, which is back in 2018. Our accelerated growth drivers were roughly $1.5 billion of the total company. We expect by 2021 that accelerated growth drivers should double to about $3 billion. And from the Analyst Day, we expect that $3 billion to double again, to about $6 billion in 24. And I think we canât say today that trajectory of the really unique differentiated growth drivers are intact, if not ahead of plan. And that all sits on top of a base of business where we have a high core RMS, Kurt talked about, and those high RMS positions are what allow us to fund some of these newer areas. Okay. Thank you for that guys. Related to the same topic 2022 has unfolded to be a better than expected year. And what has surprised you to the upside relative to when you started the year? Is it ASP tailwinds? Or is it the strength of the automotive end market? Yes. I think the speed of conversion to electric drive trains in automotive is a surprise. Had you asked me a year ago at the Analyst Day, I would not have forecasted that electric and hybrid electric cars would be I think it's now 27% of the [indiscernible] this year, it's going to be 34% next year. So as I say a solid third of the car production is electric. I would not have forecasted that. So that speed is a positive surprise is a big, big tailwind for NXP because we are over indexed to electric cars, which is not just the drive train. I mean, we shouldn't forget that electric cars have a higher electronic feature content across the board. So it's not just the drive train, which was more semi. But they also tend to have more ADAS features and more convenience features because the classic -- the buyer of an electric car expects more tech in a way. So that tailwind in the mix of cars is certainly something we have not expected. The second one is indeed pricing. Given that strong demand, we see a more persistent imbalance between supply and demand. By the way, also going into next year, which has led to obviously more pricing power. Unfortunately also more need to exercise pricing power, because cost went up for this year, and I am now very, very busy, we are now negotiating and writing contracts with customers for more price increases next year. So this is going to continue all through next year, because our input cost, unfortunately also continues to go up next year. So the philosophy which we had applied for the past six, eight quarters of passing on the higher input cost to protect our gross profit percentage, we have to stick to that we will stick to that. I mean, we are not padding margins, but we are fully passing it on. And given the environment given the continuous strong demand and kind of limited supply this -- they'll see a third year. I mean, it's then the third year in a row of price increases. And that's a surprise. So admittedly, and, Jeff, you were humble and polite, when you answered the question about the 15 billion forecast for 24. I would actually say when we made that forecast a year ago, it did not really comprehend price increases. We didn't know I mean, that was really the surprise. We didn't know that. So in a way that is a tailwind in place, which continues into next year, which is on top of the 8% to 12%, which we have given in the Analyst Day. That's some great color. Appreciate that. Have you guys gone through the exercise of looking at all your design wins? How many of them are signal sourced? How many of them are you the lead supplier, in an effort to evaluate the stickiness of pricing? So there will be a time in the future when supply and demand in balance? And maybe even supply exceeds demand? And then, maybe you're seeing that now? So how do you feel about the stickiness broadly across your product portfolio? Very high. It's just like, how our portfolio is built. And you saw that through the supply crisis? I mean, I had so many questions, why not? Customers would just walk to a competitor and take a product which is available from somebody else. They couldn't, because these designs are unique. So I don't have a percentage for you. But it's a very high number of our product, which is in signal sourced positions at customers. I think going forward for two reasons, it's even going to get more sticky. The one is, we tried to build more core industrial business, which I have to learn I mean, that's I'm not an expert from history in industrial is actually more sticky than automotive has more longevity. So these industrial applications are incredible. I mean, once you're in, it takes ages to get in. But once you're in it's like cemented into the socket. That is something as we forecasted, which will grow 9% to 14%. So on a relative basis for the company, we will have more industrial business, so that makes it more sticky. Secondly, software. We clearly see that the biggest headache for our customers is actually the cost for software, the lifecycle management of software in a car. The reuse of code, when they go from one model to the next model. And what that in the end means is they are very much locked up to a certain process of choice. So once they have a certain process from say, NXP in that case, and put their code in our system, then it's very hard to walk away. And it's not the cost of the hardware, but it's the software cost which they would face for switching. And since we have significant traction with our process of businesses, I dare to say that that stickiness actually should continue to move up. No. I was just going to say that everything Kurt said is correct. I think what maybe investors forget occasionally is the size of our processor business across the whole company. I mean, in automotive processes is the largest part of automotive franchise. It's the largest part of our industrial and IoT franchise. So I think most people don't really comprehend that. And we sell many products that are been called other things, but effectively, they're processors with DSPs and things like that. And that's a good segue into my next question, which is something from Gartner, they show that 45% of your automotive revenue comes from microcontrollers. No, you're not going to confirm or deny that but how should we think about your positioning as automotive design wins move away from a common architecture of ECUs and more towards domain and zonal controls. How is this shift a net benefit for you? So I don't know exactly which shot you looked at from Gartner, but it's probably a combination of microcontrollers and microprocessors. And I emphasize that because it's really important because this is a continuum between technologies which are needed in the future in the car. So it's about processing. If it's then strictly speaking, a microcontroller or microprocessor is fading. But it's important to look at the two together. And indeed, we are the number one player in this -- in automotive. It is very decisive for the future, Gary, because all of this concept of the software defined vehicle, which is about these domain structures and zonal structures, stops, and comes and goes with the choice of the microprocessors in the car. So you are the first to sit on the table for future design decisions. And especially now where the world is really transforming into a world where we do this directly with the car companies with the OEs. This I think becomes decisive. If you only have a portfolio, which is kind of peripheral might be nice products, I mean, we have them too analog mixed signal products. You are the second in row to -- they speak to because it's the architecture choice is made on the processors. And that's where we have indeed a very strong foothold. We win a lot of business now directly for these rearchitected cars from a structural perspective. And I mean, I'm very glad about the acquisition we did with Freescale years ago, because that actually propelled us into this position. Now, what we did, however, is we moved it away from power train, I mean, Freescale portfolio was PowerPC based, or classic combustion engine power trains. And now we totally morphed this into leadership for domain computing. And related to that, there's this perception or perhaps a misperception that you are kind of mid-tier and lower in terms of processing capability. And so from an architectural standpoint, can you address some of the new evolving applications like SL2 Plus Functional Safety domain controllers, with the existing products that you have today? So the answer is yes. I mean, we are actually for everything, which is vehicle infrastructure, which is not multimedia. We are by far the most advanced, I mean, we ship big volume now in 16 nanometer chips, which is pretty advanced. And the biggest -- single biggest design win we made this year is in five nanometers, which is a monster design within automotive, which is about a vehicle computer, it's one central computer for all of the vehicle infrastructure applications in the car. So it's actually the most advanced thing I can think of. And by the way, it's not going to be a one chip thing, it's actually one board, which holds several of those five nanometer chips. So it's a pretty massive ASP impact. But you still need to hold continuum, because cars at the same time continue to have also say more mid performance processes. But the triggers to offer the customers and this is this S32 platform, software compatibility between them. Because customers want to be flexible, they want to be able to scale up and down in performance and horizontally between different applications. So I think the fact that we have this very leading-edge stuff and 16, 28 and 40 nanometer solutions, that is actually what makes us most successful, if you only have the flagship, it's not good enough, because it's like a point solution in the car, you need the complete set. I have to say, however, there are elements which we don't do. So we have no ambition at this stage to do level four or level five, self-drive computers. First of all, honestly, I believe this is far out from being on the road. Secondly, there is other people who have more matching computers to do this. I mean, that's just not our cup of tea. And the same holds for the very high-end multimedia in the e-cockpit. There is also other companies who do this, but everything which is the vehicle infrastructure, which is the lion's share of processing dollars in the car, I think we are really in the lead. So if the perception you started with does exist, then we have to work hard just to get over it because it's just wrong. Well, I think I'd add to that, Kurt. The perception from some of those folks who maybe can do very high and fusion processing or come from the smartphone marketplace. They would like you to believe that the car the future is an iPhone on wheels or a mobile phone on wheels. There is no partner that we work with who has that vision. The cars are much more complicated multi-dimensional. There's a lot more infrastructure there that goes on. And yes, there is multimedia parts that are interesting. There are the fusion processor that will fuse radar processing signals and camera processing signals. But there's no one we know who's going to build a mobile phone on wheels. Appreciate that. For the other half of your automotive revenue that isn't processor, what are you most excited about? Is it radar evolving into imaging radar? Is it in car networking? Is the battery management systems? Is it ultra-wideband or all the above? They are all exciting, but from the most material one is clearly radar. I think I said earlier, it's growing from 600 million to 1.1 billion. I dare to say we are ahead of the curve. I mean momentum is fantastic. And it still feels like it's the early days of the penetration. It's this 3-leg penetration, there is more cars which will have radar per se, more radar nodes per car. And as you say, features like imaging radar, which is pushing the envelope from a performance perspective up means a higher silicon value per node. So we have actually three levers for higher value, which is very valid work. By the way, this is another child of -- you talked about fathers before I talk about children now, it's another child of the combination of Freescale NXP. NXP used to have spearheading the industry, the CMOS capability to integrate 77 gigahertz high frequency radar in CMOS. There, Freescale had the leadership in radar processing, so that the baseband, if you will. And we put this quickly together, which gave us actually this massive leadership position we have now. So I think this is the one outside of the microcomputers having the biggest impact into the revenue growth of NXP and automotive. Now if you probably take the years after 24, I think BMS there'll be no short of this. Because also massive momentum it just today, it's still a little smaller, but I mean over a few years, it's going to come into the same -- into the same size. And there was more which we have in the kitchen, which we will talk about when time is ripe. So I think in electrification, I started to talk about inverter control, and there is more to come. So I mean, our electrification footprint in the end is going to be much bigger than only BMS. So lots of things to be excited ultra-wideband is typical automotive it's kind of slow, not slower than we thought, but it just takes time because firstly, it needed the mobile phone. So it needed the Android and iOS adoption of ultra-wideband because you don't want to have a car where then you have to find a mobile phone to open it. I mean, the idea is the mobile phone you have should just work with your car. So now the penetration of ultra-wideband in mobile is actually -- it starts to be in a good place. All of the automotive engagements using ultra-wideband, which I am aware of are NXP exclusively 100% There is two cars which are out in the streets which use that feature already, which I think I can also speak about one is the BMW IX, which is this flagship electric SUV from BMW. And the other one is a Hyundai Genesis SUV -- electric SUV, which have fully enabled ultra-wideband access and other features which you can do with ultra-wideband. It goes beyond access. Many, many more in the pipeline. But as always in automotive, it's going to take a few years until all of these models will come out. So I'm excited. But I think I will be more excited in the few years down the road because then then I can speak about all of these cars. Thanks. And in the last few minutes. I want to ask about your commitment to the mobile market. Clearly you have a well-established market position in NFC and the secure element attached to that. And then, you have some other I guess, custom solutions. So I realize it's a big market, but it's not a growth market. And so from an R&D perspective, what is your commitment level to this? Well, we clearly are not and don't want to be a mobile company. We have a focus on where through extreme relative market share leadership, we can push content, but I'm not that dependent on units. The mobile wallet is probably the best example. We still have miles to go from a tax rate perspective. I think it was end of last year 50%. We hit the 50% Admittedly Gary over the past six quarters, the supply constraints actually lead to de-featuring of mobile wallet because we simply couldn't ship. We didn't have the product. So mobile phone companies had to de-feature, which is a massive step. Now that's going to come back once supply works out again. And there is a next wave of ultra-wideband. So we are going to build on that same concept of a secure element and middleware, but with a different radio, which has an ultra-wideband. So this is complementary to NFC. So it's not replacing it, but comes on top of it for essentially, the idea is you will likely move your credit card into the phone. We want to move your keys into the phone. So wherever you use today, mechanical keys, we want to enable mobile phones to do the job in a more secure and more convenient way. That is probably the main focus in mobile. So it's a very, it's a laser sharp focus, not abroad mobile play. Okay. I wish we had more time, but we don't. So Jeff and Kurt and everybody in the room, and online, I appreciate you joining us today. Thank you all.
EarningCall_1888	Good morning, everyone. Again, welcome to our next presentation. I'm Chris Caso, Credit Suisse Semiconductor Analyst. Our next presentation is Analog Devices, which you all know and hear from ADI is Prashanth Mahendra-Rajah. And I think finally pronounce your name correctly after all these years, so welcome. And Mike Lucarelli, Investor Relations. So gentlemen, thanks for attending today. So we've had a couple of presentations this morning. And obviously, we want to get into some of the long-term stuff, but it's on the mind of investors right now is the old where are we in the cycle, and since you just reported, what's been notable for ADI is that some of the stabilization comments that you made on the call. And you guys are a little bit on [Technical Difficulty], because you've just reported, so you've got the freshest information in the space right now. And so maybe you could speak a little bit to start about what's different than what you saw in the summer, where you spoke of some cancellations and maybe some of those comments were a bit inflated and taken a bit larger than maybe what you would have intended. And -- but now you're seeing the stabilization, so maybe you could come comment on that? We finished our fiscal â22 reported last week. Fiscal â22 at $12 billion in revenue was up about a little over 25% year-over-year. About half of that was actual unit growth, and about half of that was from pricing actions that have been taken over the course of the year. With that revenue, we generated industry-leading gross margins just around 74%, and we saw a sequential improvement in those margins over the course of the year as we were able to deliver more of the Maxim synergies and enjoying the high utilization rates for our internal manufacturing facilities. And operating margins in kind of the mid-40s with a clear path here that I think for at least another couple of quarters to be in, kind of, high 40s, I don't want to put a five-handle on for all of â23 yet, but we feel good about where we are. And over that year, we returned -- like, we took out about 4% of our share count in addition to paying about $1.5 billion in dividends. So in the third quarter, we had noticed a change in the demand activity. And because we report a bit later than our peers, we caught a lot of attention by being one of the first companies to indicate that the environment was changing, that the cancellation of our record backlog had started to tick up. And we were indicating that despite backlog growing and despite guiding up sequentially for the fourth quarter, we were seeing an inflection. And so that caught a lot of folks a bit by surprise because we were the first company to be reporting in that, and that has largely played out here for the fourth quarter. So as we reported in our fourth quarter, we've now guided down the first quarter sequentially. Weâve indicated that our book-to-bill has gone from being strongly above one to now sub-one about parity for our Auto and our Industrial markets, but below for comms and -- for communications and for consumer. The comment, I think, thatâs -- that we're getting a lot of questions on now is we made -- we've observed that our orders have stabilized, and so let me give some context on that. In the first half of 2022, we saw order activity well above our historical patterns and well above our revenue. Hence, we had several quarters of book-to-bill that were greater than one and growing into a pretty sizable backlog over -- we still have over four quarters of backlog. For the last, Iâd call it maybe two months, eight weeks or so, including the early part of first quarter, orders have returned to more normal levels, and that's a bit of what we're highlighting. So I wouldn't read more into it except to say that in the third quarter, we were, sort of, at the top of the roller-coaster looking down. We didn't know how far it was going to go. And now, we've had eight weeks of kind of flattening out, and that is -- that's kind of the situation. So the spirit of our management team has always been to be very transparent, so we're telling you like it is. Not trying to read, not trying to guide you in any direction, but just letting you know what we're seeing. We feel very good about the first quarter. I think on the earnings call, we said we are feeling somewhat confident into part of the second quarter, but we are absolutely not calling anything beyond that. So I wouldn't want you to read this as ADI has said that the worst is behind us. We're just telling you what we're seeing. Right. And to go to the roller-coaster analogy, you don't necessarily see far enough ahead to say if that stabilization, if the next leg is up, down or -- Correct. Absolutely not, absolutely not, right? We are trying to do -- we're trying to reconcile two very divergent inputs as it relates to our industrial business. Anecdotally, our customers continue to tell us on the -- for our industrial business, they continue to be quite bullish. And our customer stories and discussions from -- through sales, through executives, including the CEO, tend to be more optimistic. But all the macro data that we look at, and that I'm sure you look at, tends to be more pessimistic. So we're trying to reconcile how those can be so different. Right, right. And so are we -- all of us. One of the things in prior cycles, factory automation, for example, I remember that, I guess it was in 2018. It was one of the first, kind of, indicators of things slowing and other things came after that. Maybe you could speak to that, because it has served as a leading indicator in the past? Yes, there's no real story there, right? The factory automation is another example of where some customer conversations tend to be very optimistic. As a matter of fact, Mike was at a large customer -- large customerâs Investor Day two weeks ago with our CEO, and Vince had an opportunity with that customer to talk about their business outside of their Investor Day. And again, he came back reporting that they are also remaining relatively optimistic about their -- what they need to do. And that's not inconsistent with what we're hearing from our European or Japanese, right? For factory automation, particularly. I mean, it is -- that's a Japanese and German-driven business. That's where the majority of the products are made, although they ship globally. Right. And last one on that is where you did see weakness within your consumer segment? And I guess to clarify that your industrial segment doesn't include consumer-related industrial, things like white goods and such, where others do, so? Correct. I would be very surprised if we had any white goods at all in our business. I don't think that -- I think if you're looking for analog capability for washing machines and dishwashers, there are better alternatives to get what you need than paying the premium for an ADI product. But our consumer business is built three pieces, it is what we refer to as Prosumer, which is the technology used for teleconferencing, it's high-end consumer devices, cameras, home theater systems, et cetera. It is hearables and wearables, so think of the explosion that we've seen in noise cancellation technology really being deployed quite broadly in the headphone space. And then in mobile devices, it's really the high-end mobile devices. So -- and those are roughly equal, each at about one-third. The -- that first group, which we refer to as Prosumer, some of our peers will put that into their industrial business. Let me pivot away -- pivot to products a bit. And one of the things I think is notable for ADI versus a lot of competition is a focus on what I'd say is big products. And there's obviously a very sizable catalog business, which underpins the company, but then there's a lot of other things such as A2B in Auto, battery management for electric vehicles. What you're doing in 5G base stations, which are sort of big bets that you've taken. Maybe you could speak to the product selection process? How you allocate your R&D dollars such that you support both the catalog business and make some of the [Multiple Speakers] Great question, right. So think of where our R&D portfolio is very similar to maybe a small portfolio manager in the audience. We are diversifying our bets. We think about the end markets, and we think about near-term, as well as more sort of breakaway that the -- and it's important for us to drive that level of diversification. But it is really in the spirit of where can we drive enough innovation that we can solve a very complex problem for our customers. Sometimes, that is driven based on customer conversations where -- as we've gotten to know our customers and their businesses quite well, we have insight into what do they need. In other times, and these are really where it can be quite extraordinary, is we have conviction that we know what a customer wants although they haven't recognized that need yet, and we invest ahead of them. So -- to which I can give you multiple examples, but two more recent ones would be wireless BMS. So for those of you who might have come to the Consumer Electronics Show in January 2018, we had our first demo of the wireless BMS system, which was not, shall we say, well received by customers as they went through the booth as something that they would need. And now we're four years later, and how many wins do we have, Mike? We have five, I think? Four. We have four -- three large, one smaller customer who've signed up for wireless BMS. But four years ago, they told us not of interest don't see us having that need. So when you understand the value proposition of wireless BMS, I will be very surprised if that doesn't become the dominant solution for automotive customers, because it is so compelling in helping their economics. Similarly, on the transceiver, which many of you know, we have an incredibly strong position in 5G, and part of that was we made a decision to architecture our design around a software-defined transceiver. Again, our large infrastructure guy said, not something we want. We said this is the way that we're going to design it. It has proved to be extraordinarily successful, scalable, and it really has allowed us to take extraordinary high share. So what is so impressive about the ADI engineering team is their ability to see that future and make a market. So it's -- for us, it's less about taking share from a competitor and more about creating a market. And then when we take that market, we own it, eventually, there will be competition in that market. But by then, we've moved on to create the next market. Right. And how does that apply to the Maxim business now? Because one of the things that stuck in my mind, a conversation with Vince, your CEO, at the Analyst Day was an intention to -- for the Maxim business to take more risk. And I suppose is that the same thing as -- Very similar concept, right? So for Maxim, we acquired some very, very talented engineers, who had tremendous discipline in project execution, and that's not surprising for those of you who knew the former CEO of Maxim. He was a very, very execution-driven leader. What we've taken that skill set is now and merged it with the ADI team, which has that deep insight into the customer, and I would say that's something that Maxim did not have the same level of intimacy and knowledge of the customer. So as those teams come together, we really are getting the best of both. We're getting that great engineering execution focus from Maxim in the areas that they have particularly strong expertise and adding to it the knowledge base that we have of our customers. And we're in our fourth acquisition now with -- sorry, we've completed three acquisitions, and it's clear to me from all of them that what distinguished ADI from all of those companies we acquired is how much knowledge we have of our -- what our customers want. So we are -- you really need to look at us not as a catalog company, but an engineering partner to our customers. And we may solve that problem with catalog parts, right? Instrumentation and test is a good example of that where majority of our products in that market are catalog products, but they're still provided in a solution setting, which allows us to have extraordinary high share there without having to build customized parts. If you look at we talked on the earnings call about GMSL, we're taking a risk. Maxim is a great technology, GMSL went to automotive cars at the cameras. We've added more R&D to that budget, we present to new customers, and we're also taking it into new markets. We talked about design win at an automotive customer, but we're also taking that technology into the industrial market for robotics. And that's taking risk with a proven technology that ADI is allowing Maxim to do. Excellent example. There is a very large e-commerce company, I think the largest e-commerce company in the world, that is using GMSL, and Maxim never would have sold to them. Right, right. And how long does that take to materials? And maybe just speak to Linear business, which I think the changes you made with the Linear business were different, because my impression was always they were very close to their customers. They did endeavor to kind of get ahead of what the customer needs were. It was a different set of changes that need to be made there. What Linear did really well is they found places where nobody else was playing and they pinpointed in those areas, right? They did it extraordinarily well, and that allowed them to get to get very, very good margins. Where Linear was perhaps -- the greatest improvement we made to Linear is we disrupted their model of how they do projects where it was more traditionally one engineer to one project, and therefore, time was unconstrained. And what we have done with Linear is multi-engineers per project, so that you can be more reasonable in how long it takes to get a project done, and therefore, get to revenue faster. Very much so. In our Power business, and Mike can help me out here with the numbers, what have we said publicly about Linear, so I don't say anything that's off the record. Iâd say at the end of Investor Day, we talked about $2.5 billion. I'll say now that the year is closed for â22, it's closer to $3 billion for the full-year. We bought Linear we're probably pass that $1.5 billion of power revenue. So you can see we've accelerated the growth, and that has to do with revenue synergies. Trying to talk with Linear and bring them to new customers, changing the way they went to market with their products and drive the growth there. Okay. Maybe we'll take a pause here, about 10 minutes left. If there's any questions from the audience, we'll -- I'll let you think about it as we're going there. We'll pivot into margins a bit, and maybe starting there with what's been going on with pricing, and pricing has obviously been a benefit over the last year. And it's largely -- what you're doing is passing along your input costs. Higher input cost to customers. Do you think that continues into 2023? With some of the weakness that you've seen in the consumer-related markets, is that sufficient to kind of flatten out the price increases, or do you think that's still a favorable backdrop as you know into 2023? Sure, yes. So first, we've said this several times, but I want to reiterate because it's important. It's important for us, given our intimacy with our customers. The margin expansion that you've seen over the last 12, 18 months, is primarily a function, almost exclusively a function of two things. Our fabs are running extremely hot, so utilization levels are terrific. And we have taken significant cost out with Maxim. And we've talked about that in cost synergies. I think $200 million, $250 million of cost of goods has been taken out on a combined basis, and that has all been accretive to our gross margin. So the pricing actions that we've done, and we've had very transparent conversations with our customers, are us passing on higher input costs, whether they come from foundry or internal manufacturing costs. Now more broadly, how do we think about the pricing environment going forward? Historically, pricing has been a headwind for ADI, although it has been moderating over many years. The overwhelming majority of that pricing headwind would have been isolated to the Communications and the Automotive markets. Those were vertical markets which had a higher customer concentration, and as part of contract negotiations, those customers would typically ask for a contractual multiyear price decrease in return for locking us in on a multiyear product design cycle. What has happened over the last couple of years and why in our Investor Day, we said we feel much better about pricing really being more flattish on a go-forward basis is that the -- our position in that Communication space has increased to a point where we're not really required to give those kind of price concessions as we've had in the past. There's also been much more fragmentation of that market with introduction of O-RAN and alternative ways. And then on the Automotive market, the biggest change we've seen is the relationships we have today are primarily with the OEs, and these were not customers that we would have called on several years ago. Our customer conversations would have been through their supply chain partners. Today, we call on OEs directly. We help them with their design solutions. The wireless BMS is an excellent example. All four of those design decisions were made at an OE level, although we will not be shipping a wireless BMS chip to any OE. But the design decisions are made there, with Tier 1s and Tier 2s responsible for the module assembly. What that does is it really helps differentiate the pricing because when you're talking with an OE, you're talking about the value that your product is bringing. The overall -- from a technology and their system cost level, and therefore, you're not facing those same kind of price concession discussions. And for those reasons, we feel very good that on a go-forward basis, expect pricing to be more neutral. And what about as you go into 2023? And I know like right now, we're in the midst of annual price negotiations with automakers, the U.S. automakers. Foundries are having negotiations as well. Our Asia team tells us that TSMC, for example, is looking at putting some price increases in for next year. So does that all gets us to a more favorable pricing environment still as we get into 2023? Our model is unchanged. If our input costs go up, then we're going to pass those price increases on to our customers. For 2023, we're not making a claim on any pricing actions. Okay. See where it goes. One of the things you also have stressed again and again is the resiliency of gross margins, 70% gross margin floor. One of the questions I have is that ADI has largely been able to escape some of the take-or-pay agreements with the foundries that some of your competitors have had to take, and a rather extraordinary agreement with some of your foundry partners. You're really able to pull some of their processes in [indiscernible] fab to mitigate the effects of a downturn. Why were you able to do that? Why were the foundries willing to be flexible with you on that, which obviously provides you that benefit? Sure, sure. So it's a -- I guess a few things, right? If you are a foundry, in many ways, your -- an analog company is your ideal customer. We use technology that has largely been paid for by digital companies, so it is fully depreciated asset. Once we use your process chemistry, we are a customer for five, 10, 15 years because our products have an incredible life to them, right? And in general, compared to some of your other semiconductor customers, our products have a lot more stability of demand. You don't see the same level of volatility that you would see in other areas. So being the largest analog company and being in the sector that is most desired by a foundry partner, it puts us in a very good negotiating position. In addition, we are very committed to the hybrid manufacturing model. So we have been very clear on that that there are benefits for us to have internal and external. So you can count on us not to move business away from you over the long term. We do want the flexibility that as the product -- as demand cycles swing, we may rely less on you and bring more internal to keep our utilizations up. But in the scheme of your overall wafer starts, us pulling something out of a foundry is relatively minuscule impact to you and hugely beneficial to us. So -- and then the last is that if we're going to truly be partners on this and you are not making investments in some of the nodes that are important to us, then you have to give us the flexibility to control our own destiny. Right. I'll just check again if there's any questions from the audience before I move on. Just with that, though, then how do you make sure that there is enough capacity for the next cycle? And I know that you're making some internal investments, but I guess from your customer standpoint, after what's gone on over the past couple of years, I'm sure customers want some assurance that when the upturn happens, that you're going to have the product available. So how do you make sure of that? Sure. So the investments we made in 2022 and significant capital spend that we're adding in '23 are essentially going to double our internal capacity capabilities and also give us resiliency where we will be able to manufacture about 70% of our volume on an SKU level internal, right? That does not change our desire to be a mix of roughly 50-50 internal versus external. It just gives us that flexibility. So that helps us in a few ways, right? Economically, it helps our shareholders because it allows us that during periods of downturn, we can bring production internally and keep fab utilizations high, which gives us that confidence in giving you a 70% floor on our gross margin. For our customers, having that hybrid model gives you the flexibility that when things swing up, we can turn a lever very quickly and bring on capacity externally at foundries but also give you confidence of resiliency if you have concerns about where supply comes from. You know that in a dire situation, we have the ability to make your key products in multiple locations. Right. But what about that net foundry capacity? There's been a reluctance on the part of the foundry industry to invest in lagging edge. It's just -- historically, it's been lower margin for them. That's -- it's better margin now, that's why they've been raising prices. How do you influence the foundry partners to put capacity in place there? I think that in the coming quarters, you'll continue to hear from the foundry partners on their plans to invest in lagging edge capacity. We are highly confident based on our conversations that that's on their road map. Okay. And maybe we'll kind of wrap it up with free cash flow. And so where does that stand right now with the capital investments you're planning to make into 2023? And obviously, moving to that, how does it all materialize in cash flow? Yes. So I mean, it's a tremendous cash generation machine, right? Because we are not capital intense, and our long-term commitment is to return back to sort of that mid-single-digit CapEx intensity as a percentage of revenue, then you have all of this cash flow that comes off of this. This high 40% operating margin company that is really being returned to shareholders, either through share repurchase or through dividends. On the dividends, we've committed to a 10% growth through the cycle. It may not be every year, but on average, we're committing to 10% EV growth, and then the balance is through share count reduction. So I mean for -- at the opening of this conversation that in -- for 2022, what was the repo number, Mike? It was $3.5 billion? $3.5 billion of share repurchase, and then an additional $1.5 billion of dividends. So $5 billion of cash return on a $12 million year is pretty substantial. Yes. And do you think the cash flow accelerates coming out of the next cycle? Because there's an investment being made now, and so your CapEx is elevated. Who knows what happens to the macro over the next six to 12 months. And then coming out of that, it's safe to assume that there should be some better capital. I mean, our long-term goal is to get our cash flow margins to 40% of revenue. And we still feel confident that there's a clear path to do that that comes with some leverage and some scale, but it through revenue growth. But some of the things that have impacted us more recently, such as the higher CapEx intensity subsides, the cash tax increase that we've seen due to the toll tax subsides, and some of the inventory build that we've added to try to improve customer service levels during this supply-demand disruption will also be neutralized.
