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EarningCall_1900	Weâll get started here in just 10, 20 seconds or so if everyone can take their seat. Okay. Welcome, everyone. This is our Wednesday keynote at our 26th Annual Technology Conference here at Phoenician in Arizona. We have the pleasure of having with us today the team from Visa. We have the CFO, Vasant Prabhu. And I also want to thank and recognize Jennifer Como, Head of Investor Relations, who's also joined us here in Arizona. And with that, I want to turn it over to my colleague, Moshe Orenbuch. Moshe is the consumer finance analyst here at Credit Suisse. For those of you that I haven't met, my name is Tim Chiodo. I'm the payments processors and FinTech analyst. Great. Thanks, Tim. And Tim and I co-cover Visa, along with a few other stocks, and this is a great pleasure for all of us. So Vasant, you did put out -- Visa put out an 8-K about trends through pre-Thanksgiving. I don't know if you want to maybe perhaps add a little bit of color to that in terms of any trends that you've seen that you'd like to call out, whether there's the cross-border continuation of the recovery. And you had made some comments about foreign exchange impacts in there, if there's any kind of additions or clarifications you'd like to add to that 8-K? Yeah. I mean, the simplest way to describe the trends through the 21st is there was no change. It's been remarkable for the past nine months or 10 months. The index to 2019, which is the way we've tended to look at things, because it's a clean look and takes out all the noise, spending in the US and even globally has been remarkably stable in aggregate terms. It's in the mid-40s percent growth over 2019. And for the first three weeks, it was, I think, 47%. Debit is growing at a very healthy clip, 57% over that time frame. Credit was up, I believe, 38%, 39%. So clearly, debit has sustained that above trend growth rate since the -- through COVID even as credit has recovered. E-commerce stayed strong, it was up 9% year-over-year. And I believe it's, again, 60% over 2019. The cross-border business continued to recover. So I'd say the easiest description of what we saw through the first three weeks of November was remarkable stability and really no change in trend. And in case you're wondering why we put it out when we did is because it's the cleanest comparison to 2019 and to last year because of how Thanksgiving falls in various years. So we thought that was a clean comparison and maybe the best thing to do. Now we've had Thanksgiving week. Last year, Thanksgiving was a day later than it was this year. So between the 21st and the 27th, you can compare to last year, but you can't compare to 2019 because 2019 was a late Thanksgiving. It was 28th and 29th and you had to go in December before you really got a clean comparison. But if you look at the last week, 21 to 27, and compare it to last year, again, it's very stable. Really no change in trend. All right, great. Thank you, Vasant. Thank you, Moshe. We're going to move on to an important topic for Visa's growth algorithm, which is Visa Direct. So a couple of things we want to hit on. Sure, we want to hit on the sizing and the growth, but we also want to bring to life the mechanics. So let's first hit the sizing in the growth and then we'll move to mechanics. At least on our estimates and Vasant, not asking you to confirm these or anything, but we've published that we think Visa Direct is now, sort of, mid to high single-digit portion of your overall volumes, which is quite impressive given the product didn't exist about a decade ago. And in terms of the growth, you've most recently said, sort of, mid-30s growth on a transaction basis ex-Russia. Maybe you could just talk a little bit about the context of the drivers of that growth and how it's become such a big part of your business in such a short time? Yes. I think, it's very important to give you a little bit of what Visa Direct really is and why it's so important. If you go back to our history, as you know, we did one thing for a very, very long time, which is to enable consumers to pay businesses or consumers to pay merchants, call it C2B. And that made us most of what we are today. And what that did was money moved one way in our network. It moved from you, the consumer to a business. On one side were consumers. On the other side were businesses. Five years or six years ago, we made some changes to our network to allow the money to move both ways. So it can not only go from you to someone else, but it can also come to you. That's like saying, a car that could only go on drive can now do drive and reverse, which has a massive increase in capability. The other thing we did was we said money should be able to move from any node in our network to any node. Why should it only go from you to a merchant, why can't it go from you to me or from one business to another business? So that was another massive change in capability. And what it really did was to take our ability to serve use cases away from just consumers paying businesses to do P2P, person-to-person or businesses paying you, the consumer, B2C or all versions of B2B, as well as governments paying consumers. So what Visa Direct is really is not a product, it's a capability. And think about Visa Direct as the platform that allows us to take our business from B2C -- C2B, which was its origin to these extraordinary number of use cases across all these dimensions, P2P, et cetera. And what does Visa Direct offer that nobody else can, right? What it offers is an ability to do P2P or B2C or G2C on a scale nobody else can offer. We have a network with more end points than any other network. We have done things to expand our network where we think we can get to 7 billion endpoints around the world. Some of them are card credentials. Some of them are bank accounts. Some of them are wallets. So it's a network with more nodes by an order of magnitude than anything else anybody can offer. The second thing it has is global scale. There are lots of other networks, but many of them are national. Nobody goes as many places as we do on a global basis. Third is its real time, with reliability that's unmatched. There is no network that is up as much as our network is Six Nines, security, fraud prevention, unmatched, the ability to get your money back if you made a mistake and a guarantee that you're protected from fraud as well as reversing transactions. So I can go on and on. So it has all these capabilities that no other network can offer, and that's why it's so unique and which is why Visa Direct is going to be a critical part of our future. And think of it not as a product, but a platform and a platform that enables a whole range of new flows that we never used to be able to serve before. Excellent. Thank you, Vasant. We agree, it's been an important part of our research in terms of the growth algorithm for Visa. So that was great in terms of the context, the growth, the sizing. Why don't we hit a little bit on the mechanics? So, let's say, I am a government or an insurance company, and I want to use Visa Direct. Who do I call? Do I call my bank, a merchant acquirer? Do I call Visa? How do I get set up? Yes. You can do it in all those different ways, and I can give you a few examples. But I also believe in the long run, one of those ways or two of the ways will probably dominate. So, let's say, you're an insurance company that wants to enable getting new money, right. I mean, you may have seen those ads. Somebody is in an auto accident, and they're all very angry, very upset, and then they upload a picture to the insurance company and a minute later they get their money and they're dancing with joy. Well, we enable that with Visa Direct, right. We allow the insurance company to send the money to your debit credential instantaneously, so that you can get your advance, or $1,000, or whatever you advance you're due, right away. So, in that case, the insurance company can do it one of two ways. They can either go to their treasury bank and say, instead of cutting a check, I want you to have the capability where I can send the money in real time to their debit credential and their bank can set it up that way. So that's one way. The other possibility is that, there are intermediaries who are creating businesses that will go to insurance companies and say, hey, we'll enable you to send payments to consumers in many different ways. And we would be the way that they -- we would be the ones who power them. So I'll take another example, let's say, you're in the gig economy and you're selling a service. Let's say you're sitting in Poland and you're doing development for people around the world, the tech development, and you're doing projects and you need to be paid. Visa Direct can do that for you. In this case, you could go to your acquirer who is now enabling your payments, and say, I want you to set this up so that I can get paid right away on my debit credential. And what's good about that is that, they could have a single account where money is coming in and money is going out, so that they don't have to keep money in an account that's pre-funded to pay for their bills. The money comes in, the money goes out in one account, and it can all be netted and so on. You can have a settlement account, so to speak. A third way, which I think will become the predominant way, is partners of ours, and we have 500 partners right now already in Visa Direct, are creating businesses. Take Toast, right, Toast is creating a business serving restaurants, and they offer a wide variety of services. But within Toast are ways in which restaurants can do payments to their workers, can hand out tips, et cetera. Visa Direct powers that. So we could be behind the scenes where you work with an intermediary. We do that for cross-border remittances. And the intermediary then comes to you and offers a full service. And we are the ones who power it behind the scenes. So it's many different ways. I believe the partner model is the one that's going to be the predominant one. These people will come in and create businesses like payroll businesses or whatever, and we will help them scale. Great. Vasant, last one on Visa Direct, and I'm going to turn back to Moshe for A2A payments. But, we talked about this a little bit on the last earnings call. So pricing, what kind of yields can Visa earn on this, and we talked about it being very use case-based, right? You gave the example of the remittance use case is a very -- maybe on the higher end of that pricing spectrum and peer-to-peer being maybe on the lower end. Maybe just talk about maybe some other use cases? And really, how does Visa think about pricing this offering? Yes. Like all pricing, right, it's -- pricing is a function of the value you create and the alternatives people have and what your cost is to deliver the service. It's those three things that always play. And because these use cases are so different, the value you create is very different as well as the alternatives they may have are very different. So if you take remittances, for example, the old way of doing remittances through agents, was an incredibly expensive way of doing business and was very, very expensive in terms of what the consumer paid. We can do it for a lot less. And in that case, we're competing with something that's a high-cost alternative. And it's a service we can offer that is superior to that at a lower cost while still being a very attractive yield. P2P is another service maybe that comes in at a different yield because of the nature of the service. So it has to be use case specific. The other thing is you have to think differently about yields in this business than you do in our core business. You could -- in our core business on a typical transaction we will probably get two sets of fees, setting aside value-added services. We'll get a fee that's a percentage of the value of the transaction. That's our service fee. And then we'll get a fee per transaction, a $0.01 per transaction for processing it. And you add those together and you could say, okay, for that transaction, you made this many cents or dollars. In the Visa Direct space, you could have an ad valorem fee, but very often, it will just be a $1 per transaction, because it could be like a cross-border transaction in remittances, that's fairly large, unlike a typical payment transaction, which could be quite small. But when you translate it on a dollar per transaction basis, it's quite lucrative. And you compare that to a typical dollar per transaction you get in your core business, where the transaction may be, let's say, $20, and you make x basis points on it -- he wants to answer all the questions. And then you make a transaction fee. You add them together. You could make more per transaction on many of these transactions than you do in your core business. So, they can be -- this can be a very lucrative business, but you also have to think differently about how you price the business. So moving on to account-to-account payments. This is an area that, we get a lot of questions about from investors. It's an area, obviously that has grown faster outside the US than in the US, but it has been in the news about banks kind of thinking about and considering this area. I think investors generally understand that there are significant benefits to the card based systems that wouldn't automatically transfer into account-to-account payments. But clearly, there's going to be a move in that direction. Maybe if you could just talk a little bit about the areas in which you think account-to-account payments will be -- will become larger and what Visa is doing to participate in those payment flows? Yes. Look, account-to-account payments have been around a long time. And you have to look at it in the context of what is the -- what are all the -- what is the value we offer versus a typical account-to-account transaction. First of all, we don't view account-to-account payments as necessarily competitive because for a long time now, we've advocated a network of networks approach to our business, which is -- one of the things Visa Direct does is it's network agnostic. We will get your money where it needs to go and it may be on our network, it may not be on our network, but it will have the Visa brand on it and the Visa service package and the Visa service package is all the things I mentioned. It's the low fraud, it's the high reliability, it's the dispute resolution capabilities and so on, that many account-to-account rails, if not most, don't offer. So, we view account-to-account transfers as very much things we would do, and we would use account-to-account rails. I would argue that, while there are people who ask us questions like you did about account-to-account payments, and are they going to be a competitor, I would argue that in the last five or six years, we've taken more business that used to be on account-to-account rails and actually brought them onto our rails. So, if you look at person-to-person payments, five or six years ago, they were all account to account. Today, the vast majority of them are on some version of our rails. So that's a business that's moved out there, in fact. If you look at what some of what we talked about earlier, like insurance payments or payroll payments, they were being done with bank transfers before. Now, they're done on our rails. So I think what people, I think, are not realizing is that, if anything, our new flows businesses have begun to take a lot of volume away from account-to-account rails, whereas accountable account rails have had a very hard time being relevant in our core business, which is merchant payments. And why is that? For lots of reasons. First, it's habit, right? We're all used to paying a certain way and where we are -- it's convenient. We don't -- we as consumers don't pay for it. It takes something for me to change a habit when I'm quite happy with it. And every year, we make it easier for you to pay a merchant, right? You can tap your phone now, you can tap your card, there's e-commerce. You don't have to do anything. It's card on file. We make it -- we take the friction out of it every year. In addition, many of our issuers choose to give your rewards. So if someone wants you to change a habit, they have to, first of all, make it not only interesting for you in that want to change a habit, but also economically has to be relevant to you, if somebody is giving you 2% on every transaction. So, it's been hard for account-to-account rails to come into the consumer payment space for lots of reasons, whereas we've made a lot of headway getting into what used to be traditionally account-to-account payments. And we now have Tink, which is open banking. We have Earthport, which allows us to get access to bank accounts around the world. We have YellowPepper, that's an alias directory that allows us to connect to any more of payment. But most important of all, we view our business is getting your money where it needs to go, and we are not focused on having it just beyond our rails. Okay. Great. Thank you, Vasant and Moshe. I want to move to the next topic, which is B2B payments via card. So, we want to de-scope this a little bit. When we talk about B2B broadly, we really just want to talk about one smaller sub-segment, which is the B2B AP platforms that are sending a smaller portion of their volumes via card, virtual credit card. And we want to talk about the benefits of using a credit card in that scenario. So, oftentimes, we think about the ability to attach data to the transaction, which is important for reconciliation. But we also talk about some of the other benefits of using the card networks, whether it's the money goodness, the certainty, the ability to remove check usage, printing, handling, there are plenty of advantages and reasons to use that virtual card. But the question we often get from investors, including Nik Cremo, who covers Bill.com or Bill, the question is often, what about attaching data to an RTP type of transaction or a FedNow? And can you attach the same type of data and have the same type of money goodness? What are the differences really in using a virtual card versus a, let's call it, a faster payments rail? Yeah. I mean, virtual cards are an extraordinary innovation and it tells you how we have, as an industry, found ways to create new capabilities that existing rails don't offer. What makes the virtual card unique? And why is it better than a traditional account-to-account payment in the B2B space. So first of all, is security, right? It's a single-use PAM, it's a 16-digit number that's used once, and it's gone. Unlike, an alias or even a bank account that you would normally use in a traditional RTP or A2A transaction that sits somewhere, that somebody can access, right? This thing is used for that one transaction. And it disappears. It's incredibly secure. So that in itself is tremendous value. Then you have other things you can build in there that we do. So, virtual cards can have all kinds of controls on them. So you can have restrictions on the amount or you can have a specified amount, so you don't have the risk that somebody has a fat finger and sends a one-way payment that they can't get back. So you're protected in that way. In addition to that, you get all the security features you get from being on our network that you often don't get on RTP networks, which, in most cases, have been proven to be less secure than our network. There are -- there's global scope. RTP networks are national in scope. And as you said, a lot of these transactions are very messy to reconcile. And when it's on a virtual card, the reconciliation is very easy. Now, could they replicate all this on RTP rails? Perhaps, but they haven't done it. It just shows the versatility of our rails, just like we talked about Visa Direct, and how we were able to adapt our rails, virtual cards is another example of how we have been able to adapt our rails and create something that has a lot of value. Maybe continuing in that idea, talk a little bit about the tokenization process, nearly five billion tokens that have been issued by the networks doubling over the past year. Could you talk a little bit about the benefits that these -- using those network tokens in terms of authorization rates and any other benefits that you would cite? And maybe talk a little bit about what you have done to encourage that growth in terms of interchange rates and other kind of incentives and kind of that process. Thanks. Yeah. We've always believed that tokenization was a revolutionary improvement in our network. And we think one day, almost every transaction will be tokenized. And we made extraordinary progress, as you've just described, five billion tokens just in the last three or four years. In Europe, for example, in the last quarter, I believe the number of transactions that were tokenized increased by over 40%. And now in Europe, one in four transactions, are tokenized. That percentage is actually higher in the U.S. So we have made a lot of headway already, and it's going to keep growing. The -- we can already see the benefit. So what a token does, of course, is make the transaction far more secure, because now the data that goes with it is encrypted, it's very, very hard for there to be fraud, because the data that's moving around now is not data that you can really recreate. And so what that does is it gives everybody in our network a greater assurance of security if a token, if a transaction is tokenized. What has meant already is we think that our approval rates for transactions have gone up by three points. What that means is the false negatives, in other words, transactions being turned down for bad reasons, right, have gone down, which means there's just more volume of transactions. And you don't have the dissatisfaction of buying an expensive airline ticket and them telling you, no, because you don't do it normally, and it looked odd and -- but if the transaction is tokenized, it has a higher probability of being approved. So approval rates have gone up. Fraud is down about 28% or so or more. So we're already seeing the benefits. And this is only where the quarter or so of the transaction is being tokenized. Now in addition to security, there are other benefits of tokenization. So I'll give you a few. They all have different names, and I won't go through all our internal jargon on the names. But what are some of the capabilities you can get on tokenization? So for example, if a -- because of tokenization, we can offer a service to merchants where they can enroll you as a card on file consumer without having you fill everything in, right? They can subscribe to a service that issuer is also subscribed to, which allows them through the tokenization process to essentially get all your information. And issuers like it because you're more likely to use a card where you don't have to put everything in, so it could become your top-of-wallet card. That's one service. Another service is, you may have a card at a card-on-file merchant for a subscription, and it may have expired. But through a service, merchants can subscribe to -- through the process of tokenization, when that card is being used, they can search our database and we can give them the new expiry date and they can just go put that in. So they can get paid, and you don't have to go and update your card and they don't have to lose a payment and go through all the hassle. There are other services where, because of the use of tokens, we can give them a much -- we can give you a much clearer picture of how your spending is at different merchants, who you may have card-on-file with and give you some sort of like this is how you -- this is what you're spending on at Amazon, and this is what you're spending -- and this is it all together. We can do similar things for issuers to get a better idea of your -- so we can add on a lot of services in addition to the security benefits that make it easier for everybody in our network to use the network. Excellent. Thank you. Vasant, some, some -- sometimes when we're talking about tokenization and we're trying to explain it to investors, we use the analogy of the Excel VLOOKUP, which I think is an appropriate one. Okay. Great. Let's move on to our second last topic here as we begin to come to a close. It's very topical, the economic responsiveness of the business. So I think most investors appreciate that the top line is relatively resilient and specifically the large US debit business, we just note that in the last recession, never went worse than positive mid single-digit growth. Debit non-discretionary spend, it was very resilient. But let's focus a little bit more on the expenses. So oftentimes, we look at the marketing line item, and we see that you were able to defend profitability during the pandemic. And we look at that line item, I guess what we're really trying to get at is how much of that marketing spend is sort of locked in and contracted to events where it's not -- there's not too much wiggle room versus areas that are maybe less contracted and more discretionary? Yeah. I'll talk more broadly about expenses and also talk about marketing. So first of all, I mean, we gave you what we called our planning assumptions. And we don't view ourselves as economic forecasters and we didn't want to get into the business of predicting if there would be a recession, when there would be a recession, what kind of recession there would be, and so on. But we did set ourselves up to be prepared if there is a recession. The general view is that there will probably be some kind of a slowdown first quarter, second quarter next calendar year, which would be the second half of this year. If you look at the way we've set ourselves up, our expense growth moderates in the second half anyway, right? And our revenue growth actually might accelerate if there's no recession because we don't have the Russia comparisons. That's four points by itself. That's hurting us right now. And the dollar got stronger through the year. So unless you're in the camp that says the dollar is going to get even stronger as we go through the year, the comparisons to last year and the exchange rate drag become smaller. And so without us doing much, our revenue growth actually begins to look better. At the same time, our expense growth moderates because of how we set ourselves up for the year, we said that our expense growth in the second half could be high-end of mid single-digits. So we're setting ourselves up in case there's some kind of slowdown even before there's any kind of recession. If there's a recession, what might we do we're going to have contingency plans. And it isn't just marketing. There are a few other levers we can pull. On the marketing side, yes, there are some parts of our marketing budget that are spoken for. We have to pay certain franchise fees to the various sponsorships we have. We may have some events that will still be there that we will do. We have some money in there that we spend on behalf of our clients. And we would still do that if our clients want to do those things, but there's still flexibility there. In addition to that, a big chunk of our spend -- as you know, we don't have variable costs a lot, and we don't have cost of goods sold. So a lot of our spend in any given year is investments in the future. And that's a balancing act. This is a long-cycle business. If you don't invest today, you won't have the revenue three years down the road. This is not a business where you spend money today and you get the revenue tomorrow. So there's always in our business, a level of investment on future initiatives like Visa Direct and what we're doing with B2B or whatever. And what we can do when times are hard is decide how we want to deal with that investment pool. What investments can we slow down? What investments can we push out? And are there some things that we should just say we can get to that later. And that gives us some flexibility in our technology spend in what we call professional fees. And then there's always what people do, other companies do, in tough times. We can hold back some of our hiring in non-essential areas. We can cut back. We hope you don't, but we can, cut back some travel and meetings, all that. So there's some ability to scale back spending. But it's always a balancing act. You don't want to compromise future revenue. We've done it before; we'll do it again. And it will depend on the nature of what we're looking at. Well said, Vasant. So again, I'm Tim Chiodo. On behalf of all -- everyone at Credit Suisse, all of my colleagues and especially Moshe Orenbuch. We want to sincerely thank you, Vasant for taking the time to join us today. Jennifer Como as well being here in Arizona. And thank you, everyone for joining this keynote at the 26th Annual Technology Conference. Great. Thanks, everyone. Thank you, everyone. It's one of the best settings I've had in a while for this kind of thing. Thank you. Good to see you.
EarningCall_1901	Hello and welcome to todayâs Barnes & Noble Education fiscal 2023 second quarter earnings conference call. My name is Bailey and Iâll be the moderator for todayâs call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the call over to todayâs host, Hunter Blakenbaker, Vice President of Investor Relations. Hunter, please go ahead. Good morning and welcome to our fiscal 2023 second quarter earnings call. Joining us today are Mike Huseby, CEO; Tom Donohue, CFO; Jonathan Schar, Executive Vice President, BNED Retail and President, Barnes & Noble College; and David Henderson, President of MBS. Before we begin the call, Iâd like to remind you that statements we make on todayâs call are covered by the Safe Harbor disclaimer contained in our press release and public documents. The contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or use by another party without prior written consent of Barnes & Noble Education. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call. Thanks Hunter and good morning everyone. As evidenced by our second quarter results, the higher ed industry continues to evolve at a rapid pace and we continue to adapt our offerings to ensure that both BNED and our customers are on a path for mutual success. Given the rapidly evolving market, Iâd like to focus my comments today on three areas. First, weâll provide an overview of our second quarter financial results. During the quarter, our key strategic areas of First Day Complete, or FDC, and general merchandise performed well; however, the traditional Ã la carte course material model declined at a faster pace than we anticipated. Second, weâll discuss the significant cost reduction initiatives that we are implementing across our organization. These initiatives involve streamlining our operational structure and aligning our capital allocation decisions to our highest return opportunities that accelerate growth and drive operating efficiencies. Finally, weâll outline the decisive actions we are taking to accelerate our transition to the FDC model, which removes barriers for students by providing greater access, affordability, convenience and ultimately greater academic success. It also helps colleges and universities meet and exceed their highest priority goals, and for BNED it provides more predictable, higher margin revenue. With that, letâs take a closer look at the second quarter. Our team continued to navigate the ongoing challenges in the higher ed space, particularly the continued negative enrollment trends as well as unprecedented increases in operating and financing costs. The most profound insight we learned acutely from our second quarter results is that even though our First Day Complete model grew significantly, the traditional a la carte course model declined at a faster pace than we anticipated. Factors contributing to this decline included faculty assigning fewer course materials per class and many students electing not to purchase course materials at all. Despite these headwinds, consolidated revenue and adjusted EBITDA were essentially flat versus last year, primarily due to the growth of our higher margin FDC and logo general merchandise businesses. Nonetheless, our expectations entering the second quarter were higher than what we realized given that this was our first operating rush in two and a half years without the cloud of a material pandemic outbreak hanging over it. The engine that drives our overall business is our retail physical and virtual stores and websites, as reported in our retail segment. Total retail revenue of $598.6 million was down 1.7% year-over-year. Gross comparable course material revenue, including product sales and rental income, was down 4.6% and the primary contributor to the overall revenue decline. Mitigating but not completely offsetting the decline in Ã la carte course material sales was the success of our First Day model. The First Day model includes FDC, which includes both physical and digital course work and First Day by course, which is primarily digital. Second quarter FDC revenue grew 97% to $89.9 million and 111 of our campus stores utilized FDC for the fall term, representing undergraduate enrollment of approximately 545,000 students. The FDC Equitable Access Program removes barriers for students by providing greater access, affordability, convenience and ultimately greater academic success. This differentiated strategy is increasingly resonating with institutions. Our pipeline of schools considering FDC is very robust and seven more stores are launching FDC this upcoming spring rush, including University of Memphis and University of Connecticut, bringing total undergraduate enrollment for spring to approximately 588,000 students. Moving onto general merchandise, total GM sales were up 4.5% on a gross comparable basis. Logo and emblematic, which accounts for approximately 60% of general merchandise revenues, saw continued strength while supply products, which includes bigger ticket items like laptops and tablets, saw some softness. While a relatively small contributor to total GM revenue, supply products revenue is most directly correlated to the broader retail industry headwinds. Within GM, we see many opportunities to improve our execution and customer experience, including additional upside from our partnership with Fanatics and Lids as our integration with their capabilities matures. DSS revenues increased 2.3% to $8.5 million. The lower than anticipated increase in revenue was primarily driven by product offering mix as well as lower than expected web traffic. DSS is comprised of Student Brands and Bartleby products. Since our August 2017 acquisition of Student Brands, it has generated steady free cash flow which has been used to finance the growth of Bartlebyâs suite of digital learning and study tools. DSS grew significantly through the pandemic, including more than 30% year-over-year revenue growth in fiscal â22, and in recent years we have made significant investments to support this growth. That said, with our focus on our highest return initiatives, we are shifting our priorities within DSS to maximize our past investments in existing assets with a more rigorous approach to profitability. Moving onto wholesale, revenue declined 2.5% during the quarter while EBITDA increased by $0.4 million. Wholesale continued to be impacted by supply constraints from the lack of used book inventory, lower overall demand due to declining enrollment, and the transition to digital course materials. As we concluded the second quarter, we did not see the anticipated improvements to the operating environment and recognized the need to take swift and decisive action. We started with a deep analysis of all products and offerings as well as our markets, customer needs, operations, investment requirements and expected returns. This work has provided clarity on where we need to create efficiency and strategically invest to deliver on our mission, deepen our strategic moat, and drive our long term growth and profitability. The first part of our plan involves aligning our overall expenses and resources with current market trends. We are taking actions across the company to drive efficiencies, simplify organizational structure, and further reduce non-essential costs. For example, within DSS we are taking a much more rigorous approach to profitability. We are refining and optimizing marketing and content spend, streamlining data infrastructure processes while continuing to test pricing, positioning and features for increased subscriber conversions and engagement. These actions may impact short term growth but we will be on a stronger foundation for fiscal year â24 and beyond. We expect to achieve free cash flow breakeven in our DSS segment in fiscal year â24. Within wholesale, we are rationalizing the workforce to align costs with the declining revenue base and the industry headwinds I mentioned earlier. MBS remains a valuable part of our FDC fulfillment engine. Also, MBSâ experienced and dedicated team plays a lead role in managing our retail virtual bookstore operations and relationships, as well as all retail customer care. MBSâ initial efforts to transition our retail virtual bookstores to FDC are encouraging and will continue. We see a long tail in physical courseware demand and MBSâ wholesale capabilities are proving to be and will continue to be a key competitive differentiator for BNED. Within retail, we are significantly adjusting staffing and related costs as well as sales expectations for the remainder of this fiscal year to align with our analysis of retailâs second quarter sales levels and trends. These cost reductions required difficult decisions and included many valued long-tenured colleagues. We want to underscore how grateful we are for the hard work and contributions of all the impacted employees by these actions, which are necessary to right-size our organization and enable us to invest in our highest conviction growth opportunities. We expect annual run rate savings of $30 million to $35 million from these cost reduction activities once fully implemented. In the current fiscal year â23, we expect to save $10 million to $15 million from these cost actions. We intend to reinvest most, if not all of these savings back into the business in a very targeted manner to fund the advancement of our strategic priorities. Our highest and certainly most exciting priority initiative is the acceleration of the market transition to the FDC sales model. We have led the market change to equitable access over the past five years and in that time, we have invested in advanced proprietary software such as our adoption and insights portal to provide seamless integration with an institutionâs systems, like registration and single sign-on, and personalized mobile optimized student-facing solutions. These investments have allowed us to differentiate and be the clear marketplace leader in equitable access. They also provide the confidence that we can execute on serving a significant number of new FDC accounts with near-flawless execution at higher scale. Based on the positive outcomes that FDC provides our college and university partners, their students, content providers and BNED, we are moving quickly and decisively to accelerate FDC adoptions. We have developed a surgical approach and implementation plan to engage with and transition many more institutions to FDC. For many of our institutional partners, it will be the only model we offer, and we expect the vast majority of our institutional partners and their students to implement the FDC model over the next two fiscal years. We have a substantial pipeline of additional schools seriously considering transitioning to FDC for the fall â23 term, and we will engage with all of our schools in some fashion in this discussion as we execute our plan over the next several months. To accelerate the transition to this model, we are investing in additional sales, marketing, operational support resources and technology to further streamline the FDC customer experience. We will continue to invest in our services and expand our strategic moat as we help facilitate the student academic journey and support improved student wellbeing and academic success. As we transition from offering great products to making a meaningful impact on the highest priority goals at the colleges and universities we serve, our value to the industry will increase and strengthen retention and improve customer lifetime value. We see the inclusive and equitable access offerings becoming the de facto model of the industry. The access, achievement, mental health and affordability benefits to students are clear. The economic benefits that institutions receive are compelling, and a much more predictable, higher margin revenue growth is a critical part of BNEDâs successful path forward with our institutional partners, whose success and ours are truly shared. In closing, BNED is one of the very few strategic assets in the higher ed industry that already has the scale, unique asset mix and competitive positioning to truly meet both the digital and physical demands of the higher ed institutions and students we serve. Whether itâs facilitating a better student academic journey, delivering superior customer experiences, or building lifetime relationships with parents, fans and alumni, our unique approach and set of proprietary assets allow us to support our partners in a more relevant and highly differentiated manner. We are operating with urgency and decisive action to accelerate market adoption of the FDC model. Weâre streamlining the company structure and weâre taking costs out to allocate capital to our highest priority businesses. We have a clear path forward and we are confident in our ability to create durable growth and shareholder value. Now Iâll turn the call over to Tom to discuss our Q2 financials in more detail, as well as our updated guidance. Thanks Mike. Please note that the second quarter of fiscal 2023 consisting of 13 weeks ended on October 29, 2022. All comparisons will be to the second quarter of fiscal 2022 unless otherwise noted. Total sales for the quarter were $617.1 million compared with $627 million the prior year. The decline of $9.9 million or 1.6% was comprised of a $10.3 million decrease from the retail segment, a $0.6 million decrease in the wholesale segment, and a $0.2 million increase from the DSS segment. Retail gross comparable store sales decreased 2.2% during the quarter. Gross comparable course material sales were down 4.6% as the broader industry headwinds were mitigated by the rapid growth of our First Day offerings. BNCâs inclusive and equitable access programs increased revenue by 49% to $143.2 million during the quarter as compared to $96 million in the prior year period. Within this, FDC revenues increased 97% to $89.9 million. Gross comparable general merchandise sales increased 4.5%. Our general merchandise business benefited from strength in logo and emblematic sales offset by softness in more expensive items like laptops and tablets. Net sales for the wholesale segment decreased $0.6 million or 2.5% to $21.1 million. The decrease was primarily due to lower gross sales impacted by supply constraints resulting from the lack of textbook purchasing opportunities during the prior fiscal year, the continued shift from physical textbooks to digital products, and lower demand from other third party clients partially offset by lower returns and allowances. DSS sales grew $0.2 million or 2.3% to $8.5 million. The second quarter consolidated gross margin rate was 23.5% compared to 23.2% in the prior year period. This was primarily due to higher retail gross margins which benefited from a favorable sales mix of higher margin general merchandise sales. Our selling and administrative expenses were down $0.8 million to $107.1 million. The decrease was primarily due to lower incentive plan compensation costs offset by higher payroll in corporate and new and closed stores. As Mike discussed, we recently began taking actions to optimize our cost structure and streamline our operations. We expect to achieve $30 million to $35 million in annualized run rate savings once fully implemented and $10 million to $15 million in FY23. Savings will be in both cost of sales and S&A, with most if not all of the savings reinvested into the business. We expect to recognize a charge of approximately $5 million to $6 million primarily related to severance and other termination benefits during the third quarter of fiscal 2023. Moving onto the balance sheet, our cash balance was $19.1 million at the end of the quarter with outstanding borrowings of $252 million, as compared to borrowings of $183.3 million in the prior year period. This increase is mostly due to cash use and the timing of receivables associated with the significant growth of our First Day offerings. Schools generally remit payment for students enrolled in First Day courses after their student drop/add dates. Maintaining our balance sheet strength and flexibility is one of our top financial priorities. With the strategic actions and cost reduction initiatives we have implemented, we have a clear path to EBITDA growth in fiscal 2023 and fiscal 2024. Capex for the quarter was $10.8 million, an increase from $9.9 million in the prior period. Currently our retail segment operates 1,399 college, university and K-12 school bookstores, comprised of 793 physical bookstores and their ecommerce sites, as well as 606 virtual bookstores. Moving to guidance, given our results to date and our expectations for the second half, we now expect FY23 adjusted EBITDA of $20 million to $30 million. This represents non-GAAP adjusted EBITDA growth of $25 million to $35 million, compared to fiscal year-end 2022. The companyâs retail segment will be the primary driver of non-GAAP adjusted EBITDA growth driven by new First Day Complete implementations, growth within our general merchandise business, and new business wins. [Operator instructions] The first question today comes from the line of Ryan MacDonald from Needham. Please go ahead, your line is now open. Hi Mike and Tom. Thanks for taking my questions. Maybe a first one on the go-forward plan here. Obviously great to hear about the cost saving initiatives that are going into place, but it sounds like youâre going to be reinvesting a lot of those cost savings and really accelerating the adoption of First Day Complete here. One, can you talk about how you drive that accelerated adoption? Do you have to do anything around incentivization from a pricing perspective with the pipeline of university partners that you have; and two, as you think about accelerating that adoption and getting that adoption two years from now, can you remind us of what the unit economics on First Day Complete are and the confidence you have that this accelerated plan will get us to profitability levels that are above pre-pandemic levels, where they were at? Thanks. Ryan, itâs Mike. Iâll make some general comments on that first, and then John Schar, who is our President of Retail, can make some additional comments. One thing I would say about the unit economics is that in connection with our fiscal year â22 earnings release, we did post a fairly detailed review of the economics and how they compare, and we can talk more about it. But I think the main answer to your question is that itâs very, very clear to us that the best model for us to offer to our market for courseware delivery is First Day Complete, and weâve made a decision that based on the scale weâve achieved, the conversations we have with the schools that we serve, both First Day Complete and others, that we have to lead the industry towards that model so that we are presenting the best model to customers. Weâre not doing this to customers, weâre doing it with them. Whenever you have a transition, and this is -- First Day Complete is essentially a subscription model in many respects in terms of how its offered and how its bundled for student benefit. When you have that kind of a model, you have a responsibility, we have a responsibility as a leader in this industry in terms of serving schools and procuring courseware and the best general merchandise to make sure that weâre doing everything we can to accelerate that model, and thatâs what weâre doing. Thereâs been a very detailed school-by-school analysis of how we go about doing this. John and his team have done a great job working with some -- you know, one outside party to really dive into this and come up with a very detailed plan. Weâre already starting to talk to schools and then weâll broaden that communication in the very, very near future. Yes, thanks Mike and Ryan. Thank you for the question on First Day Complete. Just stepping back, our fall term that weâre about to conclude is really the first term of significant scale where weâve executed First Day Complete. 111 of our stores representing almost 550,000 of undergraduate enrollment and really now strong references of institutions across all higher ed sectors -- four year private, four year public, two-year public, large enrollment, small enrollment, liberal arts-based, technical-based and everywhere in between, and weâre seeing significant success really ultimately in student outcomes at those schools. We have implemented research where students are saying their more prepared. This is a model that supports their wellbeing and ultimately their academic success, and itâs based on this, that we feel the impact is going to be even more significant and will continue to accelerate. Only four years ago, we only had four institutions representing almost, I think, 16,000 in undergraduate enrollments, so weâve been able to scale this in a significant way. Weâre also investing and have invested significantly in technology to create a seamless experience and transition to this. Weâve leveraged an institutionâs single sign-on system, registration system, student information systems to have a personalized experience, and now weâre investing in more sales, as we said in the remarks, sales, marketing, operational support in addition to technology to allow us to scale, and really itâs allowed us to scale the number of individual conversations we have with institutions to understand how we meet their needs and how we make a bigger impact on the goals that are most important to them, whether thatâs driving the four and/or six-year graduation rate, attacking student wellbeing or any other goal. We think we can accomplish that and have the team, the focus and the resources now to really execute that, drive First Day Complete growth for next term, and then the vast majority of our institutions in two years. Ryan, itâs Mike. One more comment -- I think the flipside of not doing this is evident in the second quarter, and itâs not just its impact on our results, itâs its impact on the students and the schools because the schools share in our economics, and the fact that the Ã la carte model is declining, it tells us that there are many students, and we know this from our research and conversations, many students just arenât purchasing the courseware they need to be successful. This model puts the curriculum back in the hands -- the control of that curriculum back in the hands of the schools and the faculty, as opposed to just letting the market cause the chaos itâs going to do as digital increases in terms of its market share. This is a way to have a contract, have a relationship with the school that actually means something to them as well as to us, and helps the students. Thatâs helpful color, I appreciate that. Maybe on the cost optimization, Tom, you mentioned that itâs going to be a mix of savings in cost of sales and then S&A. As you looked across retail, wholesale, DSS, can you maybe just help us out and give us a sense of the magnitude of where youâre making the cuts across those three segments as we think about the P&L moving forward? Yes, thanks Ryan. I havenât necessarily broken it out. Weâre in the process of doing it. Itâs a lot of people, it would be people in all three segments, and when you think more on the cost side as opposed to just the people, itâs really switching to the FDC model both in terms of service and support, and really trying to re-focus the capital investment in that area. As we look across, it will certainly be people but it also gets down to the retail level, the store level in terms of store labor and the effects that it has there. Yes Ryan, itâs Mike. I guess the way I would answer the question without giving the numbers that comprised the total is that -- you know, we talked about each of the business units in the script, and from a relative perspective, the employees impacted are probably more significant on a relative basis at DSS and MBS because -- and thereâs some in corporate, but weâre trying to, as we said and as John just said, really focus our investment on our highest return, our core business, and drive our inclusive access model. While there are reductions across the business, the weighting of that really emphasizes focusing the savings in those businesses where we have to really get more rigorous on profitability, and then also have those savings reinvested -- when we say reinvested, we really mean to drive our core business where itâs got the highest ROI. Makes sense, okay. Maybe just one more from me. Mike, you had talked about in one of your comments that students are just -- you know, an increasing number of students not purchasing the course materials they need. I would think that structurally that would be a bit of a tailwind for the DSS business and the Bartleby business. Just curious what youâre seeing there and maybe whatâs causing the slowdown, and are you seeing any improvements in the pipeline here of the school associated Bartleby adoption deals? Thanks. Yes, thanks. Iâll answer the second question first. In terms of the pipeline for what weâre calling institutional, where we have several schools now signed up, that is continuing. As weâve said, though, the main emphasis on DSS is really focusing on more rigorous profitability, getting that DSS segment to cash flow breakeven. Within DSS, as you know, there really are two businesses: the Student Brands business, which is growing, and then the Bartleby business, where we tried a lot of things in the fall in terms of new pricing and some new approaches. Some worked well and some didnât work as well as we thought they would, some of which has to do with the environment weâre in currently, but we learned a lot in the fall and weâre making some significant changes to, I guess I would say, take advantage of the competitive differentiation we have and the ability to offer a different price point in particular, and also leveraging our footprint in a more zealous way in-store and on web than we probably did in the fall. Weâre reining in the capex by not taking as broad questions from international sources, really focusing more on the U.S. and our footprint and becoming much more focused on Bartleby in terms of rationalizing the business to fit the current circumstances and our need to grow to focus on profitability. Itâs been really set up over the last six months to a year in terms of the activities and intentionally to develop and asset for longer term growth. With our financial capacity and the focus on really the core business, weâre reining in that in a bit. Still have great people working there and I think we have great opportunity to set a foundation that positions us for more growth going forward, but the visitors to the sites were down, and thatâs an industry phenomenon. We employ an outside company that tells us about our sites and those that we relatively compete with in this area, and traffic was down across the board, so thatâs something we need to work on and have ideas as to how to do it. Very proud of Student Brands also in terms of their turnaround over the last 18 months or so, being led by [indiscernible] and his group, experts in SCO and machine learning. Thatâs a real gem of an asset that we have within DSS and I think complements what weâre doing in Bartleby and eventually downstream into our core business. Weâre focused on a big change in Bartleby and the approach just in the very near term for spring, and hope to see better results. We canât guarantee that, but weâre focused on it. Thank you. [Operator Instructions] The next question today comes from the line of Alex Fuhrman from Craig Hallum Capital Group. Please go ahead, your line is now open. Hey guys, good to talk to you. I wanted to ask about the cost reduction initiative -- it sounds like after the $10 million to $15 million youâre expecting to realize for the remainder of this year, thereâs another $20 million that you expect to realize long term. How long do you think itâs going to expect to realize that? Do you think youâre going to see the bulk of that incremental 20 in fiscal â24, and then Tom, I think you mentioned itâs your intention to reinvest most of these savings into other initiatives, so how should we think about the impact to the P&L of those cost savings? Yes, thanks Alex. I think the way to think of it is, given that weâre through at this point six months, as we reported, and then obviously through seven months if you count the month of November, the 10 to 15 is really the rest of the run rate basis for FY â23, and when you annualize that, you get closer to that 30 to 35. The steps and initiatives are being implemented as we speak -- some has been done, some will continue to be done, and thatâs really what our expectation is and you would expect the full annualized effect of that 30 to 35 would be in the â24 numbers for sure. Yes Alex, one more comment I would make is that having been through the pandemic and having taken out substantial costs in our shared services and retail right before the pandemic and actually bled into the pandemic in terms of people, we had a perk back on the spring of 2020 where 70 people accepted that. The point is, itâs given us more flexibility in terms of fixed versus variable costs in our labor force so that we can move more quickly now than we could have pre-pandemic, so thatâs why weâre confident in the numbers and getting the benefit now, and then the annualized savings. We also have other areas of improvement that weâre looking at that are just costs -- the margin, etc. I donât want to get into those today that weâre working on, weâre not quantifying any benefits, but weâre not standing still with these actions and these numbers. Weâre going to continue to look at ways to protect and improve the margin of what we offer as well. Yes, and Alex, in terms of reinvesting, itâs really to support the initiatives, with the highest priority being the conversion of schools to First Day Complete. Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting at this time, so Iâd like to pass the conference back over to Hunter Blakenbaker for any closing remarks. Please go ahead. Great, thank you Bailey, and thanks everyone for joining us today and for your continued interest in BNED. As a reminder, our fiscal third quarter earnings will be in early March. Thanks everyone for joining.