EarningCall_1889	Perfect. So Rob, why don't we start -- I got to start with Peter. Why don't you start with the safe harbor there. Yes. I have got to read the safe harbor statement here. So please bear with me for a quick second. During today's presentation, we may make forward-looking statements, and I would ask that you refer to our SEC filings for the various risks and uncertainties behind these statements. In addition, we may also be making references to non-GAAP financials and a reconciliation between the GAAP and the non-GAAP financial measures can be found on the Investor Relations section of our Web site. So with that, let me turn it back the mic. You nailed it. Good job. So Rob, why don't we just start for those in the audience that aren't familiar with -- I think you joined, what, in late 2020. So maybe give us just a quick overview of your role, your responsibilities and maybe background and then weâll dive into a ton of questions. Yes. We're in south of about two and half years now. So by way of background, I think I had a unique background to come to Western Digital, early semiconductor experience, storage experience, systems at Cisco, running enterprise at Cisco, had the good fortune of getting a call from David Goeckeler, about two and half years ago, sharing with me the basic thesis that Western Digital was actually a wonderful asset with amazing technology and amazing market position that for a variety of reasons the value wasn't being realized and persuasive enough to have me join. That was coincident with his decision to move us to a BU structure, creating a flash business and a HDD business getting focused around it with myself and flash and my colleague, Ashley on the HDD business. That's perfect. So look, I'm going to start right out of the gate. Why don't we just kind of hit the current demand environment, just the current trends that you're seeing. I think all of us probably know things in the memory, the NAND market can move rather quickly. And so maybe just give us your thoughts on what you currently see in the environment in the midst of kind of, I would argue, unprecedented declines in bit shipments year-on-year right now? Yes. I guess I would start by framing the way we think about performers of the company is what all the things that we can do under our control and particularly is how we measure our performance or relative to the industry. And my own personal MBOs were joking about last night are relative to the industry, kind of generate alpha relative to the industry. That said, we do play in a cyclical market, and there's only so much gravitational pull you can resist from that cycle. So we're definitely in the middle of the downturn here. The downturn was characterized by essentially the different sectors rolling sequentially into the downturn. I think it will be -- the coming out will be characterized by those sectors sequentially rolling out of the downturn. I can say pretty strong confidence. We feel like our consumer business is first in, has now stabilized at new demand levels and supply demand balance and is in a stable spot. We have a leadership position in client PCs and our client OEM or SSD products. Their OEMs are dealing with significant inventory conditions and they're burning down that inventory in a relatively methodical fashion. So we see ourselves -- we're shipping in at lower than the replacement rate while they burn that inventory down. Couple of quarters out, we'll get through that inventory burn and we'll return to the replacement rate. Big picture, we think PC demands come from about 350 million units in the kind of COVID peak, will be down to the low 300s, maybe 295 as more of a post-COVID sustainable level. And then last to the party was cloud. There, we definitely have seen -- it's really been over the 60, 90 days here that you've seen cloud giants come to grips the fact that they had overplanned and overpurchased relative to the underlying demand and move to much more conservative postures. And so we're really still in the middle of that. We talked about cloud digestion, like before the digestion process is the indigestion process what we're in right now as we look to sort out what the real level of demand is, what the inventory situation is. But it's clearly going to be a couple of quarters to sort cloud out. And in the context of everything you just mentioned, which is very consistent with other companies and other things we've seen over this last earnings cycle or so. Remind us again of what Western Digital, what your flash business is doing as far as your decisions to modulate the supply side of the equation and from a bit perspective in NAND versus we've seen Micron cut [50%], your partner cut [30%]. So there are basically three levers on the control on the supply side. There's a capital lever, there's an inventory lever and there's a utilization lever. Consistently, everybody has pulled back as hard as possible on the capital lever. And I think it's important because you'll see something the paper about so and so is reduce CapEx by 30% or 40%. All that means is that they already had 60% committed. So they have set discretionary CapEx to zero, and they're decelerating as fast as they can. We had -- I think there was some confusion as to whether this was going to be consistent across all the NAND vendors and there would be some clarifying statements that clearly, everybody has pulled way back on that capital lever. And so I think that's going to be the big picture that characterizes the recovery, which is supply growth is going to go to zero as you come down off this capital curve and then demand will catch up. The second lever is inventory. And here, we're seeing some changes in market dynamics. Earlier in flash, the underlying cost structure and flash pricing was falling so fast that you really could hold inventory at your apparel. Now there is a greater opportunity with lower cost downs, there's a great opportunity to use inventory as a lever in terms of smoothing out the market. And we're seeing use of that lever, again, consistently across the vendors. Where things have diverged so far is in factory utilization and looking to save variable cash costs by underutilizing the factory. Our partner, Kioxia, has made a statement to the marketplace. While we make all our capital decisions jointly with Kioxia, they have discretion over what they do with their share of the fab. So they've made statements. I think Micron has made statements. Like our position is underutilization to be good for the industry and will accelerate recovery, we don't think unilateral underutilization is the correct move for us. And so we'll watch what the industry players will clearly do. We have a lot of outlets for bits. So we don't have any risk of obsolescence in terms of where to place product over time. So we feel like we're in a position where we can continue to watch kind of the industry dynamic around fab utilization and don't have to make a decision immediately. And do you have a current view on bit supply versus demand as we start to think about 2023 in your mind? Well, the supply picture is easier to describe because it's this phenomenon over the first two quarters of '23, you'll see the last of the capital go in and then you'll see supply level off. On the demand side, the hard forecast is the elasticity of demand. Flash is a very elastic business. Obviously, if I'm willing to sell to you 5, 12 gig for same price is 256 and then your phone, you're probably going to take it. So it's a very elastic industry with a 30%-ish price down, you should expect 40% to 50% bit growth. Now there's some -- there's a time delay. It takes time for that to propagate through the system and the industry is in a place where we can really hit the gas right now. But as we get into mid '23, I would expect to see the elasticity is really what's going to drive us out of the cycle and on to the next curve. Yes, I just sort of think aggregate this whole thing up, it's going to be significant, not to pin myself down to a specific number. Understand. On the client SSD side, you mentioned earlier that you have number one, number two position in client SSDs in the market between you and I think your closest competitor Samsung. So I think last quarter, and Peter certainly is going to correct me if I'm wrong, you started to imply that maybe you've seen some normalization show up in client PCs that maybe some of those end customers are starting to maybe show signs that they work through inventory, or how do I take thoseâ¦ I'd say predictability is returned to the market. Customers are accurately forecasting, they understand their inventory position, they have a methodical view of driving that down. In certain cases, they're running low on individual SKUs and so they need to go ahead, and there's a little bit of upside coming through from that regard. So there's still -- we're in the digestion, there's still a couple of quarters before everybody is through that, it's hurt the consumer guys more than the client, more than the commercial teams. So it varies a bit by the different PC OEMs. Yes, got you. So earlier this year, you guys had an Analyst Day, pretty great updates. You talked about kind of in the flash business a longer term revenue CAGR of around 10% to 12%. Obviously, cycles come and go and that's a longer term framework. How does -- remind us again of how you guys think about the underlying bit demand growth supportive of that 10% to 12% CAGR. Yes. So I think the dynamics of the flash industry are starting to change. Flash has been this magical technology where we've been able to create the huge increases in bit growth, huge reductions in cost and then rely on elasticity to wash this whole thing out. If I think about the longer term picture, 30% bit growth, 15% cost down, 15% revenue growth kind of an equation is really where the industry was centered. I think our view now is that you're going to see bit growth come down on a more sustained basis. So that sort of 30% number, I don't think it's going to be consistent with what we see going forward. So you see a lower 20s type number. But I also think you're going to see price declines moderate as we come through this cycle as well. Yes. I think 15% is kind of the curve that we see sort of here in the near term. Clearly, the capital -- NAND capital intensity is increasing, which is going to cut into that cost down number over the longer term. Ultimately, we believe that's a healthier trend for the industry, forces more disciplined capital decisions and will be a good thing, but it's going to start to change the base of mathematics of NAND. Yes. So I'm going to shift gears a little bit and talk maybe on the technology side of the equation. And Western Digital with your partner, Kioxia, has consistently moved forward in NAND flash, but it's been at a different pace than some of the competitors, right? So I tend to get a lot of questions of Western Digital at 112 layer versus 128, or now moving to 162 versus 230-plus layer stack. So maybe update us on how you think about the cost competitiveness, how you get confidence, I guess, the cost curve that you're on with different layer stacks relative to competition? Well, I think it starts by actually measuring the cost curve and not measuring the layer count. Layers -- increased layer count just means longer cycle times, more expensive dry etch machines, more complexity in our process. Like all you really care about is bit production versus cost reduction, that's the core equation of NAND. You have an XY scaling problem, how aggressively can you XY scale, in terms of semiconductor scaling, scaling your layers on top of that. I think our belief is that by keeping capital efficiency as the number one goal and keeping that bit production versus cost reduction ratio is our number one goal, we get a better outcome. And we don't feel pressure to necessarily lead on layers as a vanity metric. We don't feel pressure to lead on the vanity metric, we will lead on metrics. I think it's pretty clear, I think, some of the folks that have been most vocal about their layer strategy or having some of those challenges dealing with the downturn. So I feel somewhat weâve validated in our communication to the market. And on BiCS6, 162 layer I think the company has talked about a 40% smaller die size. That I think 112 was pretty noted as capital efficient. I guess, do I keep consistent thinking that BiCS6 drives 15% cost curve down, or do you see any kind of changes in the quarter. Yes. So BiCS5 was extraordinarily efficient. It was a very, very efficient node. BiCS6 allows us to go to QLC's, or mainstream product. We've had a performance advantage in NAND and that performance advantage hasn't turned into benefit to the marketplace prior to QLC, but a combination of faster performance with QLC essentially are getting 33% more bits per die. So that is a little mid light kicker in terms of keeping us on the more aggressive cost down schedule. Yes, that has an architectural benefit. But the real story around BiCS6 is the fact that we were able to deliver an enterprise class QLC or 4 bit per cell technology, and you're literally just putting 4 bits in the same cell you used to put 3 bits. So that's material productivity. Perfect. So I'm going to keep bouncing around here a little bit on you, Rob. So I'm going to shift over to gross margins on the flash business, it's I mean, let's just be honest, difficult to sometimes model gross margin. So how do you -- a simple question, how do you think about the reasonable through cycle gross margin in order to get the appropriate return on capital for the flash business that you run? Yes. I mean we think that the business needs a 30% through cycle to be viable. We could keep going at 30%. I would not be -- this conversation isn't very interesting at 30% gross margin and so we're out in May talking about 35% to 37% as our gross margin target across both HDD and flash. And I think underlying that are two separate thesis. One is that we can generate some alpha that WD can perform better, and we're actually -- I think we validated that. We're ahead on '22 and '26 on the HDD front, we're executing well on our eSSD roadmaps. Consumer, we currently have share and price leadership like higher price and higher shares. So there's a lot of data points to say we're doing better at executing. The second part of the thesis is that we can better manage the industry such that the overall industry average is a sufficient level to support that 35% to 37%. Again, that plays in both HDD and flash, it's really about the structure of the industry. We are, I think, in a better position now in flash. We've seen the market essentially go from a seven player market to a five player market in a relatively short amount of time. We have a great relationship with our partner. We make common capital decisions with our partners. So if you stand back in squint, it looks more like a four player market. So there's reason to believe we can start behaving more rationally as an industry. And mix within the flash business as we move forward, I think at the Analyst Day, you talked about commodity products and some of the mainstream products and maybe that mix goes from whatever, 75% to 50%. What should I be thinking about as far as the roadmap that really starts to drive that going forward? Well, first of all, the big picture on mix is the shift from the whole flash industry from mobile centric to SSD centric. That's not just a cloud comment, that's consumer, that is client and that is in the cloud. In the consumer business, there's still 100 exabytes of consumer of HDD, client HDD going to consumer. So that is essentially ours for the taking because of our brand and position there. So we're pursuing that SSD strategy across all three of those sectors, and we expect that drives us to 80% plus SSD product volume by end of our three year forecast cycle. So a very significant shift to an SSD centric company. Really, if you think about who is WD, right? WD is a drive maker and we're really turning the whole business back into being a drive maker. Okay. Very helpful. So maybe in the context of that portfolio thing and maybe for the audience, just give us a quick reminder how the JV flash ventures Kioxia actually operate. Like how decisions are made, what happens coming out of the fabs and just that whole process as we think about that? Yes. So it's financially complicated, but operationally quite simple. We had a chance to have a summit here, a post COVID summit in September a nice spa in Northern Tokyo, with the top WD and Kioxia leadership and really reaffirmed what we're doing together. So we make all of our capital decisions in unison or in synchrony. So I say we're essentially one planning entity. So we do BiCS5 investment, BiCS6, BiCS8, a new facility. Those are all done in synchrony. The fab is run as one entity. And then over the top of that, there's a financial construct that's supplied where the wafers are split 40% and 60%. We can do -- we have a 40%. We can do whatever we want within those 40% in terms of product mix, if you want to underutilize whatever we can play within our 40, they play within their 60. But all of the fundamentals of the fab are run as a single combined team. And then post that, post wafer sort, we go our own way. We build our products, they build their products. The actual trim or the micro firmware that goes on the die, we develop independently. Yes. That's helpful. So -- and I've always -- I've asked Peter you this question. When we think about Western Digital and the stock does what the stock does. But remind us again how much equipment, the total cost of what you have sitting in the fab at Kitakami and Yokkaichi. So it's $16 billion to $18 billion in the fab. Now book value is materially less than that, but all that equipment is there. The reuse rate is very, very high. 80%, 90% of the equipment is there, it's productive, it's doing its thing. And when we talk about being capital efficient, it's as much how you reuse your gear, how much brownfield you have, how efficient your factory is, all these things are a big deal and that contribute to cost advantages. And then final on the structure of the business. When you look at the Western Digital business, and you mentioned you joined the company at a point in time when David was making decisions between hard drive and structural flash businesses separately. Remind us again about the go to market alignment between the two companies and how that feeds off each other. Yes, there's material synergy in go to market alignment. There are 70% of our customers are common, and these are customers that buy a lot of both product, tens of millions of dollars of both products. And all that's covered via 100% common team, single executive on each cloud customer and so on. Then we have some unique things, some mobile is unique, some of the video surveillance is unique. But the bulk and an important part of our GTM is fully common, so synergy there. We run the flash and HDB is quite separate really for focus and performance. And then within operations, it's kind of a hybrid part. We use common folks of operations where we get -- we have synergy and then have quite large independent entities as well. And then the other topic of the discussion I have listed here is that the enterprise SSD market, to me, represents probably the biggest incremental demand elasticity vertical for your business. you guys have -- and I think you're 6%, 7% market share today, you have aspirations of being 16% market share over time. Can you just remind us of where we are at as far as the enterprise SSD traction for Western Digital? Yes. So the enterprise SSD is -- and cloud is going to be the largest segment growing fast. About a third of that growth is unit driven. So when you look at PC server demand that's kind of correlated with units and drive units, but two thirds of that is just content capacity growth. So you're kind of getting a multiplicative effect, bigger drives and more drives. So that contributes to the share of flash going into eSSD, it means we need to have a very competitive portfolio to play. We have made tremendous progress. Two and half years ago when I joined, like every day my phone would ring with another escalation coming from a cloud customer who's trying to use one of our drives and it was not working. And that was with our BiCS4 AeroDrive. In May at the Analyst Day, we launched, we had just shipped drives into qualification, we've completed our first, our major hyperscale qual, where [indiscernible] to the second, we're halfway through the third, zero escalations, all gone super smooth. So we've proven that we now have a scalable eSSD engineering capability. And that's not easy. Very, very difficult. And so it's an intermediate point in the way that share goal, that share goal is a three year goal. So I'm not expecting that you can be able to just linearly plot every quarter along the way. But clearly, being able to execute from a technology perspective on the portfolio is step one. And so you've got three hyperscale cloud guys that you're either qualified or actually getting qualified with -- obviously, that 16% goal reflects not just BiCS5, but going to BiCS6 BiCS6 plus as well. Yes. And so step one was to get into market with a good solid product which we did with BiCS4. Step two was to follow it up with BiCS5. In the BiCS6 era, we have three platforms coming out, gives us broader TAM exposure. In some of the swim lanes that we're currently serving, customers have committed up to 40% of their TAM. We're just not serving all of the -- all of the market. So our SAM to TAM ratio isn't high enough to really go after those kinds of the [16%] number yet. Okay. And I think BiCS6, as you mentioned it earlier, also entails QLC or quad level cell NAND. How does -- I mean, when I look at the enterprise storage market, my math would still show that 80% of the storage shipped capacity wise is hard disk drive base. Western Digital is unique, right? You have an SSD business and a hard disk drive business. How do you see QLC playing a role in driving maybe more bits to move off drives to SSDs or do you not see that? There is some interest in that. I would say it's more a question about where there are workloads that could benefit. So object storage is a good example. A lot of object storage is not performance oriented, but some is. And so you're seeing cloud architects start to think about where I should be using more performance. So this is not really a cost crossover question. This is much more of a question about do the use cases need the performance that cost gap is still very, very significant. The HDD growth rate is still quite high. It would take hundreds and hundreds of billions of dollars of flash capital investment to try and replace that HDD expand HDD business. So that's not happening anytime soon. Yes. In a minute or so I've got left, just any -- Peter, for you, too, is there anything that we I should have asked you that I haven't asked you or any kind of topics you seem to get today in the meetings that we didn't really touch upon. Nothing from a broad diverse Q&A perspective, but do you want to make a quick commentâ¦ Yes. I mean, I would say, just to frame where the market -- the wobble in the market inserts a lot of noise relative to where we are in the journey of transforming the company. David came in two and half years ago with the goal of transforming the company. We've made huge strides, right? Product leadership on HDD, product leadership on NAND, we didn't talk a lot about the next BiCS beyond BiCS6, but we're extremely pleased with the NAND roadmap in development. We think that's going to be a much smoother node than the current node we're on. So from an execution standpoint, a lot of confidence in the company. We feel like we got to get through the market cycle and then we're really positioned to thrive in the -- as the market turns. And on the geopolitical side, I'm going to slip one last one in. Obviously, the discussions around US-China restrictions and the kind of the fighting to goes always with YMTC and whether or not you would see them competitively in the market is what you've seen over the last month or so really how do you feel about their even ability to compete. It's challenging. We have Yokkaichi, we have a thousand employees of our vendors in our fab every day working to keep that gear running. So if you're running a NAND fab and you don't have access to the international community to help you run that fab, that's super, super challenging.
EarningCall_1890	Good afternoon and welcome to the Blue Bird Corporation Fiscal 2022 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Benfield, Head of Investor Relations. Please go ahead. Thank you and welcome to Blue Birdâs fiscal 2022 fourth quarter earnings conference call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the Presentations box on the IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others matters, we have noted on the following two slides and in our filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Birdâs President and CEO, Matthew Stevenson; and CFO, Razvan Radulescu. Then we will take some questions. Letâs get started. Matt? Thank you, Mark, and good afternoon, everyone. Razvan and I are incredibly excited to share an update on the progress of Blue Bird. No doubt fiscal year â22, which closed on October 1, was a challenging year due to the residual effects of COVID that impacted our business, which included exhaustive supply chain disruptions and unprecedented industrial inflation. However, I am proud to say through the hard work of the Blue Bird team, we have navigated these turbulent seas and have positioned the organization for significant success in this current fiscal year 2023. On Slide 6, you can see we did that by executing our plan in several key areas, along with the added benefit of strong market fundamentals. Overall, industry demand is robust and is driving a record backlog for Blue Bird this time of the year. We also continue to hold a leadership position in alternative fuel and electric buses. Throughout the year, we aggressively increased forward pricing and we partially recovered pricing on the backlog to match inflationary economics. In addition to raising prices, we dramatically drove cost out of the business and not just for the short-term. We reorganized our functional areas to be more efficient and leaner and we eliminated several non-value-added operations across the business. Through strong leadership, tenacity, lean processes and a host of operational changes, we improved parts availability and increased our throughput and quality. Missing parts hat setup are down dramatically compared to previous quarters and the vast majority of our parts are now installed in station, reducing rework costs and improving quality. This is by far and away the best position that Blue Bird has been in since I joined the company 18 months ago. The financial performance for fiscal year â22 shown on Slide 7 reflects several headwinds that are now mostly behind us and does not capture the current state of the business. However, some key financial metrics are showing signs that we have turned the corner. Bookings at 6,822 were up only 2%. Our revenue was up 17% to $801 million as our pricing started to take hold throughout the year. Adjusted EBIT was negative $15 million, but free cash flow was up $39 million year-over-year as throughput increased in the back half of the year and we drastically reduced inventories. Even though the financial results were not ideal, we still had several key successes as you can see on the right hand side of the slide. As I mentioned, demand is robust. In fact, industry order intake in fiscal year â22 was up over 30% compared to the prior year and even up 9% versus 2019. Blue Bird is seeing this increase in demand. Our backlog is incredibly robust, with over 5,000 units worth over $600 million in revenue. Nearly 60% of that backlog is alternative power, demonstrating our continued leadership in the space. Included in that alternative power backlog is around $100 million Affirm orders for electric buses and we are only just starting to receive orders for the EPAâs Clean School Bus program. The strength in our EV business is evidenced by the fact our bookings are up 84% year-over-year and we recently crested over 850 electric school buses on the road today, including Type A, C and D. As we have discussed in previous quarters, we have raised pricing by 25% since July of â21, which is aided in doubling our standard gross margins in the backlog since the start of our fiscal year. Parts sales were another bright spot for us, up 30% year-over-year. With such a strong recovery and with our business back on track, we extended our term debt through the end of calendar year 2024. Now, the EV school bus revolution is just getting warmed up. The EPA recently announced the lottery winners for the first $1 billion in funding from the Clean School Bus program, which provides $5 billion over 5 years for clean and cleaner emission school buses. Blue Bird is poised to generate over $200 million in revenue from just this first round of this fantastic program. And this wasnât by chance. We offer the industry the leading electric school bus through our powertrain partnership with Cummins. We have proven to customers that our electric buses are not a novelty and can perform on their regular routes. Plus the Blue Bird Energy Services launch this year we successfully assisted many end customers and dealers in applying for the lottery program. Through the other facets of Blue Bird Energy Services, we are now helping these customers plan and secure their electric infrastructure. Slide 8 shows the focus areas we laid out nearly a year ago. We center everything we do on care, delight and deliver. And in fiscal year â22 that included four main focus areas: our people, lean transfer transformation, expanding our total addressable market and scaling EV. Now on Slide 9, I want to highlight the progress of each of those focus areas. When it came to our teammates, we focused on several crucial elements. We laid out a clear vision to be the clean school bus transportation leader. We hired a nearly all new leadership team to take this company to a higher level performance. We implemented numerous communication channels in our organization, everything from town halls to a mobile app to drive more engagement with our employees. That employee engagement included new opportunities for employees to provide feedback, interact more regularly with senior management and share their ideas. We have also improved the competitiveness of our wage and benefits structure to reward employees, compensate for inflation and reduce turnover. In addition, we have improved our employee onboarding, span of control and talent review processes. The second focus area was lean transformation. We rolled out numerous initiatives across the planet focused on safety, material placement, teamwork, accountability and reducing waste. For example, we are in the process of completing a rollout of self production teams. These teams are accountable for a specific portion of the manufacturing process included dedicated leader for production, quality, materials and manufacturing engineering. These teams work to deliver the best output at the lowest cost and focus on immediate problem resolution, accountability, training and coaching. They have already made a significant impact on our business performance. Lean methodologies have also improved the layouts of our areas of the plant to make them safer and more efficient. An example of this is our final finish area pictured in the top right, where we increased our output by over 30%. We also made progress on our plan to increase EV school bus production from 4 to 12 per day by the end of the first half of calendar year â23 and to 20 per day by the end of calendar year â23. We are renovating an existing 40,000 square foot building on our campus for final EV chassis assembly and commissioning and we expect it to be complete by the end of March. We also started down the path of expanding our total addressable market with a focus on the strip chassis market for last-mile delivery vehicles. There is incredible demand for an additional OEM EV provider in the space and the prototype strip chassis we debuted in May at the ACT Expo garnered much attention. We continue to progress on this product with the goal of having units in customersâ hands by the end of calendar year â23. Overall, I am very proud of the accomplishments of the Blue Bird team in a challenging external environment. Our progress in fiscal year â22 has set us up for an incredibly successful fiscal year 2023 even in a relatively supply chain constrained market. I will touch more on our fiscal year â23 outlook in a few minutes, but in the interim, I would like to hand it over to Razvan to walk through our fiscal year â22 financials in more detail as well as our fiscal year â23 guidance. Thanks, Matt and good afternoon. Itâs my pleasure to share with you the financial highlights from Blue Birdâs fiscal 2022 and fourth quarter results. The quarter end is based on a closed date of October 1, 2022, whereas the prior year was based on a closed date of October 2, 2021. We will file the 10-K today December 12 after the market closes. Our 10-K includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10-K and the important disclosures that it contains. The appendix attached to todayâs presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call as well as important disclaimers. Slide 11 is a summary of fourth quarter and full year results for fiscal â22. I will start with the fourth quarter results summary and I will focus on the full year results for fiscal â22 and guidance for fiscal â23 for the remaining of the presentation. It was another challenging quarter for Blue Bird with some persistent supply chain disruptions limiting our throughput and impacting our efficiency and over time with the planned and delayed inflationary cost pressures that became effective on July 1. We also had extremely high working process at the beginning of the quarter and we worked through still a large number of all backlog low margin units with older pricing. Despite all these challenges, the team has done a fantastic job and generated 2016 unit sales volume, which was 105 units or 6% higher than prior year. Consolidated net revenue of $258 million was $66 million or 34% higher than prior year, driven primarily by higher mix of electric buses and pricing actions that are starting to take hold. The adjusted free cash flow was $30 million positive, $70 million higher than the prior year fourth quarter. This outstanding performance was driven by the reduction in inventory back to normal levels during the quarter and supports our great liquidity position at the end of fiscal â22. Adjusted EBITDA for the quarter was negative $16 million and it includes a non-cash inventory charge of negative $9 million, which we took at the end of the year. Excluding this charge, the adjusted EBITDA would have been negative $7 million due to supply chain driven operational inefficiencies that were incurred in working down the inventory. Additionally, we experienced in this quarter increased material costs and still a relatively large amount of all backlog units. Looking back at the total year, fiscal â22 was an incredibly difficult year for Blue Bird. We started in Q1 with the supplier allocation that cut our volumes approximately in half, followed by unprecedented inflation in steel prices that almost tripled by Q2. We had fixed pricing on all backlog during the entire first half and an unsuccessful production increase in Q3 and the respective inventory accumulation. However, the current trends are encouraging, with all the operational metrics starting to improve during Q3 and continuing in Q4. As a result, we sold 6,822 buses in the year, 143 units higher than prior year, so slightly above fiscal â21. Consolidated net revenue of $801 million was $117 million or 17% higher than prior year, driven by pricing actions that started to take hold, especially in the second half of fiscal â22. The adjusted free cash flow was negative $23 million and still $39 million higher than the prior year, driven by the reduction in inventory back to normal levels by the end of Q4. Adjusted EBITDA was negative $15 million or $49 million below prior year. This includes a year-end $9 million non-cash inventory charge. Excluding that, the adjusted EBITDA for the year would have been negative $6 million. Moving on to Slide 12. As mentioned before by Matt, our backlog at the end of the year continues to be extremely strong at over 5,000 units with the vast majority of these units at much higher price levels compared to the fiscal â22 build units, more on this later on. Breaking down the $801 million in revenues into our two business segments, the bus net revenue was $724 million, up by almost $100 million versus prior year. Our average bus revenue per unit increased from $94,000 to $106,000, which was largely the result of pricing actions taken over the past 12 months as well as a higher mix of electric buses, 3.9% versus 2.2%. Supply-constrained EV sales were at a level of 269 units or 123 more than last year, an 84% increase. Parts revenue for the year was $77 million, representing an improvement of $18 million or 30% compared to the prior year. Over the past few quarters, we have seen improvement in part sales, which is an indicator that the normal workforce school district is getting back to pre-COVID levels. Gross margin for the year was 4.6% or 590 basis points lower than last year due to the old backlog fixed pricing, increased material costs and supply-driven operational inefficiencies. In fiscal â22, adjusted net income was negative $36 million or $45 million lower than last year. Adjusted EBITDA of approximately negative $15 million was down compared with prior year by $49 million. Adjusted diluted earnings per share of negative $1.15, was down $1.46 from the prior year. Slide 13 shows the walk from fiscal â21 adjusted EBITDA to the fiscal â22 results. Starting on the left of $34 million, slightly higher bus volume of 143 units and increased parts margins generated a positive $8 million improvement year-over-year. The next three bars need to be analyzed together. Pricing improvements of approximately 10% lifted our standard gross margin by $80 million. However, the material costs, including steel increased by $72 million year-over-year and supply chain disruptions and higher freight costs generated operating inefficiencies of $51 million. Bottom line, due to the old backlog and fixed pricing, weâre able to cover only two-thirds of the extra costs incurred during the year. SG&A and engineering expenses, excluding restructuring expenses, were each $4 million higher than last year due to labor cost increases versus extraordinary COVID related cuts in prior year and Blue Bird reinvesting in engineering projects to ensure our future growth in EV and chassis and to maintain our leading product competitiveness. Additionally, our JV results from Micro Bird were close to $5 million lower versus prior year, but they have been also affected by supply chain shortages, predominantly the Microchip shortage, which is impacting the chassis allocation from Ford and GM. As of today, the chassis supply has been improving, and we expect the JV to return to profitability in fiscal year â23. Looking at the total year results. If you add back the operational inefficiencies driven by the supply chain of $51 million and the year-end non-cash inventory charge of $9 million, our results have been $45 million or $11 million improvement versus the prior year. Moving on to Slide 14. We have all across the board positive development year-over-year on the balance sheet. We ended the year roughly with $10 million in cash and reduced our debt by almost $40 million. The improvement in operating cash flow and adjusted free cash flow were primarily driven by trade working capital due to our inventory reduction in the last quarter. I will discuss this more on the next slide. As a subsequent event, at the end of November, we entered into the 6th amendment to our credit facility, extending the maturity date through December 31, 2024. The 6th amendment provides for revised covenants, modifications to the revolving credit facility and the new pricing grid. The amended covenants and the extended maturity of our loan provides Blue Bird with both flexibility and stability as our business continues to recover from the COVID-19 pandemic and associated global supply chain disruptions. On Slide 15, youâll see the fantastic progress done by our operations team to reduce raw material inventories and work in process, returning to a normal level by the end of the quarter, as indicated in our last earnings call. As a reminder, our end of Q3 inventory levels were elevated due to the unsuccessful steel production ramp-up we kicked off before the war in Ukraine and China lockdowns happened earlier in the year. As mentioned before in the presentation, at the end of Q4, certain robust segment inventory had an approximately $8.8 million cumulative cost in excess of net realizable value that was recognized as a loss in fiscal â22 with no similar activity in fiscal â21. We are also continuing our strategic pre-buy of major components Ford engines and EV components to ensure smooth production levels in fiscal â23. We are very happy to report that the positive inventory reduction trend continued through October and November in fiscal â23, Q1. And our liquidity sits at approximately $100 million as of December 1, with the revolver balance at zero. So our balance sheet is in great shape for fiscal â23. In the next few slides, we will share with you why we are very confident that the worst is behind us. Our turnaround is working, and we are on track to return Blue Bird to historical profitability during fiscal â23. On Slide 16, you see how after the steel spot prices shot back up $300 to $500 per ton in March and April that bubble reversed itself by July. The favorable trend continued through December 1, and this is a very good development for our future results, especially for second half of fiscal â23 and into fiscal â24. One is to take into account that we are also entering in future logged contracts for steel prices with certain tonnages up to 12 months forward. Therefore, the favorable impact will be a stair-step function of blending lock tonnages with superior spot prices. However, this is an upside at this point for our fiscal â23 results, assuming that spot prices remained relatively low in the future. On Slide 17, we are showing a simplified production versus backlog age and pricing structure as an update of how we are working through the backlog with old pricing. You can see that the first half of fiscal â22 was comprised entirely of all backlog units. By Q3 and into Q4, we started to build some better-priced units, but still with the gap versus the current economics. This explains a large portion of our losses during fiscal â22. Together with our dealer partners, we also were able to increase partially the prices for backlog units beginning with May production and recovered above half of the missing pricing for each respective price level. However, during fiscal â23, Q1, we still have approximately one-third of our production with very old units and some of the worst margins. We estimate this headwind to be approximately $10 million for fiscal â23, Q1 or 5% on approximately $200 million in revenues. Nevertheless, starting with fiscal â23, Q2 in January, we will have put the vast majority of the all backlog units behind us and have locked in pricing and backlog units at increasingly better margins. In fact, our production schedule is almost full through the end of fiscal â23 Q3 with some production slots left for EPA EV orders. While on some models, Type D for example, we are sold out for the entire year, currently, we are filling the remaining slots open for fiscal â23 Q4 for Type C and EVs at very good margins. On Slide 18, looking at fiscal year â23, we want to share with you our forecast by quarter, which serves as a basis for our fiscal â23 total year guidance. We are taking a more transparent and conservative approach this year, but it will still be a somewhat uncertain year from a supply chain perspective, yet we are confident that we have course corrected all of the other business levers that we could address. Looking at fiscal â23, Q1, our normal year historical results are around $5 million as this quarter has a lower number of production days and sometimes seasonally labor-related higher expenses related to calendar year-end. Taking into account the headwind of $10 million from missing pricing, we expect to end fiscal â23 Q1 around negative $5 million. All of our quarterly forecasts are plus/minus $2.5 million. So the range we expect is negative $7.5 million to negative $2.5 million adjusted EBITDA for this quarter. Moving to fiscal â23, Q2 and Q3. We have higher prices taking hold, higher revenues, small improvements from lower material costs, partially offset by increased labor costs due to cost of living adjustments. Therefore, we forecast $220 million to $240 million in revenues and $10 million in adjusted EBITDA for Q2 and $230 million to $260 million in revenues and $15 million adjusted EBITDA for Q3, each with a margin of plus/minus $2.5 million. Finally, in fiscal â23, Q4, with higher volume, increased EV mix, best pricing and lower material costs, we expect to generate $250 million to $280 million in revenue with adjusted EBITDA of $20 million, plus/minus $2.5 million. Putting it all together for the total year, we expect revenues in the range of $900 million to $1 billion and adjusted EBITDA of approximately $40 million with a range of $35 million to $45 million. Moving to Slide 19. We expect in summary, a significant improvement year-over-year in all aspects, with revenues up approximately 20% of $900 million to $1 billion, adjusted EBITDA of $35 million to $45 million and positive free cash flow of $0 to $10 million. However, if you look at the second half expected results from the prior page, it shows a full year run rate of $70 million of adjusted EBITDA on revenues just above $1 billion, which is back to the recovery top level of performance and set us up for taking it to the next level in fiscal year â24 and beyond. Moving on to Slide 20. We want to provide you with a refreshed look at our outlook beyond 2023. Once the supply chain further normalizes, we expect to sell approximately 9,500 units, including 1,500 unit EVs and generate $100 million or 8% adjusted EBITDA and $1.25 billion in revenues. This could be as early as fiscal year â24 if the business environment is stabilizing by then. Looking beyond that, in the medium-term, our EV growth and operational improvement can support volumes of 10,500 to 11,000 units, including EVs in the range of 2,500 to 3,500 units, generating revenues of $1.5 billion to $1.75 billion, with adjusted EBITDA of $150 million to $200 million or 10% to 11%. Our long-term target remains to drive profitable growth towards $2 billion in revenues, comprising of 12,000 units, of which 5,000 are EVs and generate EBITDA of $250 million or 12%. We are incredibly excited about Blue Birdâs future. Okay. Thank you, Razvan. On to Slide 22, as detailed in the fiscal year â23 guidance that Razvan walked through, we still have another quarter before we start firing on all cylinders as we navigate through some older priced units in the first quarter. Still, we are forecasting fiscal year â23 results that are dramatically better than fiscal year â22. We plan on booking at least 8,000 units, a 17% increase over fiscal year â22 and driving a top line of nearly $1 billion, a 19% increase year-over-year. Parts revenue will continue to be a bright spot, and we see line of sight to at least $84 million in revenue, up 10%. The EBITDA performance, we expect to be up over 350% compared to fiscal year â22 and to be approximately $40 million. EV bookings will be a significant component of those results, and we plan to double our EV bookings to over 500. On the right hand side of the slide, you can see the ACT retail sales forecast for fiscal year â23. It continues to be supply chain constrained across the industry. And our targeted bookings will put us right where we want to be around that 30% market share. What is extremely exciting is the demand in front of us. With many other industries slowing down, school buses are a great place to be. Retail sales have been off from their average of 32,000 units per year for 3 years in a row now, and the national school bus lead is aging. The market was first constrained by COVID and school closures and has been held up more recently by the supply chain. These buses must be replaced, and we expect substantially robust years ahead of us to address in pent-up demand. ACT is forecasting a compound annual growth rate of 10% from our fiscal year â23 to â27. The last 2 years have been challenging, but our business is back on track, and we look forward to the robust market ahead. On Slide 23, you can see another critical component of our outlook, which is the EPAâs Clean School Bus Rebate program. As we have discussed, this program allocates $5 billion over 5 years for clean and cleaner emission school buses. We applaud the EPAâs execution of this program as it went off without a hitch. It was straightforward to apply and the timeline from inception to identification of the lottery winners was extremely quick. Applications were taken from May through August, and the winners were announced at the end of October. The demand was so strong that the EPA allocated nearly $1 billion in this first round. Almost all of this funding went to electric buses and 99% of this funding went to priority districts. Approximately 2,500 buses will be funded with an average rebate of $375,000 per bus. Customers will have until the end of April to place their orders. Blue Bird and our dealer partners put on a full-court press to help customers apply for this lottery program. Through our collective efforts, we assisted in directly securing approximately 300 buses, and we have identified loyal Blue Bird customers who apply for funding themselves who will account for at least another 200 buses. Therefore, we expect the impact on Blue Bird to be at least $200 million in revenue based on securing 500 to 700 additional EV orders. The long-term impact of this program will be well over $1 billion in revenue to our organization. The next round of the EPAâs Clean School Bus program is expected to start in early 2023 as a competitive grant program, and we will be right there with our customers supporting their applications. Please keep in mind, though, that this is not the only program out there funding the purchase of EV school buses California, New York, New Jersey and Colorado collectively have billions allocated to this purpose. There are so many exciting things in front of Blue Bird. Letâs turn to Slide 24 to summarize the strong outlook ahead. First is the market demand for Blue Bird school buses. With our record backlog for this time of year, we are a great countercyclical play that many companies in the industry is being affected by the slowdown in consumer spending. Plus not only are the fundamentals of our industry strong, itâs just starting to heap it up with the 10% compound annual growth rate expected over the next 5 years. Second, there is commitment from the highest level of government to electrify this countryâs school bus fleet. Not only will this reduce greenhouse gases, it will help to reduce particulates that are found to be a contributor to childhood asthma. Electrifying school buses is a mission that makes sense to everyone. And Blue Bird will be a direct beneficiary of this as we have more electric school buses on the road today than anyone. We have a proven reputation as a leader in alternative powered school buses for over a decade as evidenced by the 20,000-plus propane powered Blue Birds that are on the road today. Our partnership with Cummins on EV offers something no other electric school bus manufacturer provides, and that is a powertrain partner with over 100 years of experience and who knows the school bus industry inside and out. Razvan walked you our long-term forecast and as impressive as the outlook is, it does not even factor in our efforts to expand our total addressable market. The commercial strip chassis offering could add thousands of units per year to the long-term forecast. Also, we implemented measures to reduce costs in the short-term, and we restructured the organization to be leaner, removing non-value added processes and reducing standard production hours per bus. And the work never stops as we are constantly looking for ways to take out costs and at the same time, increase quality. As we touched on today, we have not only aligned pricing to the economic inflation in the market, but we have also revised our pricing model to be more nimble and reduce risk in an inflationary environment. All of these factors will provide us with a 10% plus adjusted EBITDA margin in a mid-term normalized operating environment. As you saw in the guidance we provided for the second half of fiscal year â23, we get back to historic levels of 7% adjusted EBITDA on supply-constrained volume, proving that in a normalized operating environment, double-digit adjusted EBITDA will be in our reach. As I mentioned at the beginning of this call, we were extremely excited to update you on the progress of Blue Bird, and I hope you now understand why. Our team has worked incredibly hard to get the business back on track and prepare for a bright future. I would like to thank all of our teammates for their efforts this past year. Doing right. Thanks for all the details, especially per quarter, very helpful. Curious, just on the EV side, first I just want to confirm, did you say that you are pretty much sold out or your production slots are full for fiscal â23. So, I guess that would be first. But then secondly, I mean is your goal that you would satisfy that? You mentioned another, what, 400 units to 600 units that you may get in terms of awards as part of the EPA program? And then fiscal â24, thatâs when you would be able to be more-timely in terms of satisfying order flow? Yes. Eric, this is Matt. I will take that. So, in terms of the EV production, so we are actually reserving slots through the back half of our fiscal year for these orders that will be coming in from this Clean School Bus Act program. So, as of right now, we are reserving slots. We have about 350 EVs in the backlog right now. But as we stated in our prepared remarks, our goal is to book well more to 500 of that for the fiscal year. And then regarding the Clean School Bus program, our estimates are we will get an additional 500 to 700 orders out of the awards that are yet to come in. And the customers have until the end of April to get those orders in. Okay. And it was good to see the award that you put out last week. I mean I would think then â I mean do you think itâs kind of weighted back in towards April when that deadline comes, or do you think there is kind of a steady pickup between now and then? I think with the holidays here coming up, it will be a little slower. We have already gotten some in, but we expect really the crutch of these to come in after the New Year. Got it. And then maybe last one for me. You just mentioned the steel prices that have come down pretty substantially. And you are almost, I guess one more quarter before you really start to feel the positive impact of the price increases. As you plan out longer term, how do you feel about being able to hold price? Obviously, your customers can see the same thing that steel prices have come down. And I know you have taken a lot of steps on the pricing side. So, maybe how you think that push and pull plays out? Yes. Thanks for the question. I will take that one. This is Razvan. So, pricing is obviously a competitive aspect of our position in the market. So, we are always watching our competitiveness, and we will adjust accordingly going forward. On the other hand, as mentioned in our prepared remarks, we have taken steps to limit our exposure on the forward codes and the sales that we have. So, we are now much more flexible than in the past. As it relates to steel, there is a time lag until the time when we can benefit from these reductions because of the forward locking that we put in place. So, we will have to take into account all these three factors and then monitor our competitiveness and our order intake. But overall, we feel very positive that our margins are very strong in the backlog, and we are collecting orders today for Q4 fiscal â23 also at very good margins. Hi there. This is David Johnson on for Mike. Just a couple of questions. You discussed an expansion plan for your EV manufacturing, putting it in a dedicated space on the last call. But since then, the EPA doubled the subsidies for this tranche, essentially accelerating the pace of its grants. Will Blue Bird be able to keep up with all of this? Can you accelerate your capacity expansion if you need to? Yes. Hi, David. This is Matt Stevenson. So, we had line of sight in terms of the funding in the subsequent buses that it would eventually provide over this time period. So, this is what we took into consideration when we developed our ramp-up plan. So, you think of that 12 per day puts us roughly around that 2,500 units a year. And then we are also expanding to 20 per day by the end of calendar year â23. So, that at what point of capacity there based on the needs of this program. Great. And then one more for me, can you provide an update on your non-bus program through Lightning eMotors? How has that been going? And do you have an updated timeline for the development and the product launch? Yes. Thanks David. So, I think you are referring to the strip chassis targeted at those last mile like box delivery vans. And we are continuing to progress with Lightning, and our goal is to have demonstration units in customersâ hands by the end of calendar year â23. Great. Maybe if I can slip one more in there. Can you confirm whatever EV buses you are getting from the EPA program, they are going to take an order away from your diesel business? In other words, the net deliveries you expect to make in fiscal â23 is unchanged? David, this is Razvan. I will take that question. At this point, our throughput is constrained by the supply chain, primarily. So, indeed an EV new order takes out an old diesel bus off the road, but it doesnât necessarily mean that itâs a one-for-one stop on our total volume. Our total volume currently is constrained by the supply chain. This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Stevenson for any closing remarks. All right. Thank you, Gary, and thank you to all those joining us on the call today. As you heard during our prepared remarks, the fundamentals of our market are strong and our demand is robust. And our business is back on track. And by Q2, we start firing on all cylinders. Plus, we remain the leader in electric school buses with more on the road than anyone else. We have also driven costs out of our business, increased parts availability, throughput and quality. The business has turned the corner and our bookings in the first quarter we are currently in will be the highest in over 10 years. We are very confident and excited about where the company is headed, and we look forward to updating you again on our progress next quarter. Should you have any follow-up questions, please not hesitate to contact our Head of Investor Relations, Mark Benfield. Thank you, again, for your time. And we hear at Blue Bird, want to wish you a very happy and safe holiday season. All the best.
EarningCall_1891	Good afternoon, and welcome to Numinus Wellness Inc.'s Fiscal Fourth Quarter and Annual 2022 Results Conference Call. A question-and-answer session for analysts and institutional investors will follow the formal remarks. As a reminder, this call is being recorded. I would now like to turn the conference call over to your host, Jamie Kokoska, Vice President of Investor Relations. Please proceed. Thank you, Brent. Good afternoon, everyone, and thank you for joining us for our fiscal fourth quarter and annual 2022 results conference call. Discussing Numinus' performance today are Payton Nyquvest, Founder and CEO; and John Fong, Chief Financial Officer. Joining them for analyst questions at the end of our formal remarks are Reid Robison, Chief Clinical Officer; and Paul Thielking, Chief Science Officer. The following discussion may include forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. The risks and uncertainties that could cause our actual financial and operating results to differ significantly from our forward-looking statements are detailed in our MD&A for the quarter and the year ended August 31, 2022, and in our other Canadian securities filings available on SEDAR. Numinus does not undertake to update or revise any forward-looking statements to reflect new events or circumstances, except as required by law. Our fourth quarter results were made available earlier this afternoon. We encourage you to review our earnings release, MD&A and financial statements, which are available on our website as well as on SEDAR. Thanks, Jamie, and good afternoon, everyone. I'd like to extend the utmost gratitude that our work is connected on the unseated homelands of the Musqueam, Squamish and Tsleil-Waututh peoples and on other sovereign indigenous lands and territories across Turtle Islands. We are committed to a path towards reconciliation through continuous learning, reciprocity and humility. Overall, we're very pleased with how our larger cross-border business is performing, and this is evident in the significant growth of our revenues, margins and gross profit during our fourth quarter due to our acquisition of Novamind, which joined Numinus in early June. While our business has grown considerably in the past year, I think it's important to take a step back and discuss how our business strategy is unique in the sector and why we believe we're on the right trajectory to meet the growing need of mental health care and for future regulatory reform. Founded in 2019 as psychedelic therapy was increasingly becoming recognized and accepted as a breakthrough treatment for mental health disorders, Numinus has set out to establish the much-needed infrastructure to enable greater patient access to these treatments. To achieve this, we founded a leading integrated mental health care platform composed of wellness clinics and research, placing us at both ends of the mental health care ecosystem. Today, Numinus has 12 wellness clinics throughout North America, has strong advocates of a not one-size-fits-all for the treatment of mental health disorders, Numinus clinics offer a wide variety of treatments, including traditional therapy and counseling, virtual psychotherapy, mindfulness programs, neurological services, Transcranial Magnetic Stimulation, Ketamine-assisted therapies, psychedelic-assisted therapies, KAP programs among many others. The differentiating element in our clinics is that we work to create a one-stop shop for patients to go on their healing journey. Whether a patient prefers traditional methods or is open to discovering psychedelic-assisted therapy, they can have access at Numinus. Numinus also has a research business composed of a network of four clinical research sites, which offer clinical research management services with the support of our Health Canada licensed lab, which develops IP and focuses on advancing psychedelic discoveries. As the choice research platform for an expansive and growing list of biotech and psychedelic organizations, Numinus has established the know-how and resources to help many of the sector's leading companies. Looking back at our fiscal 2022, the mental health platform we have today was largely built by the initiatives we undertook in the past year, which were instrumental in positioning Numinus well for the future. First, we acquired NCT in Toronto, which expanded our services to include neurological care and grow our footprint in Canada's largest city. Second, we expanded our Ketamine-assisted therapy services throughout our clinic network, allowing us to provide another important mental health offering to our growing client base. Third, we uplisted to the Toronto Stock Exchange from the venture and established our OTCQX qualification in the United States. And more recently, in the fourth quarter, we completed the transformational acquisition of Novamind in June, which provided us with a strong U.S. network of clinics and expanded our research service offering with the addition of well-recognized U.S. CRO services. And we launched our exciting new brand, which should be reflected across all our clinics and digital assets over the next several months, which should drive stronger brand awareness and enable more effective marketing and growth strategies. We're proud to have achieved so much in just one year. But we're also very excited about what these initiatives will enable us to achieve in the near future and beyond. Today, Numinus is one of the best-positioned health care companies to provide the clinical infrastructure needed for the future of psychedelic-assisted therapies. With the recent regulatory changes leading the way in Colorado, Oregon and Alberta for therapies using natural psychedelics and MAPS expectation to receive FDA approval for MDMA-assisted therapy within the next 1.5 years, the future of our sector is crystallizing. And whether it is healing centers or wellness clinics that provide psilocybin-assisted therapy, or clinics that offer FDA-approved MDMA-assisted PTSD treatments, the clinical infrastructure will be paramount in delivering and accessibility of these important treatments. And today, Numinus is well positioned to be at the forefront of that mental health care revolution. The fiscal fourth quarter is our first reporting quarter following the completed acquisition of Novamind, and the first quarter for Numinus to demonstrate the real power of the larger cross-border platform that we've built. We're pleased to report that the combined businesses with a total of 12 mental health clinics in Canada and the United States, has made a significant impact in our performance. Compared to the previous quarter, fourth quarter revenues grew 464% to $4.2 million, our gross margins improved 31.5% and gross profit grew to $1.3 million. Much of our fiscal fourth quarter was spent completing and integrating the acquisition of Novamind, which included implementing scalable systems and processes across our growing platform to ensure more efficient reporting, tracking and client service. In our most recent quarter, our clinics comprise of roughly 88% of the revenue generated average gross margins of 27%. We're excited by the immediate uptick in operations with this large cross-border network and long-term opportunities ahead for a robust and growing wellness clinic network. Nearly all our clinics experienced meaningful growth in client appointments, with significant improvements seen at our Vancouver clinic, which also has the most room capacity for growth. Our team completed more than 17,000 client appointments during the fourth quarter, including everything from Ketamine-assisted therapy, traditional therapy, neurological service, and other mental health and mental wellness offerings. We are particularly pleased with the number of new clients we're reaching, with 12.5% of all appointments in the fourth quarter coming from new Numinus clients. As well, demand for Transcranial Magnetic Stimulation, which is currently only offered at clinics in Utah and Arizona, continues to show strong demand. In total, 1,568 TMS appointments were conducted during the quarter. We're currently looking into feasibility of expanding these services into other clinics across our network to provide greater access. We also understand that key to meeting the incredible demand for mental health services is finding enough qualified and dedicated practitioners to conduct this important work. I'm pleased to say that our total number of practitioners has grown 18% from the time we completed the acquisition of Novamind, with more than 130 practitioners working for Numinus, either in a full-time or contract capacity. Our proprietary training programs continue to generate both increased awareness of the Numinus brand and a strong pipeline of prospective new practitioners to recruit. We continue to see our training programs as both an important tool to further educate the medical community about the benefits and practices of psychedelic therapy and an opportunity to diversify our growing revenue streams. It's an offering to the practitioner community we're hoping to expand in the next several months. In Canada, while we are pleased to see the first steps towards regulatory oversight, and therefore, potential legalization of psychedelic-assisted therapies in Alberta, we're currently still operating within the confines of the Special Access Program, known as SAP, to receive federal approval for our client access to important psilocybin or MDMA-assisted therapies. We are continuing to take a thoughtful approach to the SAP process, ensuring that clients we submit applications for are likely to receive approvals. This approach ensures our clients benefit from appropriate expectations and ensures Numinus remains in high standing with Canadian health regulators as we continue to drive further access. We continue to work with clients seeking psilocybin or MDMA-assisted therapies, and referring physicians to navigate the special access application process. We're pleased to say that we have another psilocybin-assisted therapy application now approved by Health Canada, with the client treatment expected to take place in the next several weeks. We're honored to assist these patients in getting access to these important treatments. With that update on our strategy and operations, I'll now turn the call over to John to review our fourth quarter financial results in more detail. Thanks, Payton, and good afternoon, everybody. Our fourth quarter results are the first to reflect the impact of our acquisition of Novamind, which we completed on June 10, a few days into the quarter. Total revenues for the quarter were $4.2 million, 756% increase from revenue generated in the same quarter last year and a 464% increase from the prior quarter. The significant increase in revenue is mostly attributable to contributions from our new U.S.-based operations. Revenues from our wellness clinic network comprised 88% of total revenue during the fourth quarter, down from 99% last year -- last quarter, sorry, indicating the greater impact from our newly expanded research division. Our new U.S.-based CRO business, Cedar Clinical Research, generated $492,000 in revenue during the quarter and continued to show great opportunities for growth. U.S.-based revenue streams, including clinics and CCR, comprise 85% of our total revenues in the fourth quarter, demonstrating the value we're already generating from the acquisition of Novamind. Our gross margins continue to benefit from economies of scale. The addition of higher volume clinics in the U.S. and ongoing efforts to enhance the operating efficiency of our business. Fourth quarter gross margins were 31.5%, a significant increase compared to 24.4% in the prior quarter. Gross profit for the fourth quarter grew to $1.3 million, an increase of 628% compared to $181,000 just last quarter. Corporate expenses grew alongside the expansion of our business, but also due to transaction-related activities from the acquisition of Novamind and a $13.3 million non-cash impairment charge taken during the quarter. Impairment as measured by accounting and auditing standards is based on auditable information, including the inquiries historical financial performance to achieve growth within regulated services. These standards do not take into account the potential future value derived from the yet-to-be-announced changes and government regulations such as expected regulatory reform and better access to psychedelic therapies. We continue to be confident about the opportunities ahead for our U.S. operations, including how they are positioned for psychedelic-assisted therapies when legal frameworks allow. Excluding the non-cash impairment, total fourth quarter expenses were $13.4 million, including $10.2 million of regular cash operating expenses, $1.2 million of non-cash expenses and $2 million of transaction-related costs during the quarter. Overall, net cash outflow during the quarter was $8.7 million, including the $2 million of acquisition-related expenses. On an operating basis, our business used $6.7 million of cash during the quarter, representative of our new larger operating platform given the acquisition of Novamind. I think it's important to note our core performance, absent the non-cash impairment charge in Novamind transaction-related expenses to provide a clearer picture of our operating performance. On an adjusted basis, excluding transaction impairment items, net loss for the fourth quarter was $9.3 million or $0.04 per share. As this is the first reported quarter since the acquisition of Novamind, it may also be beneficial to highlight that annualized, this quarter's performance would represent $16.7 million of revenue and $5.2 million of gross profit certainly positions Numinus ahead of most others in our sector. In terms of liquidity, we ended the quarter with $33 million of cash on hand. With growing revenue streams and margins, we continue to believe we are well positioned financially to sustain our business model to pursue our long-term strategy and achieve operating profitability. And with that overview of our financial results, I'll turn the call back over to Payton for some closing remarks. Payton? Thanks, John. We continue to see many developments, both on the regulatory front, but also in the clinical trials of other companies in our sector that continue to give us confidence that radical and needed change is just around the corner to support increased accessibility to psychedelic-assisted therapies. As many of you have maybe seen, MAPS, the Multidisciplinary Association for Psychedelic Studies, just released, completed their second Phase 3 trial for MDMA-assisted therapy for the treatment of post-traumatic stress disorder, with their first readout expected to be in Q1 of 2023. And there continues to be developments in regulatory reform, whether that be proposed psychedelic-assisted therapy, regulatory framework by the province of Alberta and Canada or the recent vote to allow access to psychedelic healing centers in Colorado, or increased support for research into therapeutic use of psychedelics from U.S. senators. The activities we undertook during fiscal 2022 were instrumental in building the strong platform we have today and have positioned us exceptionally well for this changing regulatory landscape. Aside from the external momentum building within our sector and the regulatory landscape, there are many company-specific catalysts we see ahead for Numinus. We continue to work with advisers on our approach to listing on a major U.S. exchange in the most effective and cost-efficient path possible. We hope to be in a position to update you on those developments in the next couple of months, and are excited about the opportunities that lie ahead. We are well underway in executing our rebranding strategy, and expect to have all of our operations under our new cohesive Numinus brand within the next several weeks. This initiative will help grow the Numinus brand and streamline the client experience. We are exploring service expansion opportunities to further drive revenue diversification, including growing our TMS offering, expanding our wellness class offerings and digital programming. And we are excited about the opportunities ahead for Cedar Clinical Research and the ways we can enhance our sector relationships to both drive clinical research forward and test new products through our clinical infrastructure. Our strategy to accelerate our path to profitability also includes expanding our higher-margin services, increasing our business development activities and proactively managing our operating costs. We truly believe we are on the cusp of a significant shift across regulatory reform, and all of our activities are aimed at positioning Numinus at the forefront of that change with the clinical infrastructure required to meet new healing center requirements of many state regulatory changes. The sector affiliation through Cedar Clinical Research, which provides our clinical team with experience using third-party psychedelic drug protocols in advance of potential FDA approvals and proprietary psychedelic-assisted therapy training programs for practitioners to facilitate the advancement of the sector build, a pipeline of Numinus trained practitioners. I'm incredibly proud of the work we're doing. Our leadership team is both innovative and financially disciplined. And while we are actively investing in initiatives to further propel Numinus forward as a leader in the sector, we're also actively reviewing all operations and identifying efficiencies wherever possible to ensure we are using shareholder capital as effectively as possible. So I guess just to start off, I'd like to see if you could help me understand some of the differences between the U.S. and the Canada clinics, which might contribute to the differential in the volume and revenues from the clinic. Does this have to do with service mix, the difference in the U.S. and Canada model? And are there any [indiscernible] can be applied between the different models to kind of help accelerate growth across your portfolio? A few things. Obviously, with Ketamine and the experience that Novamind has had with Ketamine, quite a diverse and differentiated service offering, whether that's the Ketamine-assisted psychotherapy model that they have, some of the group Ketamine models that they have and with a lot of that being covered under insurance, there's a lot that we, up in Canada, can learn from the work that they've been doing down in the United States for quite some time as Ketamine has only recently really kind of opened up as a service up in Canada. And I would say the other opportunity kind of going the other way is, in Canada, we were, at one point in time through COVID, about 90% virtual. And during that period of time, we actually saw revenue and services increase. And in the United States, there wasn't the same amount of necessity for virtual services. But what we have seen is that there's a lot of interest in being able to debt access to virtual care through virtual therapy, which we've already kind of created that platform up in Canada. So being able to bring that into the United States and keeping the higher-margin services in physical infrastructure and some of the lower margin services being able to bring those virtual, we see as a big opportunity for us. And then probably the only other big differentiator is TMS as well. TMS gets a lot of insurance reimbursement down in the United States, but is not covered by the Canadian health care system. And I'd also like to touch on -- because obviously, everyone in this space is eagerly awaiting that MAPS data. So I'd like to see if you could highlight how a potential approval for MDMA could impact the growth trajectory of clinic providers such as Numinus compared to your current offerings focused on traditional and existing interventional approaches like Ketamine? And then also touch on your involvement with that MAPS program through your clinical research. Sure. Yes, obviously, most people have probably seen the initial MAPS Phase 3 data, which was extremely compelling. We believe that this next data that is going to come out early next year should be in line with that and potentially better, which would put them on track. Again, this is me quoting MAPS, but put them on track for drug submission in Q3 of next year. So really around the corner. We're grateful to be working with MAPS for a couple of years now on everything from the training of practitioners to actually administering the MAPPUSX study. So we've been actually carrying out some of the MAPS work within our clinics, which one of the big hurdles that MAPS is going to have to jump quite quickly is how do you move MDMA into a service offering. And we've always built Numinus with the intention of being able to offer MDMA and psilocybin, which is fairly unique, everything from the kind of clinical infrastructure you're going to need, to making sure that you've got all of the back-end set up to be able to administer the therapy, all the way to MAPS-trained practitioners, which that's going to be a very large bottleneck that in order to administer the MAPS MDMA treatment and use the MAPS MDMA product, you're going to have to have the MAPS training protocol. And if you look at the data, it really points to the necessity of really well-trained practitioners in order to ensure the kind of results that MAPS is seeing in the clinical trial. And so for us, to have that familiarity and long-term working relationship with MAPS, positions us as kind of a service provider of choice for when that drug is approved. All right. And then just one last one I'd like to talk a bit on the financials. Are there any additional cost synergies you expect to be realized from the combination of your business with Novamind in the coming quarters? Yes, I can answer that. This is John Fong. We continue to revisit our operations every day, every month, after week to define these efficiencies going forward. I think over the past three or four months post-acquisition, we've done a pretty good job in trying to find some low-hanging fruits. But over the course of the next quarter or two, we're going to continue to find a bit more there. Congrats on the growth and obviously the good integration progress. My first question was on sort of scalable systems you mentioned. I thought it'd be great to get some more color on what kind of back end you guys are seeing is helping with more efficient reporting and tracking, I guess, how you see that moving forward? Is that going to be something that you try and implement in all the clinics that you haven't yet? And what goes into that? I would say one of the big things towards operational efficiency is ensuring that we have robust and interconnected IT systems, whether it's EMR or accounting or call center and billing services. I think integrating those into a seamless integrated network will certainly help with that. Got it. And I guess, you guys have already gotten some metrics out of -- that you reported, I think, in September. Are you seeing things like an enhancement in the book-to-bill ratio? Or are you seeing any improvements? Or are there kind of levers in place to improve that sort of metric? Yes. We continue to revisit those and look at the data that we do have. And we're going to see where we can do to improve, getting more timely information. Got it. And I guess, was there like a rough understanding of how far your appointment tracking systems give you visibility like right now, is a typical patient booking a couple of months in advance? Or is there kind of some color you can put there on [indiscernible] you expect more color on the future quarters? Yes, we do see appointments a couple of months of advance. But like going forward, over the next couple of quarters as we improve our systems, we'll certainly have better visibility into that. Interesting. And then I think there was a question on the MAPS. I want to touch on that briefly. Is there a time line you think of, like when players, whether it's MAPS or Compass? As they get far down the line, is there engagement outgoing from you? Or is there some sort of kind of engagement, whether it's an MoU to try and figure out commercialization partnerships or certain, let's say, you guys have designation that you could do reformulation work for them? Is there any sort of engagement with those sorts of partners? Yes. Without getting into too much detail, I think MAPS in particular is close there now from a timing perspective with that drug submission in Q3 of next year. That should put them on track. And again, speaking for MAPS, that should put them on track before the end of the year or the very early part of 2024 to get that approval. I think there's a couple of opportunities there. One is just around service offering and what those collaborations or potential partnerships look like. But also training, that continues to be a huge bottleneck for MAPS, and I think something that our infrastructure could help us significantly. And then finally, as they start to get their feet underneath them with the post-traumatic stress disorder treatment, starting to look at potentially other indications as well. But Compass, I think, it's probably still a little bit early. They've got their Phase 3 to get to. And obviously, with the two Phase 3s that they're doing, still a little bit of work ahead. And I think probably prior to that also, we'll see what happens with the Oregon change in January of next year and then Colorado as well, but there's a number of opportunities with psilocybin that could potentially put us in the market with a service offering before psilocybin is approved by Compass or whomever it is on the drug development front. Got it. Okay. Then maybe just the last one on SAP. Is there a by-indication approach right now or still by patients like if you've got multiple patients approved for different indications? Do you kind of go back and look at the patient profiles? And what does that look like in terms of growth from SAP in Canada? Yes. I think now that we've seen that open available for a couple of quarters, and I think Health Canada has gotten more comfortable with it. Really, obviously, sticking indication-dependent based off of the research. And I think you could probably see that continue to pick up for psilocybin and then MDMA, which really kind of lands with MAPS and the work that they've done. So I think over the next couple of quarters, you'll probably see some pickup on the SAP front, which is just obviously a great opportunity to help people who are in significant need and also to get those practices happening within clinic and the learning that we've been able to do from our SAP approvals and hopefully future ones is really invaluable as we're kind of getting geared up for some more approvals on MDMA that's kind of right around the corner now. I've got a couple of questions. Can you give us an update on how Ketamine-assisted therapy is actually growing across your clinic network? And maybe give us an indication of how many Ketamine-related appointments made up the mix of that, there's a total of 17,000 appointments you had in the fourth quarter? I can speak to that. This is Reid Robison. So our Ketamine, or KAT figures, include all the Ketamine-assisted therapy prep sessions, they'll see an integration as well as any Spravato or Ketamine medicine or dosing appointments. So in total, we completed more than 2,300 Ketamine-related appointments during Q4. That's useful. And just to add another question. You obviously enjoyed some good demand for TMS services. Is there any plan to actually expand those service offerings? Yes, I can speak to that as well. We are looking to expand the service into other clinics and also looking at the market dynamics. Again, Canada, for example, TMS is not covered by universal health care. So we need to be covered by extended medical insurance to become more broadly accessible. But in the U.S., we currently have four TMS machines, three located in Utah and one in Arizona. And as the volume increases and utilization of those, we plan to expand them into our other clinic locations. There are no further questions at this time. I will now turn the call back to Mr. Payton Nyquvest for closing remarks. Thank you, operator. And thanks, everybody, for joining the conference call with us today. We look forward to speaking with you in January when we'll report our fiscal first quarter 2023 results.