EarningCall_1902	Good afternoon, ladies and gentlemen. And welcome to the Fiscal Year 2023 Third Quarter Financial Results Conference Call for Dell Technologies Incorporated. Iâd like to inform all participants that this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies Incorporated. Any rebroadcast of this information in whole or part without prior written permission of Dell Technologies is prohibited. Following prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Rob Williams, Head of Investor Relations. Mr. Williams, you may begin. Our earnings materials are available on our IR website and I encourage you to review our materials and presentation which includes additional content to complement our discussion this afternoon. Guidance will be covered on todayâs call. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, and diluted earnings per share. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our webdeck and our press release. Growth percentages refer to year-over-year change unless otherwise specified. Statements made during this call that relate to future results and events are forward-looking statements, based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our webdeck and our SEC filings. We assume no obligation to update our forward-looking statements. Thanks Rob. We delivered very good results including strong ISG revenue with record profitability and good CSG profitability, despite the difficult demand environment that we highlighted in our last earnings call. The net of our disciplined execution was Q3 revenue of $24.7 billion, down 6% with record operating income of $2.4 billion and record diluted EPS of $2.30. ISG revenue was $9.6 billion, up 12% while CSG was $13.8 billion, down 17%. From a macro perspective, Q3 played out as we previewed last quarter, soft underlying PC demand and slowing infrastructure demand, though storage did hold up fairly well relative to servers with growth in multiple storage types including high end and PowerStore. Our Q3 performance underscores our strategic focus, the advantages of our model and our ability to deliver differentiated results in any market environment. Our unique sales model provides direct real time feedback from customers of all sizes and across geographies and industries, which allows us to see the demand environment shift faster than the rest of the industry. And as the demand environment changed, we reacted quickly and decisively, which showed in our results. We took actions to reduce costs, decreasing our operating expense 3% sequentially in Q2 and another 6% sequentially in Q3. We have now reduced quarterly operating expense by over $300 million since Q1. We reduced server backlog consistent with our Q2 commentary and delivered strong profitability as our model allowed us to access component cost deflation faster than the rest of the industry. And we stayed focused on relative performance in the most profitable segments of the market. Despite some expected distortions in the PC market given elevated competitor backlog, we continued to gain commercial PC unit share in Q3 and have now gained share in 35 of the last 39 quarters. In ISG, we expect to extend our industry leading share positions in servers and storage when Q3 IDC results are announced in December. And we executed on all of the above without compromising our innovation agenda with 30 infrastructure launches in the last 13 weeks, including six new Dell APEX offerings, in strategic areas like multicloud, edge, and subscription and as-a-service. Weâre excited about the launch of Project Frontier, our initiative to deliver an edge operations software platform focused on unifying edge operations across infrastructure and applications for a broad set of industries. And earlier today, we announced the availability of PowerFlex, our flagship software defined storage solution, on AWS. With a cloud-first design point, PowerFlex on AWS is the first of Dellâs industry-leading storage offerings available in the public cloud as part of Project Alpine, our effort to bring our industry-leading storage software to public clouds to provide multicloud data mobility and simplify data management. It will enable customers to use Dellâs storage software capabilities and APIs wherever their data resides, without the need for purpose-built or specialized public cloud infrastructure. Our new Project Alpine related SaaS offerings will add to our growing portfolio of APEX solutions while enabling our customers to harness the power of multicloud. Stepping back, the near-term market remains challenged and uncertain. On one hand, we are seeing some customers delay IT purchases. Other customers continue to move ahead with Dell given the criticality of technology to their long-term competitiveness and a growing need to drive near-term productivity through IT. The world continues to digitally transform, data continues to grow exponentially, and customers continue to look to technology to drive their business forward, no matter the economic climate. As the market leader in commercial PCs and infrastructure, we are well positioned whether a customer is seeking to drive growth, productivity and efficiencies, or a combination. Weâre trusted advisors to our customers, and we have a business model that allows us to adjust quickly to meet their needs. So, we are very confident in our ability to adapt and deliver results despite the near-term uncertainty. Q3 was proof of our underlying advantages and ability to execute no matter the environment. As always, weâll continue to focus on what we can control: taking care of our customers, driving differentiated relative performance, delivering against our innovation agenda, managing our cost position, maintaining pricing discipline, and building a unique and winning culture with our team. This is the playbook that has served us well across multiple cycles, and no matter the backdrop, we intend to accelerate our strategic position, as we did in Q3. Thanks Chuck. Iâm pleased with our Q3 P&L performance despite the tougher near-term demand environment. As Chuck mentioned, we highlighted the softening environment and slowing ISG demand in our Q2 earnings conversation, and the third quarter generally played out as we expected, albeit with server demand velocity slowing a bit more than we anticipated. We continue to focus on executing our strategy to win in the consolidation and modernization of our core markets and we have executed well over the last few years and again in Q3. In ISG, weâve grown our revenue for seven consecutive quarters and have grown our revenue at a 3% CAGR since fiscal year 20. We have been consistent structural share gainers in servers where we are number one, gaining 530 bps over the last 5 years in mainstream server revenue per IDC. In storage, we are bigger than two and three combined, and with our refreshed storage portfolio, we have added to our number one position, gaining share over the last two quarters, and anticipate gaining share in both storage as well as servers again this quarter when IDC results come out in December. Our CSG business has grown at a 12% CAGR since fiscal year 20. As Chuck mentioned earlier, we have gained Commercial PC unit share in 35 of the last 39 quarters including Q3. Turning to our Q3 results. We delivered revenue of $24.7 billion, down 6% with strong ISG performance, particularly in servers. We reduced total backlog by $1.2 billion sequentially during the quarter with CSG backlog now in a more normal range and ISG backlog slightly elevated year-on-year, but substantially reduced from the beginning of the quarter. Profitability was strong in Q3. Gross margin was $5.9 billion, up 2% and 23.7% of revenue. Gross margin percentage was up 2 points, primarily due to a favorable mix shift to ISG and a decrease in our cost of goods sold due to certain components turning deflationary along with declining logistics costs. FX remained a headwind and impacted revenue by approximately 420 basis points. Q3 operating expense was $3.5 billion, down 8% and 14.1% of revenue as we slowed hiring and reduced discretionary costs given the current macro environment. As a result, operating income was a record $2.4 billion, up 22% and 9.6% of revenue. Our year-to-date tax rate decreased to 18.2%, primarily due to geographic mix of income. Q3 net income was $1.7 billion, up 30%, primarily driven by growth in operating income and a decline in interest expense due to our lower debt balances. Fully diluted earnings per share was a record $2.30, up 39% with diluted share count decreasing sequentially to 743 million shares as a result of share repurchases in Q3. Our recurring revenue is approximately $5.4 billion a quarter, up 11%. Our remaining performance obligations, or RPO, is approximately $39 billion, down Y/Y due to a decline in backlog partially offset by an increase in deferred revenue. Turning to our business units. In ISG, Q3 revenue was $9.6 billion, up 12% driven by a reduction in our server backlog, consistent with our Q2 call commentary. Servers and networking revenue was $5.2 billion, up 14% and Storage revenue was $4.4 billion, up 11%. As mentioned, we did see softening unit demand in servers somewhat offset by higher average selling prices given richer configurations driven by customers running more complex workloads. ISG operating income came in at a record $1.4 billion or 14.3% of revenue, which was up 390 basis points as we benefited from scale with lower operating expenses and pricing discipline. Our Client Solutions Group revenue was down 17% to $13.8 billion, primarily due to underlying softness in both Commercial and Consumer demand. Commercial revenue was $10.7 billion, down 13% and consumer revenue was $3 billion, down 29%. Average selling prices trended higher in both Commercial and Consumer as customers bought PCs with richer configurations. CSG operating income was $1.1 billion, down 7% primarily due to scaling, partially offset by stronger gross margin percentage and lower operating expenses. CSG operating income was 7.7% of revenue. Dell Financial Services originations were $2.3 billion, up 17% with strength across geographies and DFS ended the quarter with $13.8 billion in assets. We have historically seen stronger originations, and more recently an increasing interest in subscription models, as the macroeconomic environment slows. Turning to our cash flow and balance sheet. Our cash flow from operations was approximately $400 million in Q3 and is $3.9 billion on a trailing twelve month basis. Q3 cash flow was helped by profitability but offset by the sequential revenue decline in the P&L and a use in working capital. Within working capital, inventory was up sequentially as we strategically accelerated purchases of some key components as we continue to navigate through supply chain dynamics. Improving working capital efficiency and reducing inventory remains a priority. Our core debt balance is $16.2 billion and our core leverage ratio is 1.6x. We ended the quarter with $6.5 billion in cash and investments, down $600 million sequentially principally due to $800 million in capital returns. Turning to capital allocation. We repurchased 16.3 million shares of stock in Q3 for $609 million and paid $238 million in dividends. In addition to our $1 billion annual dividend, since the beginning of our current share repurchase program, we have bought back 70.3 million shares for $3.36 billion. Going forward, we will continue our balanced capital allocation approach, repurchasing shares programmatically to manage dilution while maintaining flexibility to be opportunistic. Turning to guidance, considering the demand environment, we expect Q4 revenue between $23 billion and $24 billion, down 16% at the mid-point, with ISG roughly flat. Similar to Q3, currency continues to be a headwind for us. We are expecting a roughly 500 basis-point impact to Q4 revenue. We continue to be focused on managing cost, however, we do expect to see a roughly $150 million OpEx increase sequentially given the extra week in our fiscal Q4. We expect our interest and other expense to be up $60 million sequentially driven by interest rate volatility and the impact on our derivatives portfolio. For our non-GAAP tax rate, you should assume 22% at the midpoint, which reflects a 19% plus or minus 100 basis points rate for the full year. We expect our diluted share count to be roughly 730 million 735 million shares. Netting this out, we expect diluted EPS in the range of $1.50 to $1.80, down 4% at the midpoint. I recognize that many of you have questions about our view on fiscal year 24. Itâs still early in our annual planning process. However, Iâll frame our current thinking. We expect ongoing global macroeconomic factors including slowing economic growth, inflation, rising interest rates and currency pressure to weigh on our customers, and as a result, their IT spending intentions even as they continue to digitize their businesses. These dynamics are creating a broader range of financial outcomes for our upcoming fiscal year, particularly as we think about the second half of the year. With what we know today, itâs likely next yearsâ revenue is below historical sequentials using our Q4 guidance as a starting point. In closing, we delivered strong third quarter financial results. We have strong conviction in the growth of our TAM over the long-term even though some customers have paused purchases in the near-term. And we are committed to delivering our value creation framework with a revenue CAGR of 3% to 4%, a diluted EPS CAGR of 6% plus, and a net income to adjusted free cash flow conversion of 100% or better. Since fiscal year 20, our revenue has grown at an 8% CAGR, our diluted earnings per share has grown at nearly a 20% CAGR and we have exceeded our net income to adjusted free cash flow target in each of the last three fiscal years. We have also committed to return 4% to 60% of our adjusted free cash flow to our shareholders over time and have returned $4.1 billion of capital to our shareholders over the last 12 months through share repurchase and dividends. We will continue to be disciplined in how we are managing the business and our financial posture in this complex macro environment, focusing on what we can control and helping our customers along their digital journey. Thanks, Tom. Letâs get to Q&A. We ask that each participant ask one question to allow us to get to as many of you as possible. Letâs go to the first question. Yes. Hi. Thanks for taking my question. And Chuck, Iâm just kind of curious, you mentioned about how the IT spending is softening. What do you see across the ecosystem? Is it across all enterprises, the large and smaller ones? And within that, where do you think theyâre focusing their budgets on right now? Is it more server storage or software? Just kind of curious, any thoughts you can give on the IT spending environment weâre seeing. Yes. Thanks, Krish. Let me give you a little bit of the texture that weâre seeing. But maybe let me start by just highlighting. Look, we executed very well in what was a very dynamic environment. As weâve highlighted, our principal objective in this environment is to deliver relative performance and share gain. And in Q3, we did that across client server and storage, and we delivered very good profitability. So, while weâre not going to get into specific demand numbers today, let me offer some texture on the environment that weâre seeing. First, I would just say that the CSG demand environment remains challenged with, as you saw in our results, consumer weaker than commercial. We saw slowing server growth. As Tom highlighted in our prepared remarks, it was probably a little bit worse than we anticipated at the time of our Q2 earnings call. And so as we said, Q3 server revenue growth of 14% was aided by server backlog reduction and storage fared better. Itâs ultimately not immune to the broader dynamics weâre seeing across customers, but we saw growth across multiple storage categories, including the high-end HCI and PowerStore. To your direct question about texture underpinning that, those dynamics were largely consistent across geographies, weâd say, verticals as well and customer size. Thereâs probably a couple of exceptions we would call out. One would be China, which had a much more pronounced weakness last quarter. And we would highlight the energy sector, the U.S. government sector and then medium business generally globally as performing better relative to the rest of the business. And the customer feedback is very similar to what we described in Q2, very cautious and deliberate behavior in the face of whatâs a lot of economic -- macroeconomic dynamics out there. So, weâre hearing reassessment of budgets, reprioritization of spending and customers buying effectively for just their immediate needs. So net, I would say Q3 was a continuation of the trends that we called out during our Q2 earnings call. Tom, maybe this is for you. Can you kind of elaborate on your earlier remarks about the framework for â24. Just to clarify, when you talk about -- obviously, thereâs a lot of moving pieces, but how do you think about the historical sequential moves as we move through the year? So, are you trying to communicate that we basically start with Q4 and then take sort of a normal sequential pattern over the last, letâs say, two to three years and sort of maybe haircut that a little bit given the uncertainty? Just trying to maybe level set since my line dropped a little bit. Thanks. David, happy to sort of elaborate on that. Obviously, as we look at the environment, itâs pretty early in our planning process from a fiscal year â24 perspective. Clearly, the landscape and the dynamics are complex, and thereâs a high degree of complexity out there, whether itâs around inflation or interest rates, whatâs going on with FX, global growth in general, supply chain, geopolitical. I could probably go on, but you get the point that at this point, thereâs -- as we look at it, thereâs a pretty wide range of financial outcomes depending upon how some of these things move and change on us. And in particular, I would say the back half of next year continues to be -- has a fair amount of complexity. So, Chuck mentioned that we do see customers with a bit of cautiousness in their spend right now. I think thatâs pretty evident. And so that said, weâre going to focus on what we can control, meaning weâll focus on ensuring we help our customers as well as ensuring we manage the P&L properly, both -- and be tight on both spending and customer satisfaction. And just a reminder, I would highlight that from a spend perspective, weâve been focused on spend now for a number of quarters as we have restrained hiring and put other cost control measures in place. But having said all of that, what I was trying to elaborate while I donât want to get into exactly what next year looks like because weâre still working our way through it, we do think itâs going to -- itâs got some complexity and some challenges to it. And as a result of that, if you took sort of the midpoint of our guide and then ran historic -- normal historical sequential, say over a couple of -- two-year historicals and maybe hair cut those a bit, I think youâre going to be in the ballpark of what our current thinking is, recognizing thatâs going to continue to evolve and change over the coming months. Maybe the other data point to help you triangulate on that is if you look at P&L revenue growth in the back half of fiscal â23. So obviously, the minus 6 that we just printed for Q3, at the midpoint, minus 16 of our Q4 guide sort of points to a minus 10, minus 11 sort of growth rate, and thatâs probably something you ought to think about as you do that math. I was hoping to dig a little deeper into CSG. Obviously, in the guide, that sounds like itâs a little bit more challenged of the market. I think you mentioned ASPs were up in the Q3. So can you talk a little bit about kind of where we are with channel inventory in commercial and consumer? What you see going on in the pricing and what impact that will have in margin? And maybe if you could just throw in whatâs going on with your backlog. Iâm sure itâs being worked down as well. Itâs probably multiple parter there, but I think you get the gist. Thank you. Yes. Tim, thereâs a lot in there. Let me start to unpack it and weâll probably double or triple team this one. So look, obviously, itâs a challenging PC market backdrop. So maybe Iâll just start with our current internal estimates for this year, which I think we shared on our last Q2 call of sort of 280 million to 290 million industry units. Thatâs still our estimate as we go into Q4. And that implies sort of a mid double-digit decline in units year-over-year. And I think that would be the single largest percentage decline in recent history. Youâd have to go back to 2015 to see something sharper. So, thatâs the reality of the backdrop today. And as I highlighted, commercial is holding up better than consumer, and thatâs clearly consistent with long-term industry trends. Commercial PCs, excluding Chrome, tend to be the more durable portion of the market, along with premium consumer and gaming, and thatâs where weâve been focused. And so thatâs the dynamic that we see right now. As expected in that environment, from what weâve seen, channel inventories remain elevated. We see promotional activity to sort of move units through distribution in particular. And as I said, customers are sort of waiting for -- to purchase for their immediate needs in this environment. In terms of pricing, you mentioned ASPs. Look, pricing has remained relatively stable across our businesses. If I stay on PCs for a moment, thereâs a number of factors. Clearly, in this demand environment, weâve seen a more competitive pricing environment. Consumer was the first clearly to see that pressure a couple of quarters ago, and it remains very competitive, and we saw the pricing environment get even more aggressive as the quarter progressed. I would call commercial also as very, very competitive right now given the slowdown we were describing. Weâve seen more aggressive pricing, particularly in the largest accounts as the quarter progressed. And so, thatâs the backdrop, as you can imagine, from a supply chain standpoint, supply and demand are -- where they were out of balance last year, weâre now on more standard lead times across the portfolio, and weâre really in a position where what we sell is what we ship in any given quarter, and thatâs the dynamic in CSG. I guess if I can just talk about the sort of initial thoughts that you provided on fiscal â24 and understand some of the challenges and headwinds on the top line. But, maybe if you can talk about what youâre thinking in terms of the sustainability of the gross margin, particularly Iâm assuming some of the mix impact carries over on ISG versus CSG. And youâve had a couple of quarters of sequential decline in OpEx here. But, as you sort of look forward, how are you trying to align your cost structure to that sort of demand environment that youâre thinking of? And sort of what are the puts and takes when we think about the rest of the P&L in fiscal â24? Yes. Hey Samik, So look, I donât want to get into talking through every line item. I mean, we gave you some early thinking just so you guys sort of think your way through what the P&L dynamics at a top line might look like. Iâd highlight a couple of things though, right? So first, as it relates to gross margin stability and our OpEx, look, weâll work our way through what margin dynamics will look like. We do expect right now that component costs are deflationary in the first half of next year with what we know today. We do think that the back half potentially may change just given some of the supply-demand balances that are out there as we work our way through the year. Obviously, in a declining demand environment, if there is a little bit of ASP pressure, which we would expect that we might see next year. However, I do think that if you look at our mix of products and where weâre focused on in markets, weâve got, whether itâs due to configuration or attach rates in the client space or the fact that our servers that weâre shipping have a thicker content rate from a memory perspective, those would all be helpful as well. From an OpEx -- so margins, I think weâll have to work our way through. OpEx, look, I think weâve taken cost actions that have demonstrated the fact that we can control OpEx. And if anything that weâre very much focused on how do you manage your way through a complex environment like this, we will adjust our spend targets and our cost envelopes as appropriate to manage the P&L. So, I feel pretty confident in our ability to do so. The actions weâve taken already, you can see them in the P&L, and weâll continue to work our way through that. So look, I think itâs early to sort of talking full P&L at this point. Again, I just wanted to make sure you guys have some context around top line as we see it right now. I guess, I was really hoping you could talk a bit more about the ISG side and the performance this quarter. Is there a way to understand and look at ISG in aggregate or maybe even server and storage? How much of this growth is backlog versus end demand? And it sounds like the end demand was weak as one of the related slides goes 2 buckets up. And then Tom, I think you mentioned the OpEx headwind or the OpEx impact from the extra week in Q4. I could have missed this, but could you just tell us what the revenue benefit in Q4 as well from an extra week? Thank you. Yes. Amit, I mean, maybe Iâll jump in on the business. Iâm not sure I have a ton to add to our prior answers other than to say, look, the server business, we saw slowing server growth. We had hinted at that -- not even hinted at that, stated that in Q2 and had anticipated coming into the quarter. I would say, look, it worsened over the course of the quarter vis-Ã -vis our Q2 earnings call. And therefore, our server revenue growth of 14% on the P&L was aided by server backlog reduction. And we would characterize server backlog is now roughly in its normal range. Storage is a bit of a different story. It fared better. We saw growth across multiple storage categories, high-end HCI, PowerStore. I would say storage backlog remains somewhat elevated relative to historical norms, given the larger business weâre in. And so, a little bit of different dynamics across server and storage, but all in all, a continuation of the trend that we saw in Q2. As it relates to Q4, there is an extra week there given the dynamics of our fiscal year. Any impact of revenue/margin, and the results are already -- weâve already embedded that in our guide. Obviously, if you think about an extra week, there is some level of incremental transactional demand that you get from some of our more transactional businesses, but a big majority of our business is also project and bid based, which doesnât really get impacted by an extra week end of quarter. So, our guide envelops all of those above. I want to go back a little bit to the margin profile and maybe understand the dynamics of deflationary component costs and how quickly youâre being able to capture that in your server business. I guess in the context of just thinking about the pressure on the model, how do we think about the sustainability of that operating margin given very strong performance this last quarter in terms of ISG in that context. Hey Aaron, itâs -- let me sort of try and unpack that for you a bit, right? So look, as Chuck -- Chuck has already highlighted what we saw from a pricing environment perspective. Obviously, we talked about the fact in Q2 -- in our Q2 call that to the extent that we saw that weâre in a component cost deflationary environment, we tend to do reasonably well from a margin perspective, given that we donât move pricing as much as costs come down or the pacing of that is different. And I think thatâs what we saw this quarter. So, we had lower input costs from component costs as well as logistics costs. We obviously priced for FX and some of the other dynamics that we saw in the environment. As a result of that, given the configuration and the amount of memory and storage weâre putting on the servers particularly led to some better-than-anticipated margins, I would say. And so, our ability to hold on to that -- over time, you obviously have to adjust pricing for some of those market commodities. But again, thatâs only one element of the pricing stack and you get into things like mix and configuration as other impacts. I donât know if Jeff -- maybe add anything. Maybe to add to that back to our model and inventory. We have a lower inventory model, one of the benefits of how we run the company since beginning. And it gave us availability to the lower cost component, I think, earlier than most. Our supply chain has executed well through this time. We had fewer mismatch sets. So, we were able to convert the demand shipments and the backlog shipments throughout the quarter. And as a result of that, we were able also to take advantage, as Tom said, lower freight rates, lower expedites, lower supplier premiums, and weâve obviously benefited from that throughout the quarter. My question is on cash flow. So, I noticed your first three quarters of the year in aggregate, free cash flow was negative. And you talked about building some strategic inventory in the last quarter. How do you think about Q4, by definition, for the rest of the year? And as we think through next year, do you expect cash flow to exceed your net income? I guess I am asking how long do you think it would take working capital to get back to normalized levels. Thanks. This is Tyler. Iâll take that one. So look, I think maybe just to start, if you think about the last couple of years, right, cash has been really strong, right? So, we were seeing that build given that negative cash conversion cycle, and we obviously benefit from that. I think what weâre seeing now is the opposite of that, right? And thereâs two things happening, and you talked about it, right? So, weâve got the contraction in the P&L, which is impacting cash and then working capital. And our intent, obviously, is to drive those working capital balances down, but we also donât want to miss opportunities and you saw us take advantage of that this quarter, which impacted cash. Now, as Iâm thinking into Q4, and Iâm thinking it next year and recognize we donât provide guidance, I think you have to keep that in context that, one, Tom has talked about that there will be some pressure in the P&L, and that will impact cash. But at the same time, we do have opportunities in working capital, and itâs quite substantial, right? So, weâll be focused on driving that down. And obviously, thatâs something we know how to do, and weâll be smart about it. But thatâs how Iâm thinking about it. Yes. And then, Tyler, I would -- look, we historically do generate cash and Q4 tends to be a seasonally stronger quarter for us. Now, weâll have to work our way through this quarter. But look, Iâm confident in the long-term model in terms of cash generation. Itâs -- obviously, when weâre on a negative working capital or negative cash conversion cycle, when you get sequential revenue decline in the P&L, youâre going to use cash. And thatâs what weâre seeing. But, team is managing its way through it. Weâve got work to do in inventory. Pleased with what weâre doing in receivables in terms of what that looks like in terms of the aging profile, collections, our ability to manage our way through it. So, itâs just one -- weâre in a cycle where weâre just going to have to work our way through it. But long term, I believe the model is intact. Maybe just if we unpack the fiscal fourth quarter, the January quarter guide for a bit. Would just love to know maybe if you could double click on -- or elaborate on your comments on kind of pricing versus volume, whether we should think of both of those as a headwind or whether some of the richer configs helped to offset some of the discounting that you mentioned to allow pricing to still grow over a year. So, just really pricing versus volume comments for the January quarter. Yes. Look, hey, as we think about the guide, right, so â23 to â24, â23, â25, obviously, at the midpoint of minus 16, we essentially say that we expect ISG to be roughly flat. That sort of implies that the client business or CSG is sort of in the negative -- minus mid-20 sort of year-over-year growth. Look, as we work our way through whether units versus ASPs, Iâm not going to get into a lot of detail, but I want you to think a little -- if you think about margin dynamics in Q4 for a second, so youâve got some seasonal dynamics that typically happen in our Q4. One, tends to be a stronger storage quarter for us given the corporate budget cycle, the calendar year corporate budget cycle that tends to be a positive in terms of margin dynamics. The flip side of that is you get into the holiday season. Traditionally, that has been a bit stronger from a consumer PC perspective, which has put, as you might imagine, shifts the mix a little bit and puts some -- a little bit of downward pressure on margin, coupled with -- we highlighted the fact that we did see some incremental commercial PC discounting in Q3, particularly in the third month of the quarter. And obviously, we have -- there are elevated inventory levels in the channel. So, we put it all together and quite frankly, we sort of think about margins from Q3 to Q4 at an aggregate level as being roughly flat. And then you couple that with the OpEx dynamic that Iâm talking, we highlighted, that sort of gets the quite frankly, the P& L walk as you think about it. I had a margin question also. I was just curious, when we look at sort of the big beat in gross margins this quarter, you mentioned a lot of different dynamics, including things that seem under your control a little bit, like configuration and content attach rates. So, how much were you able to manage the margins up versus just circumstance? And how much can we sort of think about Dell going forward in the tough environment, being able to manage the gross margins a little bit better? Thanks. Yes, let me start. I think, look, Q3 highlights -- I think itâs both the advantages of our model and very good execution in quarters. So look, foundationally, if you unpack Q3, clearly, we saw higher ISG mix. And as weâve said, a relatively stable pricing dynamic. And that pricing dynamic is a combination on the PC side, richer configurations and a more favorable mix of product along with higher attach rates, helping offset PC unit declines. And then, on the server side of the business, higher content rates, so think memory, SSDs, richer GPUs, offsetting the unit pressure. So I think thatâs just foundationally. But I think the real margin story is what we were talking about a couple of questions ago, with Q3 being deflationary and our lower inventory model, it allows us to access component deflation faster than the industry. And then when you couple that with our ability to see the demand signal quickly and react, we were able to lower OpEx as we put in the prudent cost controls that Tom described. So, those were the puts and takes across Q3. A lot of that is in our control. Some of that is the advantages of our model in this environment. Maybe to add to that, another view of inventory is we donât have excess channel inventory. Weâre not in a position of having to discount that, not in a position to have to promote that. Weâre not in a position where you have to go chase volume. We have a conscious strategy in the high-price band [indiscernible] consumer and the focus on commercial. That gives us historically, and I think weâre seeing it today, an advantage in the market. So, weâre not having to respond to that discounting and promotional activity to burn down excess inventory. Plus by the fact that we have lower inventory, just as Chuck said, we were able to take advantage of lower input costs, component costs throughout the quarter. Coupled with that, like -- maybe I wasnât clear earlier, but I think itâs worth emphasizing again, the logistics costs have come down. As supply now is ahead of demand, weâre able to put things on the ocean. We donât have to expedite as much. Weâre not using as much expedited air freight. Those all go into our input cost equation, which obviously helped us in the bottom line and the performance of this quarter. Itâs actually Ruplu filling in for Wamsi today. Can you talk about the component shortage environment that is still affecting maybe ISG? And if anything, on the CSG side, did you have any revenue that you left on the table because you werenât able to get all the parts? And then just on ISG, you talked about backlog reducing this quarter. How far would you say that we are out from backlog normalizing? And do you think youâll get any support on that on the server side, or is it -- or the backlog is all on the storage right now? Thank you. Sure. Let me try to break that down those multiple questions and at least as I think about supply and where some of the shortages are. If I look at the CSG business, again, largely a handful of minor exceptions, supply is ahead of demand across consumer PCs, commercial PCs, displays, docs, to the point that weâre now able to readjust our freight networks to take advantage of that. Weâre in a good position. Servers, we had -- as the team mentioned, we talked about backlog and backlog reduction. I tend to think of it -- since you asked about supply, where are the hot spots in supply. They tend to be in power supplies, they tend to be in the power ICs and high-performance NICs. Those are still constraints in the marketplace today. I think we weathered the storm quite well throughout this period of time and particularly in Q3 and it allowed us to maximize server shipments. In storage, the shortages would be in these custom ASIC parts. So, think of it as FPGA, CPLDs, those types of devices. The best way we translate this to our customers is in the form of lead time. I donât think -- I canât remember the last time I was in front of you all and said the PC product line is essentially on standard lead time. Itâs been a long path through this COVID supply chain challenge time to be able to say our PC product line is on standard lead time. Our server product line, a large percentage of that is on standard lead time, and it will improve throughout the quarter as well storage. So, if I think about it in terms of specific backlog, we are at normal backlog in PCs. I think weâre at normal to near normal backlogs in servers and a slightly elevated backlog in storage. I think that answered all three of your questions. I wanted to see if you could maybe talk to the general idea of why storage would or would not be correlated to servers, in the sense that youâre seeing slowing demand in your server business, should that signal coming or threats to the storage business, or should we think of them as trending differently? And if so, why? Thank you. Yes. Look, Simon, I would say, look, we would never argue that storage is immune to the broader IT spending dynamics that are out there. What we would say is from where we sit right now, itâs held up better in our Q3. I think youâre right, historically, thereâs been a correlation, but it tends to have less amplitude than, say, our commercial PC market or the server market. Clearly, right now, data is exploding. The world needs more storage. And so, when we flash forward to whatâs implicit in our guidance, weâre anticipating a seasonally strong storage quarter in Q4. And so, I think while youâre right, historically, thereâs been a correlation between our server and storage business, at least from where we sit right now, weâre still seeing strength in the storage market. And maybe one quick point to add is -- and we participate in the entire storage market, primary storage, data protection, increasingly the cyber resilience side as well as the HCI side. That broad portfolio, I think, helps us weather these cyclical changes more than others. Yes. Thank you. Iâm just trying to square how much worse incrementally and sequentially you think demand may get in fiscal Q4. So, when I kind of look at your numbers, typically, youâre up from Q3 to Q4 by 5-plus-percent. So, letâs say, $1 billion. An extra week will probably add a minimum of 5%. I get -- I know you have contractual business, but you have an extra week to deliver those on those contracts. So, thatâs up another 5%. Thatâs $2-plus billion. So normal seasonality, youâd be up $2-plus billion, and youâre guiding basically to be down $1 billion. So itâs a $3 billion delta versus normal seasonality. So, I guess, a couple of questions. Does that imply that you see demand getting incrementally worse? And are you anticipating any backlog drawdown? I get it was $1.2 billion in the quarter, but that doesnât explain the $3 billion delta versus normal adjusting for the extra week. So, are you expecting any backlog drawdown in Q4? And how elevated in dollar terms is the storage backlog relative to where server was, entering Q3? Thank you. Hey Toni, let me try and answer some of those questions anyway. So, as it relates to Q4, look, I think as we think about clearly, weâre projecting that the business continues to soften, right? I mean, I think thatâs pretty apparent given the fact that Iâm telling you now that we expect PC revenue to be sort of in the negative growth -- mid-20s year-over-year negative growth. Iâm expecting client -- or Iâm sorry, ISG to be roughly flat versus where they were this quarter. So the business is softening. I think weâll manage our way through that like we always do. As it relates to the 14th week, there is a little bit of extra transactional demand in there. Itâs not that significant. So, I havenât done the math on your $3 billion or your -- that 5% comment. But look, what weâre trying to give you a point of view on is that we think demand does soften, right? And if you think about our guide for next year, thatâs sort of court -- follows from there. As it relates to backlog, look, we donât forecast what happens with backlog in terms of how weâre going to talk to the Street about it. But weâve just talked about the fact that in general, backlog is back in normal ranges. Yes, in storage is slightly elevated. So if thereâs any opportunity, it would be there, but thatâs very much going to be dependent upon linearity of the quarter and how the storage orders come in, which has always been an interesting dynamic with the storage business for us. So, what weâve told you is our best point of view at this point in time, and weâll continue to manage the business tightly as a result. I donât know if Jeff or Chuck, youâd add anything to that. Well, I think it lies in the PC side. I just did a quick look in our webdeck. Last Q3, we did $16.6 billion of CSG revenue. This Q3, itâs $13 billion, [ph] there probably lies [indiscernible]. The only thing I [indiscernible] explicitly, as you commented about service weakening during the quarter. You didnât really comment that PCs were weakening throughout the quarter. And Iâm wondering whether that was indeed the case because if it wasnât, itâs not really clear why the guidance is where the guidance is, unless youâre expecting real changes in ASPs. Yes. Look, I think we saw -- as you think back to our Q2 commentary, what we talked about the fact that we saw PCs -- consumer PCs have been soft, and we saw commercial PCs weakening. So I think thatâs pretty self-explanatory. Tom or Chuck, Iâm not sure who mentioned it. I wanted to go back to one of the comments that was made, which is that youâre seeing increasing interest in subscription models. I donât know if you can talk a bit about what customer bases are interested in them. How we should think about -- I know theyâll have a little bit of a dampening impact to revenue, but obviously locking in recurring revenue. So, maybe if you can just discuss a bit of what youâre hearing from customers. Thank you. Yes. Thanks, Shannon. Itâs Chuck. Iâll start. Look, itâs -- thatâs been our APEX business, which in Q2, we highlighted that we sort of hit the $1 billion milestone and saw it growing at a continued healthy rate and adding new customers. Weâve been consistent that weâre going to be thoughtful about how we discuss progress there. Weâre not -- certainly not going to provide sort of quarter-to-quarter updates. And so, we can share metrics that can be traced clearly back to the P&L. But what I would tell you is interest remains very high in our subscription offers. We saw again triple-digit customer growth and healthy ARR growth in the quarter. And we continue to invest in the portfolio and our webdeck as a whole series of new APEX offers that weâve released since we last spoke in August. We tend to see broad-based interest. Right now, it does tend to be concentrated at some of the larger companies in the medium-sized businesses in the world, but weâre getting a lot of interest in conversations from customers as they try to navigate this macro environment as you would imagine. Itâs not sizable enough relative to our $100 billion trailing 12-month business to sort of go much more beyond that. We are getting a lot of customer interest. Iâm sorry, Shannon. I was going to add the new backup target service that we just announced. Itâs a pretty exciting offer. What weâve done around expanding our geographic capability, and our channel capability and our customer managed option capability around ADSS, I think, is another extension that we can continue to grow on. And then the two as-a-service offers that weâve extended one, the Red Hat offer that we announced back in September. And then secondly, the new one, which is the APEX high-performance computing service, I think, is another opportunity for us to grow. And I can tell you the pipeline is full of continued [ph] APEX offers. Thanks, Shannon. Hey Keith, weâll take one last question, and then weâll turn it back over to Chuck for closing comments. Thank you. And I actually only have one question and thatâs on your inventories. While they were up and you talked about a deflationary environment for the need to secure some pretty key components, which is understandable, can you talk to us about when you think youâll actually kind of renormalize inventory and working capital, or is it just better simply to hold more because with the deflationary environment, you just kind of have to wonder here, but I understand thereâs shortages? Yes. Hey Jim. Look, I mean, it is my goal, and I think the goal of all of us here that we need to manage inventories down. We built it over the last couple of years given the supply chain dynamics going through the pandemic. In a deflationary environment, you clearly want to hold less inventory. And so, Iâm not going to give you an exact time line on where we -- how this thing sort of unfolds. But I think absent the strategic buys we did this quarter, the inventory actually came down quite nicely. The strategic buys we did -- made economic sense. And so we -- that was the whole point behind that. So, I do think itâs going to be a few more quarters as we continue to normalize inventory. And then, weâll have to evaluate this as we go in terms of whatâs the right level, given the supply chain dynamics, and so, more to come on that. But in the meantime, over the next few number of quarters, weâre pretty focused on pushing inventory down from a working capital perspective. Thanks for that, Jim. Before we end the call, Iâm going to leave you with a few final thoughts on behalf of the team, and then weâll wrap. Look, we delivered strong performance over the last few years, and we delivered again in Q3. As we discussed today, Q3 highlights the advantages of our model. We see changes in the market first, and we react and position the business to outperform. So, in Q3, we took appropriate cost action. We drove share gain. We delivered very good profitability. We drove our innovation agenda forward, and we delivered against our capital return commitments. And thatâs what we mean when we say that we can deliver differentiated results in any market environment. We do expect the demand environment to be challenging in the near term. But the long-term trends remain very much in our favor. And importantly, we have a seasoned leadership team led by Michael, Jeff and Tom, who have a strong track record of delivering across these challenging economic cycles. So, weâre going to stay focused on what we can control, and we remain committed to delivering differentiated results for our stakeholders as we did in Q3.