EarningCall_1892	Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the SLANG Worldwide Third Quarter 2022 Earnings Conference Call. Today's call is being recorded. Thank you, operator and good morning everyone. Welcome to SLANG Worldwideâs Q3 2022 earnings conference call. Our speakers on todayâs call will be Mr. John Moynan, CEO of SLANG; and Mr. Mike Rutherford, Chief Financial Officer. Before we begin, please let me remind you that during this conference call, SLANGâs management may make forward-looking statements made within the meaning of applicable security laws. Forward-looking statements may include that are not necessarily limited to financial projections or other statements of the companyâs plans, objectives, expectations or intentions. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such statements. Factors that could cause actual results to differ materially include, but are not limited to the risk factors contained in the companyâs filings with SEDAR. Please also note any forward-looking statements made here are as of today and except to the extent required by law, the company assumes no obligation to update statements as circumstances change. Thank you, Phil. Good morning, everyone, and thank you for joining us on our third quarter 2022 conference call to discuss our financial and operational results for the period ending September 30, 2022. I was appointed CEO of SLANG in early October to lead the next stage of the company's growth following the successful completion of its operational restructuring. Having previously served as COO, General Counsel and Corporate Secretary of SLANG, I have long recognized the value of the SLANG assets and have witnessed first-hand the success SLANG has achieved in building a leadership position in cannabis markets across North America. Now we have an incredible opportunity to drive even stronger financial returns as we continue to expand our branded distribution footprint under a refined strategic direction. Since the implementation of our transformational growth strategy last year, we have successfully leveraged a consolidated supply chain and streamlined infrastructure to achieve greater opportunities for sustained margin improvement and profitable revenue growth. This is a very exciting time in SLANGâs evolution and I am excited to build upon the tremendous momentum that the team has worked hard to generate in scaling our core operations at a time when we are seeing increasing demand for our best-in-class cannabis brands. First, I would like to provide some color on the status of our financial position and the reason for our strong optimism for SLANG financial growth in the months ahead. As we have outlined in the past, as part of the company's operational restructuring, we took a methodical approach to achieve greater operational efficiencies in our core markets. Through the elimination of non-performing assets, products and brands and the strategic integration of newly acquired assets, we have set SLANG on a new path for financial growth. The successes of these efforts continues to be recognized in each quarter. In the third quarter, we have reduced our total operating expenses by $2.37 million, while integrating our newly acquired Vermont operations. In October, we were cash flow positive with record unit sales across each of our core markets of Vermont and Colorado, and we have a strong balance sheet with $12.2 million in cash and cash equivalents as of September 30, 2022. In addition, we have sustained healthy gross margins of 44%, which further demonstrate the success of our refined growth strategy. This hard earned success has played SLANG in a position of strength as we advance the products several fronts where we see significant opportunities to reach our goal of achieving profitable revenue growth. We believe that the progress made in Colorado during the quarter and stronger sales over the past few months will positively shape our top line revenue in spite of the industry-wide slowdown in the country's most mature cannabis markets. We have continued to demonstrate our ability to expand our operational footprint and lead the market with our industry leading O.pen brand. We are already seeing monthly record sales volume in our core markets, while continuing to reduce OpEx and maintained stronger gross margins, which speaks to the strength of our business model. As you may remember, we entered Vermont in August 2021 through our acquisition of High Fidelity Inc. Vermont's largest medical cannabis company quickly incorporating Vermont as one of our core markets. Our immediate priority was to evaluate cost synergies and streamline operations to build a vertically integrated platform for delivering profitable revenue streams. On October 1, 2022, we opened our first recreational cannabis store in Vermont just as the state legalized adult use sales, which significantly enhanced our ability to serve the state's rapidly growing cannabis consumer base. We have been incredibly successful in Vermont with October sales alone reaching $1.58 million. Operating under the company's series collaborative cannabis group, our 1,500 square foot door front is located in the heart of downtown Burlington. Vermontâs recreational cannabis market is estimated to reach $265 million in annual sales by 2025, and we are positioned right in the center of this. We are already seeing the strength of our newly configured footprint in Vermont with October sales being higher than anticipated, due to high demand for our industry leading products such as O.pen. Colorado remains one of our strongest revenue channels and our success is in optimizing our sales structure and strategy has supported our recent growth in this market. While we, along with other cannabis operators in Colorado, felt the effects of the safe first downturn since growing recreational in 2014, we still experienced strong growth from our leading products, which have become a mainstay of Colorado cannabis users. Our O.pen brand continued to outperform all other vaporizer brands in Colorado, holding the number one spot for its 20th month since 2019 for best selling vape cartridge brand in Colorado. It commanded 12.7% of all day sales and 15.3% of all day cartridge sales for the month of September according to BDSA Analytics. But perhaps the most notable milestone for our industry leading O.pen brand was hitting its 10th year of successfully leading the Colorado Cannabis market. To commemorate this milestone achievement along with celebrating 10-years of adult use cannabis legalization, we have launched a number of special incentives, which began in October and included special edition 10-year anniversary of 2.0 batteries and limited edition commemorative THC cartridge packaging. Finally, as we have previously shared, on October 1st, we launched Alchemy Naturals, our new high quality edible brand in Colorado. These new edibles combine cannabinoids and adaptogens in a unique manner to create an all natural THC and CBD products. We have seen strong demand from consumers for a healthier and better tasting gummy and this new product line has successfully met the needs of our evolving cannabis market. By launching in Colorado's $371 million edibles market in online, we have experienced a steady increase in Alchemy sales with 8% sales growth from July to September and 16% growth in October. Given our increased marketing activity, and continued product demand sales were especially stronger in the months of September and October in Colorado. One of our key accounts delivered a 229% increase in sales from August to September. All in all, we achieved total Colorado sales growth for the month of September of 44.5% year-over-year and 75% from August, significantly beating our overall quarterly sales forecast in Colorado by 12%. As the Colorado market begins to resume stronger overall sales growth following its slowdown, we leverage our new vertically integrated operational footprint in Vermont to produce stronger high margin sales. We believe the growing opportunities to serve these core markets within the trademark of a more streamlined infrastructure will drive our new growth trajectory. Just to reiterate, our core markets Vermont and Colorado are our primary avenues for reaching the marketplace with our portfolio of SLANG brands. Since entering each of these states, we have captured significant market share and received wide recognition in accolades for our products. Our success continues to be driven by our ability to understand our customers and produce today's most reliable products in each category to meet demand. We will continue to refine our product strategy in order to consistently support our brands and drive profitable growth. Finally, turning over to our emerging markets. We continue to utilize our strategic partnership model to enter each market and secure a leadership position, driving brand metrics in the most capital light efficient manner. Working with our strategic partners such as Trulieve, we continue to establish strong positions in each new market that we enter. As a result of all of these efforts and successes SLANG is in its strongest operational position to-date. We have an amazing team in place, a strong balance sheet and a clearly defined path to profitability. Our focus remains on leveraging a proven growth strategy to further scale our brands and products, to build our position as a top performing cannabis CPG company across multiple states. I would like to now turn the call over to Mike Rutherford, CFO of SLANG to discuss our third quarter 2022 financial results. Mike, please go ahead. Thanks, John. We continue to see the positive effect of transformational growth strategy that has resulted in consistently stronger margins to support our bottom line growth. For the third quarter of 2022, revenue from continuing operations was $8.17 million, compared to $9.36 million in the third quarter of 2021, due to a reduction of $0.87 million in emerging market sales, a reduction of $0.78 million in Firefly 2+ sales and a reduction of $0.29 million in Colorado core market sales, offset by $0.75 million additional revenue associated with the acquisition of HiFi, completed on [Technical Difficulty] 11, 2021. Gross profit for the third quarter of 2022 was $3.6 million or 44% gross margin, compared to $3.46 million or 37% gross margin in the comparable period of 2021, representing a 4% increase year-over-year. Despite the decrease in revenue year-over-year, gross profit increased due to lower cost of raw cannabis inputs in Colorado, higher margins associated with HiFiâs retail operations, and two previously completed strategic initiatives being the elimination of low margin Oregon sales and the elimination of low margin products via an internal SKU rationalization process. Total operating expenses from continuing operations for the third quarter of 2022 were $8.59 million, compared to $10.96 million in the third quarter of 2021, representing a decrease of 21.6%. The decrease in total operating expenses year-over-year is due to a decrease in every expense line item with the exception of a $0.07 million increase in consulting and subcontractors and a $0.22 million increase in general and admin. Our cost cutting initiatives continue to have a positive impact for the company. Third quarter 2022 adjusted EBITDA loss was $1.24 million, compared to an adjusted EBITDA loss of $1.56 million in the third quarter of 2021. The improvement in adjusted EBITDA loss is primarily attributable to a $0.45 million increase in gross profit before fair value adjustments on biological assets, offset by an increase in operating expenditures related to HiFi, which is not presented in the comparative period before August 11, 2021. Our balance sheet remains strong with $12.23 million in combined restricted and unrestricted cash as of September 30, 2022, compared to $20.83 million on December 31, 2021 and $15.72 million at June 30, 2022. Our focus remains on advancing strategic M&A opportunities, partnership activities in our emerging markets and a refinement of our product strategy in order to drive brand performance in our core markets. Thank you, Mike. To conclude today's call, I would like to reiterate that this is an incredibly exciting time for us at SLANG. We are strategically advancing upon a number of growth opportunities that will serve to further escalate SLANGâs leadership position within the overall cannabis CPG market. We continue to leverage a strengthened operational infrastructure and have demonstrated that we can effectively expand our core and emerging market operational footprint and advance new product lines, while focusing on continued improvement to both our top and bottom line financial results. There is still a lot of work to be done, but we are now operating from a position of strength and confidence. We look forward to updating you on our year-end call.
EarningCall_1893	Good afternoon and thank you for joining us to discuss PagerDuty's Third Quarter Fiscal Year 2023 Results. With me today -- with me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer and Howard Wilson PagerDuty's Chief Financial Officer. Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it which involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements include our growth prospects in future revenue among others and represent our management's belief and assumptions only as of the date such statements are made and we undertake no obligation to update these. During today's call we will discuss non-GAAP financial measures, which are in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K and 10-Q, as well as our subsequent filings made with the SEC. Thanks, Tony and thanks everyone for joining us today. We are pleased to report another quarter of strong results as we continued to execute on our Operations Cloud. Revenue grew 31% year-over-year to $94 million above the high-end of our guidance and marking our 6th straight quarter of growth above 30%. In Q3, we achieved non-GAAP profitability a quarter ahead of our previous guidance with $3 million in operating income, an improvement of 1,000 basis points over Q3 last year. We exceeded the high-end of our guidance ranges for both top and bottom line and realize our profitability milestone a quarter ahead of schedule. We continued to see strength in our focused segments, mid market and enterprise, our customer cohorts spending over $100,000 in ARR grew 31% over last year. Total free and paid customers on our platform grew 22% year-over-year, dollar-based net retention was 123% as our customers continued to expand users and adopt more products and services. In the quarter, more than half of our ARR came from customers with two or more products. While the macro environment is likely to remain a headwind for our business in the near-term, we continued to see positive trends underpinning our performance and remain bullish about both long-term opportunities and our balanced growth investment plans. First, we continued to see strong growth in incident response. Cloud adoption and digital acceleration are enduring multiyear initiatives, DevOps transformation is now required to achieve the efficiency demanded by this macro environment. PagerDuty is essential infrastructure leading to some large digital transformation wins in traditional industries, which I will discuss later. Second, we saw solid adoption of new products, especially automation and our AIOps solution, where customers chose the efficiency and effectiveness of our integrated operations cloud offering ahead of point solutions. Third, our low cost of ownership and fast time to return on investment makes PagerDuty more attractive to customers than expensive long deployment solutions. Our sales pipeline is strong heading into Q4 for both incident response and new products. Finally, we have positioned ourselves well to navigate the challenging macro environment, achieving profitability by improving our cost structure such that we can continue to invest in growth capacity and product innovation. During Q3, we extended our competitive lead as we balanced strategic investments in product innovation growth, while also significantly improving operating leverage. Our results this quarter demonstrate the continued strength of our value proposition for enterprises and our teamâs ability to execute with an increasingly efficient go-to-market motion. PagerDuty's Operations Cloud underpins operational resilience and digital maturity for our customers in a moment when they need it more than ever. Automation capabilities integrated across every aspect of the platform reduce time and effort spent by technical employees managing interrupt work and translate to both money saved and better experiences for their customers. Our ability to orchestrate digital operations across the entire enterprise makes PagerDuty the platform onto which companies are consolidating previously fragmented [tech] (ph) spending. As organizations come under pressure to protect revenue, prioritize IT spending and do more with less, our customers have made it clear they consider PagerDuty essential. This was validated as we closed a record number of mid-market and enterprise expansion transactions, manage churn well below 5% of starting ARR and increased both average revenue per user and average revenue per customer. Our mission to revolutionize operations has always been grounded in building a durable growth company, while improving the efficiency of our go-to-market and G&A spend. We are investing to deepen our competitive moat through innovation in AIOps, automation, customer service operations, and flexible workflows that help teams across the enterprise manage interrupt work. Our efforts over the past year to sustainably lower our cost base, our cost structure with new lower cost, high talent locations like Lisbon will enable ongoing operating leverage improvement similar to the pace we have delivered this financial year. In a volatile macro environment, we are controlling the controllables with the objective of continuing to make demonstrable progress from the early 30s towards operating as a Rule 40 company. Given our role as essential infrastructure, our loyal customer base and our competitive track record and our innovation roadmap, we are positioned to weather this environment well, we are confident that we will emerge stronger as a high performing profitable growth company, the leading operations cloud for modern enterprises. In November, we announced early availability of more flexible incident workflows that enables PagerDuty customers to tailor workflows to different use cases and automate steps when a major incident occurs. We launched capabilities to reduce noise and improved developer productivity. So our customers can take back hours of engineering time. Overtime flexible workflows will be the primary solution to enable non-technical teams to manage Interrupt Work. Earlier this year at AW -- earlier this week at AWS Reinvent, we also announced automation actions for PagerDuty AWS customers. These capabilities improve resiliency and increase the use of best practices, all while saving developer time. FreedomPay, a data-driven commerce platform is saving the equivalent of four peoples dedicated time, making their critical processes more reliable and removing the risks of human error by automating tasks with PagerDuty. During Q3, a Fortune 100 global security and aerospace company nearly doubled itâs PagerDuty using footprint on digital operations and signed a multi-year contract. This long-term PagerDuty customer is realizing a return on investment in excess of 30 times its annual spend with us. In the last 18-months, this customer significantly reduced its meantime to resolve incidents, translating into tens of millions of dollars in savings, their expansion with PagerDuty was explicitly due to our ability to reduce their costs, while also freeing up time for their innovation teams. In the quarter, an Australian-based home improvement retailer in the midst of a large scale digital transformation expanded its investment with PagerDuty. The customer has nearly doubled its PagerDuty footprint since its initial deployment in 2020. This quarter, we adopted PagerDuty process automation to address more advanced use cases, including automated diagnostics and auto remediation, they expect to increase engineering productivity and resolve incidents faster as we advance their digital maturity. Also during the quarter, a multinational Fortune 200 wireless technology innovator turned to PagerDuty to consolidate digital operations on an integrated platform for action. The company sought a more flexible solution that can provide faster time to value, lower maintenance costs, visibility across multiple departments, and ultimately consolidate their tech spend. They had been using a point solution for AIOps in their IT service center for several years, but upgraded to PagerDuty digital operations, automated actions and event intelligence replacing that vendor and signing a multi-year six figure investment. Their expansion to PagerDuty enables them to automatically detect, action and manage all in the same platform. PagerDuty is central to their technology strategy to exponentially scale services, while keeping service costs low. They anticipate payback in less than a quarter and a return on investment of nearly 500% within the first year. Our value proposition has proven resilient even as decision making within organizations becomes more cautious. PagerDuty's Operations Cloud is the only platform integrating incident response, AIOps and automation. We deliver tangible ROI and fast time to value, help mature our customersâ digital operations and deliver operational resilience, which is critical in today's environment. As customers realize the initial value, they adopt new products, expand users and move towards more advanced use cases. In an environment where it's much easier to sell more to the current customers than find new ones, we have several new products to attach as the result of our recent innovation and a large underpenetrated opportunity within our installed base. The operating leverage PagerDuty exhibited during the third quarter is the outcome of structural changes implemented throughout the past several years to generate profitable growth. We have responded to the recent changes in the demand environment by accelerating the implementation of several efficiency initiatives, including standardizing our go-to-market motions across regions, opening lower cost, high talent employee locations, improving our digital marketing returns and are finding our R&D investments. We continue to expand our operating margins as we move forward into the next fiscal year. We are executing well on our long-term operation cloud strategy balancing growth and profitability. We're recently recognized on several fronts for progress that will also support success in FY â24. Earlier this week, we were honored at AWS Reinvent to receive the Rising Star award celebrating significant year-over-year growth in our business on the AWS marketplace and we expect our momentum with AWS to continue. Our investment in attracting and retaining top talent, creating an exclusive workspace and ensuring a healthy company culture manifest in the success of our teams. During the quarter, we won multiple Stevie Awards including for special achievement in workplace health and well-being and for best Corporate Social Responsibility strategy. This fall Trust Radius recognized PagerDuty as a tech care awards winners for our ongoing commitment to corporate social responsibility. Finally, G2 named PagerDuty a leader in incident response, AIOps and workload automation. Our results from Q3, the persistence and long-term tailwinds and customer demand for our high ROI, fast time to value platform reinforce our confidence in our ability to both execute well in the near-term and emerge even stronger. Even as we scale efficiently, we know that innovation fuels our competitive advantage. PagerDuty is the partner our customers trust on their worst days, it is our responsibility and our privilege to deliver for them. As we move into FY â24, we expect to continue monetizing our product investments as customers see value from PagerDuty's Operations Cloud. I want to thank our customers for their trust and partnership and I want to recognize our global [indiscernible] for their dedication to championing our customers for their resilience and for their great execution this quarter. Thank you, Jen, and good day to everyone joining us on this afternoon's call. Our third quarter results demonstrated the agility of PagerDuty and our commitment to profitable growth. The combination of our ongoing programmatic efforts, as well as our operational agility enabled us to reach the profitability target put forth during our Q4 FY â22 call one quarter earlier, while preserving our strategic growth investments. Evidence that PagerDuty's Operations Cloud is well positioned to meet our customersâ challenges reducing cost, protecting revenue, and retaining talent and enabling them to do more with less. Unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted before the call. Revenue was $94 million in the third quarter, up 31% year-over-year. The contribution from international was 23% of total revenues, compared to 24% in Q3 of last year, reflecting the challenging economic environment in Europe. Our customers continued to expand with us adding new users and new products. We had a record number of customers expand with us this quarter. While many of these transactions were on the smaller side, the volume of customers demonstrating their reliance on PagerDuty even in a challenging environment is a further testament to our durable growth. We saw the most strength in our North American mid-market and enterprise business and PagerDuty online our self-service business. We did notice an increase in customer approval requirements, particularly with large deals. We delivered dollar-based net retention in Q3 of 123%, compared to 124% in the same period one year ago. We expect dollar-based net retention to be at or above 120% for Q4. Customer spending over $100,000 in annual recurring revenue grew to $710,000, and up 31% from a year ago, demonstrating our ongoing strength in mid-market and enterprise. Total paid customers increased by 5% annually to 15,265, compared to 6% in the year ago period. Free and paid companies on our platform grew to over 23,000, an increase of approximately 22%, compared to Q3 last year. Q3 gross margins of 85% remained within our target range of 84% to 86%. Operating income was $3 million or 3% of revenue, an improvement, compared to a loss of $5 million or negative 7% of revenue in the same quarter last year. Please note the fully diluted share count associated with Q3 profitability was $101 million weighted average shares. Operating margin outperformed by 600 basis points, compared to the high-end of our guidance range for the quarter as we accelerated our scaling initiatives refining our go-to-market model, leveraging our global locations and increasing use of automation. We usually experienced a sequential improvement in operating income from Q3 to Q4. However, this year, we expect operating income to decline marginally in Q4. This is primarily due to our investment in AWS Reinvent, as well as the full quarter of expenses from third quarter hires. Now to cash, third quarter cash from operations was nearly breakeven at negative $0.4 million, compared to $3 million in Q3 of last year. Free cash flow was negative $2 million, compared to positive $2 million in the year ago period. We expect positive free cash flow in the fourth quarter. Turning to the balance sheet, we ended the quarter with $459 million in cash, cash equivalents and investments. Total deferred revenue ended the quarter at $180 million, up 26% year-over-year. Quarterly calculated billings were $104 million, which was an increase of 29% year-over-year ending above the 20% to 25% range provided during last quarter's call. This result includes approximately $2.6 million in prepaid multi-year billings. Adjusting for this the increase was 26% and also above the range provided. Last year in Q4, we had strong 30% billings growth that included a $3.2 million of multi-year prepaid contracts that are not available for renewal this period. Given a tougher compare and adjusting for the volatile macro, we expect billings growth for Q4 to be approximately 20%. Given quarter-to-quarter fluctuations in billings associated with our culture and practices, we focus on trailing 12-months billings. On a trailing 12-months basis, billings were $385 million, an increase of 30%, compared to a year ago and above the 27% estimate previously provided. We expect trailing 12-months billings growth exiting the fourth quarter to be at or above 25% over last year. Turning now to our guidance. Our guidance reflects our understanding and consideration of the impacts of the current evolving uncertain macro environment. For the fourth quarter of fiscal 2023, we expect revenue in the range of $98 million to $100 million, representing a growth rate of 25% to 27% and net income per diluted share, attributable to PagerDuty. Inc. in the range of $0.02 to $0.03 with fully diluted shares outstanding of approximately $102 million. This implies an operating margin in the range of 1% to 2%. For the full fiscal year 2023, we expect revenue in the range of $368 million to $370 million, representing a growth rate of 31% and weâre improving guidance for net loss per share attributable to PagerDuty, Inc. to $0.01 to breakeven with basic shares outstanding of approximately $90 million and fully diluted shares outstanding of approximately $101 million. This implies an operating margin of negative 1% to breakeven for the year. Before I close, I would like to thank our customers for their continued partnership and for our teams across the globe who championing. Our rapid pace of innovation positions us to realize our vision to transform critical work and revolutionize operations. We remain confident in our Operations Cloud strategy, the market opportunity and our performance as we continued to demonstrate profitable growth, expanding our operating leverage in Q4 and in a strong position to achieve a similar level of improvement in the next financial year. Okay. And it looks like several of our analysts have queued for questions already. We will start with Joel Fishbein from Truist. Joel, if you'd like to kick us off? Okay. Actually, let's move over to Sanjit, Sanjit at Morgan Stanley. Do you want to kick us off in our Q&A session, please. Awesome, well, congrats to the team on achieving profitability, a quarter ahead of time, it's very nice to see. Jen, on -- in your script, you said, you had a phrase that I love controlling the controllables, as well as talking about sort of targeting, kind of, Rule of 40 type growth versus profitability and if I sort of look at it, this quarter of 31% growth, 3% operating margin, certainly making progress? When we think about 2023 -- calendar â23, it looks like, it's going be a pretty uncertain year across software and that's the uncontrollable piece. And so as you think about that 40% Rule of 40 type framework how is -- what sort of the operating plan? And what's -- how are you sort of going to manage making progress on that going into next year and beyond? Thanks for the question. And we are really proud of the quarter. I think we did a great job of executing in a relatively uncertain environment and you sort of saw customers continue to demonstrate their demand for a platform like ours with record expansion -- record number of expansion transactions and our large customer cohort, customers spending over $100,000 and ARR growing 31%. So, we still feel like the topline is strong, because we are a platform that delivers very fast time to value and higher ROI. Having said that, I mean, we've been in process underway now for several quarters to improve the overall efficiency and productivity of our business and we're starting to see that come together in just the efficiency, the improved efficiency and go-to-market, especially marketing and sales where we are seeing us still drive that growth and drive that demand and continued to build loyalty within the customer base, but do it with much better operating leverage. So I think we've put ourselves in a really good position that regardless of what we see happen from a macro perspective, we can continue to manage to improve the efficiency and the productivity of the company. And while we're not giving any guidance for FY â24, Rule 40 is a really important goal for me and for the team and we're laser focused on it. Makes total sense, and just as a follow-up as we think about some of the components that drive growth at PagerDuty in a seat-based model, you've seen a lot of headlines in terms of pretty sizable layoffs with the big tech, if the overall employment picture across United States is still looking pretty solid, so how do we think about when we see layoffs within engineering departments with big tech, is that something that's going to be a modest impact or more noise? And we should look at the broader employment picture to assess that risk in terms of the expansion opportunities within the PagerDuty model? Or is it something to be more concerned about as we see some of these layoffs accelerating among tech and other companies? Well, there are three characteristics of our business, I will point you to one is we have a very diverse customer base. So while we do have customers in high tech that represents a portion of very, very diverse set of verticals, and in the quarter, we saw tech retail, financial services, other verticals perform quite well. So the diversity of our customer base, I think is a strength in an environment like this and it certainly was during the pandemic. Second, I would say when you look at our customer base and you look at the number of tech workers within our customer base, we're largely underpenetrated in that total addressable market. And so even if we were to see headcount compressed much more dramatically, we still have huge opportunity just within the installed base from a headcount perspective, but also from a new product attach and new use case attach. And so we don't see layoffs for instance as having a material impact on demand. The last thing that I would say is when you look across the developer community, I mean, the TAM that we measure is 25 million developers around the world and we are in single-digits of penetrating that TAM. So I would just come back to kind of what we've always said, this is an early and nascent category. We think it's a huge opportunity, developers tend to be the last heads to go when you do see customers taking action into your point when you look at the broader employment situation across the market, the diversity of our customer base. I really -- I think puts us in a good position, but at the end of the day, it really comes down to that TAM inside our installed base is still very, very large. Okay, that was exciting stuff for a big, kind of a fan, certainly fun to see, so congrats on that, congrats on the quarter. Howard, maybe a question for you, could you tell -- good results I think in a really challenging environment. Could you talk a little bit more about the linearity of the quarter? And maybe how is November trended thus far versus maybe past Novembers? Yes. So the pattern of linearity when we look through Q3, it was not unlike what we saw in Q2. I think some of the factors that we saw that we referenced even in our call on Q2 played out in Q3 in terms of just some of the decision-making processes within the customer base, took a little bit longer, but there was at least a steady momentum as we move through the quarter, particularly in the last month of the quarter, so that was pleasing. I think the thing that really stood out for me was that our customers are doing so many different expansion transactions with us whether it's adding users or adding product. So we had a record number of expansions for the quarter, but those tended to be smaller and that really indicated though that our customers are applying a level of consideration to the purchases they make, but weâre going to charge durable growth, they continued to make those purchases and continuing to grow with PagerDuty. So that was for us was a really positive sign and we expect that trend to continue. Got it. Maybe just one other guidance question. I appreciate the billings guide for Q4 and normalizing for the multiyear prepay. Yes, I guess thinking more about the assumptions in your guidance, are you assuming that we kind of get a December and in your case January budget flush? Just sort of curious, are you assuming things kind of stay the same from a demand perspective? Just a little bit more perspective on that? Yes, I mean we typically do see that for companies with calendar year ends that there is a certain amount of increased activity in December, so December is never a quiet month for us, even with the holidays and January again ends up being for those companies that are able to gain access new budget tends to also create a fair amount of momentum for us. We're still expecting that trend to continue even within the current macro environment on how that plays out exactly in terms of what people are prepared to spend and the size of checks they're prepared to write, that we'll have to see. But certainly our pipeline is really strong coming into Q4 and we certainly are seeing that customers interest particularly in our platform as a mechanism to be able to help them reduce, spend or for them to be able to be more efficient or consolidate spend across a number of niche vendors is coming to the full. Apologies for the technical difficulties earlier and congrats on the great results and on the operating margin surprise. Howard, great work. Just on that vein, Jennifer, in this challenging environment and Howard, obviously the macro uncertainty is out there, you've highlighted that on the call. How are you thinking about optionality with regard to balancing growth and profitability at this point? And how are you -- how should we be thinking about margins in the future? I mean, I know that we always ask for more and more and more so I figured, I'd throw that out there, but I mean the fact that you guys have big milestone for you guys, love to just hear directionally how we should be thinking about that? Thank you. Well, I'll take a crack at that and then Howard you can jump in. First of all, we are incredibly proud to hit the profitability milestone this quarter, quarter early, it was a lot of work from a lot of people across the organization to structurally improve our cost base, not just make sweeping headcount changes for instance. And I want to congratulate our teams, because they've been incredibly disciplined with our capital allocation, which has enabled us to continue to invest in innovation and you've seen a slew of new products and services that we've come out within the last couple of quarters. We now have an installed base that is available for us to attach those products and services. So from a growth perspective, a lot of that investment is right time, right place for us to go-to-market in an environment where our offerings which improve efficiency, improve productivity, reduce revenue risk, are very relevant and timely. So I feel like we've put ourselves in as good a position as we can be in given the macro and while I can't see the future or tell you what's going to happen next week or tomorrow. What I can tell you, is our customers are incredibly engaged. I've been spending a lot of time with customers. In the last couple of weeks, we had a large team at Reinvent where customers really want to learn about automation, it was a strong quarter for automation, for instance. And you see that in that large cohort -- large customer cohort of customers over 100 -- spending over $100,000 growing 31% and also the expansion volumes. So we are absolutely still investing in growth, but being very disciplined and balanced around capital allocation to make sure we can progress against our Rule 40 goal and that we can demonstrate that we are a profitable, durable growth company long-term. Yes, and I think what I would add to Jen's comments, is, if you have a look at the achievement this year where our guide points to 700 basis points to 800 basis points improvement over last year, we've really laid the foundation to continue to improve and expand our margins into next year and I don't expect the rate of change around that improvement to slow down. And along with that, even this year, we expect our free cash flow to be one or two points better than where we end from an operating margin perspective. And for us that becomes a point of focus for next year. Like how do we ensure that our free cash flow margins are also continuing to be strong, so I think we've laid really good foundation. So, we will give you more detailed guidance, of course on our Q4 call, but you can see from the pattern that we've been following how we expect to continue to execute. Okay. Just to follow-up real quickly, just makes it sound like, just to be clear that you are not giving up any growth for the fact that you're profitable, so that we can continue to see some leverage and the strong growth that you've been delivering. Yes. So we're not providing any specific guidance on growth for next year. We provided the guide for this year, but we certainly again to Jenn's comment control in what we can control. We know that we have created a -- an operating model that is sustainable for the long-term and we expect to be sustainably profitable and to be a profitable grower. Of course, the macro is an environment that is subject to all kinds of things. Yes, great. Thanks for taking my questions. Kudos also on the quarter and profitability and all that good stuff, so just thinking about your commentary around new logos, seemed to be a bit more challenging in this environment for anybody, and your net new customer add number, I think was kind of down relatively speaking to prior quarters and so forth, but you speak -- spoke very bullishly about cross-sell upsell expansion and so forth and the pipeline there? Net expansion is coming in a little bit, obviously it's comping against really good numbers, but how should we think about overall relative growth, overall revenue growth relative to net expansion in that delta from where it is today to maybe in a tougher environment for new logos? And I know there is a timing difference in everything and so forth, but should we expect less from new logo contribution if we look out over the next three to four quarters? Yes. So, Chad. I think what I would say is that if you look at our business, our growth primarily comes from expansion. So we tend to have a small land and customers grow with us over time, so lands are important but expansion is always the near-term opportunity for us from a growth perspective. When we look at lands what's also important for us is the right kind of lands, so this last quarter, we had over 100 enterprise and mid-market lands that we saw was really healthy and strong which lays, a good foundation for us for the future. So the contribution from new -- within the first year always remains relatively small new logos. For us, of course, the fact that we do have such a strong installed base that is able to take up new products and add users and can do that with ease and can get to value really quickly, there is a total cost of ownership equation there that doesn't require a whole lot of effort or so, this is to be able to get up and running, I think puts us in a good place. Got it. And then maybe, any more color, we've heard from a lot of calls in this space, just on renewal and expansion conversations with customers and how customers are being a little more cautious on seat expansion and so forth. I'd love your commentary on that, just kind of what you're hearing, but specifically in the tech sector where you're seeing some pretty healthy layoffs and whatnot and I know you guys are fairly horizontal from a vertical standpoint, but just any commentary on renewal discussion and seat expansion? Thanks. Well. You saw -- like I said, I've been talking to a lot of customers lately. You saw that we continued to see churn below 5%, starting ARR. So very strong retention of the base renewals, those conversations continued to go well, record number of expansions as customers are looking for new ways to automate more, because they are being asked by their own leadership to do more with less. And so I think all of the automation we've built into the platform from detection to orchestration and all the way through to auto remediation is super relevant and timely in this moment. What I would tell you is it's more that, there are just more approvals in the process like we don't see deals moving out of the pipeline. We don't see deals going to competition. We just see things taking longer, because there's more diligence associated with how these deals get done. And in long-term, that actually may be good for us, because more and more senior people are going to understand what PagerDuty does and what our value proposition is et cetera, it is little annoying right now, and when you think you're done and then you find out there is two more approvers, you have never met us before that this has to go through just because they're trying to control and constrain spend at the top. What this is definitely show me in the conversations that I've had with customers, we truly are essential infrastructure. We saw that even in the pandemic when customers, sort of, pump the brakes while they were trying to figure out everything else that they had to figure out at the beginning of the pandemic, when you see those additional approvals come out, we ultimately sort of win the day. Like I said, it's just taking a little bit longer. I really like what I'm seeing now in terms of engagement around, some are more advanced use cases, then I think the market probably doesn't understand yet how important flexible workflows are which we aid recently flexible workflows enable really opening -- big opening up of lots of different types of use cases that our customers are looking to leverage PagerDuty for, it's one of the most requested feature sets that we've been asked for over the years and it's really building catalytic capability and IP into the core platform. So I'm really excited about the discussions that we're having there as well. Thank you for taking the questions. You know, Jen, that's actually a good segue, because my first question here is going to be on catalytic, right? Obviously, it seems like some pretty compelling, your capabilities that you acquired there. So I would love to get an update kind of the overall integration progress timeline, but also how those capabilities are impacting the conversations you're having with customers and potentially contributing to the expansion, we're seeing in the user base at this point? Well, one of the critical success factors for us is always been to make the app that our users are engaging with a simple and usable as possible, because very often using us in a moment of significant duress or stress. And so for me, it felt like a really natural next step to really move into