EarningCall_1903	Well, thank you all for joining us on our day two of the conference. It's a pleasure to have the management team from GSK ViiV business. And I always really enjoy having them and that's been a tradition now since the first time we ever did this conference in Boston. So, really good to see you guys. Absolutely. There's a lot of talk about, but I felt like it's always a great idea to turn it over to you. I feel like you guys framed the discussion very well every time. So let me defer to you. Great. Thanks, Umer. So at our business investor update last year in November, we made some commitments in terms of our progress during the next decade, both commercially and from an R&D perspective. So we talked about mid-single-digit CAGR, between 21% and 26%. We talked about Cabenuva and Apretude together, being at around Â£2 billion of value by 2026. And we talked about the excitement that we had about our early development pipeline, but we had a number of milestones, which we knew that during 2022, we needed to deliver, to build confidence in the future of the -- beyond the loss of exclusivity of dolutegravir. And, I would say, 2022 has been a great year, like beyond our expectations, I would say, both from a commercial performance perspective, from an R&D perspective. So we are currently guiding that we will grow high single digit this year. And that's really powered by the performance of our innovation brands, principally Dovato and Cabenuva, but also Apretude has been launched. Fosamprenavir is doing well. And obviously, Juluca continues to power forward for a very sort of a specific population. So that's been great. And then, Kim and I set ourselves 10 really key milestones that we needed to beat or meet to give us confidence that we had the early development pipeline that we dreamed of. And, actually, we've met and exceeded many of those milestones, and we can talk about that today. So, I think, you find this very positive, very upbeat, very confident and really delighted to have the chance to talk to you today, Umer. Outstanding. Well, thank you for that. So, maybe, just to kick things off, I feel like an important theme, and I think you kind of reflected on it when you opened it up as well. It looks like there was something unique that happened from a macro perspective in the HIV market during COVID. And now we're starting to come out on the other side of that. And perhaps, can we start by thinking about that and speaking to that? Because for a while, there was starting to be this perception that perhaps the next-gen integrase inhibitors are starting to plateau? Yes. So, let's talk about the two markets that we play in. You've got the PrEP market and you've got the treatment market. So the treatment market is today worth about $23 billion and the pet market is worth about $3 billion, so important to put them into context. The treatment market is growing globally at about 2% to 3% and currently, the PrEP market is growing at about 20%, so a lot more of a growth trajectory in PrEP, even though it's a smaller market. So what we've seen, and I'll talk about now Europe and the US, because they're both really quite material markets from an HIV perspective. So, in Europe, we have seen the volume at a total level and the dynamic market, pretty much return to the pre-COVID levels. There's a couple of countries where that hasn't quite happened yet. But in the main, Europe is back to the dynamism and the size of pre-COVID from the volume perspective. If we talk about the US, we saw a significant suppression of the dynamic market as people were asked not to come into the office to see their position. And if they needed to see a position, it was virtual. We saw less testing, and we saw the dynamism of the market come down. There's been a bounce back. So the TRx market is now exactly where it was pre-COVID. So that's come back, and in fact, that's grown beyond that level. But the, sort of, NBRx part of the market is not in the same place as it was pre-COVID and I'm not sure it's going to return. So if you remember going into COVID, I think, it was about 6,000 new â or 6,000 NBRx scripts per week. It's dropped back to a fairly steady state now of about 4,500, 4,600. So you've got a little bit less dynamism in the US still. I'm not sure that's going to bounce back all the way to where it was pre-COVID, and often, it's new product launches that stimulate that to a certain extent anyway. So we're a little bit less dynamism in the US. Europe back to where we were, but at the TRx level in the US and Europe back to pre-COVID level. Got it. So back to pre-COVID levels. And, I guess, how do you think about the interplay between these -- between the categories? It looks like the -- at least on a TRx basis, it doesn't look like the dolutegravir, bictegravir, that whole category is anywhere close to any sort of plateau? It isn't. No. So I think we've talked in the past, Umer about the fact that integrase inhibitors are absolutely at the core of HIV treatment. And, I think, if you look at the dynamic NBRx, as an indicator, more than 70% of NBRx are integrase-based regimens, and we're not at that level yet from a TRx perspective. So the market has still got a way to go in terms of adoption towards integrase inhibitor-based regimens. And particularly those single tablet ones such as Dovato, Triumeq or Biktarvy, that is still on the up and up. So there's still a way to go and we're excited about that given that we've launched, obviously, highly innovative two-drug regimen and in the form of Juluca and most importantly for us, Dovato. Got it. And would you guys consider at any point having a triplet as well? When I say triplet, I'm talking about a slightly different triplet than the one like the Triumeq that you have? We've thought really hard about this over many years, and we know that from patient insight, they would like a couple of things. They want to suppress that virus with the least amount of medication possible. Because if you're diagnosed with HIV, your 20s, which is sort of the most common time that it happened. You now live the same length of life as somebody who's not living with HIV. So you're going to basically be taking medication for 40 years to 50 years, and there is a real desire to minimize the amount of drug that you put in your body. The second thing people want is longer intervals between administration, which is how we can launch our long-acting injectables. But we've managed to bring a product with dolutegravir call it that suppresses the virus with two drugs, and we have in our pipeline only two drug regimens. So we would not go back to a three-drug regimen, mainly because every single drug brings with it some side effects of some sort. And if you don't need -- if you don't need three drugs, why would you take them when you could have two? I mean, you are so connected still to the community and people living with HIV, what you hear? No, that -- you've said it exactly right, Deborah. I mean, Umer, you know, that we basically pushed the envelope when we developed Juluca and then ultimately, Dovato. And Juluca we were a little more careful in that we focus that on individuals that were already suppressed or suppressed which or with Dovato, we went all the way there to naÃ¯ve patients and have demonstrated with I think out of doubt now that two drug regimens that are based on dolutegravir or based on a potent integrase inhibitor are as effective as three drug regimens. And so -- and I think, you can see that our competition has followed us down that path. Our competition is not developing any three-drug regimens anymore with the exception of what they might be doing with regard to NASH were they are multiple in there. But every other regimen is being developed by either, I mean, pretty much is just Gilead and Merck that are out there now developing new regimens, everyone is pursuing a two-drug regimen. Now mind you, whether or not they will be as successful as our two-drug regimen is still to be determined, because we do believe that integrase at the core is critical, and we are the ones that have an integrase at the core of our two-drug regimens is a daily or long-acting. Got it. I mean, I think perhaps at some level, one of the questions I always think about is -- and this is more a high level, and there's a lot of specific pipeline programs I want to get into today because it's actually a very interesting stuff coming up. But one of the things I always look at is GSK size, so at the heart of it, the core offering is the next-gen integrase and you guys were the first ones to come up with that molecule and there was also some litigation on the chemical structure similarities with bictegravir. However, when I look at the actual reported sales, considering it's the integrase driving the sales, there is a pretty large discrepancy in where the Gilead business tracks versus the ViiV business track. And I'm curious as you guys think about planning out in your long-term aspirations, doubled, like a $10 billion-plus HIV business. Is that something that a scenario that you guys contemplated not necessarily looking for any type of guidance, but is that something you guys aspire towards or something along those lines? Because it's very much something that has happened off of dolutegravir, almost, I would argue. I, mean I do not said, I can answer and then I think I'll hand it to you. So I guess the way we think about it is we look at our pipeline and we have target medicine profiles that we design our medicines to meet those target medicine profiles have value attached to them. And we believe that our third-generation integrase inhibitor plus a partner that could go every six months as a full treatment regimen will be -- would be a game changer to take us to that next level. And that's -- if you say what are we excited about in our pipeline, there's actually an awful lot, but that's third generation integrase plus the opportunity of pairing it either with a capsid inhibitor or BINA [ph] that starts to create a future vision in the realms of what you've described. I mean $10 million, $5 billion, $7 billion. I wouldn't put a number on it. But if you ask me what I'm most excited about and how I see the evolution of ViiV and why are we confident about the evolution of ViiV beyond the loss of exclusivity of dolutegravir, that is why I'm really excited. You're exactly right. I mean, again, we said our foundation of our current regimens and future regimens is an integrase inhibitor. We have the next generation beyond dolutegravir, cabotegravir and bictegravir with our third-generation integrase inhibitor. And as we've said, it is -- our expectation is that it's going to give us more options for longer acting and that it's going to cover mutations that may have been generated by previous generation integrase inhibitors. And so we expect it to have a very, very high barrier to resistance. And so that that's how you change the game further is to be able to cover everything, get to a longer interval and have integrase inhibitor at the foundation, and that's our intent. I knew this -- I mean, the work that Kim has been doing with the team have actually accelerated the development of that medicine. That's one of the big wins in the year. So we are looking at the first time in human in the relatively in a near future. Very near future. The original plan was that we were going to get that done next year in 2023. We expect to have it done by the end of this year. So we're accelerating that asset as quickly as possible, just because we think that it really can bring something unique and special. And I think the point around integrase at the core is critical, and we know that our competitors would love to be able to say they have integrase at the core. That is part of the challenge, I think, that they -- our competitors are experiencing is that the agents that they're trying to build a new regimen on, have challenges that don't make them the most ideal foundation. Got it. And if I may, and this is a loaded question. Has there been a lot of thought and discussion internally among between the two of you and also with your broader team around an IP mode, which is stronger than the last experience? Like, does this scaffold out there on the patent website somewhere? Like is there any development effort on related scaffold? I got to believe this is probably high on the agenda this time around. I would say that we have been very diligent and very focused on the IP coverage for our new medicines. I wouldn't go any further than that. But obviously, it's at the heart of any pharmaceutical company. And yes, I would say, high level of discussion and diligence has been applied to that area. Yes. I mean we believe we had a patent on the chemical structure of dolutegravir. And obviously, it would seem that we found a settlement with Gilead based upon maybe the IP that we had there. Got it. Make sense. Can you speak to -- and so this is sort of starting to think about the third gen integrase. Can you speak to any key resistance mutations that are being observed on dolutegravir and bictegravir, because the extent of use that's happening, it's only inevitable that they start to pop-up and Kim, I know you're always very close to the patient community? So, like what are you hearing about? Is there a certain type of thing that's starting to happen more profoundly? They're rare, actually. So -- and individuals who start with dolutegravir, bictegravir as naÃ¯ve, the likelihood of failing with integrase resistance is still very rare. Occasionally, you'll have somebody fail 263 or a 118 mutation, but they are rare. The most resistance is seen in individuals who had first generation integrase inhibitors and fail those and dolutegravir has basically been able to suppress most of those, but not all. And so when you get to multiple integrase mutations, you could even get to a point where dolutegravir is vulnerable. We believe that the third generation -- third generation integrase will cover even those multi INSTI mutation viruses. Got it, got it. And because it covers that, presumably, its data strength might be stronger than what Dovato put up, being a doublet. Am I following the logic path right? Well, I mean I think Devoto has shown itself to be extremely strong. And when I say that failure with resistance is extremely rare, that includes Devoto. And so, failure of Devoto is not associated with integrase resistance. It has literally this case report when it happens, it's so rare. And so we expect to step that up even further. But the -- so the benefit from that third-generation integrase inhibitor is, yes, a broader coverage of INSTI mutations. But it's the longer half-life it actually is probably the most exciting, because stability to get to longer intervals longer than what we can get with cabotegravir. Well, oral weekly is something that we're discussing, but we haven't made a decision to make a commitment in that area, but we really want to get to six months, and that's what we see that third generation integrates giving us. Got it. And Kim, I remember the very first time, I spoke to you about this broader topic you were telling me that was one of the motivations for you to lead clinical practice being able to be in a setting where patients could just â it's kind of like a vaccine of sort for these HIV patients, and they don't have to show the disease and the pills to anyone else. How has that evolved since in terms of penetration for the long-acting and â it looks like it's on a certain path and it's continuing to evolve, but I'd be curious what you're hearing and seeing over the course of the last five years of takeaways? So, Cabenuva or Vocabria/Rekambys as it is in Europe, has delivered exactly what we expected from a patient perspective. That's what we hear, and that's what providers come back to us and say is that, the patients come back and say it's changed their lives, because they no longer have to worry about remember to take their pill, they may no longer have to worry about disclosure of their status when we're carrying that bills around all of those things that we saw in the clinical trials, when we did questionnaires for patients, all those things that we saw on the clinical trials are playing out in real life. And so it is changing their lives. And that's why we see the future and everybody else sees the feature of HIV being long-acting. So, about 10% of switches are going to Cabenuva and the penetration at a TRx is probably around the 2%. So it's still quite low. But we're in the â really one year into kind of the â the launch of that medicine. Last year, obviously, we haven't got â we've still got COVID hangover and we haven't got the license that we wanted. This year, we delivered every eight-week license. The oral lesion is optional, and we've seen quite a significant uptake. And actually, every quarter, we've delivered, I think, ahead of consensus on Cabenuva. So that product is really, really growing â whenâ¦. You know, what's interesting is about the â about the data point you just shared is I remember in antipsychotics, which was â there was a lot of parallels there for particularlyâ¦. Right. And I know in the US, they're mid to high single-digit penetration and growing and ex-US surprisingly in the teens in Europe. So it will be interesting to track this. One last thingâ¦. I think Umer -- one quick point about this. Every conference is dominated by discussions of cabotegravir, because what is happening is â the clinics took some time to figure out how they were going to implement cabotegravir. And they've come with their plans and now we're seeing that dramatic uptick because they all have waiting list, I mean, literally every provider that I talked to says, I have a waiting list of people that I want to put on Cabenuva. We are doing â we're going slow in order to manage our capacity. But we see tremendous excitement about Cabenuva and is only going to grow. Right. So the step-up on the third gen would be you effectively start to make it more like a long-acting PCSK9 in every six months? Got it. Okay. Excellent. Maybe that's a nice segue into some of the other pipeline programs as well. I know the bispecific antibody looks very interesting. But I also know there's been some attempts in the past, like Gilead over the years has shown some stuff, but it's kind of gone nowhere. Could you maybe just remind us what's been the history there? I know Jessica had some specific ones on your program? So we have a bispecific antibody that we have not presented any data in the public domain on that one yet. But we have presented on the N6LS broadly neutralizing antibody. And so that was the proof-of-concept data was posited at the Glasgow conference. And that everyone was excited about it, because of the potency, but also because it showed good activity even at low doses. And so what that does is give us the optionality that we hope to have with this. The possibility they could be a candidate to partner with cab in a self-administered option or in an ultra long-acting option, because obviously, the neutralizing antibody. This is has the LS modification on it. It is already long-acting. And so we're very confident it gets to easily three months, four months is likely and six months as possible. So all of that will understand more of the over the course of next year, and we will share some more data on the N6LS broadly neutralizing antibody in basically the first quarter of next year, hopefully, at Crown. Yes, you basically answered my question. But I guess the question is, in prior monotherapy bNAb studies resistance emerge in nearly all treated patients, was N6LS resistance potential evaluated in the Glasgow study that was presented? So in the proof-of-concept study, they were just given one dose. So you're giving one dose to see how much viral potency you got. And so we did not -- it wasn't continuous dosing to look for resistance. And so we have one individual in that study did not respond, which is we expect that there will be occasional individuals that aren't sensitive to broadly neutralizing antibodies. The nice thing for N6LS we expect it to be rare, because it should cover 96% to 97% of viruses. But that one individual is who you kind of almost want to have that so that you can understand what are the mutations that need to be present in order for people not to respond so you can have an appropriate test, just screen for whoâs sensitive and who's not. Okay. And just to follow-up. So you think that the addition of cabotegravir in the Phase 2b study will deter resistance and dosing could be every three to six months, you said with this combination? So, yes, at least three and as far as we can go. So at least three. And yes, the combination of two drugs, we expect to reduce the likelihood of resistance occurring. I mean, any product that you give as monotherapy resistance is selected. That's even given even with the second-generation integrase inhibitors and given a monotherapy, you see resistance occurring more frequently than when there as a part of at least a two-drug regimen, still not common, but it occurs. And so monotherapies a challenge in any circumstance. Here, our expectation is that combining with, again, a highly potent high barrier to resistance integrase inhibitors is going to reduce the likelihood of resistance occurring to N6LS. Okay. Excellent. Between your maturation inhibitor, the capsid and the nuke. I guess, where would you like to spend more time first? We've paused the development of that because of the ezlotivir lymphocyte toxicity. We have not -- we're not further developing that for the time being. I think that's a significant problem. And I just think we're in a world now where that level of toxicity, particularly lymphocyte toxicity is not something that most providers are going to be willing to accept given the options that are out there as alternatives. So we're not developing that. Well, it's actually -- really to me in the longer term is the goal of HIV treatment is to have recovery and increases in CD4 cell counts, if you see them declining because of a drug toxicity, that's not acceptable. And what is the long-term consequence to that for patients is the question. So that's why we've made a decision not to pursue that particular because our drugs were pro drugs of ezlotivir. And so any challenge that came with ezlotivir was going to be present. I see. I didn't realize that. My thought, Kim, on this broader point was I thought Dovato perfectly reasonable and a very good drug. It was being forced in to being a weekly. So you're going from like 0.5 milligram to a 1 milligram dose daily to having to do 20 milligrams just to get to the weekly or 60 milligrams to get to monthly. And it was at Cmax that was causing some of these lymphocyte problems. So as long as you stuck to a once-daily kind of regimen, it would have been just fine and you wouldn't have run into the CD4 problems. Well, that's possible, Umer. But remember that the decision that they've made now in pursuing even the daily dosing is they reduce their daily dosing from 0.75 milligrams down to 0.25 milligrams because they did see some of that lymphocyte change even with the 0.75 daily dose because it's an accumulation of the product within the cell. And so they dropped quite substantially. So they've got to do those studies to show that the 0.25 milligram is going to give them the same kind of potency and varied resistance that they got with 0.75 and then whether or not they can actually get to a weekly dose is still to be determined. Driven by the active metabolite, not necessarily a side metabolite, because presumably, you can get around that problem in your side metabolite? Got it. Okay. Perhaps if we could spend a quick second on your maturation inhibitor. I think this is being developed for the refractory HIV setting? And maybe just the high-level questions before we get into data. A lot of investors often ask what the commercial opportunity looks like for some of these. And I'd be curious how you would characterize that? So we haven't defined exactly which population we will target MI254. We have a commit to Phase III decision that we're going to take in the first quarter of next year. And so we'll define the populations in more detail at that point. I think the way that we've been sort of talking about to Emma is that we've got in treatment to target medicine profiles that we're focusing on. The one is about the ultra long acting. So getting to the longest gap between administration possible, and the other is a self-administered at home. And so what we've got is the number of shots on goal in our pipeline, and we can talk about each of the individual ones, because I think that could be interesting. But what we said is that, by 2024, in the first half of 2024, we'll have enough scientific data to decide which bets we're going to take in terms of our next generation of either a self-administered at home or a sort of a longer-acting than Cabenuva, Cabenuva plus almost option. And then, the next stage is to get to the third-generation integrase inhibitor, and that ultra long-acting every six months kind of option. And so, for us, it's about looking at each of the assets and we'll make a decision in 2024, which ones will progress as ultra long-acting or at home. We were not -- we don't see ourselves launching all of the options in our pipeline just to clarify that. I see. But the once-daily should be -- but as a -- okay, got it. So, I guess, what you're saying really is that, there's like this underlying momentum, which is towards where is the market and the patient treatment landscape going, which is towards longer acting. And those are the stuff -- those are the regimens you're prioritizing. Maturation could very well be a perfectly reasonable molecule, but this is still in the once-daily, perhaps more competitive in the HIV of 2000s, but perhaps not on the HIV 2030s. So weâre still determining whether or not there's a possibility for maturation inhibitor to be long-acting, that's still in the works. The potency was quite good, and the barrier to resistance is, I believe, to be better than the first, what we call the first generation, well, I guess, the second generation, which was 795. And 795 also had GI toxicity. And so what we saw in some of the early studies with 795, while both GI toxicity and some resistance that occurred. And so, it didn't have the barrier to resistance that we felt like needed to be in place for us to pursue that. That's why we moved on to 254 and 937 Got it. Okay. So the Phase II -- and I think this is the 160 patient trial. That's the one that's not out yet. So there are two Phase IIb studies. One of them is over 200. The other one is roughly 160-ish and one is a three-drug combination with the maturation inhibitor, and the other is a two-drug combination with dolutegravir and the maturation inhibitor. Got it. Okay. Makes sense. And, okay, excellent. And one last thing, Kim, maybe just to clarify this, mostly, it's my lack of understanding. What are subtype B and subtype C viruses? So, I mean, there are literally dozens of subtypes of the HIV virus, and there are regional differences where those particular subtypes exist. And so, in the US, it's primarily subtype B virus, whereas in South Africa is primarily subtype C. And so -- now, most of the time, that's not a relevant question, because the drugs will cover all the different subtypes, but in some cases, you'll find a particular class that might not have as good activity against one subtype or another. And so, some of the unique -- so, for example, fostemsavir doesn't cover AE virus that is present in Southeast Asia, for example. And so, that's the difference between -- there is minor differences in the virus that are the various subtypes. And, again, it's mostly that you see those subtypes based upon the region that the person comes from. Got it. Okay. Excellent. I guess a question for both of you really is, as you think about sort of the next 10 to 20 years because that's really where your pipeline is going to be playing and including your third-gen integrase inhibitor, what are some of the key competitor molecules that you're looking at for that get your attention? As both Mark and Gilead are hinting at some additional stuff coming up, but it's never quite clear to me if they actually have a third-gen integrase or not, I know they both have an integrase, but I don't know if any of that is third-gen? I don't know any more than you do about their integrase inhibitors. It's just word that they have some in their pipeline. I mean, I think â¦ â¦I mean, as you know I mean, obviously, we're developing a capsid inhibitor, so Gilead's capsid inhibitor, I think, is certainly an interesting molecule. And any time there's a new drug that is new mechanism of action that can help individuals who are highly treatment experienced that need a new drug, that's a positive thing. So that's -- that would be my comment about the competitors' products. And I think over the way that we're looking at it is, we've done a huge amount of work on patient insights and what they're looking for from medication to treat their HIV or to prevent HIV in the future. And what comes back is, the least medicine I can possibly take, the longest interval between having to take my medication. Although some people are happy with what its late day, but the kind of the duration between administration is a really important need. Obviously, safety and efficacy goes without saying to high barriers of resistance, minimal side effects. And we feel that, we're leading the way from an innovation perspective, both in terms of oral two-drug regimens, but also treatment, we have a treatment, a long-acting treatment, in Cabenuva that is meeting to a certain extent that the needs of people who are living with HIV. What we're trying to do is to do a better-and-better job of meeting those needs. And that's where our pipeline is. And I think we can see our competitors are following that route as well. But at the moment, it looks like there's going to be quite a long way between the next long-acting injectable from a competitor for treatment and what we've got in our hands today on the market, which patients are benefiting from. So we're just trying our very best to accelerate the molecules in our pipeline so that we can continue to serve people who are live with HIV or who would benefit from perhaps in the way that they've asked us to. I think that's the way that we're looking at it. And we think our competitors do a good of similar thing. And it's great to have people innovating in HIV and fundamental, we are competitors. But at a macro level, we're all trying to solve a global problem, which is how to suppress the HIV virus, how to end the epidemic how to prevent people becoming HIV-positive and ultimately have to find a cure, and that is what makes us excited every day about the job that we get today. And I know that our competitors they do the same way too. And if I could just make one quick build. You'll probably remember, Umer, a few years ago, Gilead was saying Biktarvy was their last HIV medicine. And the innovation that we have brought is what has pushed them to continue to try to innovate. And so what that ultimately does, is makes better options for patients. We're not accepting the idea that a single three-drug regimen is going to be the answer for all patients. We feel like we can do better. And that's pushed the field. And we're proud of that. Makes sense. Maybe just in the last couple of minutes or so, could you remind us, and I think it's always relevant, the LOE profile for your portfolio? And I know there's been -- this is probably the best time from an LOE perspective then because a lot of the major ones are behind us, but could you just remind us? Yes. So if we secure pediatric exclusivity in Europe and the US, which we have all the days to and are in the process of preparing the files as we speak, you will, in the US see, the loss of exclusivity of dolutegravir in Q2 2028. And you will see the loss of exclusivity of dolutegravir in Europe in the middle of 2029. So, it's like a staggered. It's a staggered approach to that lot of exclusivity. And we believe that the pipeline that we have in our hand today, both in terms of the newly launched medicines that we have, particularly Cabenuva and Apretude, and then the follow-on products that we've been discussing over the last 10, 20 to 30 minutes, that is what will enable us to replace the revenue that will be lost when dolutegravir goes off patent. But we don't expect it to be a cliff. We think it will be applied, and we think we've really got a great opportunity to continue to have a very successful business past that loss of exclusivity, and as time has gone on, this year as the clinical data for the pipeline has come through, we get more and more and more confident, and obviously, you can see Dovato and Cabenuva are performing ahead of expectation. And again, that Cabenuva trajectory, the trajectory of Apretude that you'll see next year and the year after and beyond, is really going to be the kind of the foundation for our future success. Outstanding. And the third gen integrase should be -- as long as things stay on track, should be sort of done on the market well before that 2Q 2028, correct? Yes, around that time frame, towards the end of the decade is when we expect to be able to launch the third generation integrase inhibitor. But we both agree that cabotegravir is -- has a loss of exclusivity out to 2031. Got it. Make sense, excellent. Well, thank you again. This was extremely helpful and always really enjoy. I feel like I learned so much about HIV every time I sit down. So thank you again for your time.
EarningCall_1904	Greetings and welcome to the Citi Trends 3Q 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, November 29, 2022. Thanks, [Malika] (ph), and good morning, everyone. Thank you for joining us on Citi Trends third quarter 2022 earnings call. On our call today is our Chief Executive Officer, David Makuen; and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 AM Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer you to the company's most recent report on Form 10-K and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. Thank you, Nitza. Good morning, everyone, and thanks for joining us today on our third quarter fiscal 2022 earnings call. I will begin the call with a review of third quarter results, as well as some fourth quarter to date insights. Heather Plutino, our Chief Financial Officer will then elaborate on our financial results and a few other items related to the rest of our year outlook. Then we'll open the call up to your questions. To begin, we delivered $192 million in top line sales, which equates to a three year comp stack of 1.4%, both of which were in line with our expectations. Our Buy, Move and Sell teams worked tirelessly to deliver compelling value driven trends coupled with an engaging in store experience to post a 39.8% gross profit, our 10th consecutive quarter of expanding gross profit when compared to pre pandemic 2019 levels. Additionally, we continue to manage inventories tightly with high freshness factor. Total inventory at the end of the quarter was only 1% higher than 2021, an improvement from 26% higher at the end of the second quarter. Lastly, I'm pleased to share that we delivered positive operating income of $2.4 million. I want to spend a few minutes on how we got here. It all starts with people and our team's ability to be both scrappy and strategic within a challenging macroeconomic backdrop. Our mantra is to remain laser focused on controlling what we can control from front of the house to the back of house. At the end of the second quarter, we committed to lowering our expense structure while shoring up our foundational infrastructure and most importantly, offering an exciting curated assortment that will never break the bank for our customers. We are right on track on the expense savings front and Heather will provide more detail. What I will focus on is how we are driving the top line and margin. More specifically, we focused on four key areas to ensure we met expectations in the third quarter, while preparing for a successful fourth quarter holiday season. They were: number one, we shipped record amounts of packaway inventory, chock full of incredible values to excite our customers; Number two, we continue to roll out new zip codes in our product cities, including Q merchandise, missy size ranges and tween girls offerings; Number three, we infused hot price points in key categories to capture market share from value shopper. And number four, we successfully lapped last year's macro supply chain issues to deliver an on time gift assortment for a strong start to the fourth quarter. It's important to recognize that the inflationary backdrop our core customers facing is truly unprecedented, particularly in the areas of rent, food, utilities and transportation. Our core customer with an annual household income of about $40,000 and 50% of our customer base having an annual household income of $25,000 and below has been hardest hit from these extreme macro pressures. Having said that, the Citi Trends customer is doing an admirable job adjusting his and her shopping patterns. What we saw in the third quarter is that our customer is shopping much closer to -- much closer to need, employing a buy now, wear now strategy for important events and end use needs in their lives. Slide back to school, which I'm pleased to report was a solid performance for Citi Trends this year. Throughout the third quarter, our traffic and conversion rates remain steady and strong and our average dollar basket size continues to hold up very well against last year's results. Through it all, I can assure you and consistent with my points in the past, the Citi Trends customer relies on -- in the heart of neighborhoods where we are the primary destination for their family apparel and accessories, home and essential needs. Before I turn the call over to Heather. I want to highlight a few remainder of your points. First, we are set-up really nicely for the remainder of fourth quarter. We generally excel during need-based events and we are confident that our families will Gift Big and Spend Less at Citi Trends this year. As we exited strong Black Friday week, our stores are full of great values across gifts, stocking stuffers and wonderful self-purchase outfits. Next, we are reiterating our second-half guidance provided at the end of the second quarter. And lastly, it's no secret that the marketplace is right for procurement of high quality, high value goods. Our flexible and agile operating model combined with our strong balance sheet allows us to be quite active for spring and fall of 2023. With that, I'll turn it over to Heather to discuss our third quarter results in detail, as well as our outlook for the second half of the year. Heather? Thanks, David and good morning, everyone. As David mentioned, our third quarter results were in-line with our expectations despite the challenging macro backdrop and the significant inflationary headwinds our customers facing. We manage the business prudently and our teams continue to execute against our transformation strategy, delivering strong gross margins and a reduction in SG&A dollars for the quarter. We ended the quarter with a strong balance sheet, including $77.8 million of cash, well-controlled inventory and our $75 million revolving line of credit remained unused. We also completed the sale-leaseback transaction on our Roland, Oklahoma distribution center for $36 million in proceeds. The strength of our balance sheet positions us well to continue to navigate the current environment, while focusing on our strategic initiatives. Now let's turn to specifics of our Q3 financial results. As mentioned in our earnings release, we are comparing select operating results for the third quarter and 39 weeks of 2022 relative to the same periods in 2019 in order to provide a more normalized comparison of performance. Total sales for the third quarter were $192.3 million, a decrease of 15.6% versus Q3 2021, or an increase of 5.1% versus Q3 2019. Comparable sales decreased 18.3% compared to Q3 2021, lapping a 19.7% increase in Q3, 2021 versus Q3, 2019, representing a three year stack of 1.4%. Comparable store transactions versus prior year sequentially improved 760 basis points from Q2 to Q3, an improvement of 1,270 basis points from Q1. Gross margin was 39.8% versus 40.3% in Q3, 2021 and 37.4% in Q3, 2019. Our strong gross margin results are reflective of our disciplined inventory management and product assortments that continue to strongly resonate with our customers. While SG&A expense dollars declined 7.6% versus Q3 2021, we experienced SG&A expense deleverage of 310 basis points versus Q3 2021 to a rate of 35.9% of total sales. We announced last quarter that we are streamlining our organization and our aligning SG&A expenses to our sales expectation as a result of a difficult macro backdrop. In the third quarter, we made terrific progress, rightsizing our expense structure and driving operating efficiencies across our business. As a result, we remain on-track to deliver approximately $10 million in expense savings for the second half of 2022 or about 7% of total SG&A expense. We will continue to manage expenses with a heightened focus on building further operating efficiencies across the organization. Operating income was $31.6 million in the quarter or $2.4 million as adjusted for the gain on the sale of our distribution center, compared to operating loss of $1.6 million in Q3, 2019. Third quarter adjusted EBITDA was $7.5 million compared to $2.9 million in Q3, 2019. GAAP net income was $24.6 million in Q3, 2022, compared to net loss of $1.1 million in Q3, 2019. Earnings per diluted share was $3.02 or $0.24 as adjusted versus diluted loss per share of $0.09 in Q3, 2019. Turning to our 39 week results. For the fourth -- for the first nine months of 2022, sales were $585.6 million, a decrease of 22% to prior year and 2.6% increase to 2019. Comparable store sales declined by 24.5% versus 2021 on-top of a 26.9% increase in 2021 sales versus 2019, a three year stack of 2.4%. Gross margin was 39% versus 41.3% in 2021 and 37.4% in 2019. EBITDA in the 39 week period, adjusted for the gain on sale of our two distribution centers was $19.6 million versus $82.2 million in 2021 and versus $22.6 million in 2019 as adjusted. Year-to-date earnings per diluted share was $6.34 or $0.35 as adjusted for the two sale leaseback transactions compared to $5.71 in the first nine months of 2021 and compared to $0.60 in 2019, $0.67 as adjusted. Now turning to our balance sheet. As David mentioned, total inventory at quarter end increased only 1.3% to Q3, 2021 versus an increase of 25.5% at the end of the second quarter. Compared to Q3 2019 total inventory decreased 5.1%, while sales increased 5.1%. Average in-store dollar inventory was down 19% compared to 2019 with units down 29%, reflecting our focus on turning goods fast and offering our customers fresh merchandise each and every time she shop. Our packaway goods decreased almost 40% from Q1 as planned as we released these exciting products to support fall and holiday sales. We continue to leverage this important merchandising strategy packing away near to current season goods that represents a tremendous value for our customers, while supporting our high gross margin rate. We are comfortable with our level of inventory and our super-proud of our team for their continued commitment to agile, disciplined inventory management. Turning to our fleet, during the quarter we opened two new stores, closed four locations and remodeled three. Year-to-date, we've added 12 new stores, closed six stores and remodeled 35 locations. As it relates to our buyback program, year-to-date we repurchased approximately 331,000 shares at an aggregate cost of $10 million, leaving approximately $50 million remaining on our program. Capital allocation remains a primary focus of our Board of Directors and in light of the dynamic macro-environment we are carefully evaluating our cash and investments to ensure we maintain adequate liquidity. Now turning to guidance. We are reiterating our second half 2022 guidance provided with our second quarter earnings. That guidance, including the impact of the sale leaseback of the Roland distribution center included low-single digit increase in second half total sales compared with first half total sales. Gross margin in the high-30s to low 40s range for the second-half, less SG&A deleverage versus prior year and the second-half compared to the first-half due to aggressive expense reductions, net of incremental lease expense from the sale-leaseback transactions. Second half operating income approximately in line with results from the second half of 2019. And year end cash balance of approximately $85 million to $100 million. In summary, we are pleased with our third quarter results in light of the difficult inflationary environment. While we expect these challenges to continue, our teams are focused on managing inventory and expenses, while continuing to execute against our transformation. Combined with our growth strategies, this gives us confidence in our ability to continue to delight our customers, especially during the upcoming holiday season. Thanks, Heather. With three quarters of 2022 on the books and with plenty of data patterns to study, we have work to do to be better. Most of our insights center on reacting faster to trends and keeping pace with our fashionable customer base. They really do live our purpose of live bold, live proud, respect all on the daily. We've got the source faster, ship faster and react faster. The great thing is nothing structural in the way. Our foundation is strong and our start-up mindset is in-full year. I'm committing to you that our amazing people are becoming excellent operators so that we can dial into our customers' needs better than we do today. Reimagined processes, revved up leadership and important new technology and infrastructure solutions we will drive our momentum on-top of a solid foundation. As we think about what's next. It's important to note that based on many external data sources, discretionary retail will likely be affected by inflationary pressures into a portion of 2023. Let me assure you this will not slow us down from making continuous improvements to our operating model. You've seen us play offense, youâve seen us course correct when needed and you've seen us involve the Citi Trends brand to be as relevant as can be. I will highlight what we'll spend our full days and probably some nights on. Number one, driving comp sales and margin. Continuing to broaden the appeal of Citi Trends to new multicultural lower income households in search of trend right apparel, home and accessories at prices that don't break the bank. Number two, upgrading our fleet, continuing to upgrade our customer experience via our CTX remodel program with 42 remodels to date and combined with new stores to date within the CTX format, 78 stores or 13% of the fleet in the CTX format with many more to come. Number three, maximizing our tech and DC investments. Leveraging our recent DC upgrades along with our upcoming new ERP system that will be a game-changer for our Buy team. Number four, actively managing our balance sheet, longer strength of Citi Trends, Heather is focused on applying fresh and innovative thinking to managing operating expenses, working capital and cash usage. And finally, number five, expanding our Citi Cares program, our platform for both CSR and ESG. Some exciting things are afoot here when it comes to giving back and focusing on our CSR initiatives, which we will share in early 2023. And of course, we will conduct our third annual Black History Makers event during February. As we speak. We are knee deep in 2023 plan. I got to say, we're pretty excited about what's on the horizon. The off-price value space is ripe for evolution. As we improve our execution and take advantage of new long overdue tools, we are optimistic about delivering better efficiencies and productivity throughout many areas of the business. As always, I want to thank the entire Citi Trends team, all the people that are the face of our brand, creators of our culture and drivers of our customer engagement. Their hard work and endless efforts in making a difference in the neighborhoods we serve never goes unnoticed. Their passion to live our purpose is shining bright and will carry us into the future. Thank you. [Operator Instructions] Our first phone question is from the line of Jeremy Hamblin with Craig-Hallum. Please go-ahead, your line is open. Thanks, and nice job in a tough environment. I wanted to see if I could get into the kind of the cadence of sales trends that you're seeing. In terms of maybe using 2019 as the best baseline, but to get a sense for how things slowed August, September, October? And here as we get started in Q4, it sounds like you're encouraged by what you saw over kind of the past week, but wanted to see if you might be able to provide a little bit more detail around the cadence of sales trends? Sure. Hi, Jeremy. Thanks for joining us today. Good question. I'll take the first portion of that and Heather can enhance if needed. But at a high-level, couple of things. We had our first really normal back-to-school since â19. And that proved to be a really strong selling period for us that started kicking in at the end of July and kind of peaked during the main weeks of August and a little bit in September. So we were very pleased with the performance of that time period, of course, driven by outsized performance in our kids business. And that was driven by some excellent packaway goods, so all that panned out like we thought. As we creamed into the rest of the quarter, we had some puts and takes based mainly on weather, but overall, our traffic conversion and sales flow was relatively consistent throughout the rest of September and October. The only thing that we really saw affected was the warm weather trends in late October into early November clipped some of our basket, because she and he bought less higher price outerwear and heavier weight clothing, that seems to have a higher retail. It wasn't for that, we would have been better than we thought honestly on that front. So overall, nothing to be concerned about. The warm weather was certainly slower, if you will, but we bounced back right away when the cold snapped in November week two and strong ever since. Great. Helpful color. And then, in terms of just the environment that we're seeing out there or that you're seeing, clearly, there has been a lot of shift in focus towards value messaging, which is a sweet-spot for Citi Trends. Not everybody -- you did a remarkable job of managing your inventory levels, but not everybody in every apparel retailer has done quite as good a job. I wanted to get a sense for what you're seeing in terms of, either the promotional environment, the mark-down environment that you're seeing in Q4 as it relates to Q3 in your competitive set. Hey, Jeremy, it's Heather. Thanks for the question. Really appreciate it. And thanks also for the comment about inventory. We are really proud of the team and the way that they managed inventory throughout the quarter and that they will continue to manage inventory in Q4. So real focus, and it's really paying-off as you saw with our strong gross margin rates. There is no doubt that the fourth quarter is always a highly promotional season. So that will change, that wonât shock you. What I will remind you though is that, we serve and under-served customer in their community. So our strategy of being in their neighborhood and being everyday low-price, we're not high-low, we're not promotional, we don't need to be, because we are value all day long and our customer knows that, entrust us for it. So we're feeling good about the way we're positioned for the holiday season because of that plus the fact that we've got amazing product ready to go to really fuel their holiday needs. And our price points are to quote David Makuen, hot. And the assortment is really-really great. So we're feeling really good about the way we're set-up for the holiday season. I like that. I just wanted to clarify. Maybe if I put it in more context of -- is the environment more promotional in Q4 relative to a normal Q4 as compared to the traditional promotional environment in Q3 relative to a normal Q3. I'm just trying to get a sense for whether versus historical context has gotten -- if it's unchanged, if it's a little bit more promotional or a little less promotional and what you're seeing out there? Yeah. Jeremy. I'll take that one. I think within our brand positioning and where we're located, we're not seeing that big a difference, quite frankly, in the promotional environment. It appears to be relatively consistent again within the neighborhoods that we didn't. I think if we broaden the lens a little bit to go out to the outer rings, call it, the mall ring and the A&B centers that are kind of a little bit away from our neighborhoods. We're seeing, I would say, a heightened sense of from a promotional activity. But again, what I've learned over the course of many years as Q4 tends to be promotional, no matter what year and no matter what backdrop herein. Black Friday sales have always started earlier for the last few years, Cyber Monday, et-cetera. And then I can get in the last 15 days, Super Saturday and so on [indiscernible] Christmas. Yeah, it's going to be promotional, but again for us, we tend to find ourselves more insulated from that activity, because where we sit in the neighborhood given our primary destination nature to our customers we don't feel this much. So I think we're watching it, we're looking at it, but it doesn't really change our behavior of that much, we got to stay focused on just making sure that the right gifts and stocking suffers are in-stock at the hot price points that we planned months ago to be in our stores and that's all unfolding nicely for us as we speak. Got it. Last one from me and I'll hop out, but just in terms of store hours for Q4 typically in need of little bit more staffing and sometimes you have a little bit of extended hours, you did less of that maybe in some years, but I wanted to just get a sense for with the addition of the rent expense from the DCs into your SG&A. Is it fair to assume that your Q4 SG&A, even despite the expense management and the savings that you're going to realize is a little bit higher than what you saw in Q3 on an absolute basis, is that a fair assumption? Itâs a fair assumption, Jeremy. I mean, we've got -- Q4 is typically a higher sales month than Q3. And you're right, there is extended hours to support that, there is a lot of product flow to support the sales. So yes, on an absolute dollar basis, but we lever better in Q4 than in Q3 as well. Thank you. Our next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead, your line is now open. Hey guys, good morning. Nice quarter. A question for you Heather, just follow up on Jeremy's question on the implied fourth quarter guide. It looks like it backs into around roughly a 4% or so operating margin, which would be below what you guys posted in the fourth quarter of 2019. So I'm curious what the pressure points would be? In the third quarter you guys showed nice improvement relative to the third quarter of 2019, so maybe just dive into the expectations for the fourth quarter and I guess why relative to â19 you expect the compression to occur? Yeah. So just a further reminder that our guide is for the fall season, right? So, just wanted to make that point. Versus 2019, there are a couple of pressure points that we just want to keep in mind. One is, we think about the freight environment. 2019, we're told by our external sources is levels of freight rates that we might not see anytime in the near-future, even though we're starting to see some relief. That compare will always be tough for Q4 versus 2019. The other on the SG&A front, of course, we're carrying the lease expense from the two sale-leaseback transactions versus 2019. So we'll have -- that will make for a harder compare as well. And then within SG&A -- continuing within SG&A, merit increases from 2019 to 2022 in stores, DCs, we're not immune to that. I want to make sure we keep our people -- keep them happy. So those compares are what I would ask you to keep in mind. Thanks. And just a follow-up on that. Can you just remind us the impact to the fourth-quarter and I guess maybe on an annual basis the impact of rent expense from the two sale-leasebacks that you did this year. Yeah, for sure. I will tell you, in the third quarter it was $1.6 million. So use that as a proxy for fourth quarter. $2.8 million on a year-to-date basis through the third-quarter. And then on an annualized basis, think $7.6 million for the two. Okay, great. Thank you very much. And then, David, when you take a step-back, 2021 [indiscernible] square foot, it's close to 150 this year, back to 128, which was pretty consistent with 2019 and 2020 levels, when you look out over the next couple of years. Can you share with us your thoughts on where you think you can grow that productivity? And then also [indiscernible] the initiatives that you have laid out for us in terms of CTX, the new ERP system Q lines, some of the assortment upgrades to women's and missyâs. Just what has you most excited and where do you think you can grow that productivity level over the next couple of years. Thanks. Thanks, Chuck. I appreciate the opening words and I'm happy to answer this question. Yeah. I think, look, as we look over the next few years, there's no doubt that we have a number of initiatives that we intend to use to fuel productivity gains and obviously overall topline gains, while continuing to expand our gross margins from a kind of topline sales point-of-view, which I sort of went on. The opportunity to grow productivity, we think is very, very bright and possible based on some serious initiatives that here to primarily haven't been part of our mix. And so, as you asked, we will sort of force rank them. The first and foremost is product and it's what you hit on, it is the adding of key options to our guy and woman and kids that we haven't had prior. And so, I probably put it in kind of one bucket, which is, enhancing our juniors business, that's anchored really by offering missy sizing. From a menâs standpoint, we're beginning to see incredible traction and appealing to more multicultural guy, where we were really zeroed in on the African-American guy [indiscernible] American guy. And we're seeing some excellent traction there. So that will grow sales per square-foot in the guys business. And then obviously contribute to the box. And then on the kids front, I think where we have the biggest opportunity is growing our girls business. And specifically, appealing to the tween girl just kind of in between the younger girl and first entry into juniors size range and we've been testing that throughout 2023 with -- excuse me in 2022 with some great results in a limited number of stores. But like you seen us do in the past two years, we will scale that pretty quickly across â23 and â24. So product, product, product for sure. The second thing would be the systems. There's no doubt that the system, the new ERP system that you picked-up on really is a game-changer for us. It will give a new tool set to our Buy team, in particular, so that they can plan and allocate smarter baseline climate, based on trend, based on replenishment needs or not and so forth and so on. And so we really don't have those sophisticated tools that many other retailers have had for years. And so we're looking very much to that. So that's the number two and it kind of sits in concert with the product initiatives as you can imagine, because we want to put all of those product initiatives in the right store and so on. And then third would be the remodel program. Third only, because the product and the system will drive us to a higher-level of sophistication. And then the CTX should really kick in the gear even better than they are today, because we'll be smarter when it comes to nurturing those CTX remodels in the future. So that's a little bit of a force rank. I think I'd add one more thing, which would be, our ability to utilize data in general across the business and just get smarter across all our functions. And so part of our ERP rollout was a new data center of excellence and that'll be used by all functions in the business, which will make us more efficient and productive in our DCs and across our stores from a labor and other standpoint in-store. So lots to come, but that's, a little over three four year, and I think that will all contribute to productivity. That's a great answer. And just one more to follow-up. And this might be a little premature, but when you think about the number of stores you could add in 2023, and the number of remodels, is there any metrics you can share with us at this point in time or are you want to wait until January? Just because 13% of the fleet in that nice new CTX format could be a big driver for you guys next year. Yeah. No, I'm glad to hear your view on that. A little premature for us to share any specifics, like I mentioned in the call where we're knee-deep in planning, but I can assure you that all of what I ranked and then some are in kind of our sites to plan against them to develop a point-of-view for â23, that we will share early next year. Thank you. Our next question is from the line of Dana Telsey with Telsey Advisory Group. Please go ahead, your line is open now. Hi, good morning, everyone. The gross margin in the inventory levels definitely came in better than expected. Can you unpack the puts and takes of the gross margin and how you're thinking about inventory levels go forward? And then when you think of your core customer base, David, anything that you're noticing different regionally or share gains that you may be making given the trade downs? Thank you. Hi, Dana. Thanks for calling in. We'll take these. I'll actually start with the customers and I'll turn it over to Heather for inventory and gross margin, but from a customer standpoint, we are pleased with the patterns we are seeing. And one of the biggest patterns that's exciting us is, we're attracting kind of more of that higher-end of our income range. So keeping in mind our average income is about $40,000. We are seeing folks more than we normally see above that number kind of up to that $50,000, $55,000 range. And so, we're seeing some nice new customer capture their and they're responding to the portion of our mix that is the higher retail. So even though they're coming to us for what we're known for, meaning, everyday values, great churn rate products. They are scooping up some of the higher retails, which is just really incredible to see. And remember, our higher retails are generally associated with better-quality and improved features and benefits on the garment or accessories. So that's really great to see. And then on the sort of other end of the spectrum, whilst we certainly see the pressure on the $25,000 and below households, we are seeing, as I mentioned, a really interesting adjustment by those households. We've done a couple of informal focus groups across our fleet. And what we're hearing is, their doing their best to adjust to mainly a rent landscape that's quite different than in the past, food with the assistance that they often get is manageable and then gas as you know, it's getting a little better. So if you put that all in the blender, they are adjusting better than we thought. And it's our job to make sure our assortment on the other end of the AURs spectrum the extreme value price points, think 999 and below, it's our job to make sure we offer those in a consistent everyday basis, replenish them and keep them fresh and new. And that's exactly what the team is doing. So we've learned a lot across Q3. Back to-school is a terrific learning opportunity because we saw higher velocities and we were able to trial out of new things this past back to school that are definitely bearing fruit, many of which continue on through the end-of-the year and into â23, meaning they just weren't back-to-school product. So that's all good on the customer front. I'll turn it over to Heather for inventory and margin data that we're certainly very pleased with. Yeah, good morning, Dana. Thanks for the questions, appreciate it. Let me start with margin. Really proud of where our margins came in for the quarter at 39.8%. I would say the strength is really across the components, right. There's IMU expansion, our team is very focused on that. We had lower markdowns on inventory discipline and then we're continuing to focus on managing our freight expense as well. So really across-the-board good news from a margin perspective. I'll tie into between margin and inventory, obviously, the two are very intertwined. Iâm going to talk about our packaway strategy, right. I mean, we spoke about this last quarter. We put some really -- the way I describe it, we put some really great product in the raptors in the beginning part of the fiscal year, tail-end of the last fiscal year, and we're excited to move those goods to the stores. Itâs exciting product that is really intriguing to our customers and the margins are really good. So it's a strategic investment that's working and we're seeing it play-out both in the margin and in our inventory levels, right? So the team has been very, very focused on managing inventory to make sure that we aren't going back to what I understand have been 2019 kind of the old retail. If I could maybe pilot high [indiscernible] approach, we're not doing that and we can point to our average in-store dollar inventory down 19% to 2019 with units down 29%. So we're really working on making sure that the velocity is right on the products that we bring into the stores, that the margin is right and that is exciting compelling product for our very important customers. Thank you. Next question is from the line of John Lawrence with Benchmark. Please go ahead, your line is open now. Yes, thanks. Congrats, David, on the quarter and Heather. David, would you talk just a little bit about, I mean, the 13% of the fleet that we've talked about CTX. Can you give any sense of still providing that lift you've talked about mid-single digits or something like that in terms of productivity of those new units? Hey, John, thanks for calling in. Yeah, simple answer, we're still seeing some healthy lifts in our CTX remodeled stores. We said that single-digit lifts mid to-high single-digit lifts, and we're learning a lot from them and we're getting better and better at operating them as we look-forward to doing many more in our futures. And now we have a lot of cross -- a lot of geographies. So we're seeing a nice consistent performance across the Southeast, Southwest, Northeast, Midwest. So it's good to see. We're excited about it. Yeah, and just to go one-step further there, as you put out and look for those locations are you seeing anything in this environment, real-estate was across the country that would change or make it easier facilitate getting at some of those units, maybe earlier? I think from a macro perspective, not too much of a change in the real-estate landscape from a remodeling perspective. What I can tell you though is, our real estate is doing a great job getting tenant allowance funding for as many remodels. As we can, which really brings down the cost of a remodel. So that's a good development. We don't get it in every instance. But we've got a pretty high batting average on that front. So I would say thatâs a new development. But overall, most landlords look-forward to it more-and-more now [indiscernible] nearby and we can [indiscernible] pitch them why TA is also great help and upgrade their center and so forth. So -- otherwise, all systems go kind of like we've been doing for the last 18 months. Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.
EarningCall_1905	Good day, everyone, and welcome to the Navios Maritime Holdings Q3 2022 Earnings Conference Call [Operator Instructions]. Please note that this call may be recorded, and I will be standing by should you need any assistance. Good morning, and thank you for joining Navios Maritime Holdings third quarter 2022 earnings conference call. We are pleased to host this call from the Cayman Islands. I will now turn the call over to Ms. Daniela Guerrero, who will take you through the conference call details and safe harbor statements. Daniela? Thank you. As a reminder, this conference call is being webcast. To access the webcast, please visit the Investors section of Navios Maritime Holdings Web site at www.navios.com. You'll see the webcast link in the middle of the page, and a copy of the presentation referenced in today's call will also be found there. Now I will review the safe harbor statement. This conference call could contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Maritime Holdings. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Maritime Holdings management and are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Maritime Holdings' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Maritime Holdings does not assume any obligation to update the information contained in this conference call. Thank you, Michael, and good morning to all of you joining us on today's call. I am pleased with the results for the third quarter of 2022. We generated net income of $39 million. Q3 2022 marks a turning point for Navios Holdings. Please turn to Slide 4. Our future results will be materially different as a result our dry fleet for $835 million, taking advantage of a strong dry bulk market. The sales generated $370.6 million in cash which we primarily use to break down on debt, substantially deleveraging the company. Given the change in the nature of the underlying business, we also offer preferred stockholders a liquidity event in the form of a tender offer. We used $9.2 million to repurchase 604,343 shares originally issued for about $15 million and eliminated an $1.3 million annual dividend obligation. After the sales, Navios Holdings owns a 10.3% ownership interest in Navios Partners, an diversified marine transportation company. We also own 63.8% ownership in Navios South American Logistics, and logistics and infrastructure provided in the Hidrovia region of South America. We are focused on developing Navios South American Logistics and have implemented a management succession plan. I am pleased to report that George Achniotis has been appointed as the CEO of Navios South American Logistics. George and I have worked together for almost 20 years, and I'm confident in his leadership. George has worked closely with the Navios South American Logistics team for many years. So this move was natural. He has moved to Buenos Aires on a full-time basis. He will also serve as the CFO of Navios Holdings. [Claudio] will obviously continue as an active Vice Chairman, and we hope to benefit from his experience and wisdom for many years. I would also like to mention a few other promotions; Ioannis Karyotis, Navios South America Logistics long-time CFO has been appointed as the Chief Operating Officer; and Enrique Ferrando, formerly our Vice President of Finance, has been appointed as the CFO. You will see that there have been changes throughout the ranks of management and George will discuss this in greater detail. We believe that this is a large commercial opportunity in the region. While this may take some time to develop, the global focus on food and energy security among other catalysts is having a positive impact on the development of logistics assets in the Hidrovia region. There has been renewed interest in the [Corumba] region of Brazil for mining assets. Overall, increasing volumes are creating new business opportunities. We hope to take advantage of the developments with our team. Thank you, Angeliki. Please turn to Slide 5 for a review of the Navios Holdings financial highlights for the third quarter and the first nine months of 2022. I want to point out that the results of this quarter were affected by the sale of the fleet to Navios Partners. Following the completion of this sale, the results of the dry bulk fleet have been reported as discontinued operations. The sale of the fleet has resulted in a net gain of $102 million. Going forward, the consolidated results of the company will mainly reflect the results of Navios South American Logistics. EBITDA for the quarter was about $150 million compared to $116 million in Q3 of 2021. In addition to the gain from the sale of the fleet, the results of Q3 include a $98 million, other than temporary impairment of our investment in Navios Partners. Net income for Q3 was $39 million compared to about $60 million in Q3 of '21. In addition to the items that affected Q3 EBITDA, net income was also affected by fees for the prepayment of debt. Moving to the nine month financial highlights. EBITDA for the first nine months of 2022 was $323 million compared to $251 million in the same period of '21. EBITDA was affected by the same items that affected the Q3 results. Net income for the period was $79 million compared to $85 million in '21. In addition to the items that affected Q3 EBITDA, the results were also affected by fees and prepayment charges for the refinancing of our debt in Q1. Moving to Slide 6 and our balance sheet highlights. As of September 30, 2022, the cash balance was about $91 million compared to about $138 million at the end of December '21. I want to remind you that at the end of December, $84 million was restricted cash that was deposited with the trustee of the ship mortgage notes in order to facilitate the repayment of the notes in January. Following the sale of the fleet in Q3 and the repayment of the maturity of our obligations, the consolidated balance sheet mainly reflects the balance sheet of Navios South American Logistics. Please turn to Slide 7 for an overview of Navios South America Logistics. Navios Logistics operates three port terminals, which provide about 90% of or EBITDA. These are complemented by our barge fleet for river transportation and product tanker fleet for coastal cabotage trades. Turning to Slide 8, as Angeliki already mentioned, in the past month, we proceeded with changes in the Board of Directors and the management of the company. Ioannis Karyotis as our new COO; Enrique Ferrando is the new CFO; and Mariana Rebolo is the new Chief Risk Officer, and I have achieved the position of CEO. We have also strengthened our commercial and business development team with the appointments of [indiscernible] and Francisco Tazelaar. As new management, we are all very excited with the opportunity ahead of us. Our strategy is to maximize the return of our existing assets, provide innovative logistics solutions to our clients and capture new business opportunities. We have unique infrastructure assets in the region, which we want to leverage to serve our existing clients and develop new business opportunities. Thank you, George. Please turn to Slide 9. The global focus on food security should benefit agricultural exports from South America. In the first nine months of 2022, grain exports through our port in Uruguay were 45% higher than the same period last year, mainly driven by higher Uruguayan exports of soybeans. According to the USDA, the 2022/'23 South American soybean crop should continue to strengthen. Importantly for our grain terminal, Paraguayan crop production is expected to recover from a difficult 2021/'22. The outlook for mineral transportation and transshipment is positive. We see revived interest in exploiting mineral assets in the Guruma region of Brazil, which are then transited through the Hidrovia river system. We expect J&F will increase production from the mines recently acquired from Vale, driving more actual volumes through our terminal. To other regional iron ore producers, Vetria and 4B Mining, both use our terminals to export iron ore currently mainly into Europe. We believe that this increase in interest will not only benefit our port and barge business directly, but also will create new opportunities for revenue growth. In the last couple of years, low water in the Parana and Paraguayan rivers made navigation difficult, adversely affecting our barge business. In 2022, water level improved compared to both 2020 and 2021, yet is still below the historical average. In addition, the poor Paraguay and soybean crop in 2022 reduced demand for dry cargo bulk transportation. The cabotage market conditions are improving. In the 9 month period, our fleet employment increased 13% compared to the same period last year and charter rates are gradually improving following the strong targeted market internationally. I would now like to turn the call over to Enrique Ferrando, Navios Logistics CFO, for the discussion of the financial results. Thank you, Ioannis. Please turn to Page 10. Q3 2022 adjusted EBITDA was $29.1 million, 25% higher compared to the same quarter last year. Port segment adjusted EBITDA grew 32% to $25.8 million, mainly driven by a 38% increase in the grain port throughput attributed to higher Uruguayan export of soybeans higher tariffs at the iron ore port terminal following the annual inflation adjustments embedded into our Vale contract, as well as increased iron ore throughput from the clients 4B Mining and Vetria. In the [bulk] segment, Q3 2022 adjusted EBITDA decreased 73% to $0.5 million, mainly due to low demand on dry cargo. In the cabotage business, Q3 2022 adjusted EBITDA increased by $1 million to $2.9 million due to more operating days of the fleet as the market environment in Argentina has improved compared to last year, following a recovery of the demand after the end of the lockdowns. For Q3 2022, adjusted profit was $4.8 million compared to $4.3 million loss in the same period last year, mainly due to improved port segment performance and lower income tax on the Argentinian operations. Turning to the financial results for the nine month period ending September 30, 2022. Revenue increased 16% to $201.9 million. Adjusted EBITDA increased 24% to $85.3 million and adjusted profit increased by $13.4 million to $10.8 million compared to the same period last year. Please turn to Slide 11. Navios Logistics has no significant debt maturities until 2025. Cash and cash equivalents at the end of the third quarter of 2022 were $52.8 million.
EarningCall_1906	Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's Third Quarter 2022 Results Conference Call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company presentation. After the Companyâs remarks are completed, there will be a question-and-answer session. [Operator Instructions] First of all, let me point out that some of the statements made during this conference call may be forward-looking statements within the meaning of the Safe Harbor provisions found in Section 27A of the Securities Act of 1933 under U.S. federal securities law. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information concerning these factors is contained in BBVA Argentinaâs annual report on Form 20-F for the fiscal year 2021 filed with the U.S. Securities and Exchange Commission. Good morning, and welcome to BBVA Argentina's third quarter 2022 earnings conference call. Today's webinar will be supported by a slide presentation available on our Investor Relations website on the Financial Information section. Speaking during today's call will be Ines Lanusse, our Investor Relations Officer; and Carmen Morillo Arroyo, our new Chief Financial Officer, who will be available for the Q&A session. Please note that starting January 1, 2020, as per Central Bank regulation, we have begun reporting results applying hyperinflation accounting pursuant to IFRS rule IAS-29. For ease of comparability, 2021 and 2022 figures have been restated to reflect the accumulated effect of the inflation adjustment for each period through September 30, 2022. Thank you, Belen, and thank you all of you for joining us today. As we are all aware, the combination of an unstable global context and the difficulties of our country to correct current macroeconomic distortions and to meet the established objectives in the loan agreement with the IMF, local market volatility [indiscernible] especially in the FX markets and local currency debt markets, a high uncertainty persists about the future development of our economic policy. Being this said, Argentina has been able to continue with its economic recovery, although within a context of present great challenges with a sustained high inflation and a capped foreign exchange rate. BBVA Argentina has a corporate responsibility with society, characteristic of the Bank's business model, which encourages inclusion, financial education and supports scientific research and culture. The Bank works with the highest integrity, long-term vision and best practices and is present through the BBVA Group in the main sustainability indexes. Moving into business dynamics, as you can see on Slide 3 of the webcast presentation, our service offering has evolved in such a way that by the end of September 2022, retail digital clients' penetration reached 62%, slightly increasing from a year back, while that of retail mobile clients reached 55% from 52% as of the same period of last year. The response on the side of the customers has been satisfactory and we are convinced this is the best to pursue in the aim of sustaining and expanding our competitive position in the financial system. Retail digital sales have increased from 79.6% in the third quarter of 2021 to 83.4% of units and represents 55.7% of the Bank's total sales measured in monetary values versus 52.8% in the third quarter of 2021. New customer acquisitions through digital channels reached 66% in the third quarter of 2022 from 67% in the third quarter of 2021. The Bank actively monitors its business, financial conditions and operating results in the aim of keeping a competitive position to face contextual challenges. Moving to Slide 4. I will now comment on the Bank's third quarter 2022 financial results. BBVA Argentina third quarter 2022 net income was ARS9.7 billion, decreasing 50% quarter-over-quarter. This implies a quarterly ROE of 13.5% and a quarterly ROA of 2.4%. Operating income in the third quarter of 2022 was ARS48.4 billion, 24% above the ARS39 billion recorded in the second quarter of 2022. Quarterly operating results are mainly explained by: one, greater interest income; two, higher income from measurement of financial instrument at fair value through P&L; and three, lower operating expenses, mainly personnel expenses. This allowed net operating income to increase above operating expenses. These effects were partially offset by a fall in net fee income, mainly affected by the negative effect of inflation. Net income for the period fell 50% quarter-over-quarter due to the contrast generated by the effects of a benefit in the income tax line, as a result of the implications of tax deferrals, recorded in the second quarter of 2022. In the first nine months of 2022, the accumulated net income was ARS34.8 billion, 28% above the ARS27.2 billion recorded in the first nine months of 2021. The nine-month accumulated ROA reached 2.9%, while the nine-month accumulated ROE was 16.8%. Turning into the P&L lines in Slide 5. Net interest income for the third quarter of 2022 was ARS76.6 billion, increasing 15.6% quarter-over-quarter and 43.3% year-over-year. In third quarter of 2022, interest income in monetary terms increased more than interest expenses, mainly due to: one, higher income from government securities; two, an increase in income from interests from loans, in particular, overdraft and discounted instruments; and three, increases in income from CER/UVA clause adjustments. The items mentioned take place in a context of increasing interest rates, product of sequential increases in the monetary policy rate by Central Bank as well as an increase in the inflation rate. In the quarter, interest income totaled ARS144.3 billion, increasing 18.8% compared to the second quarter of 2022. Quarterly increase is mainly driven by: one, higher income from government securities, both from an increase in the nominal rate and the volume in the position of LELIQ; and two, an increase in interests from loans, mainly overdrafts and discounted instruments, especially due to the increment in interest rates and higher activity. Interest expenses totaled ARS67.7 billion, denoting a 22.5% increase quarter-over-quarter. Quarterly increase is described by higher time deposit expenses together with higher CER/UVA adjustment expense. Interest from time deposits, including investment accounts, explain 70.9% of interest expenses versus 69.3% the previous quarter. Net fee income as of the third quarter of 2022 totaled ARS9.1 billion, decreasing 27.5% quarter-over-quarter. In third quarter 2022, income fell 5.9%, mainly explained by a decline in fee from credit cards, mostly due to the effect of inflation and an increase in the use of the Puntos BBVA benefit program. This was offset by an increase in fees linked to deposits given the average increase in prices of accounts and packages maintenance during the month of September. Regarding fee expenses, this increased 48.4% quarter-over-quarter. Higher expenses in the quarter are partially explained by expenditures linked to credit and debit cards due to the higher client acquisition costs. In the third quarter of 2022, loan loss allowances increased 37%, mainly due to the periodic update of macroeconomic scenarios in IFRS 9 impairment model. During the third quarter of 2022, total operating expenses were ARS43.8 billion, decreasing 2.9% quarter-over-quarter, 32% were personnel benefits versus 34% on the second quarter of 2022. This [indiscernible] effect surpassed the collective agreement with unions corresponding to the third quarter of 2022 and the revaluation of stock of vacation not taken. As of the third quarter of 2022, administrative expenses also decreased 1.8% quarter-over-quarter. The quarterly decrease is partially explained by: one, a reduction in rent; two, greater efficiency in armored transportation; and three, an improvement in maintenance, electricity and advertising costs, among others. The accumulated efficiency ratio as of the third quarter of 2022 was 69%, improving compared to the 71.3% reported in the second quarter of 2022. The quarterly improvement is explained by a decrease in expenses and also an increase in income, both due to a reduction in expenses as well as a significant increase in interest income. In terms of activity on Slide 6, total consolidated financing to the private sector in the third quarter of 2022 totaled ARS582.4 billion falling 8% quarter-over-quarter and 6.4% year-over-year. Loans to the private sector in pesos decreased 6.3% in the third quarter of 2022. During the quarter, the decline was especially driven by an 8.6% fall in credit cards, a 13.6% decrease in other loans followed by a 5.7% fall in consumer loans. Regarding our other loans, the main fall is observed in commercial loans PIV. These decreases were offset by a 6.4% and a 27.5% increase in overdrafts and in receivables from financial leases. Loans to the private sector denominated in foreign currency fell 27.8% quarter-over-quarter. Quarterly decrease is mainly explained by 47.9% decline in other loans followed by a 22.4% fall in prefinancing and financing of exports and a 12.5% fall in credit cards. During the quarter, both the retail and commercial portfolio fell [indiscernible]. Loan portfolios were highly impacted by the effect of inflation during the third quarter of 2022, which reached 22%. In nominal terms, BBVA Argentina managed to increase the total loan portfolio by 11.9% during the quarter. BBVA Argentina's consolidated market share of private sector loans reached 8.47% as of the third quarter of 2022, improving from 8.10% [indiscernible]. In the third quarter of 2022, asset quality ratio or NPL was 1.07% compared to the 1.08% recorded in the second quarter of 2022. This is mainly explained by a similar percentage reduction of both the non-performing portfolio as well as the total portfolio. The coverage ratio was 236.87% in the third quarter of 2022, above the 219.39% recorded in the second quarter of 2022. The increase in coverage is merely the product of a greater fall in the non-performing portfolio versus a lower percentage fall of allowances. Cost of risk reached 2.65% as of the third quarter of 2022, above second quarter 2022's 1.94%. This is mostly explained by a growth in loan loss allowance in the quarter, mainly due to the periodic update of macroeconomic scenarios in IFRS 9 model impairment. On the funding side, as seen on Slide 7, private non-financial sector deposits in the third quarter of 2022 totaled ARS1.1 trillion, falling 9.9% quarter-over-quarter and 7.2% year-over-year. Quarterly decrease was mainly explained by sight deposits. The Bank's consolidated market share of private deposits reached 6.68% as of the third quarter of 2022. Private non-financial sector deposits in pesos decreased 9.8% compared to the second quarter of 2022. The quarterly change is mainly affected by a decrease in sight deposits especially checking accounts by 23.3%, followed by saving accounts by 17.9%. This was partially offset by an increase in investment accounts by 14.7%. Private non-financial sector deposits in foreign currency expressed in pesos fell 10.6% quarter-over-quarter. As of the third quarter of 2022, the Bank's transactional deposits considering checking accounts and saving accounts represents 55.2% of total non-financing private deposits versus 60.2% in the second quarter of 2022. In terms of capitalization, BBVA Argentina continues to show strong solvency indicators in the third quarter of 2022. Capital ratio reached 26.2%. Exposure to the public sector in the third quarter of 2022, excluding Central Bank instruments, representing 9.8% of total assets, slightly above the 9% in the second quarter of 2022 and way below the 13.1% reported by the system as of August 2022. It is worth mentioning that as of the date of this report, BBVA Argentina has distributed dividends by ARS12.1 billion installment 1 to 11 according to the established schedule published on June 16, 2022. The 12 on last installment was announced last Friday, November 18. The Bank's total liquidity ratio remained healthy at 79% of total deposits as of September 30. This concludes our prepared remarks. I'm showing no questions. This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mrs. Lanusse for any closing remarks. Okay. Thank you for your time. And please let us know if you have further questions. Bye. Have a good day.
EarningCall_1907	Ladies and gentlemen, thank you for standing by. I am Gali, your Chorus Call operator. Welcome and thank you for joining the OPAP S.A. Conference Call and Live Webcast question-and-answer session to discuss the third quarter 2022 financial results. Please note, a video presentation has been distributed and is also available on the OPAP Investor Relations website. All participants will be in listen-only mode and the conference is being recorded. At this time, I would like to turn the conference over to Mr. Jan Karas, CEO of OPAP S.A. Mr. Karas, you may now proceed. Thank you, Gali. Good evening or good morning to everyone. And welcome on our regular Q3 2022 results conference call. I am pleased with the set of strong results announced, demonstrating elevated topline and profitability in both retail and online channel. During summer period, we saw again our occasional players gradually returning to our stores, along with the further engagement of our regular ones, while online continues to deliver solid contribution. So ahead of an expected strong finish for the year and despite macro challenges, we have upgraded our EBITDA target to around â¬720 million now in line with our original outlook. Hopefully, you have reviewed and enjoyed the results recorded with you. We shared with you earlier today. So we will jump directly to our Q&A session. Good afternoon. I have three questions, if thatâs okay. The first question is, you highlight that revenue growth is due to a combination of in-store mobility and new product initiatives. Would it be possible to get some breakdown of how much you think each of those contributed, perhaps, more interested in the new product initiative? And my second question is on VLTs, although they improved sequentially, the year-on-year performance is slightly down. So could you give a feel for why that is, and perhaps, versus your previous expectations, is that first fall dwell time or spend per visit or was the comparative from last yearâs so exceptionally high, perhaps, reflecting the re-openings post-lockdowns? And my third question is, could you just give a feel for how responsive you think revenue and subscriber growth is to the increase in marketing, and perhaps, give some updates on your relative market share in online, please? Thank you. Thank you for your questions. I will start from the end. I have some clarification question on the first part. So starting from the end, how responsive our online businesses to marketing activities. Itâs not a simple question to answer. There is obviously a lot of different marketing activities we have and we may go into the definition of what we consider marketing activity. Generally for the support of online, you do a lot of CRM actions, then you do digital media and performance media and you do actions in ATLs speaking about where we spend money to attract and engage our players. And all of them have obviously a positive return on investment, otherwise we would not be doing them. And those that donât work, we simply stop, go back to the drawing board and design new ones, especially referring now to the CRM promotions and different bonusing, et cetera. So itâs really difficult to give you one size fits all answer that anything that we do drives accordingly the growth. Overall, we are very experienced and also with our media agencies and creative agencies. I like to believe that we know what we are doing and we have a good success rate on driving customer interest through our general communication and we are getting more and more experience with CRM and performance media management as this is pretty essential for any online success. But I am not sure if thatâs what you were asking for, so maybe if you want to amend your question regarding the third part. No. Thatâs fine. And do you have a feel for how your market share changed in response to that marketing spend? Well, that starts with understanding the market to have a proper definition of a market share. So referring to AGC data, we are increasing our market share for both OPAP and Stoiximan. Yet, I would suggest to abstain from commenting on specific numbers now and letâs look at this when we will be -- letâs come back to this when we will be commenting our annual result, because thatâs a better base than any time of year-to-date data that are not necessarily exactly accurate in terms of the resources. So we will come back to that. At the same time, market share strengthening is obviously our ultimate ambition. Yet itâs not only a function of marketing spend, but very importantly, development of the customer proposition, which is something we are putting a lot of emphasis on as well. To your second question, you were asking about VLTs referring to year-to-date data? Q3 this year versus last year, actually, it was slightly down. Is that because thatâs down versus your expectations for the year or was there something so exceptionally high in the previous year, perhaps, after the re-openings post-lockdown? Yeah. Well, we had indeed exceptionally strong 2021. But itâs not the only thing that we should be looking at, because looking at trends of this year. You may remember when I was sharing with you in previous quarters that we certainly had a challenge on activity of our players and thatâs something that we see normalizing now and certainly a positive that we are happy to observed. Yeah. So sequential improvement in 2022. Now to the first quest -- first part of your question, you were referring to a breakdown between -- can you repeat please that? Yeah. Do you have a feel for -- within the revenue growth of 6% year-on-year, do you have a feel for how much of that is just -- thereâs more mobility around I get that, but how much is the new product initiatives contributing to that revenue growth, do you have a feel for that number? So that is -- I am afraid a little bit philosophical question, because we are, like, I said many times, we are building the new reality. There is nothing like coming back. We are forward looking and we are trying to accommodate as much as possible the new customer expectations. And we are largely designing the new experience of the future that people will have with OPAP that keeps in mind everything that has changed over the course of last two years through that major disruption of COVID in customerâs expectations. So whatever evolution of products and function of these is largely driven by evolution of customer expectations or are aim to attract new customer groups that we possibly did not even targeted three years back. So I am sorry, but I am not able to say how much is from product initiatives, because generally, evolution of the customer proposition is a key driver of increasing interest of customers. So itâs a bit of a chicken and egg. Customers would not come more often and would not spend more money with us if we would not be innovating and the other way around. Hello, there. Thank you very much for taking my question. I have three questions, if I may, please. Firstly, I guess, we have all seen theâ¦ â¦ upgrade you provided to the guidance. Just wondering what has given you this confidence, I mean, it must have been the topline performance during Q3, which I feel has been a bit better than you had seen your budget, maybe same has been the case in Q4 so far. So I guess what I am basically asking is, what has been going better, is this the high frequency gains, is it sports. So thatâs my first question. Secondly, I sound quite interesting the point you made that you communicate regarding Pame Stihima sports [ph], in fact that you have made this more competitive. Have you been seeing or are you hoping to see some migration back to retail from online and to what extent does this relate to the workout? And lastly, if you could just give us an indication as to your intentions regarding shareholder returns. So we have a floor, namely â¬1. We have â¬1.5, which is last yearâs total remuneration. You refreshed the EBIT guidance with quite a good degree of confidence. So what should shareholders be looking for, please? Thank you. Okay. Thank you. Good afternoon from me. I will take the first question. Indeed, the reason why we upgrade our guidance is very strong performance in Q3, which assured us that despite not very positive macro backdrop, we have been quite resilient in terms of our offering. And also, obviously, we donât expect any negative developments on COVID going forward. And basically where it comes from, itâs a combination of our belief in terms of our topline delivery, especially online being very strong in the rest of the year, and as well as compounded by the cost consciousness and very cautious OpEx management, which we have proven year-to-date and we will continue to do in the future. So those are the key drivers about our new outlook. Do you want to cover the third question, Pavel? Yeah. Intentions regarding shareholdersâ returns. Certainly, as you mentioned, we made a commitment to distribute as a minimum â¬1. We have done â¬0.30 recently. So for the final distribution, we remain very confident that it will be north of â¬1. Last year, the 150 [ph] total shareholder return was including the -- also share premium created by the script in the previous years. So that was really covering the share premium of the previous two and a half or so years. So I expect to finish somewhere between â¬1 and north of â¬1. We are strongly committed to distribute -- to maximize the dividend per share and we have yet to see how we finish the rest of the year. As for the middle question regarding Pame Stihima new attractive ads [ph]. As you are aware, we pay a lot of attention to listen to our customers. And from the segment of sports betting fans, we clearly understood that while on many -- in many dimensions of the customer sports betting proposition, we are not only highly competitive to online, but in many areas like the trust for paying my winnings, we are even leaders in the Greek market. We have been scoring really bad in the ads. So thatâs why we have made this poll decision to significantly improve our ads and bring them to a competitive level with our online to make sure that our customers will appreciate the retail experience of sports betting and they will not be missing anything or even worse leaving that experience only because of ads that they donât consider beneficial. On that front, we are seeing certainly success with a lot of positive feedback and the expectation is, obviously, that accordingly, it will be reflected in the performance of both existing customers playing more and recycling their winnings more, but also attracting customers that are playing in online today, but not in retail. On this front, however, I want to highlight that it is not about moving people from online to retail. Itâs a customerâs choice and preference that at the times when he cannot come to an OPAP store to play in online and thatâs fine. What we want is customers to also appreciate the retail experience that in many areas have a lot of benefits to the online, especially when it comes to the audiovisual experience and socializing experience that are certainly very essential to the whole mix of success. And with that, creating our ultimate ambition and that is a hybrid customer. So hybrid customers is what we want and we hope that we will see that segment significantly growing. More on that, how successful we are on achieving those ambitions is certainly something we will share with you on the next occasion since today itâs too early for making any assessments on that front. World Cup is here, so thatâs going to show us how good move we have done. Thank you. Great. Thank you so much. So certainly great news for shareholders. Just wondering about the point regarding the ads, since when have you, I think, made these changes really evidence for the pointers? We started at the beginning of September, supported by the campaign in the second half of September. So itâs really fresh now. It -- keep in mind that the ads in retail were there for years and years and it takes obviously a lot of effort to change peopleâs perception that is not just some short-term promo, but itâs really something rather groundbreaking in the history of this game and a significant milestone of sports betting in retail and we see an increasing amount of customers really getting it and appreciating. And we have a lot of customers that even consider the ads more attractive than in online. So stay tuned more on that next time as a proper assessment of the early results that we are seeing these days. I think the World Cup is certainly a chapter that we need to close make any conclusions and assessment. But itâs on a good track. Hello. This is -- ladies and gentlemen, the next question is from the line of Nekra Solmax [ph] with Citibank. Please go ahead. Yes. Good afternoon. Thank you very much for the call. My first question is on margins, right? So underlying margin if we exclude concession benefits was very strong in third quarter 28%, right, which is about 3 percentage points higher previous quarter and higher year-on-year. And I am wondering what was driving the such high level of margin and how sustainable do you think itâs going to be going forward? Thatâs the first question. Okay. Well, indeed, we had a very good margin during the third quarter. There are always some deviations in the margin driven by the product mix phasing of the spend and similar effect. Basically, our long-term development of the margin we believe will continue to be in the mid-30s. So at around 35%, 36% mark level. Thatâs really the long-term sustainable margin. Okay. Thank you. My second question is more on the kind of outlook, right? So what is the current outlook for the next year and do you think that the market pressures that we see and inflation may drive some pressure on the gaming market in Greece? Well, obviously, the macroeconomic -- macro situation and its impact on business and any business, not just an OPAP is something that we donât want to underestimate, the situation is certainly not easy. However, at the same time, we see us really well positioned for further building of success throughout next year and that simply the high relevance of our offering. We offer entertainment, the past difficult period has clearly proven that there is a big resilience of our business and big demand for our services or the entertainment that we offer to customers. And last but not least, we offer affordable entertainment. It is not like deciding for â¬1,000, â¬2,000 holiday. Itâs about deciding almost at a single-digit amount of euro to still buy in a store or browse in an online and have some moments of fun and excitement of possible winnings and the entertainment connected with that. So because of that -- because of those elements of our other specific offering, we believe that there is no reason not to -- there is no doubt for us to succeed in next year and no reason to be pessimistic about whatâs ahead of us, because like I said, the history has shown that we can deliver certainly in difficult situation. Like everyone else, we are, obviously, yet to see how the macro will evolve and how favorable it will be for us and how much it will make our hunger for success more or easier that remains to be seen. Very clear. My final question, if possible, could you share some maybe trends -- most recent trends that you saw in October and basically November so far? Well, October and especially the period now was primarily a warm up period for the whole World Cup. I was mentioning about the ads where we paid a lot of attention. Now we have a lot of upon that takes all of our resources and focus on that the big bet we are having. And not only for the GGR results of November or December, but very importantly, for the fantastic opportunity of growing our active base and increasing the regular and occasional players so far of our retail stores. So itâs about also engaging customers and building a base for the many months to come and for the other verticals of our business. So it has a great -- World Cup has a great importance for us and equally what now starts in parallel and will take over in the second half of December, all the Christmas activations and focus we are doing that. As you may have noticed, if you are living in Greece, we have launched a very innovative proposition for Christmas scratch, where we hope we will spice up the Christmas period for many people in Greece in a new innovative and attractive way. So, having said that, there is a lot of stakes now on the table for the November, December period that depending on how well they go and we certainly believe that we are prepared for success and they should be successful, we will be able to judge the Q3 period. So, all I can say, so far, so good, but the -- I would say, the jury is still out on what our results will be at the end of the month, but we remain optimistic on that front as our forecast indicates. Yes. Good afternoon and congratulations on the results. First question, it has to do for the full year CapEx, where do you see it to finalize for the year? Second question it has to do with Betano sale. As I remember, you have guided that you are going to complete the sale during the 4Q -- fourth quarter of the year, do you have any news on this, do you expect it to be finalized by the end of the year? And obviously, that would be benefiting your free cash flow of â¬50 million, if I remember correctly, do you see any other benefits in terms of accounting treatment of the sale? And the third question has to do with Hellenic Lotteries, if I remember correctly, you have a legal case against the Greek State in terms of the minimum DDR tax payment, which stood at â¬50 million, if I remember correctly. Do you expect this case to be finalized by the end of the year or would you see it to be transferred for the next year? Thank you very much. Okay. Thank you for questions. Our expectation for the full year CapEx will be around â¬20 million mark for 2022. In terms of your second question, indeed, we indicated the completion of the deal within Q4 and this is still the plan. We assume that the transaction will close in December. We are on track to complete all the regulatory approvals and demerger in Malta. So December should happen. With the third question, I will ask Jan to comment. Yeah. Thank you, Pavel. Regarding the Hellenic Lotteries arbitration that you correctly referred to. At this moment, itâs a process that continues with hearing, with the next hearing happening next year. So itâs not something that we expect to finish this year. At this moment, I have no other update than this one. So to be continued in 2023. Thank you. Hello and congrats on a record quarter. Just coming back to your guidance. You have done â¬533 million in EBITDA in nine months. Why is the EBITDA going to be lower Q-on-Q, is it just being a bit conservative or is it, quote-unquote, investments related to World Cup or any other color would be appreciated? Thank you. Well, we always have some phasing and mix of the products. So World Cup is definitely certainly important event. It has many other benefits than just purely increased revenues and EBITDA. Typically, World Cup is one which brings GGR lots of activity. But typically with the favorites winning, it doesnât have necessarily a very high margin. So itâs a current forecast of the mix of products which take us to believe for Q4 to be as we indicated. Not really because we have done the better ads not to drive turnover and activity, but obviously, to drive incremental GGR. So better ads is not the reason that it will drive our margin or profitability down. [Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karas for any closing comments. Thank you. Thank you very much. Thank you very much all being with us today and thank you for all your questions. As always, very interesting and exciting to listen to you and answer. I hope -- it might be a bit too early, but I hope you donât mind us wishing you also and your loved ones a great and Merry Christmas period. And we will be looking forward to talk to you again next year for our full year results. Thank you very much and have a great day. Thank you, Gali, for being with us today. Thank you, Mr. Karas. Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for calling and have a good afternoon.