no code or low code workflow automation, because you can't get much simpler than sort of drag and drop. And what we've learned, particularly as we've gone into large, large enterprise, highly regulated industries, industries that have very specific requirements where they want to use us for risk mitigation or healthcare environment, et cetera. They want to change what has been historically a very deterministic workflow and so flexible workflows and no code workflows really open up a lot of that opportunity for us and just make it easier for customers to deploy PagerDuty's automation into different types of incident response process and more broadly different types of interrupt work. And I just can't tell you, I mean maybe that's because I'm from the Midwest and Catalytic as a Chicago company, but we're thrilled with that team. It's a great group of technologists, we're thrilled with how well they're advancing and progressing. And in fact our automation product had a much improved quarter this quarter as well. And so we were last quarter I think we talked about automation deals being a little bit larger and taking a little bit longer. This quarter we saw strong attach there. So really good to see some of those inorganic investments starting to take hold within the broader business. That's very helpful. And then maybe one on the federal vertical specifically, historically something you guys have talked about as a kind of a key parts that $1 billion growth as per aspiration. Obviously with the government fiscal year ending Q3, we'd love to just get kind of a broader update on progress there, maybe contribution that you're seeing today. Well, today Federal is a small part of our total ARR. We do see a lot of customers in the SLED, state and local government education and we are underway with our FedRAMP certification process, which will, I think open up more and more opportunities in Federal, so that's more of a forward-looking opportunity in my view. We did -- I talked earlier in my prepared remarks about a large aerospace companies Fortune 100 company and what I loved about that deal is they are a customer that was able to tell us they realized tremendous return on investments 30 times their initial investment and a very high ROI and so they really doubled down on our products and services. And we'd like to see that kind of advancement in these tightly regulated industries because it demonstrates how truly horizontal PagerDuty can be. If you get the [indiscernible] here in Scottsdale, this week, but hopefully we'll see you in Phoenix at the game, right? Hey, listen, so actually apologies in advance if you addressed this already. I missed the first part of all. Last quarter you called out the digital operations business accelerated year over year nicely and I was wondering if -- I was wondering how the business trended in the quarter and through the first month of this quarter if the shape of the uptake is changeable? Yes, so I can comment on that Fred. In terms of digital operations, right, digital operations skew if you like, is one of the opportunities for customers to acquire additional products. So it's the add on from our business plan that allows customers to incorporate the event intelligence product amongst some other capabilities, so we continued to see strong demand for that, particularly as customers are trying to -- keen to leverage the capabilities of our event intelligence our AIOps solution, which helps them being more efficient and helps them respond more quickly to issues. So this quarter, again, we saw a strong multi-product attach which is, Jen commented in her script that more than 50% of our ARR is coming from customers with two or more products and the product attach is across AIOps and across the process automation piece. And just a quick follow-up, do you find that AIOps tend to behave from a demand perspective, more acyclical versus is it a response? Or are they more similar in terms of the pro-cyclicality relative to the environment? Thank you. Yes, so I don't -- I'm not aware of any discernible difference in terms of how the buying behavior changes around that. I think it's often related to the maturity of the customer. So we have a maturity model that we often discuss with customers that take them from being reactive to being predictive and as companies go through their own journey, the event intelligence AIOps products seem to fit in naturally with that progression. So whether they were ready at that point or aspiring to get to being a level of being proactive, then the Event Intelligence product fits in really well. So, sometimes it's a function of that more than anything else. No, I think you nailed it. It's more about digital maturity and how an organization is organized, some teams are early adopters of analytics in the flow of a production environment. Others have more of a centralized mindset where they will analyze incidents after they happen and then try and affect learning by integrating AIOps into the core operations platform, it means you can do both. And the product serves at high scale both distributed teams and centralized teams and where we -- I think saw some momentum this quarter, was a number of customers that have paid for point solutions in the AIOps space and seeing the value of being able to not only leverage AIOps from an analytics perspective and learning perspective, but being to action on that data and information immediately and inside the same platform without context switching, which is a huge time saver and money saver. And potentially a way to get to predictive much faster because the idea of AIOps as you're looking at events and preventing those events storms from becoming major incidents as opposed to just learning from incidents after they happen. So having AIOps incident response and automation all integrated into one platform is one of the things that makes us really unique and drives a lot of value. Thanks for taking my questions. It seems like the business is holding up really well. So I want to touch on something that everyone has touched on a little bit but record number of expansions in the quarter, they tended to be a little bit smaller. So how is the profile of those expansions changed over the past few quarters thinking about from a seat expansion versus a feature expansion standpoint? Yes, so I can comment on that. To begin with, So what we have seen is that with customers with that change in profile, there has been, if you like a slower uptake of users or seats and the customers are making smaller purchases of seats than what they would ordinarily purchase, we have on the other side, the same customers being eager to adopt incremental products, which then helps them with their digital maturity that we just spoke about. So it's a little bit of a mix, but I think the beauty of our model is that we allow customers to buy what they need when they need it like you don't have to sign like a large deal with us that you then drawdown over time. We've been able to model supported by self-service regardless of where you are, what kind of size company you are, to acquire the seats or the users that you need, when you need them and we've certainly seen customers taking that approach of incremental purchases as they need them. Right. Makes sense. And Jen, you mentioned customers looking to do more with less. So in the case that a customer is slow in hiring or is not expanding seats as quickly? Could that be a catalyst to start looking at more automation features? And we definitely seen that, we've seen that both inside of IT and outside of IT. I think it creates a huge opportunity in Customer Service Operations. I think it's going to create opportunities across the business, particularly with flexible workflows coming out, but for sure, we have definitely seen a transition in the conversation from, I just want to advance my DevOps transformation to how can you help me do more with less. How can I reduce that toil on my precious developer team and enable -- not that they are precious but they are precious resources and enable them to more effectively focus on high value impact. The other thing that I would say is that even in a difficult macro environment, incidents don't go away, and in fact they become much more expensive because it's harder to attract new customers for almost all businesses. So if you've paid to get a new customer into your product experience, and then something goes wrong, that loss is much larger, the longer it takes you to detect it, to understand it and then recover from it. And so I think that's one of the things, the fact that incidents are very expensive business for all of our customers that has made us essential infrastructure in an environment like this, and I would say there is just more of an appetite now even for individuals who historically might have been worried about being automated out of a job. There's much more appetite for how can I demonstrate and more productive by using automation right we're even encouraging that across our own business like encouraging our employees to use automation instead of doing things manually to improve the productivity of their team, so that they can increase their own capacity. Okay. It looks like we're down to a couple more hands up, We have Andrew Sherman from Cowen. Andrew, go ahead please. Great, thanks so much, [Derick] (ph). Congrats on the quarter Jen, the big aerospace win was impressive. I think that kind of customer in industry is somewhat new for you, could this become a larger trend as those kinds of customers and industries grow their digital maturity? Well, we have definitely seen a lot of momentum over the last couple of years frankly in highly regulated more traditional industries as more and more of their business has become digital and it's that digital transformation is not something you can sort of stop midway through and kind of take a break, like it's something that's going on Rathi Murthy, who is the customer and a Board member who was talking about. Expedia's digital transformation yesterday or two days ago on AWS stage, and I mean it's a multiyear, sometimes multi decade challenge. Well, one of the things I like that I'm seeing about our business is even some of the most traditional industries that have historically been slow to adopt digital automations slow to shift the way, they do DevOps or SRE, are coming to PagerDuty and making big bets on us. That deal In particular, one of the things I liked about it was total platform included automation and multiyear. So that's a long-term partnership but we're going to learn a lot from that as well, but it was a customer who had been with us before, seen very immediate high value and made it -- made those discussions much easier in terms of how you expand on the renewal on the back of that. Yes, that's great. And it sounds like the U.S. had a strong quarter. But I wanted to ask about Europe and others performed relative to expectations? And what your expectations there are going forward? Yes. The Americas did have a good quarter and as I said earlier mid market and enterprise continued to post strong results. Europe, as we mentioned last quarter, we definitely saw more pressure and more diligence deals there, but deals are getting done, I mean I just heard yesterday about a big customer, I'm not going to share all the details, so I can save some fun for next quarter but like I said, customers are very engaged. It's just taking them a bit more time to get organized around how they're going to make investments and again from a European perspective, Europe represents about 13% of our revenue. So again being diversified, making new investments in places like Japan that gives us the ability to continue to grow the business even as we see some mix in economic health or macroeconomic health around the world. Okay. Hey, Jen. Hey, Howard. Thanks for taking my question, squeezing me in here. Appreciate it. Hey, Tony. So I wanted to touch on the vendor consolidation point, which you guys touched on sort of second quarter in a row where you -- where Jenn, you've mentioned that a little bit in, I wanted to try to flush that out a little bit. I mean, obviously, you have a lot of coverage I think, all of us are dealing with companies that could be pressure from that trend, potentially, if we get into tough environment, it seems like you guys are seeing potentially the other side of that. And so, is that -- what areas is that in? Is that AIOps where we have a mixed system, private vendors and some public vendors trying to do it, where you guys have certainly a brand advantage and a platform advantage? Is it digital operations more broadly? Can you just -- any color you can add there would be great? Thanks. Yes. We're seeing in AIOps for sure and more broadly in spaces across the incident response lifecycle or digital operations lifecycle where a lot of point solutions have popped up and they do one thing, maybe they do on call or maybe they do SRE or maybe they do AIOps or something else. Even have customers that ask us to help them leverage our event intelligence data to understand which of their observability tools are adding the most value because they got a lot of observability and telemetry instrumentation in their environment, and they are looking for ways to reduce duplication. And I think that is kind of a key theme is nobody wants to have three of the same thing if they could be effective with one, right? And I agree that with your thesis that we are benefiting from a consolidation perspective, I think it's not just because we have multiple solutions on the platform, it's because our platform is easy to deploy, fast time to value and frankly delivering a very high ROI in a short order. And I think that's very attractive to our customers right now as opposed to some of the larger long cycle, long deployment environments they would need to be in, where they've got to bring in a lot of contractors to help them get up and running. Sure. Well, I just want to say thank you so much for all of your questions, and to all of you who have joined us today on our earnings call, we are very proud of our results and we continue our track record of durable growth and our -- and I'm pleased that we're demonstrating that ability to balance growth with expanding operating margins and achieving profitability a quarter ahead of our previous guidance. In this environment, I think PagerDuty's Operations Cloud is very well positioned, because we do help customers with mission critical challenges, we help them protect their revenue and reduce their own cost run rate, and importantly, I want to thank our customers for their trust in us and again just thank all of our lieutenants around the globe for their hard work, their resilience and for delivering another successful quarter for PagerDuty. Thank you.
EarningCall_1894	Good morning and good evening, ladies and gentlemen. Thank you for joining, and welcome to Chindata Group Holdings Limited Third Quarter 2022 Earnings Conference Call. We will be hosting a question-and-answer session after management's prepared remarks. Please note that today's event is being recorded. I would now turn the call over to your first speaker today, Mr. Don Zhou from Investor Relations of Chindata Group. Please go ahead, Don. Thank you, Operator. Hello, everyone. Welcome to Chindata Groupâs 2022 third quarter earnings conference call. This is Don from Investor Relations team of the company. With us today are Mr. Huapeng Wu, our CEO; Mr. Nick Wang, our CFO; Ms. Zoe Zhuang, our Finance VP; and Ms. Joy Zhang, our General Counsel. During this call, Nick will take you through the quarterly review of our operational performance and Zoe will present our financial results. Management team will be here to answer your questions afterwards. Now, I will quickly go over the Safe Harbor. Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our filings with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, which is distributed and available to the public through our Investor Relations Web site located at investors.chindatagroup.com. We have also updated our quarterly presentation on the company's Investor Relations Web site, which you can refer to as a supplementary material for today's call. Thank you, Don. Hello everyone, and thank you for joining the call again. The company continued its solid business performance in the third quarter of 2022. The close collaboration between our team in China and Southeast Asia led to a record nine straight quarters of upbeat financial performance. Revenue in the first nine months in 2022 has already surpassed that of full year 2021, and we are raising our full year guidance for the second time in a year. With the increasing demand for digital infrastructure globally, as well as the catalyst provided by the East Data West Computation policy, the company sees its advantages in hyperscale business to be even more apparent. We will continue to do the right thing in a correct manner to consistently build our capability, to strengthen our research and development, to enhance our competitive power to operate our business in a prudent manner, so as to create long term value for our clients, partners, investors and other stakeholders in a sustainable way. Now let's start with some key highlights of the third quarter. On Slide 4, we added one new project, hold an additional 45 megawatt new capacity in the third quarter, burning our total capacity to 821 megawatts and total number of data centers to 31. We put three data centers into service, bringing our total in-service capacity to 579 megawatts, an increase of 68 megawatts during the quarter. Demand and ramp up remains healthy and strong. We received an additional client commitment of 49 megawatts in the third quarter, burning our total contracted and IOI capacity to 700 megawatt, leading to still a healthy client commitment rate of our total capacity at 85%. Another 53 megawatts was put into utilization in the quarter, bringing our total utilized capacity to 454 megawatts and a solid utilization rate of 78%. We continue to devote resource to innovation and research and development for better data center solution. Our total approved and pending patents by the end of the quarter reached 400 compared with 361 in the previous quarter last year. Our consistent effort in innovation is earning more recognition. Recently, in November, our hybrid evaporative cooling technology catering to high computing power demand in data center was awarded first prize of data center science and technology achievements in CDCC national summit, making tune data the only third party data center company that is winning such prize for two straight years. Financially, our top and bottom line momentum remains strong and healthy. Revenue was RMB1,202.7 million for the quarter, which is up 52.4% year over year. Adjusted EBITDA was RMB614.5 million, a 66.8% year over year growth with a margin of 51.1%. GAAP net income was RMB241 million for the quarter, which is a 207.4% year over year with the margin up 20%, new high. Regarding our 2022 guidance, which is raised for twice this year, we currently expect our full year revenue to be in a range of RMB4.33 billion to RMB4.43 billion, which is a RMB200 million increase in midpoint compared with the previous guidance. We expect our full year adjusting EBITDA to be in the range of RMB2.2 million to RMB2.26 billion, which is a RMB90 million increase in midpoint compared with the previous guidance. Now let's go into the details of our product construction and delivery on Slide 7. Our delivery is generally in line with the original schedule as we put three projects into service in the third quarter with a total capacity of 68 megawatts, CN14 and CN18 located in our Shanxi and Hebei province campus respectively, are supporting the business of our anchor client. BBY01, the Indian project with the design capacity of 20 megawatts aims to support one of the key international clients. We are further expanding our capacity in the promising APAC emerging markets as we put MY06 phase three, a 43 megawatts hyperscale project under construction, aiming to support our anchor client overseas business. The project is scheduled for delivery in 2024. MY06 phase three, together with MY06 phase one/two that we previously disclosed, makes up a hyperscale data center campus of over 100 megawatts in Johor, Malaysia, currently the largest overseas campus of the company. With the above changes in the third quarter, as you can see on Slide 8, we have brought our total capacity up by 45 megawatts, reaching 821 megawatts by the end of the third quarter with 579 megawatts in service and 242 megawatts under construction. For the first nine months of the 2022, we have put a total of around 139 megawatts into service. Among the under construction capacity by quarter end, we currently expect another 35 megawatts of them to be delivered in the rest of 2022. Our MY03 project originally scheduled for delivery in this quarter is slightly delayed to the fourth quarter. We expect another 164 megawatts to be delivered in 2023 and 43 megawatts to be delivered in 2024. Now let's turn to our clients and demand on Slide 10. We continue to serve our existing clients and supporting their healthy growth as a trusted partner. The momentum on overall demand from our unique client base remains strong and healthy. Our total client commitment increased by 50 megawatts in the third quarter, mainly contributed by two major projects that aim to support core business of our existing clients. Specifically, we received the 11 megawatts IOI from project CN19 in our Hebei province, supporting the key international client and our 38 megawatt IOI for project CN20 in our Shanxi campus supporting the anchor client. Meanwhile, 3 megawatts of IOI was converted into contract during the quarter on product CE01 in Yangtze River Delta region supporting the key international client. For the first nine months in year 2022, we have received a total of around 110 megawatts of client commitment, representing a 19% increase from end of last year. We therefore continue to maintain a very, very healthy client commitment profile for our asset portfolio. On Slide 11 for our existing 579 megawatts of in-service capacity, 96% of them are committed by clients in either contract or IOI in the third quarter compared with 95% in the previous quarter and 88% in the same quarter last year. For our total capacity on Slide 12, 85% of them were committed by clients by the end of the third quarter compared with 84% in the previous quarter and the same quarter last year. In addition, the majority of specifically 85% of the existing contract of our contracted capacity remains to be in 10 years term and the weighted average remaining term per contracted megawatts by the end of the third quarter is around 8.27 years. Our unique client base and such solid contract profile has driven our performance in the past is further providing strong visibility of our business into the future. Now coming to customer move in on Slide 13. Our consistency in high quality and fast delivery combined with our healthy and differentiated client base led to another quarter of better than industry ramp up performance. We added 53 megawatts of utilized capacity in the third quarter, bringing our total utilized capacity to 454 megawatts compared with 268 megawatts in the same quarter last year, which is 69.3% year over year growth and 13.1% quarter-over-quarter increase. Quarterly move in was mostly contributed by projects in our Shanxi and Hebei campus in China that support the anchor client, as well as the BBY01 Indian product for one of the key international clients. A better sense of the faster than industry ramp-up of our portfolio can be obtained if we take a closer look at the ramp-up data of several projects that weâll put into service in year 2022. CN11-C reached over 90% utilization in less than four quarters. CN12 reached a 90% utilization in three quarters. CN14 took one quarter to reach 47% utilization. And if we further looked back at all the hyperscale projects of the company that were put into servince since 2020, it took on average 2.94 quarters for contracted capacity to reach over 90% utilization. Finally, our utilization rate by the end of the third quarter remained very healthy, standing at 78% compared with 78% in the previous quarter and 72% in the same quarter last year. Meanwhile, based on our existing client commitment, we have 246 megawatts of client commitment unutilized by end of the third quarter, which is around 54% of our current utilized capacity. [Beyond] the solid performance of our business in China, we would also like to share the recent new milestones for our development in the APAC emerging market. On Slide 14, on October 20th, the company celebrated the grand opening of the project MY06 in Sedenak, Johor, Malaysia. The entire MY06 project, as we just discussed, holds a design capacity over 100 megawatts among which 19 megawatts has been recently put into service in October, leveraging on company's innovative construction and design methodologies. The construction of the 19 megawatts or MY06 phase one as disclosed was completed in a record time of around 11 months since breaking ground in November 2021. The completion of such project has also made Bridge Data Centres, the company's APAC subsidiaries, the first company was Malaysia Digital status to complete a construction and hand over the business ready hyperscale data center in 2022. Excluding the delivery of MY06 phase one, by end of the third quarter, the company has 40 megawatts in service capacity and another 120 megawatts under construction in APAC emerging market, as well as the Thailand project to be further expended. In addition to such, we have a 65% client commitment ratio for these capacities, solid relations with existing client on existing project and an experienced local team, and we have been actively engaging with existing and potential clients in China and region for further cooperation and opportunities in APAC emerging market. We feel very confident that more can be achieved in the coming quarters and in the future in this promising region. Now let's take a look at the snapshot of our asset portfolio by end of the third quarter. Business in Greater Beijing region remains the key engine of the company accounting for 75% of our total capacity and 94% of our utilized capacity, while enjoying the highest utilization ratio of 83% among all regions that we are operating. APAC products are taking a larger share in our under construction pipelines, accounting for 49% of our total construction capacity. Our early judgment in site selections in Greater Beijing region and our differentiated way of doing business is consistently generating healthy resources, which further enable the company to tap into different regions for business opportunities and to establish a more diversified business play out. On other aspects of our business on Slide 16, the company issued its latest ESG report on October 18th, which is the third annual ESG report of the company. We have now set zero carbon as the company strategy and a D-A-T-A or data as our ESG strategy ecosystem; D represents decarbonization, implying our ongoing effort in adopting green energy for zero carbon emission; A represent alignments, indicating our stance on aligning with our industry and supply chain partners for a shared and prosperous business ecosystem; T represent technology, which is the gene that will continue to drive the company to lead the innovation and development of the industry; the last letter A represents the advanced attitude taken by the company to consistently driven the sustainable development of the industry. More information of the ESG report can be obtained on the company's Web site. Regarding other effort on sustainability, we entered into a green loan agreement in September with a bank on project financing for our project in one of our Hebei campuses. The loan is aligned with green loan principles 2021 edition with all loan proceeds intended for green building, renewable energy and energy efficiency related to the project. On Slide 17, our effort on innovation and research and development. We are winning wider for our technical solutions. On November 9th, the company's hybrid evaporative cooling technology catering to data center high computing demand was awarded the first prize of data center science and technology achievement on China CDC summit. The award authorized by National Office for Science and Technology is recognized as a prestigious national level award for data center industry. The company has been awarded first prize for two consecutive years, being the only third party data center company to have achieved such. The technology is a perfect demonstration of our ongoing effort in pursuing the mission of efficiently converting electric power into computing power. It owns 18 patents and its combination of numerous sub-technology that leads to a result of estimated 358 days of natural cooling per year, estimated annual PUE of 1.16 and the best energy efficiency achievable for liquid cooling solution. With these, I have concluded my part on our operating performance for Q3 2022. And I will now turn it over to Zoe for details in our financial performance. Zoe, please? Thank you, Nick. Now let me walk you through our quarterly financial performance. Our financials remain on a healthy momentum. On Slide 21, revenue in the third quarter increased by 62.4% year-over-year or 15.9% quarter-over-quarter to reach RMB1,202.7 million, which is in line with our steady ramp up. Looking further down on Slide 22, total cost of revenue in the third quarter increased by 74.2% to RMB736.5 million from RMB422.9 million in the same period of 2021, mainly driven by increases in utility costs and depreciation and amortization expenses. Selling and marketing expenses in the third quarter of 2022 decreased by 43.7% year-over-year to RMB15.1 million, primarily due to less share based compensation expense and less marketing activity. General and administrative expenses in the third quarter of 2022 increased by 36.1% year-over-year to RMB116.1 million, primarily due to higher share based compensation and professional fees incurred during the period. With this, operating income in the third quarter of 2022 increased by 72.2% year-over-year to RMB317.5 million with a margin of 26.4%. Net income in the third quarter of 2022 increased by 207.4% year-over-year to RMB241 million with a historical high net margin of 20%. For further breakdown of core cost and expense items on Slide 23. Regarding utility cost, itâs recorded at 97.3% year-over-year growth, faster than revenue and accounted for 32.8% of total revenue in the third quarter. The increase was mostly due to a combination of increase in utility unit cost in Hebei campus as a result of adjustments in utility cost of fee charging mechanism leading to a higher flow of utility costs as we have disclosed in last quarter, and a higher revenue proportion contributed by Hebei campus as the majority of the additional utilized capacity in the quarter came from the projects in this region. Maintenance and other costs and adjusted SG&A expense were well maintained within our reasonable range, a result of the economy of scale of our business model as well as the stringent cost control effort of the company. With this, on Slide 24, our non-GAAP profitability remained healthy. Adjusted EBITDA in the third quarter of 2022 increased by 66.8% year-over-year to RMB614.5 million from RMB368.4 million in the same period of 2021. Dynamics in utility costs has led to a slightly lower adjusted EBITDA margin in the third quarter, but still over 50% at 51.1%. Adjusted net income increased by 162.8% year-over-year to RMB294.3 million, hitting a historical high margin at 24.5%. Details in the GAAP to non-GAAP reconciliation on the EBITDA and net income would be available in our 6-K filing or the appendix in our IR PPT. Now let's take a look at our cash and debt position and our CapEx on Slide 25. We continue to work in our business expansion to meet the increasing demand from our customers by investing more capital into our under construction data centers. CapEx in the third quarter was RMB1,325.4 million and the CapEx in the first nine months of 2022 added up to RMB3,558.1 million, almost the level of year 2021. The financing channels remain open and secured for the company and we continue to draw down financing for our project development, ending up in the total debt position in the third quarter of RMB8,416.1 million. Generally speaking, we do have major loan on debt facilities to mature in 2023 or 2024, only minor ones based on some of our project loan payback amortization schedule. Regarding the cash flow dynamics in the third quarter on Slide 26, a one off delay in payment collection due to clients' internal system upgrade and COVID-19 lockdown issues leads to an negative cash flow from operation in the quarter, which has mostly recovered following the end of the third quarter in October and November already. And negative cash flow from operation, coupled with RMB1,433.6 million cash flow from investing, offsetting by RMB726.9 million cash flow from financing and the effect of exchange rate changes of RMB104.6 million, led to a lower cash position by end of quarter at RMB4,987.9 million and a net debt position of RMB3,380.4 million. Now let's take a look at some key leverage and coverage ratios on Slide 27. On leverage ratio, net debt to last 12 months adjusted EBITDA ratio stood at 1.6 compared with 1 in the previous quarter. The [seemingly] increase can be moderated if we exclude effect from the one-off payment collection issue, while the total debt to last 12 months adjusted EBITDA remained at 4.1, a similar level with the previous quarter. Our coverage ratios continue to improve as we maintain our strong profitability with our last 12 months adjusted EBITDA to interest ratio rising to 8 compared with 6.7 in the previous quarter. We maintained a healthy capital structure under the current challenging market environment with our total debt to capital ratio standing at 44.1% compared with 41.6% in the previous quarter. Our prudent financing policy, healthy cash generation, asset return and profitability have together made this possible. A better sense of the company's return profile can be referred to on Slide 28. A 78% IT capacity utilization ratio of the company by the end of the third quarter yielded a pretax ROIC of 16.5% compared with 17% in the previous quarter and 15.3% in the same quarter last year. Finally, on our 2022 full year guidance, given strong business momentum, the company raised its 2022 full year guidance, which is the second raise during the year. Full year revenue guidance is raised by RMB200 million at midpoint or a 4.8% increase compared with the previous guidance, now in the range of RMB4.33 billion to RMB4.43 billion. Full year adjusted EBITDA guidance is raised by RMB90 million at midpoint or a 4.2% increase compared with the previous guidance now in the range of RMB2.2 billion to RMB2.26 billion. First, I would like to congratulate on the [following] results. And my question is about the demand outlook. As management previously indicated that per year, 120 megawatts to 150 megawatts annual addition of the new order should be a reasonable target. But actually, up to now the company sees a pretty strong demand. And I would like to ask whether this is sustainable and whether there's any pull forward of the future demand and how to look at the new booking in the next few years? Especially, I want to hear more color that whether the demand in China and the main overseas market are different? I think before our CEO, Huapeng chip in and answer your question and also logic and behind our judgment, I can assure you that there is absolutely no pull forward about future demand into this year. And also our forecast into the future, which in the midterm, 120 megawatts to 150 megawatts increase of capacity on a per year basis is going to be a sustainable number to use. I'm going to turn over to Huapeng to give you the logic behind our expectation on the demand side and on the supply on both China and overseas. Huapeng, please? So we will divide the question into two aspects. For the short term demand, to answer your question, we can see that either from China or from our foreign overseas clients, the demand has been very small. From a long term perspective, let's first talk about China. So we will first keep on leverage our current advantage in Hebei and Shanxi where our campus are. We will firstly to keep on making investments and lock up more resources, especially the rare resources such as the power supply, green power and also the energy quota. We also keep an eye on the critical resource allocations in the East and South part of China. For our overseas market, we will continue to secure resources around our current major campuses. Well, in Indonesia and Thailand, we're going to make moderate down payments for the land resources in those areas. As a general principle, we'll only make a substantial investment when we see clear committed demands from our clients. We will still maintain a growth at a 120 megawatts to 150 megawatts growth pace. So thank you management for your time and congrats on a very strong result. My question is about the electricity cost. So we've seen that in the third quarter, it has become north of 30% as a percentage of revenue. So just into the fourth quarter and into 2023, what is management seeing in terms of the electricity price trend and then as a percentage of revenue, what kind of ratio should we expect? Also related to this, since we already delivered our first Malaysia -- not first, our Malaysia project in the third quarter as well. So just wondering in terms of the utility expense as a percentage of revenue, how does that compare to the China part of the business? And as we know in the last earnings call, we have disclosed this mechanism of the unit cost charging, the change already. So this has been fully reflected in our third quarter financial statements already and which results the energy cost to total revenue ratio around 3.8% or 3.5% quarter-over-quarter. However, as we always highlight that our China data center campus are located in areas with abundant power supply power resource and with relatively cost advantage as well. So we estimate that in the near term and midterm, the power price will be relatively stable in the near future. And if there is any power shortage across China, I think that Chindata with our location advantage, we will be least or less impacted compared with other regions in China in either the power supply or the power cost. And your second question is regarding for Malaysia. For all our overseas projects, it takes different model, the power cost is a pass through model. So if there is any fluctuation in the power costs, there will be no impact on the EBITDA side. Thanks for taking my questions. My question regarding the move-in rate of the Malaysia project you opened in October and the revenue contribution from overseas in the next few years. And considering the strong demand profile, could you give us more color on the expansion plan for next year, like the CapEx mix between domestic and overseas? I think for your first part of the question is, our overseas project, especially the milestone on MY06 phase one since we already delivered in October, looks like that the ramp-up rate is very, very fast essentially. And also through the better, I would think a reasonable contract arrangement, we can actually collect the fees or the revenue portion much quicker than the normal contract we had in China. So at the moment, I think the operation is really running smoothly. I think Zoe can answer the question about the revenue contribution and also CapEx allocation for our overseas business. Zoe, please? So overseas business has always been our focus. In the financial year 2021, we can see from the financial statements that overseas business revenue accounted for around 5% of the total revenue. But by the end of the first nine months of this year, the overseas data centers accounted for around 19% of the total capacity and total IOI intention of the customers in overseas accounted for nearly around 15%. And the most important, for those under construction capacity, nearly 50% of the capacity are from our overseas regions, from overseas countries, that is expected, we will have higher growth rates of overseas revenue. And the current estimate is with the gradual delivery of Malaysia and India campus, the percentage of overseas revenue to the total group revenue will significantly increase in next year, which we estimate will be around in the range of over 10%. And I think in the years following, it will keep the increase in trend. And the second question is regarding the CapEx. The capital expenditure at the corporate level are expected to be at a similar level as in this year compared with this year and next year. And both China and the overseas, our CapEx has competitive advantage. But apparently, the overseas project CapEx will be slightly higher than the Chinese projects. So we expect that the proportion will be also larger than the Chinese projects. My question is mainly surrounding the power costs and also gross margin, because I saw that in 3Q, your gross margin actually is down Q-on-Q and year-on-year, while your EBITDA margin is actually up Q-on-Q and year-on-year. So I would like to know maybe you can explain again the power cost calculations for your Hebei projects and what is the proportion of your projects that include power cost versus those that did not include power cost? And also part of that based on your midpoint of your new guidance for the full year, that implies that your fourth quarter EBITDA margin will drop on a Q-on-Q basis. So I wonder whether that's because your guidance is conservative or whether there are any other reasons? I think both Zoe and I can answer this question in multiple ways, but I'd rather let Zoe to state some facts for our Q3 utility cost increase. Please, Zoe. As we explained that the energy cost to total revenue rise around 3.8% quarter-over-quarter, and in this quarter compared with last quarter. But if we look at EBITDA margin, that we stayed at 51.1% this quarter and compared with last quarter, it's only, I think over 1% difference as this is offset with other expenses like the maintenance costs and other costs as well and this is offset by the economies of the scale. And the reason for this is in the Hebei province in the third quarter, there is a electricity cost increase around, I think, 15% in that region. And this has been -- this is due to the state grid has changed their charging system, charging mechanism. So this has been reflected in our full year guidance already. So this is your first -- this is the first question. And second question is regarding the full year guidance, we took a very prudent way. So you can see that as the company has always been -- we have hit the record -- hit market consensus for nine consecutive quarters. So for the full year guidance, we still take very consistent and very prudent, very conservative estimate. And also for the full year guidance, there is new substation supposed to be on live, but -- go on live. But considering current China COVID-19 lockdown situation and we think there might be some postpone, so we also take this as -- take this factor into consideration. So the full year guidance is very conservative. But anyway, the company, the management team and the delivery team will try all the best to ensure the substation will be on live, go on live timely. And if that will be the case, I think the performance will be a little bit better than our forecast. Edison, one thing I want to add is actually the Q4 expected construction of the 220 kilo-voltage substation is only onetime effect, and that's only the potential and possible onetime effect. So there is more upper side on the previous guidance based on the prudent style we always demonstrated. But the reason for building that 220 kilowatts, I want to emphasize is for the future protection of the capacity. Because as of previous quarter, as we disclosed, we have so far signed up to 500 megawatts, 500 megawatts total capacity in the Shanxi region. Right now, we have roughly 250 megawatts, there's going to be 250 megawatts more capacity. And as Huapeng has rightly point out, the early we can lock in our resources in the energy abundant region, the early we can secure all the necessary infrastructure, the better chance we'll get from the future orders and big order from our anchor customers. So we think that move to build a larger scale substation is absolutely a necessity for us and we want to make it happen as fast as possible. So thank you for the chance to ask a question again. My second question is regarding the rental price. So first of all, in the domestic market, I'm wondering what is the -- over the past two quarters, let's say, what is the new contract pricing versus the historical level? And then also for the offshore projects in Malaysia from our anchor customer, what is the rental price level versus the domestic market? I'll answer first. And for your two questions, first one is regarding the -- the sales price has been very stable for us and especially for the domestic projects, we don't see any change so far. So this is the answer for your first question. And the second question is regarding the overseas sales price. As overseas for this model is different with the domestic model the power is a pass through model, and so in each location, the price is very competitive. And since these are the hyperscale data centers, and as you know, the MY06 phase one is for one anchor customer. So I'm not in a position here to disclose the specific price here. Generally, the overseas price level, there is a two part, one service related, the other one is power related. So if we -- because power is a pass through, I don't want to comment on it, but the service related is higher than China. So I can give you that information. Thank you, everyone, for attending this conference call. As you can see that we probably have a little bit contrarian, I would say, the business momentum undergoing in three ways. Our move-in is very healthy and strong. Our current under construction development projects are very strong, on time and some of them even got delivered earlier under the request from the customer. And third, very important, our future demand, as you can see from the answers from CEO and myself and other management will be ongoing, very strong. And we anticipate that our very initial strategy to find the most efficient way of converting electric power to computing power that continue to play out in the future and bring the higher profitability, not just the operating profitability, I want to emphasize, but the return on asset, return on asset, which is historically speaking at the high teen levels. This is actually more meaningful to all the stakeholders concerned, including both equity investors and also creditors. So that's I want to say. And that the company kind of keep focusing on the efficiency, keep focusing on the hyperscale business scale and keep focusing a balanced investment versus return in the foreseeable future. And thank you for your time.