EarningCall_1908	Folks, thank you very much. My name is Simon Leopold, Raymond James' Data Infrastructure Analyst, here at our in-person tech conference in New York. It's exciting to see people again, to get dressed and to put shirt on with buttons and shoes, nice change. But we've got a session now with Cisco, Kip Compton. So, Kip, to get started, we've known each other for many years, crossed paths many times. You strike me as sort of the ultimate utility player. You've done a lot of things at Cisco side. I almost feel like no question is out of bounds, but I'm sure they are. So, to help us maybe set the context for our conversation and the boundary conditions, maybe tell us a little about your current role and current focus. And we'll dive into the outline. And folks, if you have questions, raise your hand, we'll try to take questions from the audience as well. Thanks, Simon, and it's great to be here in-person. I think we've had shirts with buttons for a while, but shoes and all the rest of it is great as well as seeing everyone in-person. Before I jump in, I'm compelled by my Investor Relations team to say that I'll be making forward-looking statements that are subject to the risks in our latest filings. With that out of the way, I've been -- as you mentioned, I've been at Cisco a long time, I've done a lot of different roles. I'm currently Senior Vice President for Strategy and Business Development, for a business that internally we call Cisco Networking. We're trying to simplify things, including with our organizational names. In terms of our external reporting segments, that roughly maps to Secure Agile Networks as well as Internet for the Future, and represents the majority of the product revenue in business at Cisco. And I guess in terms of, I've got sort of my notion of what to ask you about, but I think it's important for us to understand what are you spending most of your time on? What's -- what are you occupied with? What do you -- what keeps you busy? Yes, it's a large business. And so, when you think about strategy and business development, I spend a lot of my time thinking about how can we grow the business? How can we generate more differentiation in our products that are valuable to our customers? I spend a fair amount of time on inorganic activity as I think people who are familiar with that know you spend more time on deals that you decide not to do than you do, and those are pretty important. And I spend time working with our go-to-market teams, understanding how we can accelerate the business. And the volume question is a macro question, but I want -- I understand, I want to ask it in the context of your job. But given we've got a strong U.S. dollar, recession worries, various changes by regions and products, how are you thinking about those elements influencing the way you think and what you're working on? Well, I'm in the product, our research and development side of Cisco. So, we tend, frankly, to take a longer view. So, we pay close attention to macroeconomic forecasts in terms of our operations and understanding how we should be managing our supply chain and our forecast and our sales and all that. But in terms of our strategy and our research and development, we're looking out three to five year sort of timeline. And we have -- I mean we've seen -- you mentioned some of the strong dollar for us over -- I think 90% or more of our revenue is actually dollar denominated, and we do have some hedges in place for some of our costs. So, we've so far seen a fairly material impact from that. And in terms of softness, I mean, I think on our call, we mentioned we've seen some areas of softness, including in Europe. On the other hand, I think we just had our second biggest first quarter bookings number in the history of the company, second only to last year when things were jumping as people were building out networks in the pandemic. So, we're monitoring the situation, but we've also seen -- I mean, Gartner recently published a report, surveying IT folks and companies. And I think 51% of them said technology was the last area that they plan to cut. So, we're watching things carefully. We're investing for the future in R&D, but we're seeing some resiliency right now. And the succinct next question is lessons learned from the pandemic. And what I mean by that is prior to the pandemic, maybe you might sole source certain components that now you multisource. So, how has the experience in the last couple of years affected the way you think about that long-term strategy? Yes, absolutely. I mean it hasn't fundamentally changed our strategy. That said, we learn and adapt to an environment just like everyone else. And so, where we may have had our supply chain more optimized for certain things as we're in a time of uncertainty, clearly. Right now, I think there's a lot of exogenous forces, certainly the pandemic and now the geopolitical environment. Our supply chain team and everyone else is adjusting to the environment that we see, going forward. And so, Cisco hosted an analyst meeting. Was it September? Lights are blur, seemed like that. But it was the first analyst meeting that the company hosted in a while, and you outlined at the time a TAM growing to $900 billion, which is pretty big. So, I'm not asking you to repeat the entire content of the meeting, but help folks understand really what are the big growth drivers? What are kind of the most exciting transitional aspects of what's influencing that kind of massive TAM? Yes, absolutely. And I think you're referring to our Investor Day in September â21. For folks who might want to look that up, all the materials are online. I think what I would say in terms of drivers over the next, let's say, three to five years, certainly, we're seeing hybrid work, IoT, and then the web scalers as being three good drivers for us. On the hybrid work side, the immediate thing you think of is our collaboration portfolio, and particularly, we believe with some of the devices that we have as companies are outfitting their campuses for hybrid work and realizing basically that every meeting is going to be a video meeting, and so every conference room needs to have that equipment in it, that's an opportunity for us. But in my job, on the networking side, we're focused on the opportunity with the networking. And we're seeing that whenever a meeting is a video meeting, because every meeting will have some remote participants, the load and the traffic on the campus networks is intense. And that's driven a wireless and campus upgrade cycle that we think is fairly durable. That along with the traditional generational upgrades for WiFi 6 is -- WiFi 6 has been very good. We're seeing 6E now kicking into gear as well. On the IoT side, we're seeing people putting sensors into carpeted spaces and starting to use these to understand occupancy, to understand and optimize their energy usage. And actually, our office here in New York, there's some videos online, Wall Street Journal just did a feature on it, where we renovated and put these technologies in as a good showcase for that. On the web scaler side, we just continue to ride the growth there. I mean, we saw a strong double-digit growth in our first quarter that just ended. We're really excited about the pipeline of technologies that we have to offer those folks and expect that to continue to drive growth as well. So, one of the things that I suspect is the way Cisco operates is the business units are sort of given their targets and you run with it, you run your business. And as long as you're running it, go. And so, when we think about the -- essentially, moving strategy to execution, that's the mystery to me from -- as an outsider observing it. So, you're looking out years and your colleagues are busy working on day-to-day, what's the process? And how does it go from your vision and your activities out years to come into the business day-to-day? Sure. Well, one thing I'd say, as you mentioned, you've known Cisco for a long time. So, it's -- I think it's a good observation of how we've treated our businesses in terms of autonomy. I would say, we formed the Cisco Networking organization that I'm part of, we just formed in October. And we actually brought together all of our networking businesses across both service provider and enterprise, for instance, really looking to be able to get more synergies and deliver more integrated solutions. So, we're actually blending that classic model with more governance and more sort of big-picture thinking, so that we can get more efficiency as well as more differentiation. In terms of how strategy works, at Cisco, we have an annual long-range planning process, where we build three to five year plans that outline financial forecasts as well as strategies and areas that we want to enter, investments we want to make. Those are presented and discussed with our CEO and his staff. Once those are in place, we actually translate those into strategic intents for each of our businesses. And we work -- my team actually works with them quarterly to monitor the progress against what needs to happen to have those strategies in place. As well as in this environment, frankly, if there are any changes that would cause us to tweak our strategy, we're not changing strategy every quarter, of course. But depending on what's happening in the world, we might decide that an element of it should be sped up or another element maybe a little bit relatively less important. And then, we repeat that process on an annual basis. So, we feel good about that model. So, I want to ask about what the R&D priorities are, and I imagine there's a one-word answer, which is software. So, let's go a little bit deeper. Absolutely. So, when I think about it, I think in terms of two buckets for R&D; one is core technologies, and the other is essentially experiences that we're looking to invest in to deliver to our customers. So, I think the core technology side, no big surprises there. By the way, software is big, but we're continuing to invest heavily in our ASIC strategy, right? Our Silicon One ASIC strategy is very important. Weâre investing in our optics, which is highly differentiated and something thatâs helped propel our web scaler success. Weâre investing in core networking software. I think some of the things that weâve made our name on and that we lead the world in. And weâre also investing heavily in security. So, those are some of the core technology areas that we think are just important long-term plays, and that weâre pouring R&D investment into. On the experience side, weâve seen that what customers want is simplicity. And the way we think about this is what kind of experience. These core technologies are amazing. They enable essentially the modern world. But if you canât operate it, and you canât get the outcomes out of it that you want, itâs not very compelling. And so, investing in things like Meraki dashboard and what we announced last summer, and bringing Meraki across our whole portfolio is a big part of what we invest in as well. Now, you did make a comment earlier on about inorganic efforts, and having filed Cisco for a while, Iâve observed the strategy that, I guess, we call outsourced R&D, maybe thatâs a common term. But youâve invested in private companies historically, often they become acquisitions. How do you think about that particular strategy? It may be my imagination, or it just seems like youâve made fewer acquisitions over the last 12 months than the prior period. But there could be a lot of variables there. So, maybe update us on how Cisco thinks about that strategy. Sure. So, internally we have what we call our build by partner framework. And whenever weâre looking at a new capability or getting into a new business, weâll ask ourselves and weâll often actually do the analysis, scenario-based analysis, hey, if we built this ourselves, what does that look like? How long would it take? How much would it cost? What kind of differentiation could we build with our technologies and our engineers? If we partnered, what does that look like? We donât need to do everything ourselves. We have great partnerships across the industry, including somewhere we put things on our price list where it makes sense. And then last, and the one that generates the headlines is the buy, the acquisition case. And weâll look at what targets are out there, what would that likely cost, what kind of cultural fit? I mean, you buy a company and you get the technology, but the team bolts, thatâs usually not a value creation event for us. And so, weâll actually map out all three of those and then sit down and look and decide, whatâs the best path for each area. To your point about acquisitions, we donât have a quota. Itâs like -- Iâd have to go look at the numbers, my perceptionâs kind of aligned with yours. But we donât have sort of a plan at the beginning of the year, oh, weâre going to buy this many companies, because we do look at it through this build by partner. And what we do depends on the outside environment, where --what targets are available and what makes sense from a business perspective. And in terms of the criteria, you mentioned cultural fit, I hear that over and over and over again. What are some of the other criteria used in making these decisions? I mean, some of the criteria are somewhat deal specific. So, I donât want to suggest like we have like a scoring, rubric or something, if only it was that easy. I think how complimentary the technology is, like maybe itâs obvious, but if weâre looking for a particular capability or product and the company has it, but it has a whole bunch of other stuff that either overlaps with what we have or has things that we would not want, and so we would be potentially exiting, those are not -- those tend to not be very good deals. Where the mission -- where we buy a company and then are like, âOh yes, weâre going to change what you do. Weâre going to take you in a different direction after we buy them,â thatâs often a little bit of a warning sign. I mean the general thing that I tend to think about a lot -- I mean, the strategic fit is kind of obvious. The thing that I think about a lot of times is the fact that it is far easier to buy a company than is to like integrate it and keep the team and get the multi-year successful outcome out of that company. That is the hard part. And so, if anything I tend to bias my evaluation in that area. So, I want to pivot the questions towards a topic Iâve been noodling with a bit more is around this idea of power consumption. So, thereâs been a lot of press lately about how much electricity data centers consume that theyâre detrimental to the environment. And I read an interesting article saying, well, but if youâre not getting on a plane and flying, youâre reducing greenhouse gases. And so maybe thereâs a good use. And so, I guess with rising costs of electricity, these questions have to be come up. So, maybe could you talk a little bit about how youâre thinking about power consumption and the production of greenhouse gas as CO2 in the sort of engineering side and how thatâs evolving with your customers and your engineering? Sure. So, this is a huge focus for us, and itâs been for a while in terms of just -- excuse me, our own sustainability goals. And what, I think we published some pretty ambitious and aggressive goals as a company. And part of those sustainability goals is how we reduce not just the greenhouse gases from Ciscoâs own operations, but from our customers who are using our equipment. Thatâs part of our framework as it is for most companies. So, this has been an effort for a long time. In terms of the focus on engineering, last year, I actually formed a engineering sustainability office thatâs in engineering and works with all our engineering teams as well as the supply chain, as well as our Chief Sustainability Officer for all of Cisco to make sure that this is first and foremost as weâre designing products. In terms of what weâve seen in the market, this was important and then it became important and urgent with the rising energy costs, and particularly in Europe. And what weâre seeing is that there are multiple places where we can help our customers. Customers are coming to us and one is with our Silicon One technology that is significantly more efficient on a per gigabit basis. Watts per gigabit is a metric in networking. I think we announced deployment with Deutsche Telekom publicly where they said that they reduced their power requirements by 92% on a per gigabit basis. So, thatâs a pretty significant improvement if youâre looking at a big energy bill. Another area where we can help customers is with power over Ethernet technology. So, this is technology that lets you send power over low voltage wiring. It turns out that this makes the power supplies much more efficient. So, weâre seeing a lot of people when they renovate spaces or even build some data centers using this technology, and it improves the power supply efficiency pretty significantly. The other area is in IoT, and I mentioned earlier the sensors and environments. We did a study with Forrester using our Meraki sensors where Forrester saw a 27% energy improvement by using these sensors to trigger close the blind when itâs hot. These are some very basic things, but if you can use sensors to automate them, you can get those savings at scale. So, we see -- we talked about -- Chuck mentioned on our most recent conference call, we see these energy costs as obviously a potential macroeconomic headwind for everyone. But we also see there being an opportunity for us to help our customers in this area. And weâre seeing some instances of customers actually accelerate investment to get those energy savings. So, basically, the scenario is a customer has a, letâs say, four-, five-year-old campus or data center network consumes more electricity than the newer generation of product. So, because of that, theyâre refreshing in order to reduceâ¦ Maybe they were thinking of refreshing in a couple of years, and now theyâre looking at that return and saying, given the energy costs, perhaps I should refresh earlier. And thatâs a potential catalyst. Now, on the other side, I mean, realistically there may be customers who decide to delay projects because of energy costs. But we are seeing the energy efficiency for both the sustainability and the current economic reasons as kind of a top-of-mind topic. And I want to ask about the sort of impact of hybrid multi-cloud on your business. Because it feels to us that eight and ten years ago, Cisco sort of took the attitude of, âIâm not going to sell to those guys, Iâm going to just help my enterprise customers.â And maybe five years ago, your corporate mind changed and said, âYou know what, this isnât going to change. Letâs help the enterprises, embrace multi-cloud, hybrid cloud. Weâre a neutral party.â So, maybe help folks understand a little bit of that history and what youâre doing to help your enterprise customers and their adoption to migration to multi-cloud. Sure. So, I mean, itâs -- cloud for Cisco really impacts our different businesses in different ways. So, in the Campus business for instance, a lot of that is about using the cloud to make it easier to manage a campus network. You canât move your campus switches, your access points to the cloud. You still need them in the building. But we can leverage cloud technologies to just radically simplify and accelerate how people run those networks. And Meraki is a great example of that. And our Internet for the Future segment, well, thatâs where weâre actually helping the web scalers build their clouds with our Silicon One technologies, our Cisco 8000 product, which is the fastest growing product in the history of the company is really being fueled by that. On the data center side, itâs kind of what you were referring to which is, okay, most of our customers are going to be in a hybrid state. Weâre bringing technologies like the Cisco network control -- Cisco Cloud network controller that lets customers design and implement policies and automation and visibility across their on-prem networks as well as their VPCs at Amazon and their networks at Azure and Google Cloud as well. So, helping our customers take advantage of multi-cloud for workloads in the same way that weâve helped them take advantage of on-prem networks. So, you see us with kind of a multifaceted. In terms of the evolution of our attitude here, and I think it took us some time. The web scalers are a different kind of customer. And I think itâs -- it took us some time to learn how to sell to them. I think the success weâre seeing now demonstrates that we cracked the code and we form the relationships and have very tight engineering relationships with the key web scalers and thatâs enabled us to achieve that success. Yeah, itâs sort of interesting in that from your disclosures, it works out to be 5% to 6% of revenue from public cloud, which on the surface, oh, well, thatâs not a big number, but itâs a big number of a $50 billion revenue company, which would make you the biggest vendor of IT equipment or X servers into that vertical. I think that often goes miss. And so, in terms of those partnerships, and from your vantage point of the enterprise, do you see the cloud players as receptive to working with you as a partner? Or do you feel like theyâre more competitors? No, I donât see them as competitors. Theyâre customers and partners. As you said, at this point weâre selling -- theyâre buying billions of dollars worth of technology from us each year. And I think particularly with what we can bring with our Silicon One technology, our optics and the Cisco 8000 platform, which is actually built on Silicon One, is a pretty differentiated value proposition for them in terms of how they can really scale their network and achieve phenomenal economics and power efficiency at the same time. And thatâs why you see them adopting their technology. And you mentioned a little bit earlier the effort to extend the Meraki model. Letâs not take for granted that everybody knows what that meant. Maybe unpack that a little bit in terms of helping us understand the importance of doing that and what it is? Sure. So, Meraki dashboard is a cloud management tool. So, Meraki customers are able to manage their networks by just going to essentially a website in their browser, and they can see their whole network and manage everything from there. And because weâve got all of that telemetry and all of that configuration information in the cloud, weâre able to provide recommendations, provide more powerful tools and generally make it much easier for our customers. We also on that platform have an incredibly rich set of APIs and a very strong developer ecosystem and partner ecosystem around it, where people are able to build solutions on top of and around the Meraki cloud. And getting all of that -- getting essentially the network control plane to the cloud is really key there because developers can access that as opposed to a situation where youâve got different controllers on-prem in different enterprises. So, we donât break out Meraki separately in our results. Itâs embedded in things like wireless, switching, routing, but it has certainly -- itâs certainly been buttressing our market share, and weâve certainly seen a lot of customers interested in the simplicity that cloud management delivers. And we really think that that cloud management is that the key. I talked about delivering experiences before. We think thatâs the key to delivering the simplicity that our customers are looking for. Customers donât know what operating system their Meraki products are running, they use the Meraki dashboard, and thatâs a full stack dashboard with your full networking stacks, a route, switch, wireless. But now weâve integrated a bunch of other products. So, we have Meraki sensors, we have Meraki cameras, we have cellular gateways. We have systems manager for managing devices all integrated in a dashboard. And as we bring all these products together across different domains of the customerâs infrastructure in one dashboard, that enables us to make it simpler for them as well, because they can implement policies or track usage across these different domains. And how do you think about making that management solution multi-vendor? So, if the customer chooses to buy a particular component from somebody thatâs not Cisco, which might happen occasionally, do you integrate that? Do the customers lose any features or capabilities? How do you think about that? Itâs a great question. I mean, honestly, right now, weâre focused on bringing that simplicity across our entire portfolio, and thatâs sort of job one. And last summer we announced -- what I described with Meraki is great, but Catalyst is the -- our largest, frankly, the worldâs largest campus portfolio of networking equipment. Itâs the most powerful in terms of feature sets and performance, the most powerful campus portfolio in the world. Weâre really focused right now on bringing that Meraki simplicity across into our -- the rest of our campus portfolio. And we think thatâs the key thing for us to focus on right now. Thatâs what our customers frankly are asking for more than anything. And thatâs something actually weâve been working on for several years. And we have right now available for our customers cloud monitoring, where they can register their catalyst equipment with the Meraki cloud. They can now go into the Meraki cloud and see all of their catalyst equipment, see the topology, see the status, do troubleshooting. And weâve actually added that Meraki entitlement into our DNA licenses. So, now the people with the DNA licenses associated with the catalyst switches have the option of on-prem management with DNA center or cloud management with the Meraki cloud. So, you might imagine, I talked to some of your competitors on occasion. One of the things that they consistently point out as a challenge for Cisco is the complexity. And so, theyâll cite the fact that Cisco has multiple versions of every product, and itâs hard to deal with, and I get it, because if you are a massive company with a full portfolio, their complexity just comes along with that. And so, how do you counter the challenge when your competitors who are maybe more narrow, more point focused, argue that âWell, Ciscoâs complex, and weâre easy?â Well, I think, I mean, the breadth of our portfolio, itâs immense and outpaces just about any of our competitors. And we havenât done as much in the past probably to simplify that as we could. I think youâre going to see us using cloud management to bring that simplicity, frankly, without compromising the breadth or power of our portfolio. I think if youâre a point competitor in one domain, itâs a lot easier to be simple. I mean, they have a simpler portfolio. But what we are seeing and what weâre responding to is customers want simplicity. Weâve seen the growth and the power of that Meraki model. And we think bringing that to the rest of our customer base is the best thing that we can do to address complexity. So, as weâre about to run out of time, I always like to close with a question that itâs really meant fairly for -- from your vantage point. So, not CEO, CFO, but from your vantage point, what do you think is least appreciated by the investment community about Cisco? That one for sure. Thatâs great. I mean, I think the size of our software business. I think we did over $15 billion in software revenue last year. Weâd like to push faster. You joked earlier about how my R&D priorities are software, software and software. Weâd like to push, wish faster on that. But weâre at 43% of -- since all of our revenues recurring, weâre at a point now where 85% of that software revenue is subscription, only 15% perpetual as weâve been executing on that transition. So, I think Iâm -- I think thatâs an under-told story. At the same time, frankly, weâre not done. We feel a lot of urgency as well as a lot of opportunity to continue driving more software value for our customers and more predictable recurring software revenue for the company. Well, great. Well, thank you very much, Kip. Appreciate you joining us. Folks, thanks for joining us with Cisco at our fireside. My job is to make sure you get to your next meeting on time.
EarningCall_1909	Greetings and welcome to the GMS Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carey Phelps, Vice President of Investor Relations for GMS. Thank you, you may begin. Thank you, Melissa. Good morning and thank you for joining us for the GMS earnings conference call for the second quarter of fiscal 2023. I am joined today by John Turner, President and Chief Executive Officer, and Scott Deakin, Vice President and Chief Financial Officer. In addition to the press release issued this morning, we have posted PowerPoint slides to accompany this call in the Investors section of our website at www.gms.com. Turning to Slide 2, on todayâs call managementâs prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward-looking statements represent management's current estimates and expectations. The Company assumes no obligation to update any forward-looking statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the Company's filings with the SEC, including the Risk Factors section in the Company's 10-K and other periodic reports. Today's presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call for the second quarter of fiscal 2023 relate to the quarter ended October 31, 2022. Finally, once we begin the question-and-answer session of the call, in the interests of time, we kindly request that you limit yourself to one question and one follow-up. Thank you, Carey. Good morning and thank you for joining us today. With elevated single family home construction activity, as completions eclipse starts for the quarter, along with strong multifamily residential demand, year-over-year growth in commercial and a favorable pricing environment, we again delivered record levels of net sales, net income, and adjusted EBITDA for our fiscal second quarter as we continued the solid execution of our strategic priorities. Looking at Slide 3, with comparisons to Q2 of fiscal 2022, here are some highlights of our second quarter results. We grew net sales 24.4% with 24.9% gross profit growth as our teams continued to manage a shifting market mix and inflationary product pricing. Volumes in Wallboard were up 11.6% and we were again pleased to deliver positive year-over-year commercial Wallboard volume growth for only the second time since the start of the pandemic after doing so last quarter as well. The inflationary product pricing environment combined with our continued operating cost discipline, enabled us to improve our SG&A and adjusted SG&A percentages of sales by 50 basis points each. Net income improved 38.7% to $103.2 million, and adjusted EBITDA grew 30.7% to $195.5 million. And finally, adjusted EBITDA margin of 13.7% was up 70 basis points as compared with a year ago, with significantly improved cash flow. Our team's commitment to delivering outstanding customer service, together with the continued execution of our strategic priorities helped drive this success. On Slide 4, we highlight our progress this quarter in advancing these strategic initiatives. First, expanding share in our core products. Although pockets of supply chain challenges remain, our teams continue to work diligently throughout the quarter to ensure product availability and to provide exceptional service for our customers. As a result, we delivered year-over-year organic Wallboard volume growth of more than 11% for the quarter, which we believe outpaced the industry as a whole. We're also seeing success in Ceilings as we delivered organic volume growth in the low single digits with organic sales dollar growth of 13.6% for this category. We remain confident that leveraging our scale and our commitment to exceptional customer service and product availability will help us continue to grow the core business as we move forward. Second, growing our complementary products. We continue to diversify and profitably expand our offerings, thereby enhancing our value to our customers. During the quarter, we continued to benefit from both higher prices and volumes and grew our complementary product sales by 26.5% in total and 17.8% organically. In particular, some of our larger complementary subcategories that are a higher focus of growth for us, including tools and fasteners, the stucco and EIFS product lines and installation collectively grew 33.4% for the quarter. Third, expanding our platform through accretive acquisitions and greenfield opportunities remains a top priority. So far this fiscal year, including those that opened subsequent to the end of our second quarter, we've opened five greenfield yards and nine AMES store locations. Our pipeline of potential acquisitions remains strong. We continue to actively pursue opportunities to strategically broaden our product assortment and expand our service territory to help us provide added value and best-in-class service to our customers. Finally, our fourth strategic priority is to drive improved productivity and profitability. This is a broad focus across our organization as we continue to leverage our scale and employ technology and best practices that improve both cost and service. Included within these initiatives are ways to enhance the customer experience, making it simple to do business with us. As a result, the percentage of customers interacting with us online grew each month during the quarter. Additionally, we are making it easier and more productive for our teams, providing automation tools to improve, picking, loading, and staging efficiencies, as well as fleet upgrades to reduce idle time, improve fuel efficiency, and promote safe work practices, building our yard of the future to drive greater efficiency and productivity has helped us deliver improved profitability. Overall, I am very pleased with our team's execution. At the heart of our business is our people, our passion for service and our relationships with our customers. Thank you, JT and good morning. Looking at Slide 5, net sales increased to 24.4% year-over-year to $1.4 billion for the quarter. Organically sales rose 22.2% and after adjusting out both acquisitions and the unfavorable impact of foreign exchange translation. Adjusting for one additional selling day, year-over-year, net sales increased to 22.5% with daily organic net sales increasing 20.3%. From a U.S. end market perspective, residential continued to lead the way with sales up more than 34%, including greater than 50% growth in multi-family. Single family sales were up 29% year-over-year, while commercial sales continue to show improvement with sales up 17% over a year ago. Wallboard sales of $584.6 million increased 41% or 38.9% on a per day basis comprised of a 28.9% increase in price and mix and a 9.9% increase in volume. Organically second quarter Wallboard sales grew 41.4% year-over-year comprised of a 30% increase in price and mix and an 11.4% increase in volume. And on a per day basis, organic Wallboard sales were up 39.2% comprised of a 30% increase in price and mix and a 9.2% increase in volume. In terms of Wallboard volume, per day multi-family residential gains of 30% outpaced the mid-single-digit volume growth we achieved in single family. Permitting, starts, and quoting activity in multi-family remained active and with longer build cycles in single family, the backlog and demand for this customer segment should remain strong through at least the remainder of this fiscal year and likely beyond. Meanwhile, as with last quarter, year-over-year, our commercial performance continued to improve. We were pleased to again see expansion in commercial Wallboard volumes as compared with the same period a year ago. And in terms of Wallboard price, our average realized price has increased sequentially for the past eight quarters, demonstrating resilience even as we've seen a slowdown in single family starts. For the quarter ended October, the average realized Wallboard price was $474 per thousand square feet, up 8.4% sequentially and 26.3% as compared with a year ago. October's price of $477 per MSF was only slightly higher than the quarter's average, while November flattened further. Conversely, new manufacturer increases are being announced in the market. So while the outlook is mixed and we can't fully predict the degree or timing of market price elasticity going forward, our current near-term expectation is that the rate of our increases will continue to flatten with some sequential declines possible in future quarters. Regardless, given the healthy base of inflation realized thus far, we nevertheless expect year-over-year expansion in Wallboard pricing through at least the end of our fiscal year. Ceiling, tile and grid second quarter sales of $159.6 million, increased 13.3% over the same period last year, or 11.6% on a per day basis, comprised of a 9.6% benefit from price and mix and a 2% increase in volume. Organic sales in Ceilings grew 13.6% to 10.7% of price and mix, and a 2.9% increase in volume. On a per day basis, organic sales for Ceilings were up 11.8% with 10.7% price and mix, and 1.2% in volume. Reflected in these numbers was a sequential price increase of 6.6% for the quarter. Second quarter, steel framing sales of $278.2 million increased 2.3% versus the prior year quarter or less than 1% on a per day basis, where price and mix benefit of 7.5% and was largely offset by a 6.8% decline in volume. Our second quarter of fiscal '22, excuse me, 2022 featured inflation in availability based dislocation that drove a short-term increase in shipments. Moreover, in this market, we've seen stronger activity in stick-built lower rise structures, which typically call for less steel framing, while large office activities for both new and remodel also remain muted. Organic sales and steel framing were up 2.5% comprised of a 7.9% increase in price and mix partially offset by a 5.4% decline in volume. On a same day basis the trends were similar with steel framing per day sales of 1% organically comprised of a 7.9% increase in price and mix offset by a 7% decrease in volume. As we discussed last quarter, prices for steel framing products had begun to decline sequentially at the start of the second quarter with August prices roughly 1% below July's level. As expected steel framing prices have fallen further since. September fell 4% sequentially, while October fell another 3.5% from there, ending the quarter roughly equal to where the price was in October a year ago. Overall, however, given the tremendous rise in steel framing prices earlier in the year, the quarterly average price for steel framing products for our fiscal second quarter was up nearly 9% as compared with a year ago. Although, again, difficult to predict, our current expectation is for steel prices to decline each month sequentially in the low single digits through the end of our fiscal year, likely moderating a bit as we enter the spring months. Complementary product sales of $408.7 million, which comprised nearly 30% of our total net sales for the quarter, were up 26.5% year-over-year as we've benefited from positive contributions from acquisitions as well as improved pricing across the category. Sales in this category were up 24.5% on a per day basis. Organically sales of complementary products rose 17.8% or 16% on a per day basis with the increase coming mostly from price and mix, but with moderately increased volume as well. Now turning to our gross profit during the second quarter, our gross profit of $464.5 million increased 24.9% as compared with a year ago, principally due to our successful pass through of product inflation, continued strength in residential market demand, improved commercial sales and incremental gross profit from acquisitions. Gross margin of 32.5% increased to 20 basis points year-over-year with strong margins in complementary products and better than expected margins, which were up slightly year-over-year in steel framing as our teams remained focused on inventory management and diligent project quoting amid the environment of declining steel prices throughout the quarter. As we have previously shared, while we managed the business towards an EBITDA level of profitability to account for mix and cost of execution, we traditionally operate at or around 32% gross margin and believe this to be a reasonable near-term expectation as well, even as we see a slowdown in the single family demand ahead. Turning to Slide 6. Operating costs increased this quarter, particularly in items such as labor, fuel and given robust activity and strong performance incentive compensation. Regardless, as has been the case in recent quarters, product price inflation and the result increases in both revenues and gross profit dollars have outpaced these pressures. Therefore, adjusted SG&A as a percentage of net sales for the second quarter improved 50 basis points as compared with a year ago to 18.9%. All in adjusted EBITDA improved $46 million or 30.7% to $195.5 million for the quarter. Adjusted EBITDA margins improved 70 basis points year-over-year to 13.7% for the quarter, representing an incremental margin of 16.4%. Now, turning to Slide 7, providing the foundation and support for the continued execution of our strategic priorities is our capital structure and balance sheet. At quarter end, we had cash on hand of $124.2 million and $293.8 million of available liquidity under our revolving credit facilities. Our net adjusted EBITDA debt leverage at the end of the quarter improved to 1.6 times, down from 2.4 times a year ago. During the quarter, we recorded significantly improved levels of cash flow and supply chain constraints have moderated. Cash provided by operating activities during our fiscal second quarter was $107.3 million compared with a use of $2 million a year ago. Free cash flow was $96.5 million for our fiscal second quarter compared with a use of $11.3 million for the same period last year. Capital expenditures of $10.7 million for the second quarter compared to $9.3 million in the prior year quarter. For the full year of fiscal 2023, we continue to expect capital expenditures to be roughly comparable to those of fiscal 2022 at approximately $40 million. All considered, we expect to generate full year free cash flow for fiscal 2023 of approximately 60% of adjusted EBITDA on an expectation of marked relative strength in the second half of our fiscal year. Finally, a note on our share repurchase activity before I turn the call back to JT. As part of our previously announced upsized share repurchase authorization, during the quarter, we repurchased approximately 601,000 shares of common stock for $25.8 million compared to $195,000 shares repurchased for $9.3 million during the prior year quarter. As of the end of October, we had 161.2 million of repurchase authorization remaining. Going forward, we will continue to align our capital allocation to our four-pillar strategy, balancing investing in our strategic initiatives with paying down debt and opportunistically leveraging favorable market conditions for share repurchases as they arise. With that, I'll now pass the call back to JT to provide some perspective on our broader end markets and our outlook for the third quarter. Thank you, Scott. Turning to Slide 8, despite the challenging macro environment and the developing slowdown in new single family housing permits and starts, building activity and demand for our residential products has been strong through the first half of our fiscal year, which has helped us deliver outstanding results. That said, while we expect continued strength in multi-family, as well as some continued recovery in the commercial market, we also expect a decline in single family demand for our products to further materialize in the coming months. We are preparing accordingly and in our single family business, which makes up roughly a third of our overall business and about half of our Wallboard revenues. We will feel demand pressure. However, our backlog of work in process remains in the specific timing, extent and duration of this decline is uncertain. Moreover, we believe we are well positioned to weather this expected slowdown. We have the benefit of a balance split between commercial and residential revenues and the ability to flex to meet the demands of each customer segment. Also, in recent years, we have successfully expanded our product offerings to better serve all of our customers, including growing our Complementary Products segment, whose revenues we estimate to be roughly 60% commercial. And in terms of execution, the improvements we've made in enhancing the productivity and efficiency at our yards and across our business have made us better operators. With variable performance based incentive compensation and other activity driven costs, currently making up a large portion of our G&A, we are confident that we will be able to flex as the business requires. On the pricing front, inflation is moderating across all categories. We expect steel framing to continue its deflationary trend and ceiling grid will likely follow suit. As Scott discussed, we also expect the pace of Wallboard price increases to slow, but still expect year-over-year favorability in pricing during our third quarter for Wallboard, ceiling tiles and Complementary Products. With this as our backdrop as highlighted on Slide 9, for our fiscal third quarter, we expect to deliver total net sales growth in the mid-single-digit range, most of which we expect to be organic and inflation driven. Gross margin percentage consistent with a year ago, and with our long-term trend around 32% and adjusted EBITDA margin should approach last year's level of 11.7%. I am pleased with the commitment and determination demonstrated by our team as we continue to deliver solid results. Over the long-term we are confident that our scale, breadth of product offerings and our demonstrated capability to service commercial, single family and multi-family customers positions us well and that continuing to execute against our strategic objectives will deliver value to our shareholders. Thank you. [Operator Instructions] Our first question comes from the line of David Manthey with Baird. Please proceed with your question. Yes, hi. Good morning everyone. Three quick questions here. First off, what percentage of U.S. MSAs do you have a presence in today? Second, if you could talk about multi-family, what the mix of Wallboard and overall GMS sales are multi-family? And then finally, what percentage of customers and revenues come to you via online channels? Thanks. Sure. From an MSA perspective, outside of New York City, we really are in all of the balance of the top MSAs in the country and also the state of Utah. So we're not in New York City. We're really not in the state of Utah. Outside of that, we're in all the top MSAs in the U.S. And in Canada, other than Montreal and the Eastern provinces, we are in all the major MSAs in Canada, so fairly well balanced. So we think that our multi-family mix is about 15% of our Wallboard sales and about 10% of our overall sales David. And then, what was the third question? Online sales? Right. What percentage of your customers use online channels and, and maybe what percentage of your revenues, sorry, what percentage of your revenues is coming to you via online? So from a revenue perspective, pretty small, but from a usage perspective pretty good. I'll give you some color on that. So it is, it's a B2B process. So we began the journey in e-commerce to specifically improve service. And so what happens is, our large customers tend to place orders in their own systems and send them to us, but once we get those orders, we get a lot of activity from an automated perspective. So I'll give you an example. Of our top 100 customers, over 80% of those customers are signed up with us online, and 60% of those 80% consistently use the system month-to-month. So we have a pretty good number of our largest customers using our system. Of our total customer base we have about 40% of our customers signed up, and about 50% of those customers use us on a regular basis. And that last number I gave you of 40% of our customers signed up, that's any customer that has an open account with us, that has done any sales with us in the last 12 months. So it's a very broad base of customers. So we have fully 40% now of that very broad base of customers signed up. And again, of those customers about 40% to 50% use us consistently every month. And what do they do? Primarily, they check orders, they check inventory availability, they check pricing, and they check shipment activity as well as we've talked in the past about our picture delivery capability. So after delivery they check our pictures on site to ensure that the products are there and that they're ready to dispatch labor. So we have a lot of activity going on in e-commerce, but from an actual order receipt and revenue generation, it's still fairly small. Although our accounts receivable now is up to north of $65 million on a monthly basis is coming through our e-commerce system. Again very good numbers considering our large customers are not going to pay that way. Our large customers are going to use their automation and their own systems to pay us. So we, we feel pretty good about the traction we've got going on there. David. So if we could touch on commercial, so commercial sales up for, I think it was the second quarter in a row. You mentioned an improving commercial landscape for the near-term. First off, if you could maybe speak to where you are seeing relative strength and weakness on the commercial side and looking forward, what kind of visibility do you have there and how are you thinking about the commercial demand more kind of in the medium term, should that continue to hold up relatively well, or are you kind of bracing for a potential slowing on that side as well? No, I think that the headlines are just starting, right? If people are already worried after one month of the ABI being below 50, I mean we're going to give that a little more time. I think we feel like the commercial market is going to remain relatively flat to up low single digits in the medium term Trey. And the big drag there is still office, right? Office is just not coming back. And, and that's the driver of our steel framing decline as well right now in volume. So that's the one, kind of elephant in the room is just the office component. The balance of the commercial space is continuing to do just fine. I mean, it really, almost everything else is either flat or up. Education's flattish, hospitality's been showing some real positives just recently, but the other trends have been more positive, but office is the one that we're still waiting for recovery on. And so our internal pipeline and our internal checks as well as external checks with our larger commercial contractors basically would tell us that we're going to be flat to up slightly over the course of the next quarter or two. Got it. Okay, perfect. That's super helpful. And then you guys have been very acquisitive over the last, well, for as long as I've known you guys. And so I guess the question is, as we see some kind of slowing on the horizon, especially on the residential side, how are you thinking about M&A? How are you, what's your appetite there? Do you kind of, do you feel like it's appropriate to kind of take the foot off the gas some now or do you continue with the current strategy or just how are you approaching M&A and what's your appetite there? And then I guess as part of that leverage is in a very nice place right now. I've seen you guys take it up higher than this on, for the right deal pointing to the Canadian acquisition you did a few years ago. But how are you also kind of thinking about the leverage with that backdrop as well? Thank you. Well, I'll start with just the appetite for M&A. Nothing has really changed other than our valuation today is not where we'd like it to be. And our objective has always been to acquire at or better than our current valuation. And then enjoy the synergies internally that we bring to the new company or the new acquisition. So that's been a little bit of a headwind. Valuation expectations on the seller's side still appear to be a bit inflated. And then of course, you got risk out in the next six to nine months across the board. So it's hard to pay with the anticipation of any kind of upside in growth. So that all three of things make us a little more cautious than we normally would be. All that being said, continue to have great relationships with sellers in our pipeline and constantly are having conversations with them. And we would expect to have some things happen over the course of the next couple of quarters, although not strategically, right? Nothing huge. Today in the pipeline I donât think we have that kind of risk appetite. So in the midterm, weâre going to do what we just did this last quarter. Weâre going to generate a bunch of cash. Weâre going to continue to pay down a little bit of debt, and weâre going to continue to use the authorization that we have in stock repurchases. Yes. Trey, to your point about leverage, weâre down at 1.6 now. As you noted, when we did the Titan acquisition, we showed a willingness to go above three to be able to get something of that level of strategic importance done, but we did it only with the expectation that weâd be able to very quickly get that down below based on the combined cash flows of the companies, and we did that. So weâve always been clear that we will continue to be pursuing those larger types of opportunities as well as the medium and smaller ones. And if something like that presented itself and it had the strategic benefits, and we thought we could be able to bring that leverage down relatively quickly, we would definitely do that. Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. Hi, thanks for taking my questions. As just as a follow-up, when youâre thinking about the resi piece of your business, obviously you see the kinds and the starts permits, Iâm sure you see the builder order trend. So whatâs going into the funnel is quite a bit smaller than whatâs coming out of the funnel as builders kind of pushed their year-end deliveries. Do you have a way of kind of quantifying or looking at what percentage of the homes under construction are still pre-Wallboard installation phase or anything like that, that helps you kind of gauge when this slowdown will actually more materially impact you over the next couple of quarters? I know you say little visibility maybe at year-end, but if you could just go into a little more detail on other things youâre looking at or more granular data, that would be great. Yes, I mean we have all the macro data that you do. And so we have the full pipeline of backlog calculated on a divisional level or an MSA level. We have some data available to us thatâs provided by outside services, but mostly we rely internally on our own checks with our team, but also with our big customers that are doing that work. And so we do have a pretty good view of that. Now our big customers, generally speaking, theyâre operating in terms of the next month to two months or three months in residential. So theyâre not really giving us exact numbers out four, five and six, but they do give us kind of anecdotally what their thinking is happening. So we do have that. So on a division-by-division basis, we have that. Itâs interesting at the moment, what weâre starting to experience is a little bit of, Iâll call it, bifurcation in certain markets and that you have the West Coast as an example. Theyâre eating through the backlog fairly quickly because there have been less supply chain disruptions. The land developers were able to deliver the lots, et cetera, et cetera. We get into the Southeast as an example, particularly Florida. Youâre still having product availability issues there. And so the cycle times for the bills are still longer. And youâve got some land issues, some land development issues down there that are slowing builders as well. But youâre also hearing the builders now start talking about the fact that the buyers that are out there are all interested in spec homes. They want quick closings. So we are seeing activity, at least to whatever the expectation of sales are youâre seeing a lot of builders reflect that in their strategy into next year. So a long-winded answer, but we have a pretty good view, and itâs usually incorporated into the outlook, well itâs always incorporated into the outlook, quite frankly, and we break it out in a bunch of ways internally and so far, weâve been pretty good at it. Although I would tell you, itâs getting more complicated. Yes. Okay, thatâs helpful. And my second question as part of this, thereâll also be a follow-up. But when weâre thinking about the 3Q guide in terms of total growth going from the 20s to mid-single digits, youâve articulated some of the moving pieces certainly, but maybe a little more detail. When you say timing of single-family demand slowdown unknown, but will materialize. So do you expect -- is the expectation your resi, single-family resi business is down year-on-year in volume terms in the third quarter? And then on the pricing side, very helpful color on some of the sequential trends in October trends in the ceiling grid and the steel. If those sequential declines continue as you expect. What does that mean for the year-on-year declines that youâre expecting within your third quarter guidance? I would tell you that Wallboard, weâre still expecting to have a slight growth in Wallboard volume but still really strong pricing on a year-over-year basis, so high double digits really in total revenue growth from a Wallboard perspective. Ceilings, possibly in revenue we had a very, very strong third quarter last year, winter season last year in Ceilings So weâre going to comp that as well, but itâs probably down low single digits. And steel based mostly on the same trends weâve already been experiencing just the reality of the steel prices year-over-year; we are lapping now the high point in steel. I should have made that commentary a little earlier to you all, but I think you probably know it already anyway. But this is the high point in steel pricing as November, December, January was the peak of steel pricing last year. And so thatâs probably going to be down in that, I donât know, 15% to 20-ish range plus. And so you mix all that together with complementary and you get that mid-single-digit revenue guide. Thank you. Our next question comes from the line of Jeff Stevenson with Loop Capital Markets. Please proceed with your question. So you guys saw strong Wallboard volumes during the quarter, which came in ahead of the industry. And I just wanted to know kind of what were the primary drivers of that above industry growth? And can you talk about as well how volumes trended throughout the quarter? Well, I think the efforts weâve put in over the last several years, weâve talked about it many times of being more focused on the builder business as a company over the course of the last three to four years, not that we were big, and I said it before, not that we anticipated the post-COVID balance and the extreme success in single-family. But the reality is we were focused on doing more of it, and that came to fruition and here we are, unfortunately, peaking when inflation hits and now the rates are up, and now weâre going to go from peaking into whatever is going to happen to us next year. But I think that thatâs really the biggest driver is really the success on the single-family side. The other piece of it, of course, is we still were -- even though weâve had all the success in single-family, weâre probably still more weighted in Wallboard to commercial than the industry is. And so the whatever the commercial recovery is weâre experiencing low to mid-single-digit recovery in commercial at the moment, thatâs a help for us as well. And multifamily is just a strong period. I mean -- itâs not a huge, as I mentioned earlier, right, itâs not a massive part of the business, but itâs growing 20% or 30%. So thatâs certainly a tailwind. Right, right. No, that makes sense. And then I appreciate your comments on your commercial business. That was very helpful. But during the earnings season, thereâs been some talk of a slowdown in discretionary nonresidential renovation work given delayed projects. Have you seen any signs of this in your ceilings business? And if so, do you believe there just delayed or canceled? I donât see any activity in office growing. I just donât see it happening. And so thatâs -- Iâm assuming thatâs primarily what youâre talking about when it comes to ceilings to how itâs a huge driver of it. But weâre not seeing transportation projects delayed, airports, those types of projects are still happening. Main Street commercial is happening and still doing well. Hospitality is going to be fine. Health care is strong, but office is not. Itâs just not happening. We talked about discretionary remodel in office; weâre just not seeing that yet. And I think that building owners just have to wait and see what happens from an occupancy perspective or they have to decide to compete one or the other and neither of those things will happen to that. Iâd say as well, Jeff, in commercial, some of the dynamics you talked about have really been going on for the better part of 18 months in terms of longer quoting cycles, rebidding kinds of activity, reengineering of quotes as inflation factors have been accounted for, et cetera. And ultimately, thatâs extended the entire commercial process. So those kinds of things youâre talking about are not a recent dynamic. Theyâve been something weâve been dealing with for the better part of 18 months or so. Thank you. Our next question comes from the line of Steven Ramsey with Thompson Research Group. Please proceed with your question. Hi, good morning. Maybe to start with on the commercial, I mean, the complementary side of things, growth rates, very strong and very favorable compared to the other three groups and seems to be very strong in relation to pricing being the major driver. As we get to the other side of pricing being such a driver for the three core groups, will we see complementary take up a much stronger percentage of total sales? Yes. I mean, I think weâve talked about it in the past that if you were to reduce and remove the steel inflation over the course of the last year plus, our complementary business is approaching 40% of the mix. So all that being said, thereâs some inflation in complementary as well. Itâs been less there than it has been in some of the other categories, but there is definitely still inflation there in complementary. But complementary will continue to be a focus and should over the long-haul, be a larger percent of our overall business. Okay, helpful. And then one more on complementary with margins up in the quarter, you called it out as a driver to gross margins. Can you talk to the drivers of that? You also talked about AMES? Is that a major contributor? And do you see margins improving in the next several quarters? AMES is a driver. We donât see margin improving, but we donât see any reason the complementary margin would be declining. So our margin guides always include the entire business. But yes, AMES as Scott called out, right, incremental gross margin from acquisitions, AMES is a great company, continues to operate at very high gross margins, a wonderful part of our business now. And in general, our complementary business has leveled off, letâs say, at much higher margins than we would have thought. And some of that is the mix of products that weâre able to sell as we talked about, particularly tools and fasteners, EIFS and stucco, and insulation were up 30% plus versus the whole at what I say, 26.5% or something in that neighborhood. So weâre gaining traction in a good mix of complementary products as well. Thank you. Our final question this morning comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Good morning. You have Elizabeth Langan on for Matt today. I was wondering if you could talk a little bit about how youâre thinking about SG&A going forward, kind of how youâre thinking about cost leverage as residential volumes come down and maybe you still continue to see that strength within commercial. But how should we be thinking about costs within that basket and maybe how that relates to your plans for spending on like productivity and automation? So Iâll kind of work backwards and I'll really start with how we managed the business during the early days of COVID when there was a lot of uncertainty out there. We really took a lot of actions very quickly in a very focused way to manage the cost of the business. And I think you certainly saw that in our results in terms of the incrementals we were able to -- and decrementals we were able to manage. We took some pretty tight actions there. And I think the learning from that is we would do that again. Specifically to your point on automation and some of the things weâre doing around the art of the future that is one area that we did not skimp on. We continue to focus on those strategic investments, both in terms of CapEx as well as spending. So I think you would see us do that again. Bringing your question all around and full circle to the types of things weâd be focused on in this environment, we're actually fortunate right now that weâve got a higher level of what I would call actionable types of things that we can affect in this environment if we saw a marked downturn. For example, incentive and bonus compensation is relatively high because the business is doing well. If that were to shift at all, weâd be able to move that down. We have other variable expenses like fuel, like maintenance, like those types of things that are truly activity driven in the business that would flex really nicely. And then also in this environment with being quite busy, our levels of contract labor, for example, are relatively high. So weâd be able to take actions on that before we got into the types of things that would be a little bit more difficult to affect. But again, looking back at how we handled the business during the early days of COVID showed a lot of discipline in how we manage those costs, and I think you very much see us do that again. Okay, thank you. Thatâs really helpful. And then I was also wondering, following up a little bit on the complementary side of things is a larger part of your business now, and that has kind of been a point where there have been a lot of acquisitions. Is that an area where you expect youâll continue kind of building out those offerings there? And are there any other spots within the business where you think maybe thereâs a different vertical you eventually want to enter? Yes. Thatâs -- I appreciate you raising that. Thatâs very much something we have been talking about. And as JT was talking about some of our pipeline activity, our pipeline still remains very full, both on the core products as well as those complementary areas. And while weâve got some near-term pricing kinds of dynamics and valuation kind of dynamics weâre thinking through, all of the things that we do, both in terms of thinking through our opportunities strategically, working on the relationship building and driving the pipeline development is very much focused, and weâve got a widening of the aperture in those areas, particularly those three areas that JT focused where weâve seen some higher-than-average growth in our complementary tools and fasteners, EIFS, those types of things. Weâve got a lot of really promising activities going on there. So I think youâll see activity from us, both in the core as well as the complementary going forward. Thank you. Ladies and gentlemen, this concludes our question-and-answer session and this concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.
EarningCall_1910	Excellent. Thank you, guys. Thanks for joining us. Pleasure to have Amgen management join us. But before we start, I always love turning it over to Arvind who I feel like frames it so well. So Arvind, all you. Umer, thanks so much for inviting us to your conference. And I was just talking to Dave earlier that it was great news that you're planning on having this conference in Miami this year, or next year. Let me just kind of tee up some of kind of the broader picture of some of the key topics, and then obviously delighted that we have David Reese, our Head of Research and Development with us. And with all of what we have going on with the pipeline, I think it's just a great opportunity to kind of dig into some of the opportunities that we have there. So I will start by saying that despite the fact that we have confronted some macro headwinds, we have had a year of solid execution so far. It has been near the end of the year. And our focus, our strategy of focusing on volume-driven growth I think is a very effective strategy. If you look at many of our priority trials through the first nine months of this year, we have generated some very good unit volume growth for these products, notably products like Repatha, products like Otezla, Prolia and EVENITY. And, of course, with some of the recently launched products TEZSPIRE for severe asthma is off to a very good start. LUMAKRAS continues to do well, obviously a lot more development work that has to be done there as we think about moving LUMAKRAS to earlier lines of therapy or in other tumor types. I would also note, Umer, that our recently closed acquisition of ChemoCentryx, that brings a newly launched innovative product to our implant portfolio, a product called TAVNEOS, so more to come on that. And then also we continue to make very good progress with our innovative pipeline. And you might recall that recently at the American Heart Association, we presented some data, some detailed Phase 2 data of Olpasiran, our LP(a) inhibitor. And what we demonstrated in this data is that Olpasiran dosed 75 milligrams or higher every 12 weeks reduce the LP(a) concentration by more than 95% in patients with established cardiovascular disease. Now we conducted an Investor call in conjunction with the American Heart meeting and you might recall that we also presented data from single and multiple dose cohorts of a Phase 1 study on AMG 133. This is our Phase 1 obesity molecule, very novel mechanism targeting GLP-1 and the GIP receptor. And we are going to be presenting a more detailed data set from this Phase 1 study at the upcoming Congress on Insulin Resistance, Diabetes, and Cardiovascular Disease, which is going to be held here in December. And of course, planning is underway to initiate a Phase 2 trial, but happy to delve into that in greater detail depending on the questions that we might get from you and others. LUMAKRAS, as I mentioned before, the development continues. We have a very broad comprehensive program as we look to move this into earlier lines of therapy and other tumor types. And then just a couple of other comments that I would make. Biosimilars, we'll continue to add new biosimilars to our portfolio over the next several years. We have had positive Phase 3 data from three programs this year, biosimilars against STELARA, SOLIRIS and EYLEA. And of course, we are very much looking forward to launching our biosimilar version of HUMIRA. Our product will be called AMGEVITA towards the end of January of next year. The last comment that I would note is we have a strong balance sheet, continued to generate significant cash flow. We generated almost $3 billion in free cash flow in Q3. And we retained significant financial flexibility to continue to look at strategic business development. So with that, let me turn it over to you and happy to jump into any questions that you might have for Dave and myself. Sure. And Arvind, maybe, and I feel like there's a ton of R&D specific questions I want to get into, but just ahead of that, can you remind us what specifically are you guys seeing on BD? Is ChemoCentryx like deals the focus right now? We have been fairly consistent in our posture that we are size agnostic. We have a fair amount of financial flexibility. Our quest for BD really emanates with the strategy of the company. Does it allow us to strategically add to the portfolio of the company? Does it allow us to expand our geographic footprint? Perhaps most importantly, is this something that's going to allow us to create value for our shareholders? Can we be the best buyer of that asset? So those are some of the criteria that we look at, and size of course is secondary to that. If you look at some of the deals that we have done of late, if you think of the Otezla acquisition as an example, this is a product that had been launched and had been approved in a number of markets, but had been commercialized in a limited number of markets. And with our global infrastructure, we are able to take this product in these markets where the product had yet to be launched. And really the same applies for TAVNEOS. We have a significant amount of experience and in plan [ph] in the rheumatology space and we can leverage that as we commercialize Otezla. Got it. And Arvind, also -- sorry, just one other quick high level one was on the 2030 numbers, can you remind us if that guidance is all organic? And how much denosumab do you guys assume in there? Because it's always these questions on do you guys have additional plans [ph] beyond the 2027 or not? Yes. Again, what we have mentioned, Umer, is that in terms of our own modeling, we have estimated that we retain exclusivity on denosumab through 2025. And the projections or the growth outlook that we have communicated through the end of the decade is indeed organic. Of course, it takes into consideration certain assumptions that we have made on our growth products, notably products like Repatha and Otezla. Some assumptions that we have made on the biosimilars business, we have estimated that off of the revenue base that we have for biosimilars in 2021, which was just a little over $2 billion, we can more than double that by the end of the decade. It takes into consideration pipeline contributions and some of those, of course, will continue to be derisked as we get additional data. So all of that translates into an organic outlook that we have communicated of mid single digit growth as far as revenues are concerned and low double digit -- or high single digit, low double digit EPS growth on average over this period between now and 2030. So any business development activity that we undertake between now and then should be additive. Denosumab, like I said, we have assumed that there will be biosimilar competition post 2025 in terms of our own modeling. Got it. Okay, excellent. So there's a ton to talk about, David, so let me jump right in. And let me start with the -- not so much because I think this is the highest profile program in your pipeline, but more because that's the data that's coming up on the obesity side. So let me start with this. One of the questions that often comes up is should there be an expectation for an A1c benefit or not considering, Amgen is only developing an obesity setting? So what I would point out is we will be showing the data in a couple of days. Actually now here in Los Angeles at the Hybrid Conference, poster will go up on Thursday, then there will be an oral presentation on Saturday afternoon where we'll share the full data set from the Phase 1 trial. In that trial, we enrolled only individuals with normal hemoglobin A1c levels. So these are not individuals with a history of diabetes or hyperglycemia. However, based on the mechanism of action, we would expect antihyperglycaemic effects in the Phase 2 trial, which we'll talk more about in due course as that gets up and running. We plan on enrolling both patients with a history of Type 2 diabetes as well as those who are normoglycemic where we directly address that question. Got it. The other one -- so that's really helpful, David. I appreciate you clarifying that. So there's no reason not to expect A1c benefit. The other one is a lot of -- I feel like there's a lot of mismatched cross trial comparisons going on. People are taking your data at a certain time point comparing it versus some of the other data sets at similar or slightly later time points. But one of the important differences is the relevance of a titration regimen. And can you speak to how that was done in this study? Yes. The Phase 1 study was a very standard design. So there were single dose cohorts and then there were multiple ascending dose cohorts and those individuals received three doses basically four weeks apart. So a total of 12 weeks of dosing, monthly dosing is an easy way to think about it. What I would pay attention to when we release the data in a few days here are the kinetics of that weight loss. So the rapidity, sustainability, and then also, of course, the adverse event profile. So these are things that we all think are important and will potentially differentiate if we're able to maintain a favorable profile through Phase 2. Got it. So I guess, David, you're saying since it's multiple ascending, there technically is a titration first versus second versus third shot? That's one of the questions that we will address in Phase 2. So we will -- this is planned to be a very robust Phase 2 trial. One thing that I really want to have coming out of that study is optionality in terms of further development. So we will look at both dose escalation, i.e. titration as it's commonly referred to in this field, as well as fixed dose regimens and a variety of doses. Got it. So Dave, I guess -- let me just say it back to the way I understand it. It almost sounds to me like you're fairly comfortable with where the profile is tracking right now on the AE side? You think there might be room to further improve by trying a titration as well? And so the question is, can we optimize the dose and schedule? And that's why we're planning a fairly robust Phase 2 to investigate a range of dosing and scheduling paradigms. Got it. And where -- as you envision this program on longer duration studies, you're getting close to mid teens in weight loss already. And we know sort of the big bogeys are Manjaro [ph] getting to 20% at a much later time point and Novo modeling, never showing but modeling that they can get to maybe 25% with CagriSema. Do you think -- considering you're approaching mid teens at such an early time point, do you think there's a plateau coming at a certain point? Are you tracking those patients beyond their early dosing as well as what's your expectation? Do you think you'd get to that mid 20s or higher perhaps? We are following those patients. This is, of course, a key question for Phase 2. What I can tell you is that based on the kinetics and the curves that we've seen in Phase 1, again, that will be shared in a few days, we don't appear to have reached the plateau, number one. And so the question is, how much weight loss can we actually drive with continued dosing? Remember, this was a total of three doses maximum for these patients. I will say also that it was relatively well sustained. As you'll see from the curve, some patients maintained weight loss for a decent period of time after that third dose. That suggests mechanistically that there's still room to go in terms of additional weight loss. But obviously, that's a key question for Phase 2. But I'm relatively optimistic based on the data we've seen so far. Got it. And David, at a patient level, was it generally consistent the percentage that hit, let's say, a certain threshold versus not? Because Lilly and Nova Nordisk have always shown certain thresholds of weight loss and patient distribution, are you comfortable with what you're seeing or is there outliers too? Yes, I would say we're relatively comfortable with that with the caveat that Phase 1 always has relatively small numbers of patients sick, typically eight in a cohort. A couple of them are getting placebo. So you've got small numbers of patients. But for these sorts of studies, we're quite happy with the data. Got it. And perhaps my last one on this topic is really just around the mechanism, because I know there's been questions raised on what Manjaro is doing on the GIP side is kind of the opposite of what you're doing in this regimen. And nobody really understands, because Lilly says one thing, Amgen says another thing. In my simple mind, I'm just wondering maybe it's all GLP that matters, and then the other part may or may not be doing something? Well, yes, I would say a couple of points here. Number one, there's very good genetic evidence, including a lot of our own data, both published and unpublished, that suggests that variants of the GIP receptor that are associated with decreased activity of that pathway associate with the lower BMI, lower weight. And so based on that, in our own preclinical mechanistic studies, we were very, very confident in GIP receptor inhibition as the appropriate approach. I think that chronic agonism of the receptor probably ends up leading to receptor exhaustion and the same sort of thing over time, i.e., pathway downregulation. We chose to directly go after that. In addition to the second part of your question, is this all potentially GLP-1? I don't think so. And we certainly have preclinical data suggesting that this combination of GLP-1 agonism with GIP receptor antagonism has a synergistic or additive effect on weight loss. And David, one last one, sorry, on this topic is, is there any one off side effect we should be aware of because it's an antibody approach? Is there something like that? We'll share that with you. What we said publicly to date is for these pathways, we're not seeing adverse events that are anything unexpected for these pathways. Most of them are associated with the first dose and are transient, and we will give details on, of course, the safety profile, the tolerability profile in just a few days here. Got it. Okay, make sense. Maybe transitioning next to, and I don't want to spend too much time on this but I do want to touch upon the KRAS program obviously. I guess one of the confusions I've had is when I comped the Phase 1 safety profile for LUMAKRAS versus the Mirati molecule, I felt like at least on those early comps, LUMAKRAS looked cleaner. But then when I look at the PD-1 combination data generated to date, the Mirati data, at least what's been reported so far, it looks like it is tracking better on the tolerability. I guess why is that? And is that something you guys have thought about internally? Yes, of course, we've thought about this. I'll let others speak to their data. The one thing I would point out here that's important is to follow these patients for a significant period of time. One of the things that we saw in terms of the elevation in liver enzymes is the dose limiting toxicity for the LUMAKRAS/PD-1 combination is the fact that that actually appeared often 30, 60, 90 days into therapy, sometimes later. And so you need adequate follow up to really define that profile. So, of course, we'll wait for data to emerge in the field. As we've mentioned before, we're now taking an approach where we're using a lower dose of LUMAKRAS, 240 milligrams is the lead in and then layering on top of that, the PD-1 inhibitor, to see if that improves the tolerability profile. We're actively enrolling that right now. And over the course of next year, we'll share those data we hope. Got it. But as of right now, no plans for a pivotal trial in PD-1 combo, but you're not shutting the door on it either? Yes, absolutely not shutting the door. I think we need to do further investigation here. The other thing to point out is that we are moving forward with potentially a pivotal trial with a chemotherapy/LUMAKRAS combination in patients who have PDL-1 negative tumors, and that's roughly a quarter to a third of patients with non-small cell lung cancer. Got it. So presumably, the active arm could get PD-1 on crossover. But even with that, I think what I recall is if it's within 90 days of care as exposure, then you could have more side effects. Are you guys gating on that? Yes, potentially depending on exactly the timing of exposure. But this is a trial where we'll look especially at progression free survival, so before any sort of crossover, that will be one of the primary endpoints. Got it. And then also, David, I'm curious sort of internally in your organization, what was the feedback on, because ORRs dipped a bit, but that's okay, going from Phase 2 to the pivotal trial onto the Phase 3 trial in monotherapy setting, but then what got my attention was the PFS of 3.5 months. Like I wouldn't have thought it would be sort of in the threes. I was thinking more like five, six months. So what was sort of the internal feedback on that because it sounded --? I'm really sorry. I was switching, I was switching, I was switching, yes. I should have clarified on the DLL3, the 3.5 months. It's scary that I immediately knew which one on that PFS number. First of all, these are patients with advanced small cell lung cancer where there's very, very little therapy available. The disease is often quite aggressive. So a median PFS I think may not be particularly helpful in that setting. What actually really encourages me on this program is, number one, their response rate, but beyond that the duration of response in the 13 months area, which is really just remarkable for these sorts of patients. We have many of them now still on therapy ongoing where the expected survival is often measured in a matter of few months and then the overall survival, median overall survival of over a year in that particular population. So I think if in the potentially pivotal Phase 2 trial we can replicate those sorts of results, this is something that will really be welcomed by the field when I talk to these investigators who are really enthusiastic about what they're seeing in the clinic. So I remember [indiscernible] and got approved in small cell lung, their Phase 1, Phase 2 dataset. Shouldn't your -- considering you're in mid to high teens on the DLL3 BiTE, shouldn't that technically potentially be registrational? Well, so the Phase 2 trial is potentially registrational. Obviously, we've had ongoing discussions with the FDA and other regulatory authorities. It will all depend on the data package in the end. Yes, I don't think we've said publicly when we expect that. I can tell you the trial is enrolling, number one, very briskly. And number two, we do have an agreed final dose with the FDA. You may recall that we took a couple doses into that Phase 2 trial consistent with the spirit of Project Optimus and dose exploration in oncology. We're very comfortable with is the go-forward dose, and so all additional patients will be enrolled at that dose going forward. Got it. Okay, excellent. Eric [ph], is there anything on the oncology part that you want to touch up on before we move on? Yes, I was curious about what your expectations on CB outcomes were given what you saw on the Phase 2 data? Yes, I really liked this program. Of course, we just presented the data a few weeks ago at the American Heart Association meeting. There was a concurrent paper in the New England Journal of Medicine. The molecule is really behaving beautifully in the clinic right now. As Arvind pointed out in his introductory remarks, we're seeing very profound suppression of LP(a) levels at any dose, 75 milligrams every 12 weeks and above, with quite a good tolerability profile in the Phase 2 study. So I think we absolutely have the tool in hand to address the LP(a) hypothesis. The cardiovascular outcomes trial will be launching we hope before the end of the year, so within the next month or so. And our goal, of course, is to enroll that as expeditiously as possible. I had a chance to talk to a large number of physicians at the AHA meeting regarding this program. There is great interest, one of the reasons being that there's nothing available. Of course, right now in many cardiologists, they have these patients where there's a family history, there's an elevated LP(a) and there's not much that they can do right now. Many of them drive the LDL level down to very, very low levels to control the one risk factor right now that you can control. But there's tremendous interest. We saw that I think even in enrollment in the Phase 2 trial, which moved along very, very briskly. And what happens to the background -- like some of them might inevitably have high LDLs. How does that bake into this trial? Yes. So that needs to be well controlled just as we did in Phase 2. And if you look at the Phase 2 data, you'll see that in fact patients were coming in with very well controlled LDL levels. But I recall, David, PCSK9s have a pretty meaningful LP(a) reduction as well. What percentage of your trial do you expect? I think it's going to be a relatively small percent. I don't remember the figure offhand in the Phase 2, but it was a relatively small percentage. The PCSK9 effect on LP(a), it is there but it's nowhere near the magnitude that we're seeing with Olpasiran, not even close. In fact, there's no therapeutic now that's really -- that can produce a pharmacologic effect and induce LP(a) lower. Yes. When we don't have here that we had in the LDL field was, of course, a half century of showing that if you reduce LDL by a certain amount, you can predict very accurately what the reduction in event rates will be. We're actually going to be generating those data within the context of this trial. Yes. As enrollment moves along and as we get event rate projections, we will provide updated guidance periodically as to when we can expect data. Okay, excellent. All right. Perhaps switching to a program which I personally find fascinating and I think there's a lot of interesting things about it, but a lot of nuances about it too, the OX40 program. David, like the first thing that stands out to me is do you expect -- first of all, I guess let me start with this. The durability of efficacy, how have you thought about that? I know that was an observation seen in the Sanofi program too. There have been some questions that whether a related mechanism and non small molecule site CXCL might be showing something. Like are those related or not? And how do you think about that? Yes. I mean one potential explanation I think in our program is the partial depletion of pathogenically activated T cells and the OX40 pathway is one of the primary drivers of pathogenic T cells in atopic dermatitis. That partial depletion may actually account for the duration of effect, because, of course, with cessation of dosing, it would require time to repopulate that pathogenic T cell population and that may be what gives you the duration of effect. This is something that we'll obviously be tracking quite carefully in the suite to Phase 3 trials that we're going to be conducting. So you do think the depletion of pathogenically active T cells across your program, the Sanofi program, the small molecule, these are all like related mechanisms? That would be my leading hypothesis right now. But I would view that as a very good strong hypothesis, but something that we need to nail down with the large amount of Phase 3 data. Got it, okay. But I guess the reason I was asking was there has been questions around could this be a false positive of sorts on this durability we're seeing, but the fact that it's happening in two or three different trials makes me wonder what are the odds? Yes. The other point that comes up, David, is the pathogenically active T cells, are they always peripheral or could they also be central as well? Because I know you act on both sides. Some of the approaches are doing peripheral. Got it, okay. The other one is, when I think about your efficacy, given the modal, given the mechanism here, there's reasons to expect that you could put up an efficacy signal in Dupi [ph] resistant patients. Is that something that's being explored or thought about? Yes, that's absolutely part of the development program. In the Phase 2 study, about 14% of patients had prior Dupixent. And based on that data set, we didn't see any apparent differences in the efficacy or safety profile of rocatinlimab. So that is part of the development program. We're actually going to be exploring a wide swath of patients here; age, adolescents and adults, different ethnic backgrounds, as well as prior exposure. So whether patients have had no biologics prior Dupixent or prior JAK inhibitors, so we're going to be taking a look at all of that in the suite to Phase 3 trials. And David, was there ever a consideration to start, let's say, a 200 patient Dupi experience or Dupi refractory trial, put up some easy 50 score and then use that to form the basis of an accelerated approval, because theoretically that should exist? Yes, one thing you need to also recall here is the FDA requires relatively large safety databases for these sorts of indications and for patients to be followed for a good amount of time. So it's a little more challenging in terms of accelerated pathways than something like oncology might be. I see, okay. No, that makes a lot of sense. But I guess on the flipside if the efficacy is still durable, like you can just do one shot or two shots in Dupi refractory and say that's that, we're not aiming for more at least not for the early? Yes, so we're taking a look at some of these questions within the Phase 3 program. We are actually planning to restart Phase 3 study in the very near future. And in addition, you'll see additional studies starting at that time to start rounding out this suite of about a half dozen studies or so that will constitute -- Okay, so that was my next one because I only see one Phase 3 clinical trial. So you have a bunch more coming it sounds like? Yes, I would say stay tuned in the relatively near future and then we will provide more guidance and information on what other studies will look like. Yes, I think this is certainly one of the, I would say handful of programs that I always don't like to pick my favorite child. But this is certainly a very important program. There's a huge unmet medical need in this disorder, which is quite prevalent around the globe. And we're optimistic based on what we've seen so far. Makes sense. Now the one thing, David, which I have been -- like on the efficacy side and everything, I feel like there's a lot of very strong momentum behind this program. The only part about it that has confused me every time I've looked at the data is when I looked at the tolerability profile, I felt like I was looking at the tolerability of the COVID vaccine with the pyrexia and everything. So how should we think about that? And how relevant is that from a development perspective, especially in a population like this? Yes, it's it seems to be -- so fevers and chills, we're seeing in a number of patients in the Phase 2 trial. It's very transient and it appears to be largely a first dose phenomenon. So in the large majority of patients, it happens with just the first dose. Certainly in talking to clinicians here, it was clinically managed. It wasn't something that they really -- the investigators I've talked to see as any sort of barrier at all. Yes, I don't know. I think this is something that we need to sort out and mechanistically I'm not sure why you might see different reports that we've seen across the field. Got it. Okay, that makes sense. And then perhaps just switching briefly to TEZSPIRE, there's a bunch of new indications coming up. Is there one or two in particular that you find most promising and your expectations on efficacy in those trials? Yes, so chronic rhinosinusitis with nasal polyps on Phase 3 trial ongoing now, you may recall that we presented some data from the pivotal trials of TEZSPIRE where we looked at the subset of patients who had overlap between severe asthma and concomitant chronic rhinosinusitis with nasal polyps, those two actually not infrequently travel together. We saw an 86% reduction in the exacerbation rate in those patients. And then looking specifically at the chronic rhinosinusitis component, there was a 22% improvement in clinical symptoms which was considered by clinicians quite significant in this patient population. Quality of life impairments and challenges are quite common in these patients. They often undergo multiple surgical procedures for the nasal polyps, for example, and have ongoing symptoms. So that gives us a lot of confidence I think and optimism regarding that Phase 3 trial. We're planning a Phase 3 trial in eosinophilic esophagitis based on all of the mechanistic data that we've accumulated in the program to date. And then we've got ongoing studies in chronic spontaneous urticaria as well as chronic obstructive pulmonary disease. Got it. And, Dave, maybe just the last one for you and I have a couple quick ones for Arvind as well. But just very quickly, what will be the top three or so programs that you would have put? Like I remember you mentioned OX40. What would be the other ones you would say the commercially most important from your perspective, or the highest priority? Yes, highest priority in the non-marketed, I think we've talked about them. In the cardiometabolic portfolio, it's obviously the Olpasiran trial program in the lead, AMG 133 moving into Phase 2; rocatinlimab in the inflammation portfolio in Phase 3; and then tarlatamab ongoing LUMAKRAS development and then AMG 509 which is a bispecific targeting STEAP1 in prostate cancer, also one to keep an eye on in the oncology portfolio. Okay, excellent. Arvind, just two very quick ones for you. One, Otezla, any impact or any feedback from your commercial team to launch or any impact there, because that was always a big question in the past? Yes. The fact that we have a broad spectrum of indications that we cannot cover with Otezla when we are at the fact that we can cover from mild to moderate to severe disease, I think that has been quite meaningful in terms of the commercialization. There are no laboratory monitoring requirements. So I think the overall profile of Otezla is very well understood. So we'll continue to press on. Again, we think we are very well positioned. We do get a lot of questions on [indiscernible] in terms of does that get positioned. And our thinking is that for patients who perhaps aren't appropriately responding to Otezla and before they commence a biologic, that maybe the niche that [indiscernible] goes after. But like I said, based on the profile that we have now established with Otezla from a safety and efficacy standpoint, we feel that we're very well positioned in this market. Got it. And Arvind, is there any feedback you're sharing on sort of where the numbers stand into next year, any pushes and pulls you'll flag for people? We have been planning. Obviously, we have provided the guidance for the year and we'll stand by that as far as 2023. As we have done customarily in conjunction with our full year results presentation at the end of January, again, I will provide the guidance at that time.
EarningCall_1911	Good morning, ladies and gentlemen and welcome to Calianâs Fourth Quarter 2022 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Ms. Jennifer McCoy, Director of Investor Relations. Jennifer, the floor is yours. Thank you, Jenny and good morning everyone. Thank you for joining us for Calianâs Q4 and fiscal year 2022 earnings call. Presenting this morning are Kevin Ford, Chief Executive Officer and Patrick Houston, Chief Financial Officer. As noted on Slide 2, please be advised that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements maybe materially different from actual results. As a reminder, all amounts are expressed in Canadian dollars except as otherwise specified. Thank you. And before I begin, I think itâs important that I introduce to you Jennifer McCoy, our Director of Investor Relations. We are looking forward to having on board and Jennifer has over 25 years of experience in Investor Relations and will help us to drive our IR program. So, welcome, Jennifer and good morning everyone. The fourth quarter capped off another record-breaking year for Calian on several fronts. Q4 revenues reached $161 million, up 26% compared to the same period last year. This growth was primarily driven by our expansion in the United States and Europe. Gross margin set a new record reaching over 31%. Similarly, adjusted EBITDA increased over 50% to reach $19 million significantly outpacing revenue growth. When I spoke with you last August, I spoke at supply chain slowdowns affecting near-term revenue. Our teams work diligently this quarter and we were able to make significant gains in our ITCS segment in the final months to deliver orders for our customers and recognize revenue earlier than we had previously forecasted. This, coupled with the dedication of our staff, the power of our 4-piston engine and the successful execution of our strategic plans, delivered an outstanding quarter. I would also like to highlight our continued push to win new customers and extend our relationship with existing clients. This quarter, we recorded $161 million in new contract signings, with approximately $100 million from existing customers and the balance from new customer wins. Iâd like to turn now to fiscal year â22 results. I am pleased to report that FY â22 represents another record year across several key performance metrics as we continued our growth through acquisitions and our journey to bring differentiated solutions that truly add value to our customers. Revenues increased 12% in line with our objective to deliver consistent double-digit growth. In fact, I am proud to say that this year represents the fifth consecutive year of double-digit growth for Calian. Acquisitive growth this year was very strong, coming in at 19%. Both acquisitions we completed in FY â22 have exceeded our expectations and helped us diversify both our ITCS and learning segments. Organic growth took a pause this year coming in at a negative 6%, primarily impacted by two factors: the first being the unwinding of the peak COVID response business in our health segment and the second being our completion of a large ground system project for North American customer. While organic growth revenue took a pause this year, our 5-year trend over driving organic growth has been strong and Patrick will discuss our guidance for next year when we expect organic growth to return in fiscal â23. You have heard me frequently say that we are looking to grow properly across all of our segments. This year, we successfully expanded gross margins and EBITDA margins coupled with our growth. This is our fifth consecutive year we have grown margins at a pace ahead of revenue. And I would sum up the year in this way. Our team continued to live our strategy despite COVID or the uncertainty of recent economic impacts. We continue to deliver for customers, grow into new geographies, diversify our offerings and reinvest in our business to position Calian to continue the momentum of the last 5 record years. However, our success in FY â22 canât be told through numbers alone. During the year, we had some leadership announced their retirement as we welcome new talent. Sacha Gera took over as President of the ITCS segment and Michael Muldner started as our CIO and I would be remiss in not thanking Jerry Johnson, our previous CIO for his 30 years of service and wish him well in his retirement. We completed two acquisitions, which have exceeded all expectations and has again shown our ability to complete successful M&A transactions. We also expanded our service offerings through several initiatives. We launched Nexi, re-launched Corolar Virtual Care, added market leading technologies in the synthetic training, virtual reality and immersive training, as well as expanded in the space market, designing, developing, manufacturing and delivering ground-based solutions to name just a few. As we celebrate the companyâs 40-year history this year, let me take a few minutes to demonstrate how far we have come in the last 5 years. Revenues have almost doubled from $305 million to $582 million, representing a CAGR of 18%. Profitability has paced top line growth. Gross profit more than doubled to $169 million, representing a CAGR of 27% and gross margins increased from 21% to 29%. EBITDA performance was the strongest ever over the last 5 years, growing by 164%, representing a CAGR of 27% and EBITDA margins have grown from 11% or so â from 8% to 11%. This performance has been the product of multiple initiatives. But above all, it has come from our entire team bringing their commitment and talent to the work everyday to transform our business. Over the same time period, we were able to successfully diversify our revenue streams by geography, customer and offering. In FY â22, our revenues outside Canada represented 29% of total revenues, up from 20% in 2018. Revenues from commercial customers surpassed the 50% mark for the first time in our history from 32% just a few years ago. We are able to do this while continuing to grow our legacy Canadian government business. And today, 27% of our revenues are generated from technology products, demonstrating our progressive pivot to a technology company. Each of these milestones is some significant indication of our strategy and action and further motivates us to continue to execute our plan. As we complete the last year of our Imagine 2023 strategic plan, we are focusing on developing a clear path on our journey to become a $1 billion company, which we are looking forward to share with you. So stay tuned. For now, let me provide an update on the results by business segments. If you have been on one of these calls before, youâve heard me mention our corpus and engine and how growth in one segment balances the potential decline in another in any specific order. This diversification allows us to capitalize on opportunities across multiple diverse markets. The broader trend of continued investment in IT and cyber across North America has helped propel our ITCS group to a record year and the quickly evolving landscape and the global military training market has meant a robust pipeline in our learning group. These have offset temporary pauses in our health and areas of our advanced tech segments. Both of these segments have promising opportunity starting in fiscal â23. So, letâs begin with IT and cyber. This segment posted impressive revenue growth for both the quarter and the year. Revenues tripled to $69 million in the quarter and more than doubled to $173 million in the year. This growth was driven by expansion in the U.S. market with the acquisition of Computex in March of â22. Their performance has greatly surpassed our expectations. To provide some color on this, we expected to generate about $75 million in annual revenues when we first acquired Computex and in fact, we generated $71 million in 7 months since the acquisition. Our top line growth was also the result of our continued expansion of our Canadian based cybersecurity offerings and increased demand for managed security platforms. In addition, the easing of supply chain shortages allowed us to deliver a backlog of orders to customers in the quarter, in effect recording record revenues we expected to deliver in fiscal half of â23. In Q4, gross margin increased to 36% and EBITDA tripled to $12 million. In FY â23, we expect this momentum in our cyber market to continue as we exceed the robust demand in the market and our offerings are well positioned to deliver value for the customers. Turning to our health segment, the pace of new business in health has not yet picked up to the level where it offsets the last remnants of the impact of COVID-19 resulting in a decline of revenue quarter-over-quarter. We have continued to focus on service delivery and building up a network of healthcare practitioners across Canada in what has been a very challenging backdrop coming off 2 years of COVID fatigue. While revenues for Q4 declined 11% to $39 million from $44 million from the same period last year, gross margins and EBITDA margins held steady at 25% and 16% respectively, a testament to our proactive management of costs. In fiscal â23, we expect a return to organic growth. Despite the reduction in revenue this year, we remain optimistic about our market position and the three-pronged approach to drive future growth, including digital health technologies, pharmaceutical solutions and health solutions and services. In fact, after quarter end, we won a contract with the Provincial Health Services Authority of British Columbia to provide hospital nursing service and support across all five health authorities. Turning to our advanced technology segment, as we neared the completion of our largest ground system project, which has impacted revenue growth, our diversity into adjacent markets has begun to yield results. These lower volume but higher margin divisions has resulted in gross margin and EBITDA margins increasing significantly to 33% and 15%, respectively. Currently, we are seeing strong demand in our software engineering for satellite and communication customers as well as demand for our precision location services through our GNSS products. Looking to FY â23, we expect a return to organic growth. The diversification I mentioned in our space and terrestrial division over the past several years is going to help us offset what was the slower second half for awards of new large ground system projects. And we have already seen some breakthroughs with the announcements of a new $12 million project for the three new earth observation antennas. Turning to our learning segments, in Q4, revenues increased 24% from the previous year coming in at $22 million. Similarly for the year revenues increased 23% to $92 million, up from $75 million from last year. This growth was driven by the acquisition of SimFront at the start of the year, which allowed us to expand our Canadian military training presence as well as expanded into the United Kingdom. They have also brought technologies that are relevant commercial customers and we have continued to develop a pipeline of opportunities. In Q4, gross margins were down slightly from previous quarters to the timing of software and projects. For the year, gross margins and EBITDA margins increased to 25% and 18% respectively versus 23% and 17% from the prior year. In fiscal â23, we see continued demand for our services and technology in the military training space in Canada and Europe and this should put us on track to break the $100 million revenue mark for the first time in our learning segment. Now, I will turn the call over to Patrick to discuss cash flow balance sheets and our guidance outlook for fiscal â23. Over to you, Patrick. Thank you, Kevin. Driven by significantly higher EBITDA, profitability increased. Net profit in FY â22 increased to $14 million or $1.19 per share, up from $11 million or $1.07 per share for the same period last year. The significant increase in profitability was offset by increased charges as our acquisitions have outperformed and achieved their earn-out targets. The amortization of intangibles for current acquisitions is tapering off and will result in further net earnings in coming periods. Adjusted net profit, which isolates the one-time impact of acquisition-related charges, grew 19% to $44 million, or $3.87 per share, up from $37 million or $3.50 per share last year. Through execution and accretive M&A transactions, we have been able to grow this by 150% in the last 5 years. This continued strong profitability translate into robust cash flow generation and has become a staple of our operating efficiency. While posting record EBITDA margins and growing this at a pace significantly above our top line growth, our conversion to cash flow has consistently improved as we have gained greater scale and have been able to implement further operating efficiencies. We generated operating free cash flows of $47 million this year. This is up 38% from last year and up 213% in the last 5 years. During those 5 years, we have increased our cash flow conversion from 50% to above 70% in this most recent year. This strong conversion and focus on managing working capital in the longer term means their already strong liquidity position will strengthen in the coming periods, allowing us to continue to invest in our M&A agenda. We continue to have a disciplined approach to capital deployment in FY â22. When we say discipline, we mean consistent deployment of capital with the view of getting maximum return for the amount invested. As Kevin mentioned earlier, the early returns from our last two acquisitions have been strong. Their performance has been above expectations and both will be key contributors in fiscal â23. We have continued to pay earn-outs as they are earned and again showing that the acquisitions we have made are growing and consistently hitting or exceeding their targets. We have maintained our dividend rate at $1.12 per share. We continue to see the dividend as an important part of our balanced capital deployment strategy and we will reevaluate the size of the dividend in future quarters. Our CapEx levels have remained stable despite significant increase in the size of our business over the last 5 years. This again speaks to our improved operating cash flow efficiency. We continue to invest in capital that will help us scale and not inhibit our growth aspirations. After making all these investments, we ended the year with a solid balance sheet. As of September 30, we are in a net cash position once again. Our cash on hand of $43 million, combined with our unused credit facility, provides us with $150 million of net liquidity. And we are able to further expand this liquidity with our current lending syndicate if need be. This strong balance sheet position coupled with strong profitability and cash flow conversion positions us well in a more uncertain market and will help us continue to execute our strategic plans. In addition, we are starting the new year in a position of strength. We signed an additional $699 million in new contracts in FY â22, of which over $400 million were contract renewals and extensions. We also exited the year with a robust backlog of $1.3 billion, of which over $400 million is planned to be realized in fiscal â23. As we seek out new customers and new geographies, this strong backlog of business will serve as our anchor as we look forward to another year of record growth. Letâs take a look at our guidance for FY â23. For the fiscal year ended September 30, 2023, we expect revenues in the range of $630 million to $680 million. At the midpoint, this reflects revenue growth of 13%. And this would represent our sixth consecutive year of double-digit growth and record levels once again. It also assumes a return to positive organic growth with an even split between organic and acquisitive growth for the full year impact of acquisitions completed midway through last year. We expect adjusted EBITDA in the range of $70 million to $75 million. At that midpoint, it reflects adjusted by the growth of 10%. This growth takes into account the current economic conditions, cost increases and continued impact on supply chains. And finally, we expect adjusted net income in the range of $46 million to $50 million for the upcoming year. Our strong Q4 performance and ability to accelerate revenue will mean that our first half of fiscal â23 will be slightly lower weighted than the second half of the year as new business comes online fully. Finally, I must caution that revenues and profitability realized are ultimately dependent on the extent and timing of future contract awards, customer realization of the existing contract vehicles and any impacts due to COVID-19. Our guidance does not incorporate any additional M&A activity and should we close any new opportunities, their contributions would be incremental. Please see our press release and MD&A for detailed reconciliation of our guidance. Thank you, Patrick. So in conclusion, we had a record year yet again as our 4-piston engine continues to deliver on a consolidated level. Whatâs more coming off a record year, we are on track to sustain this pace and deliver another record year while continuing to search for strategic acquisitions. I want to thank our staff for their commitment and dedication as they make all the difference in our results. Iâd also like to thank our customers for their loyalty, our suppliers for their collaboration, and our shareholders for the continued support. We are also proud to announce the publication of our inaugural ESG report that describes our journey as we work towards embedding ESG best practices into our business. We developed a strategic framework to build, set priorities and drive value for our shareholders and stakeholders. You can find the report on our website. Thank you very much. [Operator Instructions] Thank you. Your first question is coming from Amr Ezzat of Echelon. Amr, your line is live. Kevin, Patrick, good morning and congrats. Can you speak to the quarter-on-quarter growth in IT and cyber? There is an incremental $20 million in revenues, which is pleasantly surprising. Is that concentrated to one specific project or customer or how do we think about that? Yes. Good morning, Amr. Yes, it was tremendous quarter for the ITCS group. And part of it was dealing with some of the backlog that we had built up over the last couple of quarters and we are obviously working with our supply chain to get that product and a lot of it started to come into focus here in the last quarter. So, we are able to deliver it. It wasnât one specific product, but just clearing out some of the backlog across multiple customers in several different industries. And so itâs strong performance from our team to make that happen given the current challenges on the supply chain. Okay. And what do you feel is a normalized like revenue levels like for IT, is it I assume itâs not like the $68 million or $69 million you guys reported? Now, certainly we did see a significant bump from that. So I think we get back to a more â somewhere between the Q3 and Q4 performance going into next year. We are still seeing a lot of momentum on our IT business and certainly, they are white hot right now. So I think they are going to continue that momentum into next year. Fantastic. Can you give us a little color on the pace of new projects starting in advanced tech? I mean, you guys recently announced the Natural Resources Canada contract. You have got the European project as well. I am trying to get a sense if you feel that Q4 was a trough quarter for advance tech essentially? Yes, thanks Amr. Itâs Kelvin. So for the advanced tech, itâs important to look at all the moving parts between our space, terrestrial and defense business. From our legacy space business right now, with the announcement of the three antennas, we had had announced earlier a NASA antenna with regard to our InterTronic team in Montreal and our GNSS products, our global positioning of precision location antenna business is actually growing significantly year-over-year. So right now, I am expecting advanced tech to actually to make a turn on this year from a growth posture. We see good backlog. We see good opportunities. And then when you look at our aerospace and defense elements as well as our terrestrial element with our IntraGrain, we are seeing good push across each of the divisions within that business unit. So right now, I am expecting a good year from advanced tech. And right now we are coming out strong with a few key wins to kind of propel that growth for next year. So, definitely advanced tech is going to comeback this year. And across a bunch of setting of projects that we will talk about our Investor Day later, but we are definitely going to give us more exposure to our shareholders with regard to all the exciting things happening in advanced tech right now. Fantastic. Then Kevin, like your stock price has held up well in the face of very weakest markets and you guys remain pretty under-levered. Can you maybe give us an update on your appetite for M&A and how would you characterize like the current markets? Are you guys seeing a lot of attractive opportunities or whatâs happening? Yes, we have continued to see good momentum on M&A side. We are still quite busy looking at a lot of targets and working with some key opportunities. So the pace that we set here in the last couple years of doing one or two strong deals that have really performed, I think is our objective here going into next year. So thatâs what I continued. And we certainly have the balance sheet to execute those deals. So I think we are well positioned as long as things come into focus to have another good year from an M&A perspective. Then maybe one last one, Patrick on the working capital side, anything to read â and the jump in accounts receivable for describing that? Yes, I mean, we really push hard to finish the year strong. We did deploy some extra cash towards the working capital to make sure some of the material came in so that we could realize the revenue. But I think a lot of that is very, very short-term and should kind of reverse back out in the next couple quarters. So I wouldnât be overly concerned. And I think it was the right thing to do to make sure we are well positioned to have the equipment and parts we need to deliver revenue in Q4 and into next year. I wanted to ask a couple of questions about the health unit and whatâs implied in your guidance. I mean, obviously, last year, there was some volatility related to COVID work. Can you speak to what degree you factored? I guess Iâd call it any temporary or short-term work into your guidance for the health unit in the year ahead? Yes, thanks, Doug. Itâs Kevin. So we have really not factored in any additional COVID-19 or immunization work that really dominated the last frankly couple years in the health business unit. So we have in fact and a lot of our work right now is getting back to what I call business as usual with regard to healthcare services. As I mentioned, the product launch we are doing now focusing in that our pharma business contract research, patient support programs, we are kind of getting back to what I consider to be a normal, a normal healthcare business. And so right now nothing has factored in that would be aligned to COVID-19. Okay. And I see from your disclosure, you talked about some temporary slowdown due to some contract transitions. Can you shed a little bit more light on this and when you might expect those to be resolved? Yes, our pharma business certainly runs kind of on a cycle where we get projects. We work on them for a couple years to deliver. And then usually the customer comes on with an additional project, we did see some gap there in Q4, where some of the projects were winding down and we hadnât started the new ones. But we have a strong pipeline on the pharma side for FY â23. And we think it was just more of a timing issue than a slowdown in the business. Okay, So nothing related to your kind of foundational contracts supporting military and things like that in the health unit and is there â are there any of those upcoming that we should be aware of? No, they have continued strong demand from that strong base of customers we have built over the last 5 years, like 50 contracts across Canada, those have continued. Our biggest struggle has been finding the resources healthcare workers, in general has been very tired after COVID-19 and itâs been thatâs probably our biggest challenge right now. But the demand from the customer sites continue to be strong. Okay. Maybe last question for me, I mean, in the year, IT and cyber, you are talking about relief from supply chain, previous supply chain issues, you also speak on the other hand to some parts shortages in your advanced tech unit. Is there visibility to relief on those? If it is supply chain impacted as well as we have started to hear from other hardware vendors that most of that is loosening up? Yes, we have got some promising feedback here in the last couple of months. We have seen kind of lead times actually reduce from what we were getting lead times or more than a year on certain parts come down. So that would point to things getting better here in the next 3 to 6 months. But again, itâs a bit of a waiting game to see if that actually comes through. But some of the information we have gotten seems to indicate better â23 than â22. Itâs Kevin. Just â it also, what I did mention before, because the question, I remember, on the advanced tech group, we do have a backlog of products that are sold again waiting for parts. So we think that will relieve, first quarter second quarter for sure. So I am hoping by this time next year, we are not talking about this anymore, Doug, but in the same spirit, a lot of opportunity. And I think again with backlog and parts we are going to see that to unwind in Q1, Q2 and advanced tech, so still very optimistic on that, based on my discussion with Pat that it runs out. So hopefully we see that to actually happen over the next quarter here. Thank you very much. Your next question is coming from Benoit Poirier of Desjardins Capital Markets. Benoit, your line is live. Yes, just to come back on advanced tech, you made great comment about the expectation of positive organic growth going into fiscal â23. Just in terms of margin profile, could you maybe provide some color given the completion of the large ground system contract and positive organic growth assumption whether we could see further upside in terms of EBITDA margin specifically for advanced tech? Yes, thanks, Benoit. Yes, I think you start to see some of that this quarter as the mix kind of went away from the large ground system business to some of the adjacent markets Kevin spoke to that we have been working hard to expand into and you saw the margins kind of tick up this quarter. So I think right now itâs in the near-term, maintain those margins and hopefully, by the end of the year, we are improving it back to kind of historical levels for IT just as the mix gets better. So I think there is some room to grow there. Okay, perfect. And on the learning side, there was a good mix of organic growth contribution from the latest acquisition, although margins came down sequentially. So if you could provide more color about what could explain the drop from the 18%? What could be the reason behind the drop and also kind of a reasonable assumption we should be looking for fiscal year â23? Yes, I think as we pivoted what was historically a very service oriented business to more technology, we have seen the better margins, but that also brings a bit of variability depending on software sales and deliveries, which are generally much higher margin. So I think that was the reason for the Q4 change. I would look at the level for this entire year, Benoit, as kind of a guidance on what we can deliver next year in learning. Okay, okay. Thatâs great. And for ITCS, obviously, you talk about the strong contribution in the quarter and kind of some expectation going into next year. It seems that you have been very good at leveraging the Computex acquisition, just wondering about the opportunities to leverage Dapasoft in the U.S., any new opportunities there or any, yes? Yes, thanks, Benoit. I think for from our viewpoint, the acquisition and Sacha and the team have been doing a great job in both not only integrating Computex into the Calian family, but really remaining focused on our customers. And having actually visited their sales kickoff this year, itâs probably the one of the most mature sales engines we have had in Calian, itâs pretty incredible. So now with presence in Houston, Florida, Minnesota area, we see great customer demand as organizations look to pivot. With regard to their cyber infrastructure managed services, the team is now driving more recurring revenue as well through that segment. So we are seeing those opportunities as between our security operation centers that we now have now in Houston and Toronto. So from my viewpoint, we continue to see great demand in network services, cyber services, our product relationships with organizations like Cisco. And we do believe that frankly that momentum is going to continue. So for going forward, we want to combine that the organic growth engine that we acquired through Computex and iSecurity as you remember, Benoit, about a year ago, 2 years ago, and also look for other M&A opportunities to continue to expand our footprint in the U.S. So we expect ITCS has remained white hot into the year and itâs definitely got our focus as we see that segment is definitely a high margin, high growth opportunity. Okay. And in terms of working cap, Patrick, you mentioned color about Q4, what should we be looking at for fiscal â23 given you are still growing, but you mentioned that there could be some release in the shorter term should we expect still some consumption of working cap given the growth posture ahead of Calian, ahead of you? I think our targets would be neutral to slightly positive. We have got some things coming back to us this year between the investments we made in Q4 and some of the ground system project unwinding. But I will be offset by some of the growth that we are forecasting obviously plus 10% growth again next year. So our target is to be neutral to slightly positive and hopefully some positive inflow here in the first half of the year. Thatâs great color. And just in terms of tax rate, was there something unusual in the quarter that could explain maybe a higher income tax. And when we look at the income taxation and change in fair value related to contingent earn-out, total about $10 million in fiscal â22. So from the modeling standpoint, I am just wondering how should we be looking at those two items going into fiscal year â23 and if you could provide some color about the tax rate that would be great? Sure. On the deemed content and the earn-outs like we have continued to see over achievement from several of our transactions Talisam, iSecurity and Dapasoft and SimFront, so we have booked pretty much all of the earn-outs now, so I am not expecting any large changes on that going into next year. And on the tax rate, yes, I mean, the net income was significantly impacted by that. So it made the tax rate look unusually higher, but on a cash basis and against EBITDA, I think itâs stable to last periods. We are still kind of on a cash tax in that 23% to 25%. So, thatâs what I expect for next year. Thank you and good morning. I just wanted to circle back on advanced technologies. And I guess how much of what you have been talking about is for next year is waiting for parts and how much of it is kind of the slowdown in the contract award timing. I am just trying to wonder how much risk there is for some of those awards to slip later in the fiscal year or if itâs primarily the supply chain issues that you have more visibility on? I would say right now from a supply chain perspective, itâs affecting certain elements of our products. We have been able to maneuver through that on our GNSS antennas. So, we are not expecting a slowdown. We expect to see continued growth in our precision antennas. Itâs specifically some of our products are decimated products, where we are waiting, we have a backlog of orders. And we are just waiting for specific parts to remove that. So, itâs not significant in the context of revenue, I would say, but definitely a margin, itâs going to help with the advanced tech performance. As far as the pace of business, again, with some wins on our belt here now, and some good opportunities that we are in the middle of the bid process, and these arenât bids we are waiting for. We are right in the middle of the going through the evaluations and we expect the next quarter we will be hearing wins or losses, but we still have quite a few opportunities in the funnel. So, we are feeling pretty good about the organic growth, as I mentioned earlier in advanced tech, Nexi and because of the backlog and parts or the backlog of products, as well as just the bidding pipeline right now. And our ground system business, our GNSS antenna business, our integrating business, our nuclear business is going well. And we are having some good opportunities also in defense manufacturing. So, again, I expect this to be a turnaround year for advanced tech and the growth posture across many, many factors that are going to give us some tailwinds this year. Got it. And switching to the Learning segment, I mean there has been continued rhetoric about military spending in light of the conflict in Ukraine. I am just wondering if you are seeing any immediate impact from that on demand for Calianâs business, or we should think about that as more of a longer term tailwind? Yes. Great question. Itâs really going to be both short and long-term, I believe. So, what we are seeing in the short-term, with our customers in both Canada and now NATO in Europe is an increased demand for training across multiple disciplines, so extra highs, rehearsal, cyber, so you are starting to see more cyber requests. So, in the short-term, itâs definitely going to give us some opportunity. And I think we have built that into our guidance for next year. From our Learning segment, as I mentioned, we are pretty excited by, we see the potential of our learning business being over $100 million next year. On longer term, the defense spending way this works is that that money sometimes takes time to get from budget into program. And so we expect longer term as well, that this will be a positive tailwind for Calian across all of our businesses, whether itâs on recapitalizing equipment, increasing the training capacity and pace, the IT cyber spends. So, we see both short and long-term, this as an opportunity, Maxim and definitely for learning business, increased demand and training pace, I would say both in Canada and Europe. Okay. And finally, just on M&A, I know you mentioned, looking at kind of the bigger deals, are there any segments that looks more attractive in the near-term given kind of the changes in the macroeconomic conditions and movements of valuations? Are you seeing any particular segment that looks attractive either from a valuation perspective or from Calian strategy perspective? Yes. ITCS, still is the focus for us just because of we have purchased a couple of good assets there. They have really been performing. So, we are looking and we have got a strong team there sort of saying how can we supplement that with additional assets that would give us either geographical reach, or more net new talent, which is an issue in this space right now. It helps come back to us where I think the valuations were too high for us the last couple of years thatâs come back. So, I think thatâs helped and continue to see some good targets in both AT and learning. So, I would say right now all four of them are pretty active from a pipeline perspective, with ITCS, and being one of our main focuses here for FY â23. Yes. Maxim, itâs Kevin. I think for me, as you know, the opportunity we have is the diversity, again. So, as Patrick mentioned, that we have discussions going on in each of our segments, I can confirm that. So, each of our segments right now is out with active discussions around M&A. And â but aligned to our strategy, we want to make sure that when we are doing acquisitions, itâs supporting our strategy, as well as our goals to increase margin and differentiation as well as diversification. So, all of our segments have opportunities, but we do take time or we make sure we are very rigid on our due diligence. So, the pace of these will be really at the pace that we are comfortable that we found the right targets, and the right ones that are going to support our strategy. So, I would expect this year across each of our segments, hopefully some activity, but we are not pushing it until we make sure we have the right type of company that will fit into Calian long-term. Thank you very much. Your next question is coming from Deepak Kaushal from Stifel Capital Markets. Deepak, your line is live. Hi. Yes. Just quick correction itâs BMO Capital Markets now. Good to talk again, Kevin, Patrick and nice having called Jennifer. I have a couple of folks here I think I can fit some in. Just on the advanced technology, you mentioned a couple of orders that came through one for NASA and one for International Resources Canada, ground systems and antennas. Can you talk about whatâs particularly moving those forward, given the delays recently? Is that certainty on interest rates and they are project specific factors here? And what can we read through across the broader segment of that space side and the advanced technology [ph]? Yes. Hi. Good morning Deepak. Definitely, to your point, we have seen some delays in new satellite launches, some of the new LEO constellations are working through that either looking at their debt posture. So, we are seeing that definitely create some delays. The ones that we have signed were basically on the books and moving forward with regards to customers that hav their funding and have requirements short-term too, to get new observation data or deep space exploration. So, what we are seeing right now is still a good pipeline, frankly, of ground based antenna opportunities. And with our acquisition of SatService and InterTronic, we also have the ability now to expand our antenna line with regard to the size and complexity of the antennas we build. So, in the past we were larger aperture attendants, now we can do things and we have done a bunch of research and development with the carbon fiber 4 meter antenna, full-motion, 4 meter antenna, which is relevant for LEO constellations. So, in some ways, these delays have been good for us, because itâs allowed us to pick up our R&D and our product lines to be responsive to these as they come to market. So, we have some good short-term opportunities, I am actually really excited about long-term because our product â if you walked into the Italian restaurant of antennas, our menu is much more with regard to both capacity, size, right from GNSS, now, 15 meter antennas, whether metal or carbon fiber. So, we expect this to continue to be a strong push for us, Deepak, in the next little â next few years, for sure. Okay. Great. And just a couple of clarification questions first on the M&A and then on the cash flow. On the M&A side, initially it kind of sounded like you guys were focusing on two segments, or two big acquisitions and two big good acquisitions, one, particularly being an ITCS. And then more recently, you said you are looking for activity in all four. I mean how do you decide which segment to feed, can you feed all four segments in the next 12 months? And just maybe just in general, like your capital allocation process, and how you think about capital allocation across your portfolio businesses, if that makes sense question? Yes. No, itâs a great question I think and frankly, as you look at the four segments, I want to reiterate a few things. Number one is that we have our strategic plans and business plans in place. And we look to identify in those plans where we want to grow something either organically through R&D or new innovation. Thatâs one of the reasons that created a CTO position here, or itâs going to be an M&A opportunity. So, across our strategy, M&A as a reminder, supports either diversification, innovation, or both. And from a capital allocation perspective, working with the business unit presidentâs, working with Patrick, who I have asked to run our M&A office, some of these things, the timing of them can be offset. We never really see something, just to align where we have four acquisitions in one quarter or just the way these things play out. So, we are actually proactively monitoring, itâs almost a daily discussion with Patrick. Our M&A team, our business unit presence on the status of these discussions. And from a capital allocation perspective right now, we are really looking to prioritize high margin, high growth, high scale opportunities across each of our segments, Deepak. So, we will definitely â we will keep that M&A engine running. And Patrick, any comments you would like to make on capital allocation or M&A pipeline? Yes. I think you are bang on. We keep looking out for the timing on needs that I was uncertain. So, it gives us some optionality. And on the size again, as we have gotten bigger, I think we are focusing on those acquisitions that can really have an impact both strategically and financially across each of the four segments. And so, I think thatâs what you are going to see from us in the short to medium-term. Okay. Thatâs fantastic. And then just lastly on working capital, Patrick, you mentioned earlier on the operating cash flow. You are converting now 50%, sorry 70%, up from 50%. And then given the growth expectations for this year, you are expecting to be working capital neutral. How should we think of that going forward, because as you grow the businesses working capital requirements, certainly in some of the large projects, there is a big working capital requirements. Can you continue to grow the business at double digits and maintain working capital neutral here, or is there some kind of cash investment required there that we are missing here? I think it depends as the business goes. I think for next year, certainly we were looking for double-digit growth. We have got some working capital we are trying to pull back in. Itâs going to kind of offset that growth. So, thatâs why I am thinking we can be neutral to net up next year. And going forward, we are just being, from a conversion perspective, as we scaled and gotten much bigger, we have gotten more efficient, both from a CapEx and tax perspective, which has really allowed us to convert that EBITDA into cash flow. So, I think thatâs a maybe a misunderstood thing about Calian. But I think itâs certainly a highlight in this market today in our ability to convert that kind of operating performance into real cash flow for the business. Hi. Yes. Thank you and good morning everybody. I just want to understand Kevin on the M&A front, now that you have put â you have got the CTO position in place and all that. How do you guys approach M&A? Do you just look at targets that are out there and take more of a business economics view and look at targets that give you good growth potential, maybe open up some market segments and give you some good economics, or you take â is part of that decision, product base. In other words, you are looking at your current offerings may be identify some product gaps based on customer feedback, and look at â make that internal decision to either acquire or build. So, I was just trying to understand how you guys are approaching M&A. Is there a product gap approach to it? And if there is, what are the product gaps that you have identified within the four segments? Yes, great. Thanks Nick. So, from an M&A perspective, it really does supports, as I mentioned that our customer diversification and innovation, and I will take Computex as a great example of that. So, with one acquisition, we were able to diversify our customer base to no government, it was all private industry, SMB, or sorry, mid-market, customers over 1,100 new logos, so massive tick mark on our customer diversification objectives. Then you look at the innovation that that acquisition brought. With regard to the relationships with organizations like Cisco and CrowdStrike and then as well our managed security services, our now of iSecurity. So, when I look at the acquisitions going forward, we want to do the same type of thing. We want to find those acquisitions that bring us more diversification that customize, whether itâs in certain sectors, whether domestically, whether globally. And also as you said, in product gap, look at more innovation. So, buying organizations that are bringing some element of technology, some elements of differentiation through their products, to help augment our current product/services mix. So, itâs a bit of all of it, to be honest with you, Nick, with regard to our approach here. We match that strategy alignment with the financial metrics that we look for both in past performance and future performance. And then we spend quite a bit of time with the organizations to assess culture fit, because we do believe thatâs a key element of these as well. So, itâs a bunch of moving parts and M&A accounting, but â and we learn from everyone, there is nobody perfect in M&A, but â and we are learning from everyone. And from my viewpoint, though, that innovation, customer diversification across all that we do is going to be the main focus for M&A engine across each of our segments. So, hopefully I answered your question there. I rambled on there. But hopefully I answered your question. Yes. No, but that was helpful. I guess just as a heartbeat that you mentioned product innovations. When you look at your current offerings, are there any product innovations or ideas that maybe you think you need to add? And you may be contemplating building or at the same time you are out there looking to acquire if the opportunity is there. So, is there anything that you have identified from a product gap, or is it just you look at the M&A targets that are in front of you and you evaluate what innovation they might have as opposed to having something in mind? Well, I think for us, just sort of high level if you kind of walk through our segments and our health business clearly as you look at our Nexi and Corolar Virtual Care platforms. This year, we ran through L-SPARK here in Canada with Gordon and Sasha. We ran an opportunity to look at products that could build into our current product base. We are referring to as ecosystem development. So, I would say, at our healthcare platforms, we would be looking for pieces that could help augment that platform, and basically continue to differentiate and provide more value to customers. In our learning space, our SimFront and SimWave acquisition has been very an eye opener for us, and just on the amount of innovation and learning across virtual reality, war gaming, of the things that are now being asked for by customers. So, again, more opportunities to expand our learning portfolio to make that training environment as real as possible. And an immersive learning/virtual reality capability would be one. If you look at our Advanced Technologies Group, continued expansion of our space business is going to be an important element of this because we still believe long-term that this is going to continue to be a massive growth opportunity for us to support our growth objectives. And we are looking at diversification of our antenna, our capability in recurring revenue opportunities. And then on our IoT segments, again, we have got now quite a bit of â Sasha, who told me quite a bit of technology on the truck, and we are looking to amalgamate, integrate those technology components. But in the same context, look to invest in new capability to strengthen our cyber resilience offerings, as well as building more ecosystems out there, regarding products that could plug into our cyber services. So, itâs a really a lot of discussions here that we have across each of those segments, that just to highlight a few. And I could probably spend 15 minutes, 20 minutes on this alone just on each of our segments as to all the different moving parts, but those are the kind of the highlights and priority of it for the time. Okay. I appreciate that. I guess there is just one last one. I think you kind of highlighted pretty strong demand or interest on the augmented reality, can you just talk to how, I guess the cross-sell that you are getting when it comes to your digital assets on the healthcare side? What the reception has been in the marketplace, the cross-sell, and more importantly, maybe specifically, what the growth rate is for those particular products? And I will leave it there. Yes. I think for me, as we launch digital products, and I expect â my expectation here in the company is everything is a double-digit growth number, I want to see that. And â but as you look at those product launches in Corolar Virtual Care or the Nexi platforms, they are definitely getting. There is a lot of presentations right now. Itâs as you integrate new products and introduce new products to the market, it takes time. So, we are expecting this year not to see massive growth there. We expect to be investing on getting products, understanding product awareness, and working with customers. And we are doing lots of work. Now, we are having extra sales capacity and we invest here to actually get these products to market. And the point you made I donât talk about enough frankly. When you think about the convergence opportunities across our business units, we are definitely seeing more of those. We are looking at remote healthcare. And we just recently got an opportunity, where we combined our healthcare business with our satellite business to basically provide remote healthcare units, that then has a remote learning capability and a cybersecurity element to it. So, we are starting to see those opportunities that come across our business units and what we call a convergence opportunity. So, standby for those but so each and other segments right now, we are going to have more innovation, more product gaps, as we said, things that we are fixing, but as importantly, we are looking for those opportunities to move across the business for collaboration with our business units for customers biggest challenges. Okay. We donât appear to have any further questions in the queue. I am now going to hand it back over to Kevin for any closing remarks. Okay. Thank you, Jenny and for facilitating todayâs call. Before we close, I would like to mention that we will be hosting an Investor Day in Toronto on February 15th. So, please save that date and more details will follow in the next couple of weeks. So, on that note, I want to thank you for each for â everyone for attending. I want to thank everyone for the great questions, and we look forward to providing an update on our next quarterly call. So, with that, Jenny, we can close the call. Thank you very much and thank you ladies and gentleman. This does conclude todayâs conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation. Have a great weekend.