EarningCall_1895	Good morning, everybody. Welcome. It's good to see everyone here. Thank you for joining us. It is my pleasure to welcome you to our 33rd Annual Goldman Sachs US Financial Services Forum, 33 years. It's a long time. We have a record 114 participating companies and over 1,200 registered attendees. I look forward to this event every year. It's a great opportunity to stop, take stock of everything that's happened in the financial services industry over the past 12 months and to debate the landscape for 2023 and beyond. And this year, we certainly got a lot to talk about. As you might expect, it's been a challenging operating environment, the war in Ukraine, the energy crisis in Europe, rising tensions between the United States and China, inflation, rising rates, their impact on asset prices; the list goes on. Speaking of inflation, we, of course, like everyone else, are focused on it. And for students of economics, the inflationary trend should not be a surprise. Our fiscal and monetary policy pumped an enormous amount of money into the economy as a response to the pandemic. And now the Fed is raising rates and money is no longer free, we've obviously seen significant increase in volatility in markets. The way I see it, while many policymakers are unwinding of policy responses to the pandemic, the global economy is rebalancing itself. And as a result, economic growth is slowing. Our economists expect the global economy to grow by 1.9% in 2023. They believe Europe is already in the midst of a recession, a mild recession. China's economic prospects are uncertain as they start to potentially unwind their zero COVID policy, and they expect the US to narrowly avert recession in 2023. I'm actually slightly more cautious. When I talk to clients, they sound extremely cautious. Many CEOs are watching the data and waiting to see what happens. I get a lot of questions about China and its relationship with the United States, the economic trajectory of Europe and obviously, recession risks. But I'm not hearing panic. Balance sheets are still strong, even with higher interest rates, investment grade markets remain open as clients work on their budgets for 2023, they are revising their economic forecast downward, but not dramatically. They're using cost controls they put in place long ago. They aren't concerned about current stock valuation so much as protecting against future vulnerabilities. And we're seeing clients shift attention away from supply chain resiliency and towards keeping headcount down. When you look at the current environment for financial services and our businesses in particular, the picture is also cautious. We were hopeful that we would see a more meaningful rebound in capital markets activity this quarter, but that hasn't happened yet. On the trading front, engagement levels for the majority of the year have been robust, as we've helped clients manage risks and a viable market backdrop. But so far, this quarter, clients seem to be taking risks down, and we ourselves are focused on prudent risk management. To me, clients seem fatigued after a very viable year. At the same time, we continue to see headwinds on our expense lines, particularly in the near-term. Non-compensation expense is pressured by investments in technology and integration as we deploy resources to strategically grow and strengthen our business as well as the broad impact of inflation. And in terms of our largest costs, our people, the job market remains surprisingly tight, and the competition for our talent, particularly top talent is as strong as ever. So we will continue to seek balance. We will continue to seek to balance an appropriate pay-for-performance mindset with a focus on talent retention at this time. You've already heard from us that we've set in motion certain expense mitigation plans, but it will take some time to realize the benefits. Ultimately, we will remain nimble and we will size the firm to reflect the opportunity set that we see in front of us. Overall, I'm cautious about this macroeconomic outlook, but I am bullish on Goldman Sachs long-term ability to serve our clients and navigate the operating environment as we prepare to start a busy 2023. A couple of months ago, we announced some organizational changes, structuring the firm into three business segments: Asset Wealth Management, Global Banking and Markets and Platform Solutions in order to further strengthen our core businesses, accelerate our ability to scale growth platforms and to improve overall efficiency. One of the benefits of this new structure I found in the last six weeks is our ability to highlight the two big muscle groups of the firm, which comprise the vast majority of our revenues, capital and profits. First, we have a powerful asset management franchise, the fifth largest active asset manager in the world, and alongside it, we have our Crown Jewel Wealth Management business. We focused on performance and client flows, historically drive -- the holistically drive toward our target of over $10 billion in management and other fees in 2024, including more than $2 billion of fees from alternatives. Second, running investment banking and global markets together will help us do even more for clients. These businesses are performing at the top of their peer group over the last few years, and integrating them together gives us the opportunity to maximize share across our world-class franchises in financing, risk intermediation and strategic advisory. We also made a purposeful decision to focus our efforts in consumer. We lean into our strengths and narrowing our ambition. I'm very focused on achieving scale and profitability across our platform businesses, transaction banking and consumer platforms. We feel good about the platforms we've built, and we're encouraged by the opportunities they present. I've also heard from many of you that you like the fact that we further clarified the extent of our consumer ambitions and that we will be providing more transparency on these activities going forward. This reorganization is an important step in our strategic journey. It sets us up to deliver on our medium-term targets and continue to unlock shareholder value. And in February, we'll do our next Investor Day, we will lay out more details and give you specific metrics so everyone can clearly track our progress as we go forward. So even in the midst of a difficult operating environment, we continue to work hard to strengthen the firm. We know progress is never a straight line, but we're excited about the opportunities ahead, and we think we're extremely well positioned for the future. Lastly, I wanted to touch base briefly on culture where we have a renewed focus. Our culture has always been a differentiator. It is distinctly collaborative, which we have worked hard to preserve. It drives our performance, and it's enabled our success across many generations, because we have welcomed thousands of new people to our firm in the past few years, and our global footprint has expanded. And due to the impact of having so many people work remotely for a significant period of time, we've launched a broad new culture initiative to help our people experience the culture in-person with the goal of giving everyone a sense of pride and fostering a sense of shared identity. I am personally super focused on enhancing and preserving Goldman Sachs special culture. And with that, I'd like to kick off our program. We've got a great lineup for you today. Our speakers are going to offer you insights into all the major trends, affecting the financial services industry and the global economy as a whole. You'll also hear perspectives on how the industry's strategic priorities have shifted over the course of the year and what to expect in a world where recession risk looms. So again, thank you all for joining us. I'm now going to pass it off to my partner, Richard Ramsden, and I hope you'll enjoy our conference. Thank you, and have a great day.
EarningCall_1896	Hello. And welcome to RIV Capitalâs Second Quarter 2023 Earnings Conference Call. Iâm joined this morning by Mark Sims, Chief Executive Officer; Matt Mundy, Chief Strategy Officer and General Counsel; and Eddie Lucarelli, Chief Financial Officer. For your convenience, the press release, MD&A and condensed interim consolidated financial statements for the three months ended September 30, 2022 are available on the Investors section of the companyâs website at www.rivcapital.com, as well as on SEDAR. Before we start, please note that remarks on this conference call may contain forward-looking information within the meaning of applicable securities laws about RIV Capital, its investees and Etain, current and future plans, expectations, intentions, financial results, levels of activity, performance, goals or achievements or any other future events, trends or developments. To the extent any forward-looking information contained in the remarks constitutes financial outlook, this information may not be appropriate for any other purpose and you should not place undue reliance on such financial outlooks. Forward-looking statements are made as of the date hereof based on information currently available to management and on estimates and assumptions based on factors that management believes are appropriate and reasonable in these circumstances. However, there can be no assurance that some estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Financial outlooks are also based on assumptions and subject to various risks and the companyâs actual financial position and results of operation may differ materially from managementâs current expectations. As a result, RIV Capital cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on those forward-looking statements. Forward-looking information is made as of the date given and except as may be required by law. RIV Capital undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the companyâs financial results, press release dated November 29, 2022, and the risk factors referenced in the Q2 2023 MD&A and RIV Capitalâs Annual Information Form. In addition, this call may contain certain market and industry data obtained from various publicly available sources. Although the company believes that these independent sources are generally reliable, the accuracy and completeness of such information is not guaranteed and has not been verified due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and the limitations and uncertainty inherent in any statistical survey of market size, conditions and prospects. The company does not make any representation as to the accuracy of such information. All dollar amounts expressed today, unless otherwise stated are in U.S. currency. I would now like to turn the conference over to your host, Mr. Mark Sims, President and Chief Executive Officer of RIV Capital. Thank you. You may begin. Thank you, Operator, and welcome, everyone, to our second quarter 2023 earnings call. I will begin todayâs call by providing an update on our acquisition of New York-based Etain and outlining our U.S. strategy before turning it over to Chief Strategy Officer and General Counsel, Matt Mundy, for a regulatory outlook on New York, followed by a review of our financial results with our CFO, Eddie Lucarelli. Last week, we were pleased to announce that the New York State Cannabis Control Board or CCB and the New York State Office of Cannabis Management or OCM approved Etain change of control request. Now that all necessary regulatory approvals have been obtained, RIV can complete our previously announced Etain transaction. We are eagerly awaiting the final closing of this transaction, which is expected to occur by year-end and will firmly establish RIV as a U.S. cannabis operator. Last week, the CCB and OCM approved the long-awaited draft of New York cannabis adult-use regulations, which will be going out for public comp and shortly. Matt will address these regulations in more detail shortly. We have already begun preparing our feedback and look forward to continuing to work with the regulators to support the establishment of a thoughtful, equitable and successful marketplace that is beneficial for all stakeholders, while avoiding some of the pitfalls that we have seen in the regulatory rollout of other adult-use markets. In the meantime, we have worked closely with our partners at Etain to make several improvements to our existing assets, especially and particularly our Chestertown cultivation facility. These improvements have already resulted in higher yields, higher potency and a more attractive offering for our patients. The latest two whole flower strain launches, Golden Pineapple and Cranberry Hays, tested at more than 20% THC potency with robust terpene profiles and we are excited about the continued strides we are making in ensuring patient satisfaction. Our expansion and optimization of Etainâs Chestertown cultivation facility continues and is expected to be complete by the end of calendar Q1 2023. We are planning to bring the expanded cultivation areas online in calendar Q2 2023 with our harvest from the expanded areas expected to occur in calendar Q3 of next year. We are also continuing to upgrade Etainâs retail locations for enhanced customer experience in anticipation of new SKUs and product launches. In September, Etain launched its Mini Moment Pre-Rolls, which came filled with our new premium strains, Forte Lemon Cookies and Forte Key Lime Cookies. During the quarter, we also signed a lease for our planned flagship cannabis cultivation and manufacturing facility in Buffalo, New York, and the developer has begun preparing the site for construction. The new facility is designed with premier cultivation and production infrastructure and will include two buildings totaling approximately 75,000 square feet with 10,000 square feet designated specifically to host social equity licensees. The lease remains contingent on the receipt of regulatory and other necessary approvals, including completion of any environmental remediation pursuant to the New York State Brownfield Program. Operation of the facility is also subject to receipt of regulatory approval from the OCM. Turning to our broader industry outlook, both the macroeconomic environment and the cannabis market have changed considerably since the first quarter of this year, when we first announced our plans to acquire Etain. In the last few months, we have seen a number of notable developments in the New York cannabis space, including Ascend Wellness pulling out of its agreement to acquire MedMen and Verano pulling out of its agreement to acquire Goodness Growth, purportedly due to the state of the assets and agreement breaches, respectively. More recently, Sean Combs agreed to buy the assets of Columbia Care and Cresco for up to $185 million, while the two are undergoing a merger originally valued at $2 billion. What we are seeing is a decline in the market value of assets based on comparable businesses, exacerbated by slower-than-expected regulatory developments related to the New York adult use cannabis market. As Eddie will discuss during the second quarter, we determined that these were indicators of impairment for our Etain cash generating unit. When we conducted a quantitative impairment assessment, we recognized a goodwill impairment charge of $138.9 million on the asset. While unfortunate, this development is consistent with what other cannabis operators are experiencing. Impairment charges are not uncommon, not just in the New York cannabis market, but in cannabis markets across the U.S. macro headwinds, regulatory uncertainty, political gridlock and the flight of capital from the space and the markets in general have led directly to a deterioration of asset values, but importantly, not the deterioration of the quality of the assets themselves. This couldnât be more true for Etain. Etainâs enduring brand presence in New York since the cannabis programs inception when combined with cultivation capabilities that we are in the process of expanding provides a solid platform on which to grow. We still intend to develop and expand new brands and products that will resonate with New York consumers offered alongside Etainâs product line as one of our core brands. Itâs becoming increasingly clear from our perspective that New York is going to be a wholesale market, where the most successful companies will be those that can build the strongest brands. This was our thesis upon entering the state and it continues to be our thesis. We believe that New York offers us the best platform to launch our brand-focused strategy, one that will be supported by the unique and diversified expertise of our leadership team and partners. To capitalize on this thesis, we believe that Etainâs cultivation footprint, which we are in the process of expanding more than fourfold, will provide RIV with the type of operational horsepower we need to gain significant market share in the premium wholesale market. Our long-term strategy remains the same, to build a leading multistate operating and brand platform with New York serving as our foundation. In the near-term, though, we are focused solely on our New York operations and weâll continue to execute on our plans as we obtain clarity on the regulatory climate. Before I turn the call over to Matt, Iâd also like to take this opportunity to welcome Amanda Rico as our Chief Human Resources Officer. With more than 17 years of experience in HR across various industries, she joins us from The Scotts Miracle-Gro Company, where she served as the Vice President of Human Resource Operations. In that role, she is responsible for managing all HR operations for the company, primarily supporting The Hawthorne Gardening division. Amanda holds a Bachelorâs degree in business from the Ohio State University and brings a unique perspective to supporting people operations. On behalf of everyone at the company, weâd like to give a warm welcome to Amanda as she begins to support and further develop RIVâs diverse and inclusive culture. With that, I will now turn the call over to Matt Mundy, Chief Strategy Officer and General Counsel for regulatory outlook on the New York market. Matt? Thanks, Mark. Iâll begin with what I suspect is on the top of most listenersâ minds, last weekâs publication of the CCB and OCMs draft regulations for New York Stateâs Cannabis Program. I will review some relevant points of the draft regulations from the perspective of a registered organization or RO, which is the license held by Etain. First, the draft regulations called for 100,000 square foot Canopy limit, which is the highest in the supply tier and corresponds to approximately 50,000 pounds of annual biomass. This limit can be further increased with regulatory approval. Biomass processing will be capped at 55,000 pounds per year under the draft regulations. Second, adult-use market entry fees under the currently proposed regulations would include an upfront $5 million fee for cultivation, with up to an additional $5 million in cultivation fees to be paid over five years and $9 million in adult-use retail related fees payable upon colocation. Third, ROs would not be permitted to launch adult-use retail sales until three years after the stateâs first recreational sale. Once ROs do begin adult-use retail sales by colocating up to three medical dispensaries for adult use, 40% of the retail space must be allocated to non-RO suppliers for a period of five years from the date of the stateâs first recreational sale. Iâd like to emphasize that these are draft regulations and they are subject to a 60-day public comment period that will commence from the date the draft regulations are published in the state register, which has not occurred as of today. We are looking forward to continuing to work with the state to help create an efficient market where registered organizations can operate effectively and which will lay the groundwork for successful, equitable and responsible market. We intend to provide our feedback during the public review period and continue to work with the regulators to support the creation of rules that are mutually beneficial for all stakeholders. Turning to other relevant industry developments, last month, President Biden took an important first step in cannabis justice reform, pledging to issue pardons to anyone with a federal conviction for possession and asking that governors do the same at the state level. The President also called on the Secretary of Health and Human Services and the Attorney General to begin a process to review cannabisâ scheduling under federal law, which can potentially move cannabis out of the most restrictive class Schedule I. While there is still significant uncertainty regarding how this process will play out, the Presidentâs action seems to be a favorable development for cannabis at the U.S. federal level. We are also cautiously optimistic that Congress will make progress on potentially passing the Safe Banking Act during the lame-duck session. Earlier this month, Kathy Hochul was reelected as the Governor of New York, which we also view as favorable for the stateâs cannabis industry. We are looking forward to dialoguing with Governor Hochul and her office, and to working with the OCM and the CCB during the draft regulation public comment period and beyond. This is a tremendously exciting time for the cannabis industry and for RIV Capital in particular. We are about to see the launch of the adult-use market in New York. While there is much work to do to get there, this is undoubtedly a watershed moment for the industry as a whole. The development of the cannabis industry has been one of incremental catalysts, law-by-law, state-by-state, brick-by-brick we are building this industry. Itâs not easy, but it is important, meaningful work, and thereâs no doubt that when we look at these bricks that have been painstakingly built over the past years and decades, that adult use in New York will be viewed as one of the more notable ones. Legalizing cannabis in a global center of finance and culture like New York is an absolute landmark event and we intend to be a major player there and are working tirelessly to make that happen. We could not be more excited. Thank you, Mark and Matt, for those updates. I will now review our financial results for the second quarter of our 2023 fiscal year. Please note that as previously disclosed, as of April 1, 2022, we shifted our presentation currency from Canadian dollars to U.S. dollars. For the second quarter ended September 30, 2022, we reported revenue net of excise taxes of $1.9 million, comprising retail revenue generated from Etainâs dispensaries and wholesale revenue generated from sales of Etain branded products to other registered organizations in New York. Cost of goods sold, excluding nominal amounts for unrealized fair value changes included in biological assets and realized fair value changes included in inventory sold was $0.9 million for the quarter and gross profit was also $0.9 million, representing a gross margin of approximately 48%. Operating expenses included selling, general and administrative expenses of $4.8 million during the quarter, compared with $4 million for the same period last year. The size and scope of the companyâs general and administrative functions continue to increase as the Etain operations scale in anticipation of the adult-use market coming online in New York in calendar year 2023. Aside from selling, general and administrative activities, operating expenses also included the biggest factor that contributed to the net loss that we reported today, which was $138.9 million impairment charge related to our Etain cash-generating unit. Since the time of the Etain acquisition was announced at the end of our last fiscal year, there have been delays in the development of the regulated market for adult-use cannabis in New York relative to initial expectations, as well as increased uncertainty regarding the pathway for registered organizations to participate in such market. We believe that these developments have contributed to proposed transactions involving New York cannabis license holders being abandoned and values implied by recently announced transactions involving comparable businesses being lower than the purchase price paid in Etain acquisition. In addition, we believe that market-based perceptions of the value of New York cannabis licenses have also been negatively impacted by the perceived proliferation of the unregulated market that has developed, particularly within New York City and a disappointing lack of enforcement to curtail such activities. Accordingly, we determined that indicators of impairment were present for the Etain cash-generating unit as of September 30, 2022. Cash-generating units are tested for impairment by comparing the carrying value of the cash-generating unit to its recoverable amount, where the recoverable amount is the greater of fair value, less cost to sell and value use. The fair value less cost to sell of the Etain cash-generating unit was estimated using a discounted cash flow model that considered updated cash flow projections reflecting some of the realities that I just discussed, as well as a discount rate that reflected the heightened uncertainty in the New York market. As a result of this quantitative impairment assessment, we determined that the recoverable amount of the Etain cash-generating unit was less than its carried amount. Accordingly, we recognized a goodwill impairment charge of $138.9 million, which eliminated the carrying value of the goodwill acquired through the Etain acquisition. Other loss was $1.6 million for the quarter compared with a nominal other loss for the same period last year. Other income this period included an unrealized foreign exchange gain of $4.4 million, which was primarily attributable to foreign denominated cash deposits held by the company and certain of its subsidiaries. This was offset by accretion and interest expense of $4.3 million, which was primarily related to the convertible notes issued to The Hawthorne Collective and the deferred consideration payable related to the Etain acquisition, among other items. Income tax recovery was $2.1 million for the quarter, compared with an income tax recovery of $2.9 million for the same period last year. Based on the foregoing items, we reported a net loss of $142.3 million for Q2 2023, compared with a net loss of $1.2 million for the same period last year. Other comprehensive income was $0.4 million for the quarter, compared with other comprehensive loss of $6.6 million for the same period last year. In aggregate, the company reported a total comprehensive loss of $141.9 million for Q2 2023, compared with a total comprehensive loss of $7.8 million for the same period last year. In terms of our cash flow activities during the quarter, net cash used in operating activities was $2.5 million, reflecting the day-to-day operations of the company. Net cash used in investment activities was $2 million, reflecting investments made in the development and operation of Etainâs current and future cultivation and production facilities. Net cash used in financing activities was $0.6 million and primarily related to lease payments. Shifting to our balance sheet. During the quarter, we continued to refine the purchase price allocation related to the Etain acquisition. Specifically, the total estimated fair value of intangible assets acquired was allocated between separately identifiable intangible assets being the cannabis licenses and brands and goodwill. Furthermore, the estimated fair values were updated to reflect the tax attributes of the assets acquired. Specifically, as a result of the difference between the accounting basis and tax basis of the cannabis licenses acquired, we recognized a deferred tax liability of $23.9 million, with a corresponding increase to goodwill. However, as discussed, as a result of the impairment testing, the carrying value of the goodwill was reduced to nil. The purchase price allocation remains provisional as of September 30, 2022 and will be finalized during the measurement period prescribed by the relevant accounting standard, which is one year from the date of acquisition. Any measurement period adjustments would be applied retrospectively to the period of acquisition in the companyâs consolidated financial statements. We ended the period with $165.4 million of cash on hand and we estimate that the cash required for the second closing of the Etain acquisition will be approximately $42.4 million. Our financial position remains strong and we continue to believe that provides us with more than enough liquidity to complete the Etain acquisition and finance our contemplated expansion plans in New York. We continue to evaluate our capital allocation strategy, and as part of that process, we may consider a repurchase of our common shares, subject to the applicable law and stock exchange requirements and receipt of any applicable approvals. Any such action would be subject to further determination of the Board of Directors of the company and there can be no assurance any such steps will be pursued by the company. Thank you, Eddie. We are eagerly awaiting the final closing of the Etain transaction in the coming months, which will establish RIV as a U.S. cannabis operator. We are confident that New York is going to be a wholesale market, where the most successful companies will be those that build strong brands. New York continues to offer us the strong platform from which to launch our brand-focused strategy, while our expanding cultivation capabilities and strong balance sheet position RIV well for the future. Finally, during the next two months, we intend to work as much as we can with state regulators to support the creation of rules that are mutually beneficial for all stakeholders. We look forward to sharing our continued progress and updates on our strategy during our next call and I thank all of you for joining us today.
EarningCall_1897	Ladies and gentlemen welcome to the Yatra Fiscal Second Quarter Financial Results Conference Call. My name is Glenn and I will be the moderator for today's call. [Operator Instructions] Thank you, Glenn. Good morning everyone. Welcome to Yatra's fiscal second quarter 2023 financial results for the period ended September 30, 2022. I'm pleased to be joined on the call today by Yatra's CEO and Co-Founder, Dhruv Shringi; and our new CFO, Rohan Mittal. The following discussion, including responses to your questions, reflects management views as of today, November 29, 2022. We don't undertake any obligation to update or revise the information. Before we begin our formal remarks, allow me to remind you that certain statements made on today's call may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to several risks and uncertainties that could cause actual results to differ materially. For a description of these risks, please refer to our filings with the SEC and our press release filed earlier this morning. Copies of this and other filings are available from the SEC, and also on the IR section of our website. Thank you, Manish. Good morning everyone and thank you for joining us today for our second quarter earnings call of fiscal 2023. Before we discuss our results for the quarter, let me just quickly update you on the Draft Red Herring Prospectus, the DRHP, which was filed by our Indian subsidiary, Yatra Online Limited, on March 25, 2022. The Securities and Exchange Board of India, which is SEBI, issued the final observation letter dated November 17, 2022, which means Yatra India's proposed IPO can open for subscription now within a period of 12 months from the date the final observation letter was issued. I just want to clarify that this doesn't mean that it will open after 12 months, this means that it can open at any point within a 12-month window from the date of the issuance of the letter. You will recall that the Yatra India subsidiary had proposed an IPO of its equity shares, comprised of a price issue of primary sale of up to INR 7,500 million and an offer for sale of up to 9.3 million equity shares in a secondary offering. We expect to commence marketing activities shortly, and currently anticipate that we can complete this offering in the first quarter of calendar year 2023. Aside from strengthening our balance sheet, we expect this offering to allow us to pursue new corporate business more aggressively and to explore alliances with partners who might not have being comfortable with an overseas structure. Let me also welcome our new CFO, Rohan Mittal, to this earnings call. Rohan brings over 20 years of experience to Yatra most recently serving as CFO for RIVIGO, and prior to that having spent time with other listed companies in India, especially in the logistics space. We are very excited to have Rohan to be a part of our team and look forward to his input. Now onto our fiscal Q2 results. I am pleased to report that we delivered strong sequential growth of 21% in adjusted revenue in what is typically a seasonally weakest quarter. We were able to achieve this growth due to higher take rates in our Air Ticketing business, which more than offset a 10% Q-on-Q decline in traffic and lower average ticket prices. Reflecting these dynamics revenue of INR 831 million, which is approximately US$10.2 million was up 85% year-over-year and adjusted revenue of INR 1.52 million, which is US$18.6 million, approximately increased 92% from the previous year. Adjusted EBITDA for the quarter of INR 77.7 million, approximately US$1 million was up 234% year-over-year. Our adjusted EBITDA was adversely impacted by higher legal costs of INR 24 million incurred in connection with the expansion of the Yatra Board with the addition of Mr. Kaufman, the debt facility that we took subsequent to year end, and IPO-related legal cost. After rebounding strongly in Q1 overall domestic air travel industry volumes contracted by 10% largely on account of Yatra's overall air tax volume declined only 2%, which was substantially lower than the overall industry resulting in market share gains for us. This gain was aided by a very successful online travel shopping festival that we launched around our 16th anniversary in August. Our brand strength and recall continues to remain high and we believe this will enable us to continue to grow meaningfully faster than the industry, especially as both B2C and corporate continue to migrate online at a very rapid pace. Our consumer business remains strong as airline shared special payers to counter the seasonally low quarter that we typically see in September quarter. Domestic travel ended the quarter at approximately 100% of pre-COVID levels. We also saw continued strength in new corporate customer signings with 30 new signings, which exceeded the previous record of 27 large and medium sized enterprises that we had achieved in the previous quarter. The international travel also continues to improve gradually, exiting the quarter at approximately 70% of pre-COVID levels. With the lifting of all travel restrictions in Asia-Pacific region, barring occasional shutdowns in China, international travel has lagged the global recovery and Asia-Pacific specifically. But we are optimistic that in the current scenario we see sustained growth and recovery happening in international travel going into calendar year 2023. On the hotel front, our adjusted revenue was up 47% year-over-year as we saw the benefits of implementing contribution from the Flipkart partnership and we continue to pursue other such opportunities which should be accretive to us in the near to midterm. From a competitive standpoint, the intensity has remained stable from our last quarter and remains overall manageable. We are currently in one of our seasonally strongest quarters, which benefits from both the Diwali holidays in late October and Christmas adherence and we are seeing further signs that consumers continue to have the propensity to spend on leisure travel. In October, domestic air passenger traffic reached 11.4 million passengers representing an increase of 10% month over month and a breakout from the 10 to 11 million average passenger traffic range that we've seen in the proceeding seven months. From a macro standpoint, the IMF currently expects India's GDP to grow at about 6.8% in our fiscal 2023. As we have mentioned previously, the travel industry has historically grown at approximately 2x of GDP in developing markets versus a 1.5x multiple in developed markets. We continue to believe that we should be able to achieve growth above market rate given by share gains in the corporate travel market and the ongoing secular shift from offline to online in the consumer market. Given the ongoing recovery in corporate and leisure travel, our continued success in signing new, large and medium enterprise customers and our upcoming Indian IPO, we believe we are well poised for a strong half of fiscal 2023. Aside from seasonality, we expect our results to benefit from accelerating growth in our corporate business as we continue to align new customers. Additionally, a successful Indian IPO should also leave us well-positioned because the higher take rates in the air business and to accelerate growth in freight. Even as we invest for growth, we also continue to make strides in improving our operational efficiency. We are already starting to see significantly higher levels of profitability as a result of these efforts. I want to express my gratitude to our employees and shareholders for their continued support. Thank you, Dhruv. First of all, I would like to say how excited I am to be part of the Yatra team. Since joining the company, I have been impressed by the quality of our employees and our strong positioning in the corporate and consumer travel markets. Iâm looking forward to helping our business reach new heights. I will now review our September quarter results and focus primarily on year-on-your comparisons. Our adjusted revenue increased by about 92% on a YoY basis to INR 1.5 billion. The strong year-on-your growth was driven by a rebound in the air passenger traffic of about 41% and an improvement in needs, which resulted in 110% increase in the Air Ticketing â adjusted revenue to INR 1 billion. Adjusted revenue for Hotels and Packages was up 47% to INR 240 million. Sequentially, the total gross booking declined 11% to INR 15.9 billion reflecting normal seasonality. This was partially offset by the special affairs shared by airlines to counter the seasonal trends. Gross bookings however registered a strong year-on-year growth of 88%. Hotel and Packages gross bookings improved 97% on a YoY basis reflecting strength in the corporate uptake of hotels. Gross air passengers booked were 1.27 million, up 41% year-on-year basis. Standalone hotel room-nights booked were 412,000, up 43% YoY. Moving on to the expenses. Marketing and sales promotion expenses including an add-back for consumer promotions and loyalty program costs increased by 131% on a YoY basis to INR 796 million. Our personnel expenses decreased by 3% YoY to INR 288 million in the September quarter. The decrease from the prior year was predominantly due to a decrease in the employee share-based payment expenses to INR 36.5 million from INR 79 million in the prior year quarter. Excluding the impact of the share-based compensation, personnel expenses increased by 16% on a year-on-year basis due to the reinstatement of salaries and increments for employees to the pre-pandemic levels. Other operating expenses increased by 91% YoY to INR 390 million primarily due to the increase in payment gateway charges, sales commission and communication, which increased in line with the growth and revenue as the business continued to recover strongly. And an increase in the legal and professional charges associated with the expansion of the Yatra Board,as well as raising a debt facility subsequent to the quarter end. Adjusted EBITDA of INR 77.7 million improved significantly from INR 23.3 million on a YoY basis. As Dhruv mentioned earlier, our adjusted EBITDA was adversely impacted by higher legal cost of INR 24 million incurred in connection with the expansion of the Yatra Board with the addition of Mr. Mike Kaufman as well as the debt facility that we took subsequent to the quarter and IPO related legal cost. Barring the impact of this incremental cost, our adjusted EBITDA would have been INR 102 million, which would have been a growth of almost 4.4x on an year-on-your basis. As of September 30, 2022, the balance of cash and cash equivalents and term deposits on our balance sheet was INR 703 million or roughly translated into USD 9 million. The decrease in cash balance from the previous quarter is primarily due to increased working capital to support the recovery of the corporate travel business. Subsequent to the quarter end, we raised an additional capital of $10 million from MAK Capital to help maintain a growth momentum and continue to work closely with banks in India to increase our receivable financing limits as the corporate business continue the strong recovery. This concludes our prepared remarks. I would like to turn this back to the operator and open the floor for any Q&A from the attendees. Thank you so much. Thank you. [Operator Instructions] We have our first question comes from Scott Buck from H.C. Wainwright. Scott, your line is now open. Hi, good morning guys. Thank you for taking my questions. First one, Dhruv, when you guys talk about pursuing new corporate business more aggressively post-IPO, I think weâre talking about some M&A in there, right? And if thatâs the case, whatâs that pipeline look like and how quickly could we see some deals get done? Good morning, Scott. Scott, in terms of addressing that question, there are two thoughts to it. One is obviously the organic growth itself and we are seeing a strong pipeline on the organic side also today given that companies are very keen to adopt the technology solution. So thatâs something which is materializing quite rapidly as weâre seeing in the number of new customers and accounts that we are signing Q-on-Q. On the other part in terms of M&A, while as part of the IPO, we have some capital for M&A. M&A as you well know has its own timeframes associated with it, but our endeavor would be once the IPO is done to accelerate this growth through a combination of both organic and inorganic. Itâs hard for me to pin down an exact timeline, but I think our endeavor would be to do this as quickly as we can without compromising on the quality of the assets that we look at as part of the M&A or without doing adequate diligence. So given those constraints we will try and move as quickly as we can, but we are seeing a great opportunity at this point, Scott, both as I said organically and inorganically. So itâs not just one way, I think there are multiple levers for growing this as of today. Okay, that makes a ton of sense. Thank you for that. Iâm curious, when I think about OpEx moving forward with the return in travel demand, can you give us a sense of maybe where you are from a headcount perspective versus pre-COVID levels? And how we should think about sales and marketing expense moving from here? And I understand thereâs some seasonality in there as well. Sure. So at the headcount level we are at about half the headcount that where we were pre-COVID. Headcount increase will now be at a much more gradual pace and linked to largely new customers that we are acquiring on the corporate side. Otherwise, on the headcount front, I think we are fairly well capacitized to manage the business as is that is today. So I donât think there will be significant bump up in headcount. Whatever incremental headcount had to come in has come in either in the September quarter or has come in subsequently in the October-November timeframe to gear us for the incremental demand that we are seeing as of today. So from a headcount perspective, I donât see major movements happening from the headcount level that we are at as of today. The other OpEx we should, sorry, on the other OpEx, Scott, just to factor that in, I think we should start seeing good operating leverage on that. Legal and professional cost will continue to remain at a slightly elevated level as we go through the IPO process, but then going forward from there into fiscal 2024 should paper off significantly once this one-time IPO cost is all baked in and out of the way. Great, thank you for that. And then last one for me, if you could just, touch on for those of us that arenât local, what the Indian IPO market looks like today? I mean, what does demand look like in any recent offerings that might give some color on how your offering may perform? Sure. So in terms of the overall markets in India, the markets continue to remain fairly buoyant [ph], in fact the markets recently touched a new 52-week high, which is quite unheard of, right? Weâre seeing on the other hand, in more developed markets that markets seem to be touching a 52-week low, whereas in India we just recently touched a 52-week high. So markets are quite buoyant. Demand for good offerings continues to remain there. We think we are one of those where there is a strong appetite given the high degree of that. Hi, thank you for taking my questions. Iâm just curious for the new enterprise clients. This is like you accelerated up to 30 new customers this quarter. Are you at all scaling up the sales team? Or are they just getting â are you just seeing a stronger demand or is there more growth to go after, so maybe â it should be scaling up your sales team or should we think about that? Anja, I think Dhruvâs line just drop, Iâll take that. We havenât really expanded the sales team as much. Itâs more of the inbound demand we are seeing coming in and thatâs whatâs resulting in the number of customers we were able to sign. Hi. Sorry, sorry. My line just seems to have gone silent for a while. Iâm back on. Yes, Anja, please carry on. Okay. Thank you. Manish was able to address my first question. But my second question is about the freight business. Howâs that trending compared to your expectations and what can we expect in terms of revenue contribution from that for this year? So the freight business, before â as weâve mentioned in the past in the last quarter, I think a bit working capital constrained. Hence, we were being a bit more cautious on the trade business. Our first priority was to provide incremental working capital to our corporate business, which was recovering very strongly. So freight was slightly muted in the previous quarter because of this working capital constraint. But given that subsequent to quarter end, weâve got this debt facility from MAK Capital and we are now in advanced stages with some of our other banks out here for extending the working capital facilities and increasing the size of our current facilities. We expect the freight recovery to happen very rapidly as well. So again on freight, the organic demand for technology and a technology lead solution is extremely high in this market. Freight, as you would recall is a very opaque market, so we think technology can really disrupt that. There were some working capital constraints because of which we had to slow that down slightly, but in the November month onwards we've started seeing recovery happening again very quickly. So freight for next fiscal year, which is like FY 2024 we would expect the trade business to do almost between US$5 million and US$6 million of revenue. Hi, good morning. I was just wondering if you could talk a little bit about what you're seeing as far as demand from consumers. In the past you said there's a lot of pent-up demand. Is there still pent-up demand or has that pretty much been filled? Good morning, Lisa. Lisa, I've been in the travel industry now in India for the last 15, 16 years and honestly I haven't seen this kind of demand ever in my 15 years in India in the travel industry. So demand still continues to be at extremely elevated levels, especially for leisure travel and that too during peak holiday periods. Now, we are seeing very strong forward booking numbers at this point looking into the December holiday season, the Christmas and New Year holiday season. And weâve also seen similarly, the Diwali, Dussehra break being fairly strong. So demand continues to be at high levels and we expect that this to be the new norm rather than this being just pent-up demand, which is tapering off. Okay, interesting. So you havenât seen any pullback at all because everyone I talked to over here in North America is saying, all of a sudden demand is getting weaker and things like that, but not in India and not in travel. No, not, not as of now. Because, whatâs also happening is that in India wage inflation right is hovering in the early double digits, right? People are seeing between 10% and 15% kind of wage inflation, especially at the mid and lower levels. And that provides enough and more, capital in the hands of consumers to continue to spend. Weâve seen saving rates also come down, historically saving rates in India where in the mid to late 30s. We are seeing them taper off to as low as, 28% to 30%. So overall in the economy, we are continuing to see enough headroom from a consumption standpoint. Thatâs great. Thatâs good to hear. I look forward to see, how the December quarter looks and best of luck with a successful IPO. Thank you. Thank you, Glenn. Thanks everyone for joining the call today. As always we are available to follow up, so please feel free to reach out. That concludes our call for today. Thank you.
EarningCall_1898	Our next presentation is Texas Instruments, which Iâm sure you all know. Here from TI is. So Haviv thanks for attending. And maybe as I kind of jump right in and Thank you Alright, everyone. Good morning. Sorry, my microphone fell off. So welcome back. So again, I'm Chris Caso covering semiconductors here for Credit Suisse. Our next presentation is Texas Instruments, which I'm sure you will know. Here from TI is Haviv Ilan, Chief Operating Officer of TI. So Haviv thanks for attending. And maybe as I kind of jumped right in, and we were speaking about it a little before the what's on all investorsâ minds right now is the cycle and kind of what's the same and what's different in this cycle. And I think what's interesting for TI as you guys have been through a number of cycles yourself, you certainly do not manage the business around the cycle. And I think that's some been some of the controversy this year is that you are looking out, for a 10-year plan. But, perhaps you can give some perspective and you've been through some cycles yourself about, perhaps what you may see, similar and different to past cycles from what you have right now, because you have seen some weakness in some areas and some areas some strength. So Chris thanks. I'll start with a high level comment about what you described and how we use cycles and we've had plenty of them I had some more. And in general we do, we never ignore the cycle. We watch it but we do spend 90%, 95% of our time on how to get prepared for the next opportunity or looking beyond the cycle. Especially with many of the actions we take. They have long lead time in terms of how do they convert the results. So if you think about getting capacity in place, getting our inventory in the right levels, that's where I spend a lot of my time and not ignoring the cycle watching it. But, it's going to do what it wants to do. We have to think beyond that. And that's where the energy of the company is, it has to be. Specifically yeah, and the cycle has been in some ways different because maybe not all markets are behaving the same. And we've seen PE and notebooks so personal electronics and notebooks starting in Q2. They've talked about; we're seeing spreading weakness and industrial in into Q3. And then automotive is still holding, but I'm not going to try to predict what it's going to do and when. But my high level view is that they usually correct. So that would be my guess, if I have to, as Dave mentioned, during the last call, the last earnings call. We don't know, exactly. You simply don't know. But do they usually behave the same? Maybe yes. So that would be high level guess. Right. It may be good to get in the industry a little bit. And it's you know, one of your competitors, analog devices had reported recently, and they talked about some stabilization. And they had started to see some cancellations back in the summer, and expressed some caution on that. And more recently the optimism was there was some stabilization in orders. It didn't exactly get that from, from you, folks on your recent earnings call. So Iâm wondering if you maybe contrast, what, what you're seeing, and maybe, is it somewhat different than we heard from ADI? Yes, I think I don't have a lot to add here to what Dave said. In October, we left to let the quarter run its course and we'll see what it did in January, when as we really pulled back. I will say that industrial again, if you look at the, the secular growth, industrial, we are excited about it. And that's why we spent so much time preparing for that next opportunity because content deletion in industry less visible than what you see in automotive, but it's across all the sectors, all the end equipment's. We are excited about that, and it will drive, it's a big engine that will drive the industry in the next 10 years and beyond. I think it's in the early phase of change, and adoption of semisâ. I will also say that our position in industrial and automotive has been stronger than it ever was. We finished 2021 at above 60%. So again, as I said, our eyes on what it can do in 2025 2030 and getting the company ready for that opportunity. Right. And that seems to be precisely why you're embarking on the CapEx program that you are and spending for that. What Dave has told me in the past which is a mantra in the company that you'd rather be three years early than three months late. Right. And unfortunately, over the last year and a half, the whole industry, and certainly I put myself in that shoes of was surprised that at the resiliency of the macro, post COVID. And, and there was some opportunity that was lost, due to shortages, not having the capacity in place. And I suppose that's why you're embarking on this, this program. Yes. And again, we have embarked on the program, even before the cycles. Think about RFAB2, we have started that investment back in the previous cycle, and we didn't get a lot of cheering at the time. Why are you, why are you investing in a downturn time but could offer to be even earlier for us and would serve us even during that cycle? That the answer is yes. So again, I want to be prepared for the next opportunity. But in generally, if you go to the way TI performed in a cycle and what we have seen I think we've done okay, the beginning of the cycle was a little counterintuitive to us internally, but which was very convinced. Let's run the factories open and full capacity in the second quarter of 22 of 20. Sorry, demand was vanishing. During that time, there was no demand and it served us very well. We built a nice level of inventory that served us almost through the middle of 21 but we ran out I ran out of gas and that's part of the lessons learned to your point of how we prepare for the next one. So getting capacity ahead of demand and having it at the right level, but also the right location and this concept of, we call it geopolitically dependable capacity that can ease customer minds of where the parts are coming from. And can I rely on TI for the long-term, that's a very important parameter. The second one is, as I mentioned before, getting the right level of inventory, because our parts, most of them have these unique attributes of diversity and longevity. So building ahead, that inventory by -- powered by power at the right levels, according to the future, potential demand of them could serve us very well for the next opportunity. So I spend the majority of my time on the on the couple of these actions. Right. If we go back to what you said around middle of 2021, when you started to run out and you ran the FABS hard before that, but then things got tighter. At that time, TI was often, one of the first companies that that your customers had talked about of, of being a being short. And of course, you're the largest in the industry. So perhaps that's it, do you feel that you the shortages that happened 2021 2022 put you in any competitive disadvantage? Or is it just simply a function of you are the biggest guy on the block. So in an industry, that's short, that you're the first one that comes to customer is going to speak about because you're the largest? First, I think there is a barometer of that just statistically. I mean the breadth of our product, the number of customers and also our decision to support all of them. So in a way, you can say, say, hey, let's don't select the customer base, you're going to support and maybe make life a little easier. But we said no, we're going to support all of your customers, even if you're a smaller industrial customer in Europe, and you don't have the voice or the pockets that the big customer has. We took that approach; it's a very hard one, because you kind of have maybe more folks to take care of. And statistically, you'll have maybe even more challenges, but the team has done very well. And not only that, we grew in all markets, we bias the growth into industrial into automotive across a very high breadth of customers, and I think it will serve us very well. But even more than that, customers especially in industrial and automotive are paying for more attention to these issues. Because first their bill of materials is now more based on semiâs compared to before, because end equipmentâs are being re redesigned with more electronics in them. And us having the plan that we have with RFAB2, in production with Lehi ramping in Q4 this year. That's a great strategic advantage for us because customers do care about this capacity coming online, especially on the 130 to 45 nanometre. Think about analog product; think about flash based products for embedded. Having that capacity and already ramping now, and heading in the right location is a great advantage. And I think customers are turning to us and we'll see that materializing in the years to come right. Right. I want to pivot to that a bit and speak about your manufacturing strategy is different than most of your competitors. And what your competitors have been doing largely now is moving into sort of a long term supply agreement situation with customers, the large customers and that's being backed up since mostly competitors use some degree of foundry being backed up as long-term and supply agreements from the foundry. Do -- how is TIâs approach give you an advantage because you have the captive capacity. So perhaps that makes it less important for you to enter a long-term supply agreement because you don't have a secondary agreement with a foundry partner. It's your own capacity. But the other side is you want to keep your FABS loaded as well. So how does TI do that? And how is it different than what maybe ADI might do? Chris, I think it is different. In the sense that we own our manufacturing plant, we put an aggressive plan to have as we said capacity head of supply and we tell our customers, you don't need to write these long-term agreements with TI. Now we do have discussions with customers. When they understand the level of investment and they understand the where the capacity comes from. I do believe they turn to us but we don't we don't have in that discussion because I think it's simply not good customer service because customers would have changes in the next five and 10 years and they want to have that flexibility, and I think just better customer service to have the capacity ahead of the demand having the right level of inventory so they can count on us as they grow their business. And then you talk about those many customers, and we have 10s and 1000s of them that you can write LTAs with all of them. And some of them don't have the financial means even to commit to such a deal. And I think serving these customers as is as important to us. So I do believe that, again, we've stayed very disciplined to our competitive advantage of controlling our supply chain, controlling its costs. Just in we've done it for years, I mean, we've come with this strategy 10, 15 years ago, but I think customers get it now. And they, they do realize that what we do, sir, is going to serve them very well. So maybe to paraphrase and correct me, if I'm wrong, it's a case of where TI is making that investment and ahead of demand. And whereas, because you do it yourself, you can make that decision on your own and see where the where the market is going, whereas perhaps the competitors have to convince the foundry that to make that investment, have to make some commitment to it, whereas you control that decision on your own. It's controlling the decision. The confidence we have is high in as part of the company's has grown. I mean, we came with that plan earlier in 22, during the capital management call, and since then, we've talked with so many customers. So since then our excitement, our confidence in our plan has grown. It is a big debt. Itâs a big spend to build a 300-millimeter wafer fab. Itâs not an easy investment. But again, the secular growth of what the market will do and our position in these markets and our ability to control our supply plan I think will pay dividends in the long-term. So yeah, agree with what you said. What leverage do you have? And I think, the investor concern that kind of goes around with that is, well what happens and what happens if we hit a downturn you're making, you're making that capital investment, you have to go through a period of underutilization. Are there ways that you that you mitigate that in the event of a downturn event, it's not that different this time, we do see automotive and industrial slow? Or is that a case of TI is just willing to take that risk right now, looking at it over the 10-year lens that it's going to be better for you over a 10-year period? It's a good question. From a high level, it's kind of the latter meaning, we can time our investment to the cycle, because by the time the market wants to go up, again, it's going to be too late to meet investments. So we â and the lead times of building these factories are years. This is not measured in quarters. So we do have to stay very disciplined about it. And again, we don't ignore this cycle, but we don't we don't let it lead our strategic decisions. But having said that, there is always tactics. So these factories are very efficient. So running our material or parts there versus old technologies is important. We announced closure of last 150-millimeter wafer fabs, so we can -- the for through of running the factories for either building the inventory to the levels you want, or just getting the nice cost advantage, when you run the variable cost to run a wafer in a 300-millimeter wafer fab which is just so much better, we will take these tactical decisions. So we are thoughtful about it, but again, can't led the cycle slow us down in getting ready for the next one. Right. Maybe pivot a bit. And one of the things I always think is interesting with analog companies is the R&D process and the product selection process. We always felt that was a differentiator, just making investments in the right place at the right time not chasing the market being ahead of it. Maybe you could speak to how TI does that? Absolutely, Chris. And growing up in R&D, and then going into the business and spend most of my career there. It's actually an exciting process that we run. And our -- is everything that we do our approach to R&D has always been steady and in long term. Maybe not everything is shows on the P&L because we also had some restructuring in the last 10 years that we have to go we had to go through. But if we just take analog, for example. So we had a very steady hand on the analog investment over 20 years, okay? And continuously grew up portfolio, continuously grew market share, and the way we do it and people talk about broad and breadth of products, but the fact of the matter is that each and every product has to be very competitive. It has to be at low cost, it has to be high performance. And otherwise over time, you fall out of competitiveness. So we pay a lot of attention on that topic. We have 10s and 1000s of products, into hundreds of product families into 65 product lines, and it's a granular, detailed work that we do. I think the way we spend R&D is against steady hand, but very efficiently, I do believe in the concept of scarcity when you when you put R&D in play, because that's how the team would choose the best opportunity and get the best party, the best return on investment over time. And I think TI is becoming better and better at that. So again, our commitment to R&D investment is always been there. I will say, if I refer to the past decade, we did have a lot of moving parts getting out of wireless, the comms business and making some big shifts in R&D. That's more or less I mean, there was always fixes and shifts you do. But most of that work is behind us. So I'm very excited about the future. We are now we've based our R&D in the areas we want to have. The last work we've done was on the embedded side. And from here on, I expect a very steady hand on R&D moving forward. Right. And you mentioned embedded. That was going to be next question is that's one of the areas that you sort of have changed your focus. Is that well, I mean, one is from an R&D and investment standpoint, is that done? And then what does that mean for sort of embedded growth going forward? Does that become a small piece of revenue over time, as some of the R&D has been reallocated? So again, the embedded R&D was not reduced. It was, as you said, reallocated into the best opportunities, and I'll describe it in a high level. We've done that three years ago, I think. We embarked upon it. And most of that hard work is done meaning get your R&D based on the best product portfolio, and we think about it as how do you align your investment to your competitive advantages? So manufacturing technology, can you build these products internally. Lehi is a great example. It will enable us that 65-nanometer flat 45-nanometer parts, that's where embedded is, is mainly based in. Think about the breadth of our portfolio. Can we concentrate on prototypes that have this idea of they can serve multiple customers, and multiple end equipment, multiple sectors, and that's, that's where we are taking that investment, and then use the channel advantage to get them into customers and design the mean. So that work is a from a restructuring, from an R&D retuning is done. It's the hard part, as I said, the product is starting to come out. And that's where the excitement is. We are seeing the early indicators of that business can be performing very nicely for our future. I have very high confidence with what I hear from my sales team, and how they reallocated their resources to go and put their energy around these parts. And it will be a great contributor to free cash flow growth. Now we are not trying to match margins to the analog product. We do think about how can that embedded business, generate cash for us and free cash flow per share growth and it can. So I donât want to tell you an exact timing. But most of the hard work to your point is I think it's behind us. Okay. I guess maybe I'll take a pause here. If there's any questions in the audience, or let you think about them in a second. Randy, you want to ask one? [Indiscernible] a short term question on China, how you're seeing the low end of the market pricing competition inventory demand, if that has much impact in the mid-to-long-term? How much you see the impact of localization or local suppliers ramping up? So China market and how much of it? I think we reported Dave shipping to China, it's about 50%. But if you look at revenue, we shipped to customers headquartered in China, it's about 25%. That would be the number. So that's your first part of the question. And again, China has been a very competitive market for us for several years now. And yes, we do see competition, the local competition, as you said, and these are hungry, aggressive companies that we compete against, but the market is growing, and it's big, and we want to play there. So we are competing. And we tell internally to our team say China is going to be harder, but it's still a great opportunity. So we are very committed to that to that opportunity. I will say that again, the competitive advantages for us in China play big factors so you mentioned you know price but controlling our manufacturing and our costs. I mean, we are competing with fab less and AT less companies, okay? And these, these folks, the foundries that they use or the AT, they don't give the price for free, okay? There is a margin stacking there. So I think we can be very competitive on costs. The breath that we have is just un comparable. So I most of this competition, and I see if 65 product lines in the company. The typical competitor in China usually attacks half a product line or couple of product families, just because it's very hard to build that right. It takes time and expertise in technology, and many, many years. And the breath is helping us because when you engage with the customer, and you have a set of parts of the offer, that's it's a big advantage. And when you move into this, the market that we serve, automotive, but especially industrial, you do have to reach many of the customers. And that's you need to scale here. This is why you see most of these competitors kind of more narrow or more vertical in terms of the product offering and the same on the markets, they attack, because they do look for a high level of concentration of revenue per socket, if you will, because otherwise, you need the scale and the breadth to go attack it. And that's how we address the competition there. I always tell to my team, if you're going to be on power with the same price, same performance, same level of service, as a local competition, you will lose, okay? So you do have to be ahead. So if it's a tie, it's going to go away. But I think our ability to compete in China is wrong. And I think it's even growing with the investments we're making. Question, just on pricing environment. Some of your competitors that use more foundry, they're selective price increases and they're passing it on. How do you see TI just industry pricing and your pricing outlook into next year? Yes, so I like to separate cost and price, right. So to me pricing is set by the market, and we always had a steady hand on that, thinking about the long-term, opportunity for us to share, again to gain share. And we that's how we price. We price with a very steady hand like everything we do. Now, when the market turns up, and prices go up, we react, we don't, we just don't ignore that. And pricing did contribute to some of the growth in the last couple of years. But our approach is always, always make pricing non barrier for customers to adopt us. But that's not how we gain share customers turn to us not because low price they turn to us, because what we have our capacity, the breadth of the product portfolio, the performance, the breadth of the technology, and the process technology we have, and that's how, high performance analog works. So I don't think that's going to change in the future. If I could follow on that, because the reason and what most of your competitors say is they've raised prices, because their input costs have gone higher foundry costs for in particular. And if you're using TSMC, TSMC had to raise price in order to make investments in lagging edge because they needed to get the same margins between both. In your case, your investment, your costs are still going higher. The used tools that you got financial crisis, that those no longer available, so your prices going up, perhaps, do you feel that your costs are going up at a lesser rate, such that you can either be more pricing, say price aggressive but more attractive to customers? Or that you don't have to follow those same steps? Is it work out to be a competitive advantage for you? Yes, I think there is a competitive advantage here on the way we control our costs and I'll touch upon it in a minute. But at the end of the day, why did prices go up? It's always like supply and demand mismatch right? Demand was high supply was scarce and that's what happened and does it fix over time? It depends on how faster it does it depends because you're right the investments are you know the intensity of these messages and desire. The access to use tools for companies like TI also is -- if I look at Alpha-1 versus Alpha-2. It's a big difference. And even Lehi that we bought a year ago it's a mix because we got a shell and we got some use tools but also to augment the factory with new tools because you can find these used tools like it used to before. However, the return over the long-term is still wonderful. So even with newer tools, that is a great investment or a great ROI for TI. And that's why we are embarking upon that investment. Now, regarding do we have a better control of our cost? I think we do. I mean if you just â you mentioned foundries look at their margins and what they did, right? So we when we control our input costs, and we are not immune or insulated for inflation. But when you own your manufacturing capacity, I think it's a competitive advantage. And I think it will serve us in the years to come, and it will fall through to your question. But do you think longer-term, that this elevated cost of manufacturing analog now is now sort of a permanent phenomenon such that, we're not going to go back to where we were five years ago, where these use tools were available. This is something that's permanent. And therefore, the pricing increases that we've seen in the permanent because one of the investor concerns is the pricing is going to come back down once demand slows down. Yes, I would say and again, the way we plan forward and still decided to make the investment, we believe capacity investment or capacity, or capital intensity, let's call it is not going down. So I think that's a fair assumption. That's how we make assumptions. And that's how we decide to make decisions, whether we want to invest or not. And what the industry will do will determine pricing, meaning is there going to be -- if Iâm worried of oversupply. I'm not very worried about it. What we know is that to support our growth or our ambitions, we need to make the investment, because there is no free capacity out there that you can just grab you put your hands on. So we want to control our destiny. We do want to make the investment. I think it will pay off. And that's the direction we are taking Chris. I don't know, hopefully, that helps. Yes, No it does. And one final one, and with regard to kind of how this affects cash flow going forward, certainly cash flow is how you manage the company. And now that, we've kind of set this this investment level, it doesn't sound like necessarily that the capital investment needs to go higher from where you are right now. And I suppose that as you start to utilize the, the new fab and such, that we should start to see the cash flow results, starting 23, 24 as we're kind of at this new level of CapEx, revenue grows, whatever, as we get through whatever downturn we're going to see, and you start to see that in your in your free cash flow, is that an accurate description? Yes, again, the unknown is what the cycle wants to do and what's the shape of it going to be. But if you look beyond if you just take a trend lines, this is where as you said, these investments, you don't need to wait 10 years for that to fall through to your point, meaning once you put the investments, fab is moving wafers, the variable cost to run them is very attractive. And that's what we intend to do. Now free cash flow is a parameter not only of your CapEx, it's also what revenue will do, for example, and that's where we as I said before, we have to think about it in the long-term. The -- but when we run the what ifs, assuming that our assumption that the market can grow in a higher rate because of the secular changes in industrial and automotive because of content addition. And if that sits on a certain trend line that we believe in, and we make that investment and I'm not talking about a specific year, but free cash flow per share can grow very nicely. And it will have to come from top line growth, mainly because there is not a lot of margin leverage we have left. But our confidence of that investment falling through and being a great producing great results on free cash flow per share is very high. And maybe we'll, we'll end with that. We're out of time.
EarningCall_1899	Good morning, and welcome to Deere & Company's Fourth Quarter Earnings Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session of todayâs conference. I would now like to turn the call over to Mr. Brent Norwood, Director of Investor Relations. Thank you. You may begin. Hello. Also on the call today are John May, Chairman and Chief Executive Officer; Josh Jepsen, Chief Financial Officer; and Rachel Bach, Manager of Investor Communications. Today, we'll take a closer look at Deere's fourth quarter earnings, then spend some time talking about our markets and our current outlook for fiscal year 2023. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our website at johndeere.com/earnings. First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at johndeere.com/earnings under Quarterly Earnings & Events. Good morning. John Deere finished the year with a strong fourth quarter, thanks to a 40% increase in net sales. Financial results for the quarter included an 18.5% margin for the equipment operations. Across our businesses, performance was driven by continued strong demand, higher production rates and progress on reducing our inventory of partially completed machines. Looking ahead, ag fundamentals remain positive, continuing to drive healthy demand as evidenced by our order books full into the third quarter of fiscal year 2023. The construction and forestry markets also continued to benefit from solid demand contributing to the division's notable performance in the quarter. Similarly, order books are extended into the second half of '23, providing visibility and confidence in the new fiscal year. Slide 3 shows the results for fiscal year 2022. Net sales and revenues were up 19% to $52.6 billion, while net sales for the equipment operations were up 21% to $47.9 billion. Net income attributable to Deere & Company was $7.1 billion or $23.28 per diluted share. Next, fourth quarter results are on Slide 4. Net sales and revenues were up 37% to $15.5 billion, while net sales for the equipment operations were up 40% to $14.4 billion. Net income attributable to Deere & Company was $2.2 billion or $7.44 per diluted share. Let's take a closer look at fourth quarter results by segment, beginning with our production and precision ag business on Slide 5. Net sales of $7.434 billion were up markedly at 59% compared to the fourth quarter last year. This was primarily due to higher production rates both year-over-year and sequentially. Additionally, we made progress on clearing partially completed machines from inventory. Both contributed to higher shipment volumes for the quarter. Price realization in the quarter was positive by about 19 points, whereas currency translation was negative by about 3 points. Operating profit was $1.74 billion, resulting in a 23.4% operating margin for the segment. The year-over-year increase in operating profit was primarily due to higher shipment volumes and price realization, partially offset by higher production costs and higher SA&G and R&D spend. Operating profit for the quarter was negatively impacted by higher reserves on the remaining assets in Russia, affecting the quarter's margin by about 1 point. The production costs were mostly elevated material and freight. Overhead spend was also higher for the period as factories continue to experience some production inefficiencies due to supply challenges and clearing of partially completed machines in inventory. Despite these headwinds, our factories were able to maintain higher rates of production and reduce the number of partially completed machines in inventory, allowing us to deliver more equipment to our dealers and customers. Moving to small ag and turf on Slide 6. Net sales were up 26%, totaling $3.544 billion in the fourth quarter due to higher shipment volumes and price realization, which more than offset negative currency translation. Price realization in the quarter was positive by nearly 13 points, while currency translation was negative by over 6 points. For the quarter, operating profit was higher year-over-year at $506 million, resulting in a 14.3% operating margin. The increased profit was primarily due to price realization and improved shipment volumes and mix. These were partially offset by higher production costs, higher R&D and SA&G expenses and unfavorable currency impacts. Please turn to Slide 7 for the fiscal year 2023 ag and turf industry outlook. We expect large ag equipment industry sales in U.S. and Canada to be up 5% to 10%, reflecting resilient demand that continues to be higher than the industry's ability to supply, bolstered by the need to replace aging fleets. Our order books now extend into the third quarter and the dealers remain on allocation for '23. For small ag and turf, industry demand is estimated to be flat to down 5%. The dairy and livestock segment remain steady. However, demand for products more correlated to the general economy, such as compact utility tractors and turf equipment is softening. Shifting to Europe. The industry is forecast to be flat to up 5%. Farm fundamentals in the region are generally stable since small grain prices continue to outpace input inflation. Meanwhile, supply constraints in 2022 are extending the equipment replacement into 2023. In South America, we expect industry sales of tractors and combines to be flat to up 5%, moderated by supply chain constraints. The region remains one of the stronger end markets, especially in Brazil, where they are forecasting record production and strong profitability for the year. Industry sales in Asia are projected to be down moderately as India, the world's largest tractor market by unit stabilizes after record highs in 2021. Turning now to our segment forecast on Slide 8. We anticipate production and precision ag net sales to be up between 15% and 20% in fiscal year '23. The forecast assumes approximately 11 points of positive price realization and 1 point of negative currency translation. For the segment's operating margin, our full year forecast is between 22% and 23%. Slide 9 shows our forecast for the small ag and turf segment. We expect fiscal year '23 net sales to be flat to up 5%. This guidance includes about 7 points of positive price realization, partially offset by 2 points of unfavorable currency impact. After accounting for the effects of price and FX, the guide implies a slight volume decrease due to softening in certain product segments. The segment's operating margin is projected to be between 14.5% and 15.5%. Turning to construction and forestry on Slide 10, price realization and higher shipment volumes both contributed to a 20% increase in net sales for the quarter to $3.373 billion. Price realization in the quarter was positive by nearly 13 points. This was partially offset by almost 5 points of negative currency translation. Operating profit increased to $414 million, resulting in a 12% operating margin. Favorable price realization and higher shipment volumes more than offset higher production costs during the quarter. Segment quarterly results were also negatively impacted by 1.5 points of margin due to higher reserves on the remaining assets in Russia. Now I'll cover our 2023 construction and forestry industry outlook on Slide 11. Industry sales of both earthmoving and compact construction equipment in North America are expected to be flat to up 5%. End markets overall are expected to remain steady as oil and gas, U.S. infrastructure spend and CapEx programs from the independent rental companies offset moderation in the residential sector. Global forestry markets are expected to be flat as stronger European demand continues to be limited by the industry's ability to produce and demand in North America begins to subdue. Global roadbuilding markets are also expected to be flat. Demand remains strongest in the Americas, while Europe is softening and Asia remains sluggish. Our C&F segment outlook is on Slide 12. 2023 net sales are forecasted to be up around 10%. Our net sales guidance for the year includes about 8 points of positive price realization and just over 1 point of negative currency translation. The segment's operating margin is projected to be 15.5% to 16.5%. Note, fiscal year '22 operating margin would have been 14.5%, excluding special items, such as the onetime gain from the remeasurement of the Deere-Hitachi assets. Let's transition to our financial services operation on Slide 13. Worldwide financial services net income attributable to Deere & Company was slightly higher in the fourth quarter year-over-year, mainly due to income earned on a higher average portfolio, partially offset by less favorable financing spreads. The provision for credit loss increased, reflecting economic uncertainty in Russia. Financial services received an intercompany benefit from the equipment operations, which guarantees investments in certain international markets, including Russia. For fiscal year 2023, the net income forecast is $900 million. Results are expected to be slightly higher year-over-year primarily due to income earned on a higher average portfolio. The portfolio has continued to grow in line with growth in the equipment operations. Overall, Financial Services is expected to continue to deliver steady results. Credit loss provisions, lease return rates and past dues all remain in good shape, reflecting sound balance sheets for our customers. Slide 14 outlines our guidance for net income, our effective tax rate and operating cash flow. For fiscal year '23, our full year net income forecast is a range of $8 billion to $8.5 billion. We expect favorable price realization and higher volumes to more than offset increased spend. Next, our guidance incorporates an effective tax rate between 23% and 25%. And lastly, cash flow from equipment operations is projected to be between $9 billion and $9.5 billion. Before we transition to Q&A, John, I'd like to thank you for joining us today. Do you have anything you'd like to add? Yes. Thanks, Rachel. First, I want to recognize all of our dedicated employees, dealers and suppliers. Fiscal year 2022 was another unprecedented year in several ways. We started the year in a work stoppage at some of our largest U.S. factories, but we resolved that with a groundbreaking industry-leading new contract, then supply and logistics hurdles created disruption and constrained our production worldwide. At times, deliveries were delayed as demand simply outstripped what the industry could supply. Our operations folks worked tirelessly to get equipment shipped to our dealers and customers. The team overcame disruptions from part shortages and delays to the clearing of partially completed machines to meet our customers' needs. In the last half of the year, and particularly here in the fourth quarter, we executed to our plans, saw a substantial lift in production and outpaced the industry production and retail sales. This resulted in our highest revenue and margin quarter for the year. It proves what we've known all along, that we've got the best factory teams in the industry, and I'm extremely proud of their efforts and resilience. As I look ahead to fiscal year 2023 and beyond, I truly believe our best years are still ahead of us. In the near term, order books across our businesses are full into the third quarter. And it's important to note that not only do the order books continue to fill when we open them, but the velocity of orders has remained strong. We opened North American combined EOP back in August. Like our crop care EOP, it was on an allocations but it filled in 2 months. That's noteworthy because we normally have the EOP open for five to six months. And since our order books are still on allocation for retail sales, we have yet to begin replenishing dealer inventory. And as we continue to make progress on our Smart Industrial strategy and Leap Ambitions, I'm even more confident and our ability to unlock immense value for our customers. When you integrate the industry's best equipment with cutting-edge technology and a world-class dealer channel, it's powerful and it's exciting. We already have solutions in fields and on work sites, and we are bringing more solutions to the market that will make our customers a lot more productive, a lot more profitable and help them do the jobs they do in a much more environmentally sustainable way. Great. Thanks, John. Now we know there are some -- likely some common topics of interest, so let's dig into those before opening the line for Q&A. First, I'd like to take some time to look more closely at the macro environment and some of the fundamentals for each of our segments. Let's start with production and precision ag. We're forecasting the industry to be up 5% to 10%. Brent, there's a lot going on there in terms of what is driving that growth. Can you unpack a little for us? Sure. There's a few things going on I'd like to point out, Rachel. Stocks-to-use ratios for key grains still remain very, very low, while exports from the Black Sea region are expected to be down about 40%. So it's going to take a couple of growing seasons to ease the tight supply and this should help support commodity prices in the interim. While crop prices may have come down a little bit since the summer, they remain at levels where our customers still have healthy profits despite some of the higher input costs they're facing. Finally, the industry has not been able to meet demand due to supply chain constraints and demand continues to outpace supply. And we see that in how quickly our order books fill up and historically low dealer inventory of both new and used equipment. It's also evident in the fleet age, which is well above average. All right. So fundamentals remain solid, but weather, geopolitical tensions and broader economic conditions may be weighing on our customers' minds. Yes, that's absolutely true, Rachel, and we recognize that. But our order books really serve as the best indicator though. Not only are they extending into the third quarter of 2023, but the velocity in which they fill remains really encouraging for us. Recall that our order books are still on an allocation basis when those orders ship, they generally retail right away and almost all of those machines have a customer's name on them when they go down the production line. Remember that our dealer inventories still need to be replenished. Four-wheel drive inventory to sales ratios are at 10%, while 220-plus horsepower tractors are at 12%. And those numbers might even be a little bit overstated because our dealers are working through all of those fourth quarter shipments right now, and they're still delivering them to customers. Also of note, our guidance does assume that we build to retail demand. So any dealer inventory replenishment will likely be pushed to 2024. Additionally, I would like to point out that the 2023 North America large ag volumes will be 20% to 25% lower than the five-year average volume from the 2010 to 2014 replacement cycle. This is clear if you look at the AEM data our revenues are higher because we've increased our value per machine for our customers through precision ag solutions. But volumes are still rather modest when compared to the entire replacement period of that five years of 2010 to 2014. Yes, Brent, I have a few things to add here. This last year, I've been out meeting with dealers on a regular basis. And I often hear them telling me that they're not able to quote every customer who wants to place an order because we're still constrained by the supply base and on an allocation basis. So clearly, more demand -- there's more demand for our equipment. And this replacement cycle will have an extended duration. I am confident we will produce more large ag equipment in 2023 than we did in 2022, and not just more equipment but more value per machine. Our production system approach has us laser-focused on the customer and unlocking more value for them. This will increase the value per machine even more. All right. Let's move on now to small ag and turf. This division has the most diverse end markets of any of our segments. Josh, can you elaborate more on how we're viewing those different markets? Sure. There are definitely different macro drivers when you break down the segment a bit further. If we begin with small ag, supply of meat and dairy products has remained tight, which has helped prices remain elevated. And as a result, livestock and dairy margins remain above historical averages. Additionally, dealer inventory to sales ratios for midsized tractors are below levels -- below normal levels as demand has continued to outstrip supply. So this part of SAT has remained stable and resilient. A good proof point here is that the order book for our midsized tractors built in Mannheim, Germany is about 70% full, taking us well into the third quarter of fiscal '23. On the other hand, turf and utility equipment as well as compact utility tractors are more closely correlated to the general economy and somewhat specifically to housing. So we've seen some softening there. Channel inventory remains low, especially for turf, buffering our shipments to some extent. But we're monitoring inventory closely so that we can react if demand pulls back and forth. We don't intend to let inventory climb to pre-pandemic levels here. All right. That's helpful. Thanks, Josh. Let's shift now to C&F. The last few years of demand were largely driven by housing. So how is that segment housing starts. Brent, can you talk through that? You bet, Rachel. So on one hand, we have seen some softening in housing while non-res building projects have continued to decline a little bit. On the other hand, oil and gas CapEx has been very steady with rig counts projected to be up next year. And U.S. infrastructure is beginning to show some promise going into 2023, which is especially important for Wirtgen. In addition to that, both dealer-owned rental channel and the independent players have significant refleeting programs going into 2023. So all in all, we're seeing a shift in the composition of demand drivers for that business, less housing, but more than offset by rental infrastructure and oil and gas. Brent, I'd like to add that C&F dealer inventory, as with other parts of our business is historically low and needs to be replenished but we're currently focusing on retail demand and our order books are close to 70% full. All good insight into the various industries and market dynamics and it's all factored into our net sales guidance for the full year. To recap, common themes across our businesses, our order books are strong, but still on allocation. We're focused on meeting pent-up retail demand, and we still need to replenish channel inventory possibly late 2023, but more likely into 2024. Sure. So this past year, we did not have our normal seasonality. And we had the work stoppage at the beginning of the first quarter, and we had experienced the worst of the supply chain issues as we tried to ramp up more during the second quarter. So we played catch up later in the year, resulting in a significantly more back half-weighted 2022. In fact, we ended up producing more in each successive quarter throughout the year with the fourth quarter being the high point. We achieved our highest daily production rates in the fourth quarter, and we plan to keep those higher daily rates going into the first quarter of 2023. Now while line rates remain at those higher levels, there will be some key differences in sequential revenue though. First, there are about 15% less production days in the first quarter due to the holiday season. So expect revenue for small ag and turf and C&F to drop by about 15% sequentially in the first quarter of 2023 when compared to the fourth quarter of 2022. Our PPA factories will have another 5% to 10% fewer production days due to some model year changeovers, maintenance, training and supplier recovery. So in total, production and precision ag production time will decrease by 20% to 25% in the first quarter compared to the fourth quarter of 2022. Now also keep in mind that PPA benefited from clearing about $400 million of partially completed machines from inventory in the fourth quarter. So that benefit won't repeat in the first quarter. So we likely won't get back to a similar level of 4Q revenue until the second quarter of 2023. Yes. This is John. Brent, I want to reiterate something you said while sequentially, the first quarter compared to the fourth quarter will be lower, however, year-over-year production will be higher in the first quarter. We aren't starting the year out behind, so we'll have more production in the first half of 2023 than we did in the first half of 2022. That's helpful. Let's switch gears now to the supply chain. We've taken steps to try to mitigate risk, but the supply base remains fragile. We do see pockets improving, but at a slow pace and certainly not to pre-pandemic levels that we would consider to be a healthier supply chain. So our guide does not assume significant improvement or deterioration in 2023. Josh, can you elaborate on our production costs included in the forecast? As it relates to production costs in '23, there are a few puts and takes. Certain raw materials like hot-rolled coil steel are easing, as you can see in some of the different indices. Also, we expect the need for premium freight to subside next year. On the other hand, labor and energy costs will increase. That's not only impacting us directly but also our suppliers, so we continue to see increased cost for purchase components as well. Additionally, as you mentioned, we're seeing pockets of improvement in the supply chain, but it remains fragile. So we're not assuming that our operations return to normal levels of productivity and efficiency in our forecast. With the different ups and downs, our guide assumes a net increase in production costs in 2023, but we fully expect this to be offset by price realization and anticipate the full year being price production cost positive. Thank you for that. And before we open the line for other questions, Josh, can you talk briefly about the use of cash priorities and capital allocation in 2023? Sure. Simply put, they remain unchanged. We're happy with our liquidity position to maintain our single A credit rating and fund our business. Our guide considers an increase in R&D and CapEx as we continue to progress on strategic projects building upon the tech stack and unlocking more value for our customers. Next, the dividend. We increased it 8% in fiscal year '22. And it's worth noting that over the last two years, we've increased it nearly 50%. Finally, share repurchase. We purchased over $1 billion of shares in the fourth quarter for a total of $3.6 billion for fiscal year '22, and we have an opportunity to continue that trajectory heading into fiscal '23. So all in all, we're in a great position to grow our business execute on our Leap Ambitions and continue to return cash to shareholders. Now we are ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. In consideration of others and our hope to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you re-join the queue. Maybe just circling back, Josh, on your comments there as to the full year, the expectations for price to be in excess of production costs. Obviously, a lot going on from a year-over-year standpoint just given how the comps kind of will play out, is there any more kind of help that you can give in terms of -- does that -- would you expect that spread to grow as we move through the year and thus the margin benefit is more back-half weighted or maybe not just because of how costs are trending? Maybe just any more kind of more on a quarterly basis, any more help you can give on that? Tim, this is Brent. Thanks for the question. As we look out to next year, we probably see a little bit of a different quarterly cadence than what you experienced in 2022. If I do a look back on this last year, we saw our most challenging price/cost quarters in the first half of the year. In fact, that compare got better as we got through each of the quarters with the fourth quarter being the most positive from a price relative to production cost perspective. As we look out to 2023, I think you'll see a very different cadence there. We intend to be price/cost positive on a much more even basis throughout all of the quarters. You'll probably see the strongest price performance for us really earlier in the year just as the compares are most favorable. And then in the back half of the year as some of those price compares get a little harder production cost compares maybe get a little bit easier in the back half of the year. So I would expect for next year just more even cadence throughout the course of the year as we compare price to overall production cost. Tim, one other thing. I mentioned this earlier in the prepared comments, but we have not forecast a return to normal productivity and efficiency in our factories. So as it relates to the overhead inefficiencies we saw in '22. To the extent we see more stability in supply chain, the ability to operate more in line with our plans through the year. There could be some benefit there. But at this point, we haven't pulled that into the forecast. We need to see that stability first. Josh, I think you mentioned the $400 million of inventory that you cleared in the fourth quarter. Can you just frame for us what's still to come? I mean, is first quarter like an equivalent amount? And do you expect that to be largely done by, call it, the first half? Or just how should we be thinking about the inventory that's kind of sitting around waiting for parts or materials? We have made a lot of progress on the partially completed machines. We've had in inventory since the second quarter. That's really where we saw that figure peak. We took down about 1/3 of that over the course of the first quarter, and then we took another $400 million down in the fourth quarter. I would say the level of partially completed inventory within the system right now is running at a much more normalized level. I mean there's always some level of partially completed machines kind of within our working capital system. So it's much more normalized right now. The benefit that you saw in the fourth quarter is not going to repeat in the first quarter really at any other time, I think, in 2023, assuming we don't build more inventory of partially completed machine. So I would say, by and large, the tailwind from that has largely been completed in the fourth quarter. Yes, Seth, this is Josh. Maybe importantly, too, our intent in our factories is to not have partially completed machines and build and have to take things offline and bring them back because of the inefficiencies and disruptions that drives. So the intent is to run much more linearly with our plans and not create as much of this rework that has to happen because it does drive a lot of disruption in the factory. Nice quarter and happy Thanksgiving. I guess my question was there -- you talked about the order book being full through the third quarter. Was there any difference by geography within large ag? And sort of when do you expect to open the order book up again so that you'll have visibility through - the visibility through the full year? And then my second question, sorry, just on the production in large ag. Given what you said about production in the first half, I'm trying to think about the second half of the year. Does that imply just with your sales forecast by the fourth quarter sales could be down a little marginally just based on my back of the envelope math, but just trying to understand production cadence. Jamie, thanks for the question. I'll start on the order book. As we noted, we're running about kind of 70% full for next year. It varies a little bit by product line, things like combines were effectively sold out for the entire year. In North America, the tractor order book is, I think, 2/3 full. If I move to Europe, that's 70% full for Mannheim, 65% pool for combines. So pretty similar, I think, across those two geographies. Brazil is the one that we manage a little bit differently than the other two. We run that at about a three-month window just so that we have a little more flexibility with respect to pricing. That market tends to be a little dynamic with both FX and inflation can change quarter-to-quarter. So we're holding that order book in a little bit tighter than North America and Europe. And we've been executing that strategy for two years. We've been really successful there. I think managing price a little more dynamically in that region. I think going forward, you expect us for the remaining order book that's left in North America and Europe, to manage it on a rolling six-month window, in front of us. So as we get to the first quarter, we should have pretty good visibility on the rest of the year with just a few slots left available. As it relates to sort of the production cadence in the year. As we noted, first quarter we'll have just less production days, but we'll continue at those higher line rates. That will put quite a bit of production in the second quarter to give us a much better start to the first half of the year in '23 as we had -- than we had in '22, as John noted earlier, probably just maybe a little less than 50% of the production will happen in the first half. So I think when you look first half, second half, you're not going to see as big a differential in the splits when you compare it back to 2022. My question is on how we should think about increasing interest rates, both with respect to kind of the impact on your finance company, but also what you're seeing relative to kind of how customers are reacting to higher financing rates as well? Hey, Steve, good morning. Well, I'll start with the question on the customer first, and we can talk about John Deere Financial. I think the impact to the customer maybe varies a little bit depending on what customer segment we're talking about. Historically, the customer segment most sensitive to interest rates, is the customer segment for more of our consumer-facing products. So I think compact utility tractors and turf products tend to be a little more reliant on low interest rate financing. I think what you'll see as we progress through 2023. You may see a little more discount or incentive spend from the equipment operations on things like rate buy downs, but that's where we see the most sensitivity historically. When we look at large ag, interest costs overall are a relatively small portion of their P&L, that's not to say there's no sensitivity there, but it tends to be just a little less sensitive than maybe other customer segments that we have. And I think the good news for 2023 is that customer balance sheets are really in incredible shape right now. Over the course of 2022, we actually saw lower penetration rates at John Deere Financial because customers were using more cash to finance that acquisition. So that just speaks to not necessarily their sensitivity to interest rates, but more on just a strong balance sheet position that they're in going into 2023. From a John Deere Financial perspective, we run a match funded book there. So as our cost of borrowing goes up, that will take the forum and higher cost to our customers. We tend to manage that book in a way so that you don't see a lot of spread degradation because we manage those interest rates pretty closely and that match funded book. So I wouldn't say you'll see a big impact to profitability there. You'll see higher interest income and higher interest expense going into 2023. Can you talk a little bit about the road construction business in North America? Obviously, we've got a lot of moneys coming IIJA. Do you think that the roadbuilding business gets front loaded on that? Should it be continuous over this period of time when you think about kind of like a five-year plus sort of horizon? Yes, we are we are definitely seeing higher levels of demand in North America for Wirtgen. So if we kind of go across the different geographies, Wirtgen operating in right now, by far and away, the strongest are in North America, followed by South America. Europe is starting to ease a little bit. And to your point, I mean, we're really just now starting to see the benefit from infrastructure going into '23. So I think that probably grows for Wirtgen over the course of the year and continues to strengthen that market. Importantly, North America right now is really strong mix for Wirtgen. I think about our manufacturing footprint, which is primarily German based. So the FX rate is actually really favorable for a strong North American market. Yes. Maybe to add to that, Brent, we just completed the bauma show, and we had really, really strong bauma order activity it was actually higher versus 2019. So the demand is strong and customers are buying new equipment and new technologies in order to serve their customers. Maybe just one other thing to add to that. As we ended 2022, we had the strongest margin performance for Wirtgen that we've seen since we've owned that business. So we continue to be pleased with the progress of the acquisition and the synergies that we've integrated in over time. Given there were some one-off items this year, taking those out, can you just confirm what kind of core incremental margins you're expecting in each of your segments in 2023? Yes. Absolutely. Good morning, Tami. We can talk through that. We did have a few special items in the year on the construction side, the onetime gain on the Deere-Hitachi deal as well as some Russia impairment. When we look at incrementals for next year, a couple of things to keep in mind. One, it's really still a very dynamic operating environment that we're in. We are still seeing some production costs running higher, right? Labor, energy. A lot of our purchase components are all going to be higher. Some of that is getting offset by decreases in raw materials and freight. But all in all, we could see mid production costs increased by mid-single digits next year. We're also going to see a little more higher SA&G and R&D in the year as well. Now we're getting the price to offset that and enough to put us back in line with historical incrementals at Deere. So I think even once you adjust for some of those onetime items, you'll see incremental margins sort of commensurate with what we've done traditionally or maybe even just a tad higher. Yes, Tami, it's Josh. One thing to add there is, I think what's important too is probably a bit above historically what we've done on the incremental side when you take out some of the onetime items. But we're also investing pretty heavily in executing on this future of where we're headed. And thinking about the Leap Ambitions and some of the business model transformation that we're working through that are going to -- as we deliver that, create more value for customers, to dampen cyclicality and create a more resilient business. So there's -- embedded in here is investment in strategic projects to deliver on that. Brent, and I think, John, you mentioned that a little less than 50% of production will come in the first half. Given the fact that you guys have more of a tailwind for pricing in the first half and more of a tailwind from subsiding costs in the second half does ultimately the earnings cadence basically just follow the production cadence for the year? Matt, with respect to the earnings cadence, I think that's probably a fair assessment that you'll see. You'll see earnings cadence, sort of follow that production ramp that you just outlined there and sort of the puts and takes between higher price in the first half of the year, lower production costs in the back half of the year. So I think those sort of net out a little bit. And really, you can just I think, factor in some of those traditional incrementals as you apply them to the varying production rates throughout the course of the year. Yes, Matt, it's Josh. Maybe one thing to point out. It's been a while since we've had a year that followed a typical trend for seasonality. And I think this this year, '23 probably returns a bit more to that, where you see higher levels of both sales and margin in 2Q, 3Q, which is much more traditional to what we've done in the past. Maybe just to add to Brent and Josh's comments, we're much -- very much focused on getting off to a strong start in 2023 and getting our machines delivered to our customers. really, the bottom line, I think, for you all to take away is, we won't be as back-end loaded in '23 as we were in 2022, and we're doing everything to keep up just the outstanding production progress that you saw in the fourth quarter, and we believe we'll be able to continue with that execution into the first and second quarter of 2023. I'm wondering if you could just talk about Precision Ag. Can you just update us on Blue River we're talking to folks that are seeing pricing in the mid- to high single digit dollars per acre range for the subscription. I'm wondering if you could comment if that's representative of the pricing points. And I believe you folks planned on full rate production year two of commercial availability. I'm wondering, is that still the plan for 2024 at this point? Just a couple of high-level comments on Precision, and we can dive in to Autonomy and See & Spray after that. But overall, we're seeing kind of higher take rates for a lot of our existing technologies that have been in the market for the last couple of years, I would say anywhere from 5% to 10% higher take rates in 2023. So we're super encouraged by that. Technologies like ExactEmerge and ExactApply continue to do well, continue to penetrate the market further. Also notably, some of the newer technologies that we've had, like ExactRate or the CH950 have also made really good inroads as we start filling out the order book for next year. I think for ExactRate, we're almost double the take rate almost 20% going into next year. Now as you noted, we're also very focused on some of these next-gen technologies like See & Spray, like Autonomy. And those two technologies carry with them more recurring revenue opportunity than we've had in the past. So we've been super encouraged by putting this out with customers. We've done it on a limited basis. But these are paying customers, and they are adapting to the new business model, and that's part of the learnings that we've had over the course of the summer. And then in the fall, we were running autonomous paid acres over the fall. The vast majority of our customers have really accepted the model, and we're really encouraged by that. We're going to get a little bit smarter and tighten that up as we go into 2023, which will be a second year of a limited production release there. Yes, Brent, just to add to that, I think an important comment that underscores why this is happening and why we're seeing these strong take rates is the current environment underscores the need for precision challenges of our customers are definitely more acute than they've ever, ever been and the need for our customers to do more with less is greater than it's been in the past, especially when you consider all the rising input costs, not just labor scarcity, but lack of skilled labor. So precision ag is the best solution to help them solve these very, very difficult problems. We're more confident today in our opportunity to create value for our customers through our identified $150 billion of IAM, and we're going to continue to prioritize our investments towards the technologies and solutions that unlock that value. And Josh indicated earlier on. This year, we're spending more than we ever have in the past to create those new products, new solutions, and that's going to have a big benefit in future years. Great point, John. Maybe one thing I'd add there is we've also made a change to our dealer pay for performance. So we're including precision ag execution in that pay for performance. And that's a really important step as we think about continuing to drive the outcomes that we wanted to deliver and really a shift from adoption to utilization to make sure we're delivering on that and we're showing and demonstrating the incremental addressable unlock that we can create, which we think is differentiated for Deere. Just maybe asking a quick one on pricing. With the price guidance that you guys have embedded, is that all price carryover? Or are you embedding another annual increase as per like a return to normal in 2023? And how has the customer response been to pricing? So with respect to price, you're picking up a little bit of both. I mean there's definitely some carryover from 2022. Particularly, we had a lot more -- a lot higher pricing in the back half of 2022. So you're going to see those compares be a little bit higher in the first half of 2023. But there were additional list price increases for the 2023 order book. So it's going to be a combination of both. I think with respect to the elasticity of demand, we haven't seen a drop off in demand yet. As we noted, we've had to put ceilings in on all of our order books, which right now, demand just continues to outstrip supply. And as John noted earlier in his comments, the velocity of those orders hasn't slowed at all as we've paced through the fourth quarter. I want to go back to the discussion on precision ag, if we can. And I'm sort of curious here, the Autonomy product suite, how are you -- how has your thinking evolved in terms of the way you're commercializing this portion of the business and the progress that you've made towards bringing this to actually become the mainstream product. Is that a 2024 timeframe, 2025? And I'm curious for the customers that are buying 8R tractors now do they have the option to get this feature as a mass product? Great question on Autonomy. So right now, our autonomy is being rolled out on a limited basis. So it's not available to every single customer. 2023 will be another year where we'll have a limited commercialized rollout of Autonomy. I think what's changing a little bit with our mindset around precision, really two things. One, this is the type of technology that we think lends itself really well to a per acre type of monetization model which is different than our historical point-of-sale model for most of our products and solutions. . So we're getting an opportunity to roll that out with customers. And what we're learning is how customers consume our solutions differs among the customer base. I think they've actually really enjoyed the variable cost aspect because what we're seeing is customers use Autonomy, a bit of a hybrid role or a hybrid model. They're driving their tractor some. They're putting on autonomy mode overnight to get the job done while they sleep. And so that allows them to really pay just for the part of the product that they use. I think the other thing that's really important with the rollout of Autonomy is -- and this is a little bit different than what you've seen in the past. We will roll out this technology, really retrofit first or field kit first as opposed to most of our technologies have gone factory installed first. So I think you're going to see a little bit of a shift in some of these next-generation technologies, both in terms of the business model that we apply to it, giving us some opportunities for recurring revenue, but also more of an emphasis on field kit opportunities or retrofit opportunities at the onset of some of these technologies. Yes, Brent, just to add to that, a couple of things I think are important. First of all, our experience with customers this fall really reinforced our view on the very real challenges our customers are facing with respect to labor, labor availability and the value of hitting that agronomic window. So with limited skilled labor, the downside effect to it is not hitting the agronomic window and then having an impact on yield. So having the machine running when it needs to run was very critical to our customers. Also, as you mentioned, the customer acceptance of the per acre model was really, really good. And one evidence of that is every single customer that use this product in this fall have signed up to use it in the spring. So really, really important. Last thing I want to leave you with is, when you think of Autonomy, I want you to start thinking about autonomy and automation. And this is just one major productivity unlock an entire production system. And if you remember, as part of our Leap Ambitions, we're committing to have a total autonomy and automation solution for corn and soy in the U.S. We want to unlock all of this value for our customers. And what we've been doing here the last couple of years is proving out, this is technically possible, and I am really excited about it. Good morning and nice start, Josh. So staying on that topic a little bit, you continue to obviously put price and value per machine, but it's getting harder to pencil out for the midsized farmers, and forcing more scale needed in the industry. So ultimately, I'm wondering if we're getting towards the upper limits of what the growers can handle and will accept in terms of price, maybe -- do you think they need to break maybe into â24 and or perhaps this is moving us closer towards a broader per acre model beyond just your Autonomy quicker? Larry, it's Josh. Thanks for the question. I think the opportunity we have in front of us here is -- and John and Brent just mentioned this as a retrofit, and the ability to go back across the installed base and upgrade and improve productivity and technology without requiring a completely new machine. So I think that is differentiated solution than we've had in the past and also allows for relative value based on whether it's size of farm, particularly if you're paying on more of a per use per acre basis. So we think that's a significant component to unlocking that value for our customers and allows the technology to cover more acres as we go through the field. Feels like eating dessert first with your results here. So -- and this should be quick. I mean just following up on Mig and Larry's question. When you think about the per-acre model, I mean, does this ultimately become a kind of take it or leave it decision for producers such that if you want to get Autonomy, if you wanted to have See & Spray, then you have to have the subscription, otherwise, you don't get it? Yes. I think the -- John, thanks for your question. I think the opportunities do retrofit gives you some optionality to whether or not you want to leverage it. I think what we're seeing from customers having it and having the opportunity or the optionality to engage is really important. And we've seen this, whether it's with See & Spray or Autonomy, there are different trade-offs that customers will make, whether it's timing, whether it's field conditions, whether it's labor availability, something creating optionality is really, really critical and really providing an opportunity for more scale skilled use of these technologies across greater acreage and farm sizes. Josh, I think it's also important to talk about what our goal here is with each one of these technologies. Our goal is to develop technologies that are targeted at the greatest problems that our customers have with the and/or the outcome being by using John Deere technology, you as the customer will be more profitable because it will minimize your inputs you're going to be more productive because of the case of Autonomy, when we might take somebody out of the cab or other technologies. And you're going to do the jobs you do in a more environmentally sustainable way. That's really good for our business. It's good for our business long term regardless of where we are in any given cycle. Customers are going to buy these technologies to improve their profitability. I was curious about the comment you made about the inability to raise your dealer inventory through '23. Obviously, that's very encouraging for your build schedule for '24. Can you give us a sense of what percent below normal? Do you see your dealer inventory exiting '23? Yes. Thanks for the question, David. With respect to dealer inventory -- and I'll talk kind of both new and used here. I know your question is more around new. For high horsepower equipment, on four-wheel drives, we're at 10% inventory to sales. High-horsepower two-wheel-drive tractors are 12%. Historically, that would be 25% to 30% IS ratios there. Combines are especially low, although that's a bit seasonal. Those are always -- that always in the year pretty low post harvest. But that gives you an idea of sort of the magnitude of the increase we need to see in the channel going forward into 2024.

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