EarningCall_1912	Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company First Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this conference call is being recorded. Good morning, and welcome to Campbell's first quarter fiscal year 2023 earnings conference call. I'm Rebecca Gardy, Chief Investor Relations Officer at Campbell Soup Company. I am joined today by Mark Clouse, Campbell's President and Chief Executive Officer; and Mick Beekhuizen, Campbell's Chief Financial Officer and President of Meals & Beverages. Today's remarks have been prerecorded. Once we conclude our prepared remarks, we will transition to a live webcast Q&A session. The slide deck and today's earnings press release have been posted to the Investor Relations section of our website, campbellsoupcompany.com. Following the conclusion of the Q&A session, a replay of the webcast will be available at the same location followed by a transcript of the call within 24 hours. On our call today, we will be making forward-looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to Slide 3 or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward-looking statements. Because we use non-GAAP measures, we have provided a reconciliation of each of these measures to the most directly comparable GAAP measure in the appendix of this presentation. On Slide 4, you will see today's agenda. Mark will share his perspective on our first quarter results as well as in-market performance by division. Mick will discuss the financial results of the quarter in more detail and then review our guidance for the full year fiscal 2023. Thanks, Rebecca. Good morning, everyone, and thank you for joining our first quarter fiscal 2023 conference call. I hope you had a happy Thanksgiving and filled up on Green Bean casserole, Pepperidge Farm stuffing and plenty of our delicious snacks and cookies. As you read in our press release this morning, our fiscal year is off to a fast start. Our strong year-over-year performance across all three key metrics reflects the continued strength of our portfolio and our successful efforts to substantially mitigate significant inflation through a combination of pricing and productivity improvements. I am also encouraged that we delivered those results while increasing investments in our brands and ensuring we remain a good value to consumers in this difficult economic time. We also made significant progress on market share versus the fourth quarter, growing or holding share in most of our categories year-over-year. We are very pleased that the combination of stronger supply, accelerating innovation and appropriate investment is translating into strong profitable share growth as we had planned. Overall, Campbell's portfolio continues to demonstrate compelling consumer relevance and is well positioned for the current economic environment. We recognize it's still early in our fiscal year, and the environment does remain challenging. But given the strength of the first quarter performance, the health of our brands and our consistent execution, we've increased our guidance to reflect our current outlook. Mick will provide more details on the drivers shortly. But this quarter's results and the full year outlook demonstrate the significant progress we've made across our brands, supply chain, culture and capabilities. Although there remains more to do on the business as we continue unlocking our full growth potential, this quarter's results represent a positive milestone in our journey. Organic net sales increased 15% to $2.6 billion due to both inflation-driven pricing and strong consumer demand. While we did see some volume declines, it was partially mitigated by expected retail inventory recovery and a strong rebound in unmeasured channels, especially food service. Dollar consumption was up 10% in the quarter versus the prior year and 21% versus three years ago. As expected, we shipped ahead of consumption in the quarter as our supply chain execution and service levels continue to improve, and retailers rebuild inventory levels. The improved supply also allowed us to significantly increase our marketing investment in both divisions as planned. Turning to adjusted EBIT. Higher adjusted gross profit, partially offset by higher marketing and selling expenses and higher adjusted other expenses, resulted in a 15% increase in adjusted EBIT. The team has done an excellent job navigating inflation, leveraging a good balance of different tools. I also can see that our agility has improved in reacting to the volatile environment. As an example, we recently announced a very targeted Wave 4 pricing action on products where our input costs have gone up further. Adjusted earnings per share were $1.02 also up 15% as the flow-through of adjusted EBIT and lower weighted average diluted shares were partially offset by higher adjusted taxes. I'm thrilled with our progress on dollar share. We grew our held share in most categories year-over-year and also grew share versus the prior quarter. In fact, 10 out of 15 of our key brands grew share in the quarter. Some of which responded faster and more significantly than expected as inventory and support were added. Even in categories where we experienced modest share declines such as soup and pretzels, our share performance improved sequentially as planned. There is no question that the focus of our portfolio from a category and geographic perspective is a distinct advantage right now and is enabling us to effectively deploy investment and drive consistently strong execution. Let's look at our divisions. Starting with Meals & Beverages, which delivered a strong first quarter with reported and organic net sales growth of 15%. In-market performance continues to show the underlying health of our portfolio with dollar consumption growing 8% over the prior year and up 17% versus three years ago. The recovery in our supply chain resulted in materially improved service levels, up over 18 points versus the prior year, enabling retailers to replenish inventory in the quarter and be well positioned on supply heading into the critical holiday season. We also saw a marked recovery in our foodservice business as supply has also improved in this important channel. Turning to Slide 10. Our strong dollar consumption growth was across most of our Meals & Beverages portfolio as we are well positioned within growing categories. The growth of our brands in key segments, namely ready-to-serve or RTS soups, Italian sauces, Mexican sauces and select segments in our condensed soup well outpaced the growth of their respective categories. Turning to Slide 11. Our consumer insights show that consumers continue to cut back on out-of-home eating and are migrating from more expensive grocery categories as they seek ways to ease the impact of inflation. Consumers are making changes to stretch their budget and following several years of becoming more confident and comfortable with cooking, they continue to turn to our categories and importantly, our brands as evidenced by the continued growth of our Meals & Beverages business. With consumers preparing about 80% of meals from home, our brands are well positioned for sustained growth, delivering consumers the quality, value and convenience they seek for simple at-home meals and quick-scratch cooking. For example, our Spaghetti Carbonara recipe is a top performer year-over-year as it easily and economically feeds a family for about $1.53 a serving. Turning to Slide 12. U.S. soup net sales grew 11% over the prior year, with gains in ready-to-serve, condensed and broth. We continue to see a favorable net pricing benefit with dollar consumption up 5%, partially offset by pricing-related volume declines. Elasticities remain below historical levels. And while our total dollar share of U.S. soup declined, it was by less than one point. We had positive dollar share growth in the quarter in key strategic segments, partially offset by competitive share losses to private label in total condensed and broth as expected. We continue to focus on price gaps and are adding equity support with meaningful innovation to maintain the strength of the category and our brands over the long run. Chunky continued its positive momentum with dollar share up 1.6 points in the quarter coming from strong base velocities as we further recovered on shelf, and 13% dollar consumption growth versus the prior year. This was the fifth consecutive quarter Chunky held or gained volume share, reflecting the powerful combination of a strong base business, highly relevant innovation and increased investment in compelling advertising. Versus three years ago, Chunky grew dollar consumption by 26%. Our chunky digital and social activations are seeing notable year-over-year increases in engagement and our Lunchtime is your Halftime campaign is resonating, particularly with younger consumers as we expand our reach through our NFL partnership and gaming via EA Madden. Closing out the slide, Pacific has returned to growth as a result of restored supply and innovation with dollar consumption of Pacific RTS soup up 21% versus prior year and share grew by 0.4 points in the quarter. Pacific's growth is outpacing organic sub-segments in the quarter, and the launch of RTS cans is the leading contributor to the growth with millennial buyers, up 16% versus prior year. Turning to the next slide and our progress on building a $1 billion sauce business, Prego continues to solidify our position as the branded dollar share leader in the Italian sauce category. Growth in the quarter was driven by both pricing and higher volume, reflecting improved service versus a year ago. The brand had strong in-market dollar consumption of plus 21% and share growth of 1.1 points versus prior year. Pace also performed well with dollar share gains of 0.4 points, marking the third consecutive quarter of dollar share growth and increased dollar consumption of 16%. Turning to snacks. We had an impressive quarter as our brands rapidly responded to the recovery of supply and increased investment with accelerated top line growth and share improvement. The strong 15% top line growth, which was fueled by our power brands, reflected pricing actions offset by slight pricing-related volume declines. Sales growth exceeded dollar consumption of 13% versus prior year due to the replenishment of retailer inventory, which have been depleted in the prior year due to supply challenges. As you'll see on the next slide, in-market dollar consumption in our power brands was up 15%, with six of eight brands growing double digits. On a three-year basis, dollar consumption was up 28%, with all eight power brands growing double digits and four of our five salty power brands growing over 30%. This also supports the historical learning that consumer snacking behavior is very resilient and relevant in tough economic environments. Overall, six of our eight power brands grew dollar share in the first quarter, including Cape Cod, Snack Factory and Lance, each of which grew share by over one point. As we have recovered from significant supply constraints that began in the second quarter of fiscal 2022, we began to see sequential dollar share improvement quarter-to-quarter. Specifically, over the last four quarters, Goldfish gained 0.6 points, Snyder's of Hanover gained 3.5 points, Lance is up 4.8 points and Pepperidge Farm cookies were up 0.4 points. Our snack brands are also highly differentiated against competition with positive velocity trends. In fact, on Slide 16, you'll see that our brands are growing faster than their respective categories. And five out of seven power brand categories, including crackers, kettle chips, deli snacks, organic tortilla chips and sandwich crackers. Consumers continue to show their love for Goldfish and respond to the steps we've taken to broaden the appeal of this iconic brand. This is a remarkable growth story for one of our most important brands. We continue to deliver against our strategy to expand our consumer base with robust and relevant innovation and effective marketing that engages the entire family, not just younger kids. In fact, for the third time in a row, Goldfish crackers were teens most preferred snack brand according to Piper Sandler's Fall 2022, Taking Stock With Teens survey. Our Goldfish Dunkin' Pumpkin Spice crackers were the top turning new cracker item and leading pumpkin spice stacking item during the quarter. We've continued this momentum with a new partnership with Disney Marvel and our limited edition Black Panther Wakanda Forever Goldfish, which hit the store shelves last month. And keep an eye out for the limited return of Goldfish Frank's RedHot Crackers in the coming months. We also continued to win in salty snacks with dollar consumption and dollar share gains in Kettle Chips, Cape Cod, Snack Factory and Late July. Our Snack Factory Pretzel Chris and Snyder's of Hanover will have new holiday activations inspiring new occasions and elevating every holiday snack trade. And finally, I want to highlight Pepperidge Farm cookies. The holidays are their Super Bowl and with supply back, we're able to return to full speed through the holidays. We've introduced new packaging designs across the portfolio from Milano to Chessman and brought back holiday favorites like Linzer cookies. We also have new limited edition Milano Hazelnut Hot Cocoa, and with the return of the Milano Fancy Santa activation, we hope to do our share in making the holidays a little more special. In closing, I'm really pleased with our strong year-over-year performance and the fast start to the year. This is perhaps one of the most complete quarters we've delivered. We continue to build momentum and confidence with a powerful portfolio of brands in both divisions and the continued strength of our supply chain execution. We're recovering on share and driving growth in key categories. And with our portfolio focus, we are well positioned for the current consumer and economic environment. Our innovation is resonating with consumers, driving more engagement, especially among younger households and there's more to come. It's important to remember that there's still much to do on our business, and the environment does remain challenging. But being able to face those challenges off a stronger and more stable foundation is very encouraging and bodes well for the future. Before turning it over to Mick, I wanted to comment on our recent management changes. As we announced in November, Mick has been appointed President, Meals & Beverages; and Chris Foley is now President of Snacks. Mick will continue to serve as Chief Financial Officer until a successor to this role is in place. The search is going very well, and I look forward to updating you in the future. Both Mick and Chris have played a significant role in Campbell's transformation over the last several years by enhancing our culture and improving our business performance. I'm confident that they are the right leaders to continue to build our momentum and unlock our full growth potential. In closing, I'd like to thank all of the Campbell's team for their hard work and wish all of them and you happy holidays. Thanks, Mark, and good morning, everyone. We are pleased by the strong results we delivered in the first quarter with 15% growth across all three key metrics: net sales, adjusted EBIT and adjusted EPS. Top line growth was due to inflation-driven pricing, sustained brand health and improved supply chain execution, partially offset by modest volume declines. First quarter net sales growth of 15% outpaced consumption growth due in part to retailer inventory rebuild as well as the strong recovery in our foodservice business. Strong sales growth, a relatively flat gross profit margin as cost inflation and unfavorable volume and mix were mostly mitigated by pricing and productivity improvements combined with continued support of our brands and expected lower pension income resulted in a 15% increase in adjusted EBIT. On a margin basis, adjusted EBIT was comparable to the prior year at 17.4%. Adjusted EPS increased 15% to $1.02 per share, driven primarily by the increase in adjusted EBIT and partially offset by a higher adjusted effective tax rate. Our cash flow from operations in the first quarter was $227 million, which allowed us to continue to invest in the business while we returned over $150 million to our shareholders through dividends and share repurchases. With Q1 results ahead of expectations and our strong confidence in the health and momentum of our brands and improved supply chain, we feel it's appropriate to raise our guidance. That said, let's first discuss our first quarter results versus prior year in more detail. Net sales in the quarter, both reported and organic, increased 15%, driven by 16 points of inflation-driven pricing, this was partially offset by a one point volume and mix headwind. Promotional spending in the quarter was down 1% in Meals & Beverages and up 1% in snacks and thus, overall comparable to the prior year. As an aside, going forward, we will combine the impact of promotional spending with the impact of pricing in our quarterly earnings materials. Turning to Slide 22. Our first quarter adjusted gross profit margin decreased 30 basis points from 32.5% to 32.2%. Inflation and higher other supply chain costs had a negative impact of 1,260 basis points with the majority of the impact driven by continued cost inflation as overall input prices on a rate basis increased by approximately 18%, which were slightly higher than the fourth quarter of fiscal '22. Additionally, unfavorable volume and mix had a negative impact of 150 basis points in the quarter. These factors were mostly mitigated by a higher net realized price, which drove an 1,140 basis point improvement, reflecting the impact of our inflation-driven pricing actions. In addition, our ongoing supply chain productivity and cost savings programs contributed 240 basis points to the adjusted gross profit margin. In the first quarter, we continued our efforts to mitigate inflation highlighted on the next page. Through a combination of targeted price increases and trade optimization as well as supply chain productivity improvements, cost savings initiatives and a continued focus on discretionary spending across the organization. As discussed during our previous earnings call, we expect cost inflation to continue throughout fiscal 2023. To mitigate the expected inflation, we are currently implementing selective additional pricing in both divisions, which should become effective in the second half of our fiscal year. We continue to focus on all other areas of inflation mitigation while we diligently protect the important value proposition for consumers. Moving on to other operating items. Marketing and selling expenses increased 18% or $31 million and represented approximately 7.8% of net sales versus 7.6% in the prior year. The primary drivers of higher marketing and selling expenses were higher advertising and consumer promotion expense or A&C, which increased by 31% versus the moderated levels in the prior year and higher selling expenses, partially offset by increased benefits from cost savings initiatives. Administrative expenses on an adjusted basis increased 1% to $155 million due to higher general administrative costs and inflation, partially offset by lower expenses related to the settlement of certain legal claims. As a percentage of net sales, adjusted administrative expenses were 6%, a 90 basis point decrease compared to last year. On Slide 25, we are providing an adjusted EBIT bridge to summarize the key drivers of performance this quarter. As previously mentioned, adjusted EBIT increased 15% in the quarter, primarily due to a 14% or $102 million improvement in adjusted gross profit. While the increase in adjusted gross profit benefited adjusted EBIT, it was lower as a percentage of net sales, resulting in a 30 basis point decrease of our adjusted gross profit margin and a corresponding decrease of our adjusted EBIT margin. Marketing and selling expenses increased $31 million versus the prior year and had a negative impact on our adjusted EBIT margin of 20 basis points. Adjusted administrative and R&D expenses were $176 million, a 1% increase over prior year. This increase resulted in a 100 basis point contribution to the adjusted EBIT margin as these expenses were lower as a percentage of net sales versus prior year. Adjusted other expenses of $3 million compared to adjusted other income of $7 million in the prior year and a negative adjusted EBIT margin impact of 40 basis points. This headwind is largely due to a reduction in pension and postretirement benefit income compared to prior year. Our adjusted EBIT margin was in line with prior year at 17.4%. The following chart breaks down our adjusted EPS growth between operating performance and below the line items. Higher adjusted EBIT impact of $0.16 was partially offset by a $0.04 headwind of higher adjusted taxes. Earnings per share also benefited from a reduction of the weighted average diluted shares outstanding. All in, adjusted EPS increased year-over-year by 15% to $1.02. Turning to Slide 27. Our Meals & Beverages division delivered a strong quarter with both reported and organic net sales increasing 15% versus prior year primarily due to increases in U.S. retail products, including soup and Prego pasta sauces as well as gains in our foodservice business. Inflation-driven pricing and sales allowances and lower levels of promotional spending were partially offset by volume declines. Sales of U.S. soup increased 11% due to sales increases in ready-to-serve soups, condensed soups and broth. Segment operating earnings in the quarter increased 18%. The increase was primarily driven by higher gross profit, partially offset by higher marketing and selling expenses. Overall, within our Meals & Beverages division, first quarter operating margin increased year-over-year by 60 basis points to 22.7%. On Slide 28, reported and organic net sales in our Snacks division increased 15%, driven by sales of Power Brands, which were up 21% and sales growth was driven by increases in cookies and crackers, primarily Goldfish crackers and in salty snacks, primarily in Snyder's of Hanover pretzels and both Kettle brand and Cape Cod Potato Chips. Inflation-driven pricing and sales allowances were partially offset by volume declines and increased promotional spending relative to moderated levels in the prior year quarter. Segment operating earnings in the quarter increased 20%, primarily due to higher gross profit and lower administrative expenses, partly offset by higher marketing and selling expenses. Overall, within our Snacks division, first quarter operating margin increased year-over-year by 50 basis points to 13.7%. And I'll now turn to our cash flow and liquidity. Fiscal 2023 cash flow from operations decreased 21% year-over-year to $227 million, primarily due to changes in working capital, partially offset by higher cash earnings. Cash outflows from investing activities were reflective of the cash outlay for capital expenditures of $77 million, which was an increase from $69 million in the previous year. Cash outflows from financing activities were $127 million, including $115 million of dividends paid and $41 million of share repurchases. At the end of the first quarter, we had approximately $375 million remaining under the current $500 million strategic share repurchase program and approximately $131 million remaining on our $250 million anti-dilutive share repurchase program. We ended the quarter with cash and cash equivalents of $130 million. Before I turn to guidance, I wanted to touch on a few additional items. First, at the end of September, S&P Global upgraded our credit rating to BBB with a stable outlook. Secondly, on November 15, we raised a delayed draw term loan totaling up to $500 million. We plan to use the proceeds of the loan to refinance our existing $566 million notes maturing in March 2023. And lastly, on November 21, we entered into a 12-year renewable power purchase agreement with Enel North America to support our goal to reduce greenhouse gas emissions. Improving the sustainability of the agriculture and food value chain is important to Campbell, and this agreement is a substantial step forward in meeting our science-based emissions reduction target. With that, let's turn to Slide 30. As previously mentioned, we are raising our financial guidance for the year given the strength of our first quarter performance, the health of our brands and our consistent execution. For the full year, we now expect net sales both organic and reported to be plus 7% to plus 9%, adjusted EBIT of plus 2.5% to plus 6.5% and adjusted EPS of plus 2% to plus 5%. First, the fiscal 2022 results, resulting in fiscal 2023 adjusted EPS of $2.90 to $3. Lastly, as we mentioned on our fourth quarter call, our guidance reflects an approximate 3% headwind to adjusted EBIT and adjusted EPS from lower pension and post retirement income. All in, we're off to a great start to fiscal 2023 and are confident in our strategy and execution. As Mark mentioned, while we expect the environment to remain dynamic, our brand momentum remains strong as both supply and investment returned to pre-pandemic levels. To start off, I guess, last quarter, I think, Mark, you mentioned that you expected sequential improvement in gross margins as the year progressed. Given how much better gross margins came in, in 1Q, I'm trying to get a sense of if that's still the case; and if so, if that would mean your full year gross margins could be better than the flattish outlook that you gave last quarter? So, I'm basically trying to get a sense of just sort of the cadence over the next couple of quarters in terms of the margin profile? And then I've got a quick follow-up. Yes, that's -- yes. No, I got -- great question, Andrew. I guess maybe let me start with a little bit of what was better in Q1 than perhaps we had expected. I think it really does begin with top line. We were stronger performance on the top line, really driven by two things. I think the first was better in market, lower elasticity than we had expected paired with the marketing effectiveness. I'm always a little bit tough to tease those two things out. But at the end of the day, that in-market performance share recovery was stronger and faster than we had expected. I think the second area is we continue to execute really well on the supply chain. And the recovery in supply was fast enough that it allowed us to accelerate availability both for that inventory that we had planned. But also you saw places like unmeasured channels growing even faster than we had anticipated. In particular, foodservice was very, very strong. And as you drop that down into margin and you say, okay, top line better, how to -- what was different in the margin. As you know, when you get that top line going, there's a lot of positive effects throughout the P&L. And I do think, consistent with that, we saw greater efficiency. And again, I do think the execution across the Company has been very strong as well, whether it was the execution of pricing or Wave 3, whether it was our supply chain. I think, the combination of those elements were all very positive, and it did result in a better top line and a better margin than we had initially expected. I do think as you look out then across the balance of the year, what we would continue to expect, I'm not making a broad balance of the year move in our elasticity assumptions. In fact, you would have heard Mick talk a little bit in his comments about some pockets of increases in inflation that are resulting in a Wave 4, although very targeted, still a bit more pricing that we're in the midst of executing right now. And so balancing that ongoing view of consumer resilience, I think we're being pragmatic and not necessarily carrying that elasticity favorability through the year. I think then if you start to say, okay, well, how does that kind of play out across the year. As you think about the next quarter, I think the two things you'll see that are going to be a little different than Q1 and is you won't have the inventory recovery opportunity, and you probably will see a little bit of modest increase in promotional spend and the continued kind of investment in the year, and that might be a little different than what you saw in Q1. And then, of course, as you get to the back half of the year, you're beginning to lap the significant pricing from a year ago as well as some tougher comps to get through. I think the net of this I just would say is that we are in Q1. This does remain a pretty volatile environment. I think we've tried to be appropriately pragmatic and looking at the balance of the year. But if you take our guidance versus where we were, it does imply, and I think a little bit of this is the way for pricing and inflation dynamic. If you take the midpoint of the two guidance ranges, we're about 20 bps actually lower in margin assumption for the year. And that is a little bit of reflective of the dynamics that I just explained. But like I said, it's very early in the year. And I think we -- the good news is we feel great about starting really on our front foot and the things that we can control, we really saw positive performance across those variables in the Q1. And that certainly does give us greater confidence heading into the balance of the year based on where we are today. We've seen some of your competitors in soup and broth be maybe a bit more aggressive with pricing on shelf lately. I'm just curious, is there anything you're seeing that's surprising in terms of competitive levels in these categories? And as we head into 2Q, are you hearing anything or seeing anything that would suggest that as you get more promotional as well, which you mentioned, that maybe your competitors will do the same or step it up even more. Yes. I would say, first off, just to kind of make sure I appropriately caveat this. Everything that we're doing as it relates to an investment side, especially on the promotional side, would be very responsive to the marketplace, very modest in the sense of it being quite normal and just kind of how supply has recovered. This is not a overly aggressive stance or one that we're trying necessarily to distort a position as it relates to share or market because we don't really need it. I think the -- the reality is that the combination of the marketing, innovation and what we're doing on the brands have been very effective. And again, with my druthers, I'd rather be supporting the equity side. But at the end of the day, it's important that we stay very vigilant on the price gaps. And so everything that we're doing is really about watching where those price gaps are and how we feel about the value proposition. I think what's been really impressive across our portfolio is that although we're watching and seeing consumers change behavior in how they're purchasing and which categories they're migrating into this has been very, very helpful in the sense of getting the relevancy of our brands continuing to remain quite high. And so I think as we look forward, I'm not seeing anything that would suggest that our pricing would be overly aggressive or necessarily conservative. And I think that's the way we want to be, and that's where we want to be balanced. I think you mentioned soup obviously, in places where we're seeing more private label pressure. We want to make sure that we're especially vigilant there in keeping those price gaps reasonable. And I think we're -- right now, we're exactly where we expected to be on the soup business, actually a little bit better as we continue to see just tremendous momentum on our ready-to-serve side with both Chunky and the introduction of Pacific Can ready-to-serve soup has done very, very well. So probably a little bit ahead there, but on the condensed and broth side, very much in line with our expectations. Mark, I was actually kind of hoping to circle back on the guidance a little bit. Are you largely caught up now on the shipment inventory replenishment? Should we kind of expect a shipment relative to consumption to be a lot closer, obviously, versus, I think, the 700 basis point spread that you saw in meals in the first quarter? And then I just have a quick follow-up. Yes. I think we're pretty caught up. If we think about what we expected, as I said, I think if you remember, we talked a little bit about the unmeasured channels and a little bit of lagging there. I do feel really good. And again, you see that in the 500 basis point delta between our net sales and our consumption that really does reflect some of the -- both the inventory recovery in retail, but also those unmeasured channels recovering. And I think as I look forward, I would expect us to be closer and much more in line between consumption and sales as we go forward. Got it. That's helpful. And then just back on Andrew's question around the gross margin. I think you said the implied math is that your margins are 20 basis points lower maybe than the flattish from before. A) I just want to make sure that, that was what you said and B) that was a gross margin comment, not an operating margin comment. Yes. It's more an operating margin discussion, right? If you take the implied math of our EBIT and our top line evolution in the guidance, it nets to about 20 bip EBIT difference. And again, I would say that as we look at the year, I would suspect that what I would be thinking about for margin is some of the drivers that I discussed probably putting a little bit of pressure on that through the year. Mick, do you want to add a little bit perspective? To your question, when you look at the 20 basis points of reference, that's really the change versus the previous guidance. Yes, not versus a year ago. So you do see -- I mean, as we already described last time around, there was a little bit of that margin pressure year-over-year in the mid-level of our guidance range and you basically have a little bit more of that reflected in the updated guidance. A couple of quick questions. First, can you remind us how big foodservice is as a percentage of sales in your Meals & Beverages division and give us a little more color on how robust the growth was this quarter? Significant. And I think if you kind of -- right now, in Q1, it was in and around 6% of the overall enterprise. Yes. I think one of the things to keep in mind on that number, Jason, is it was one of the harder hit when we were rationalizing supply a year ago. It was perhaps one of the places that felt that the most significantly. So although I would say we are seeing increase in demand. The biggest driver of that recovery is really the recovery of supply. Got it. That's helpful. In context of that, you said we should expect consumption sales to be tracking reasonably close. With that type of robust growth, shouldn't we actually expect your reported results to be outstripping what we see in measured retail sales data going forward? Yes, I do think there'll be some delta there. But as it relates to retail in particular, I think those two things will be close. I do think your overall net sales will get a little bit of bump as foodservice and some of the other unmeasured channels recover. However, I don't think you'll see this kind of difference because we -- as we did start to stabilize supply you see kind of a steady recovery. So although I agree with you, some delta, not as significant as this quarter. Got it. Make sense. And one more, if I can, on inflation. Most companies are seeing the level of year-on-year inflation. If not stabilized, generally begin to moderate, you're going the other way with the acceleration here quarter-on-quarter. What is driving that? So Jason, when you think about our overall inflation for the year, we're seeing a very similar dynamic what you're describing, right? Just it is low teens inflation year-over-year for the full year. However, I mean, basically, that Q1 number was as expected, the 18%. Because as you might recall, when we spoke about kind of our outlook for the full year, we're expecting double-digit inflation in the first half, but then we cut over into the new calendar year and certain contracts reset. And of course, then you start to comp also higher inflation levels from this past year. And then in the second half of the year as a result we expect more in the, call it, high single-digit type of inflation. So it's really, call it, a little bit of first half versus second half story. First half still continued double-digit inflation you saw in Q1. However, then in the second half, you start to see that installation is starting to moderate; however, still inflationary. Yes. And I think the places where we saw deltas are really in the protein, resin areas and a little bit of this at times like, for example, in steel, we might have expected a little bit faster walked out in prices that may not have materialized at the same level. And so part of what we're reacting to is a little bit of the change in outlook for the cost relative to what we talked about for Wave 4 pricing. And again, it's a very targeted pricing action in particular to certain areas where you may have experienced some of that pressure. Yes. And the dynamic that Mark is describing between on the one enterprising, but also a little bit additional pressure on that inflation around whether it's steel and protein that's really a second half dynamic. My first question was just in relation to the wave of pricing you've taken. Have you said how much that is? And I thought it I'd be just good to hear how those conversations are going with retailers? As we near the end of this incremental inflation, is there any change in the tenor, if you will, in those discussions with retailers? Yes. So it is a much more targeted action probably low single digits overall. I would say that as we've navigated through this last couple of years of elevated inflation, the level of transparency and almost the mechanical nature of understanding the validity of pricing actions has become a muscle that has really been built well, I think, on both sides of the table. So, it's really much more about the dialogue of where our costs, what -- how do those reflect what we're suggesting on price. So, I do think we are in a moment now where this is more the tail end and thus then ensuring that everything that we're doing is really clear and transparent, rationalized by the costs that we're dealing with. But I think when that happens, it's relatively constructive and the conversations kind of move forward, I would say, in a very almost mechanical way. I do think that the sensitivity around ensuring that we're doing everything possible to support the brands and the categories we're in, maintaining affordability for consumers in this tough environment. It's certainly top of mind for both us and the retailer as we work together. And so, we're quite conscious of those dynamics and ensuring that we're making the right strategic choices for the business for the long term. That's great. I'm sure the increase in marketing helps a lot in communicating that to the retailer. So that's great. Just one follow-up with -- one follow-up, which is in -- you're starting to lap some pricing from the prior year. So you have a little bit more pricing coming through sequentially as well. So I just want to get a sense from like the pricing contribution in that pricing versus cost inflation. Is that a similar dynamic in 2Q as it was in 1Q in rough terms? Yes. So I think it will be closer in Q2. I do think you might see a little bit more promotional spend in Q2 than Q1, again, all within a very reasonable range. It's really then the back half where you start to see the significant impact of a year ago pricing. And incremental contribution from pricing would be significantly lower as we get into Q3 and Q4. It was -- just about a year ago, you set your 17% margin target for snacks by 2025. But obviously, with just the environment being a little bit more difficult than we might have imagined then and just the margin outlook for this year and what last year looked like. Can you just give us an update of how much that might be on track or what might be needed to get there? Yes, that's good question. I think that -- let me start with the elements of the strategy of our margin road map on snacks are very much intact. And so the ability for us to see the progress on the initiatives that we had as part of that, whether it was the original completion of the original value capture or the next wave of opportunity that we've seen relative to network route to market are all very much on track and in line. I will also say further to that, that the top line performance continues to be very, very strong. And as we all know, at the end of the day, on snacks, growth is really and has been the top priority for that division from the beginning. But I think the good news is all the things that we expected to be delivering, we're delivering. I think what we can't predict exactly right now is how the environment will evolve over time. There's no question that the combination of both inflation and some of the costs associated in the supply chain relative to COVID and all of the things that that we've been navigating over these last couple of years, how that comes off as we go forward and the environment begins to normalize. We talked in the past, if I were to kind of put a let's call it, a rough framework around it, I think there's probably a couple of hundred basis points of just what I would call environmental overhang that I do expect us to be able to improve by. So when I think about longer term on the business, I still remain very confident that, that margin objective and goal is in place. I think we just need to see how the environment unfolds to put a better qualification on timing. But I think the good news is the elements that we need to see progressing, we are seeing progress. Okay. That's helpful. And maybe just on sauces, you also touched at the Investor Day on a potential new sauce brand either organically or M&A as part of the path to $1 billion. Is that still part of your thinking? And what -- can you give any latest on how that might unfold? Yes. I mean we continue to be very bullish on the sauces area. This is a place that, quite frankly, before COVID was growing very well and certainly has continued through the pandemic and even in this moment of economic pressure, we continue to see a very high degree of relevance in that space. And when you look at our portfolio and sauces and you say, okay, where are the opportunity areas or the white spaces? I do continue to believe that there is opportunity at different price points. And I also think that in adjacent segments, there's opportunity as well. And I do think as you see our strategy kind of unfold over time, you'll continue to see us both driving that base business aggressively while adding strategically kind of either small tuck-in acquisitions or some perhaps organic developed new items to complement, not unlike what we're doing with flavor up and the re-launch of sauces, which again, very early in a different model of launching. But at the end of the day, continuing to build out. One thing I'll just mention that's quite interesting in this moment where economic pressure is putting barriers to -- away from home eating a little bit more. What's been very interesting is younger consumers have been one of the bigger sources of migration back into in-home cooking as their confidence and capability through COVID was established or built. You see them returning to that area. And so our opportunity of continuing to kind of arm them with new products or also innovation as it relates to recipe or usage is very much a focus of our strategy, one that's working very well at this moment and one we would expect to continue to do both through innovation as well as the marketing side. I thought I remember three months ago, Mark, you've given guidance for a 2% headwind from promotional spending for the full year. And this quarter is zero, are you pushing out some of the spending into the future quarters? Or do you think the promo headwind will be less than you originally expected? I think, Rob, certainly, in Q1, I think the -- as I said, I think the execution and the growth certainly supported a lower rate than that. And I think as you look forward, I've not made a big adjustment to any out-quarter outlook. I think, again, as we navigate through this environment, we're trying to make sure we stay as pragmatic as we can. And as I think about it, what are the things that we're watching very closely, it does revolve around that consumer resilience and the continued overall value proposition. And so I haven't changed much of the outlook for the balance of the year, but I would acknowledge Q1 certainly was better than I might have originally expected. Well, I mean one, the top line was better, and that helps. I think there also as we as you go through, as you might remember, we were in the midst of executing a fairly significant Wave 3 pricing. And I think as you kind of go through that process, you've always got assumptions that as you execute, you may need a little less promotion in one area, maybe a little bit more effective in another area. Competition or price gaps may be a little different than what you anticipated. And so there's always a bit of agility that goes into this. And actually, this is a muscle that I would say historically may not have been as strong as it is today. And so kind of making some of those decisions in real time is very much an important part of the tool bag right now. And so I think that combination of elements really kind of led to what I would say is a better kind of on paper, if you will, lower bps of spending than what we might have anticipated.
EarningCall_1913	Good morning and welcome to the Designer Brands Incorporated third quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After todayâs presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended October 29, 2022 to the 13-week period ended October 30, 2021. Please note that remarks made about the future expectations, plans and prospects of the company constitute forward-looking statements. Results may differ materially due to various factors listed in todayâs press release and the companyâs public filings with the SEC. The company assumes no obligation to update any forward-looking statements. We posted another consecutive quarter of solid results and made material progress on our brand-building journey. We ended the quarter with comparable sales up 3% compared to the third quarter of 2021, which was on top of strong comp net sales growth last year of 41%. We are incredibly proud of these results as we lapped a record third quarter in 2021 and invite you to review our earnings infographic on our Investor Relations site that highlights some of these accomplishments. Notably, we made tangible progress against our long term plan of doubling sales of our own brands by 2026, while also maintaining our sales levels of national brands as we continue to strengthen relationships with our top partners. As you know, our owned brand strategy will continue to be the key driver of our growth over the next five years as we have the unique ability to intimately understand our customers so we can design, source and sell the products they love. Weâre excited to share that in the third quarter, owned brand sales grew 25% compared to the same period last year. Our direct-to-consumer sales through our retail stores and websites delivered a 33% increase to last year and wholesale distribution also grew at 8%. What makes this even more impressive, this growth is coming at a time when the industry is flooded with inventory. While we see this inventory pressure across the industry, our ability to self-liquidate excess product through our own retail clearance section is a key differentiator of our unique business model that gives us confidence in our ability to continue to build our own brandsâ penetration and extract as much margin as possible along the way. Doug will dive more into our owned brand strategy in just a few moments. As weâve been transforming into a brand builder, weâve been making strategic investments in talent and experience. To that end, over the last two years we have created new positions and teams inside of Designer Brands, including a chief supply chain and sourcing office, brand-level leadership, and international sourcing groups in new parts of the world. Additionally, we just announced last week the appointment of two new board members: Rich Paul, CEO and Founder of Klutch Sports Group, the powerhouse agency representing some of the biggest athletes across major professional sports, and Tami Fersko, Chief Operations and Supply Chain Manager of Centric Brands, a leading global lifestyle brand collective, who brings strong leadership in this space, including past executive roles at sourcing and branding leaders, Li & Fung and The Jones Group. Both Rich and Tami bring extensive brand-building expertise and knowledge of the footwear industry, and we look forward to their input on our strategy. As weâve been calling out since the introduction of our initial fiscal 2022 guidance, the third quarter was planned to be the quarter in which our strategic efforts to bring back our clearance shopper were expected to be running on all cylinders, and Iâm happy to report we were wildly successful. Our clearance sales were up 28% compared to the third quarter of 2021. We were pleased to see this critical part of our business model return to full strength, especially at a time when the industry faces large inventory challenges and more consumers are looking to cut back on discretionary spending. Given the material success we have had in growing our own brands and given the structural changes we have made in our overall retail business, we have seen our gross margin rates materially and substantially improve from legacy levels, and while we will always be subject to the impacts of macro conditions and consumer sentiment, these structural changes should keep our margin profile consistently above legacy levels we delivered in 2019 and prior. In the third quarter specifically, we saw some of those pressures take hold. First, many of the largest footwear industry players, especially athletic brands, are massively over-inventoried and have become very aggressive in their own D2C businesses, including exact styles we carry in our retail assortments. We noted last quarter that this was an area of potential risk as the effects of competitors lowering price impacts the entire industry. Additionally, as youâve heard many other brands and big box retailers discuss, we saw a drop in discretionary demand starting in the last two weeks of October. This drop came on very suddenly and appears to be widespread and continuing across much of the consumer market. With these impacts, we are returning back to a range within our original 2022 EPS guidance. Our revised guidance still includes mid single-digit retail comp sales growth and full-year adjusted EPS in the range of $1.75 to $1.80. This still puts our EPS significantly above 2019 given our structurally improved gross margin profile. Jared will go into more details around some of the numbers and efforts we are implementing across the business to minimize the impact of this uncertainty as much as possible. In closing, I want to take this opportunity to thank our associates for remaining nimble and continuing to support designer brands. Thank you Roger, and good morning everyone. I want to talk first about the incredibly exciting developments and milestones we achieved in this third quarter. Our journey as a brand-builder is continuing at an exciting clip and we continued to deliver against our long term strategy of doubling owned brandsâ net sales by 2026 and maintaining national brands. Designer Brandsâ strategic differentiator is the unique synergies between the brands we build and our best-in-class retail infrastructure. We have a unique ability to connect with our customers and identify their needs and present them with the widest assortment of brands they love across a highly developed and in-place omni infrastructure. In the quarter, our owned brands represented 27% of DBI revenue compared to 22% in the third quarter last year. This puts us well on our way to our goal of making our owned brands approximately one-third of our total revenue by 2026. That is a huge accomplishment on our path to elevating DBIâs status as a brand builder. I want to specifically highlight two of these owned brands and some exciting progress that weâve made in the quarter. We are very enthusiastic about the momentum we are seeing with Crown Vintage, a brand that is vintage-inspired at its core and free-spirited in its [indiscernible], with shoes and accessories that invite customers to embrace their individuality. In the quarter, we launched a collaboration partnership with Emma Roberts for our Crown Vintage brand which included a robust marketing campaign across national and social media channels. This campaign received over 6 billion press impressions and 120 million social media impressions and was the strongest social celebrity content we have ever had. You can see some of the beautiful campaign imagery on our Q3 2022 infographic. As part of this launch, we hosted pop-up shops in both Los Angeles and Nashville that generated over 1 billion impressions, including 25 million organic social media impressions. Crown Vintage searches on Google have been up significantly with index scores trending up over last year in the same period by 43%, indicating the consumer interest weâre generating beyond DSW channels. Additionally, as we move through the fall and winter, we are proud that Crown Vintage was the number one demanded brand in womenâs boots at DSW during Sept-ober and can sit comfortably in the neighborhood with other brand partners such as Ugg, Lucky Brand, and Vince Camuto. Similar, Kelly & Katie met some incredible milestones in the past few months. In the third quarter, Kelly & Katie grew in the triple digits as it continues to resonate with our customers and in fact was one of our top three brands sold at DSW with two styles in the top 10 styles at DSW for the third quarter. We are excited about the progress we are making in our owned brandsâ portfolio and look forward to continuing our brand-building journey with the official launch of our first athleisure brand, Le TIGRE. You can expect more exciting upcoming announcements in the near future. We continue to hold true to our goal of having the best possible assortment available both in stores and online, which is allowing us to attract a broader customer base. Specifically as it relates to clearance, we have reactivated 2 million shoppers who had not shopped with us since the pandemic due to our lack of clearance product. At DBI, we have a longstanding history of rich customer data. We know how to best leverage that data to design and market to our customers in effective ways to meet them with the products they demand the way they want to engage. Our Warehouse Reimagined store in Houston is another example of how we are meeting our customersâ needs across the board. We have received overwhelmingly positive feedback from customers relative to how light and bright the store feels, with customers describing the store as warm and welcoming with a better shopping experience. Our Warehouse Reimagined store allows for increased capacity in smaller square footage which has resulted in a double-digit sales productivity increase. The expanded kids section has also increased customer engagement. Also, brand new to our shopping experience, we have listened to our customer and have launched Scan and Go self checkout at this location. Customers have responded and we have seen nearly a third of transactions run through these kiosks. Intimately knowing our customer and regularly speaking with them is such a vitally important tool for us as we continuously evolve our brands and our shopping experience, and is a massive competitive advantage for all parts of Designers Brandsâ business. Turning to the seasonal focus in the third quarter, we mentioned on our last earnings call our increased attention to back-to-school during the third quarter as we lean into this newest season for DBI, which we only started capitalizing on in earnest in 2021. Overall demand increased 4% on top of a 2% increase last year compared to 2019, and we were especially pleased with our kids business that delivered a 2% increase in sales on top of a 40% increase last year compared to 2019. Let me turn to Sept-ober, which as you all know is an incredibly important season for us. Our owned brands performed exceptionally well during this time period. In our womenâs boots category, five of the top 10 brands sold were owned brands with Crown Vintage holding the spot as the number one demanded brand during Sept-ober, as was mentioned earlier. Additionally, those five womenâs boots brands posted 28% growth compared to the same period last year. We did see some unplanned softness in the rest of our assortment as temperatures were much warmer than normal across most of the Sept-ober period. Additionally as Roger referenced, we saw a sudden drop-off in consumer traffic and demand that most of the consumer discretionary market saw starting in the back half of October. If we look to historical builds for the balance of the year and apply that trend to where we ended October, we feel there is pressure to the original plan for Q4. This coupled with the continued massively competitive promotional posture of the branded athletic business right now is what is giving us reason to be cautious and bring down balance of year expectations. Before I pass it over to Jared, I want to thank the team for their hard work throughout the quarter. I was really impressed with how the team stepped up time and time again to read, react and adapt as necessary. Thank you Doug, and good morning everyone. Please note that the financial results that we will reference during the remainder of todayâs call excludes certain adjustments recorded under GAAP unless specific otherwise. For a complete reconciliation of GAAP to adjusted earnings, please reference our press release. I want to echo Roger and Dougâs comments around the pride we have in our third quarter results. We delivered on our strategic goals of owned brand growth and the reestablishment of our critically important clearance business and customer while also seeing the fruits of our change and diversified business model come to bear. We put up numbers that demonstrated the power of this evolved Designer Brands, and I couldnât be prouder of what the teams continue to accomplish. Letâs first review our results. For the third quarter, sales increased 1.4% to $865 million compared to the same quarter of 2021. For the third quarter, total comps were up 3% on top of a strong 40.8% comp last year. Within this growth, we saw positive sales across all of our segments. U.S. retail comps for the third quarter were up 1.1% compared to up 43.9% in the prior year. [Indiscernible] comps were up 27% compared to a gain of 50.4% in the prior year, and Canada continues to see strong growth and posted comps of 18.8% for the quarter on top of 15.2% in the same quarter of 2021. Gross profit for the quarter was $285.8 million. As planned and as previously communicated, our consolidated gross profit rate for the quarter decreased to last year as we strategically and intentionally reestablished our clearance business and won back that lapsed clearance shopper, while coming in meaningfully above 2019 given the structural changes weâve made in our business. Our gross profit rate for the quarter came in at 33%, 370 basis points above 2019âs rate of 29.3%. In the third quarter, consolidated adjusted SG&A was $221 million. Given our sales increase and the expense mitigation tactics we implemented as soon as we saw some of the macro pressures surface, we were able to hold our adjusted SG&A ratio relatively in line with last year at 25.5% of sales in the third quarter, compared to 25.1% of sales last year. Adjusted operating profit in the third quarter was $67.1 million and 7.8% of sales, 340 basis points above 2019âs operating profit rate. We had $4.8 million of net interest expense during the third quarter compared to $7.7 million in the prior year. Our effective tax rate on adjusted results was 25.9% in the third quarter. Third quarter adjusted net income was $46.1 million or $0.67 per diluted share. Turning to our inventory, we ended the third quarter with inventories of $681.8 million compared to $602.1 million last year. As planned and as previously communicated, we continued to decline in our inventory comp versus last year and expect for this to continue as we round out the year. Inventory levels were elevated at the end of the second quarter and we flagged they would be coming down throughout the year; accordingly, we ended the quarter with retail inventories up 14% on a square footage basis compared to the third quarter of 2021, materially down from up 33% at the end of the second quarter. We expect to end the year much closer to last yearâs inventory levels. Unlike other large brands who have had to turn to liquidators as part of their solution to slow moving inventory, we have a self-liquidating machine through our DSW clearance business that allows us to perform better than others when needing to clear through inventory. As a brand-builder, this is a massive differentiator to our model and is why we needed to reestablish our clearance business, which we did. Importantly as we move into the fourth quarter, our liquidity position remains strong. During the quarter, we repurchased 1.3 million shares. Repurchases year-to-date through Q3 were 10.7 million, which is equivalent to roughly 15% of our 73 million shares outstanding at the beginning of the year. We ended the quarter with $62.5 million of cash in our total liquidity, which includes cash and availability under our revolver with $193.4 million. We had $130.9 million available to draw on our revolving credit facility. In addition, we are pleased to share that we received $120 million of the $160 million CARES Act tax refund due to us from the IRS in November, which was immediately used to pay down debt, and we ended November with well over $300 million of total liquidity. We continue to await the receipt of the remaining $40 million which we expect as soon as the standard audits of the applicable prior tax years conclude. As mentioned, we could not be more pleased with the success weâve had with our strategic initiatives, however macro pressures, including a constrained consumer and an excess of inventory in the industry resulted in a drop in demand in the last two weeks of October. We expect similar dynamics to persist and therefore we feel it is prudent to revise our full year guidance. Given the challenging macro environment, we continue to closely manage our business and our costs in a strategic and effective manner. We are cutting investments where prudent in the near term to better assess the longevity of this macro pressure, but also want to remain cognizant of the critical growth we want to continue in our owned brands business and retaining our top talent in this hyper competitive labor market. With all of this as a backdrop, we are revising our full year guidance as follows. Retail comp sales growth is still anticipated to come in in the mid single digits, but is now projected at the lower end of that range. Non-DBI wholesale growth is expected to be 20% to 30% over last year and adjusted EPS is now expected to be $1.75 to $1.80 for the full year, actually squarely in line with our initial 2022 guidance of $1.75 to $1.85 we issued at the beginning of the year. We continue to be very proud of the structural changes we have made in our business that allow us to better perform even when these macro pressures arise. As a comparison, 2019 saw sales actually a bit higher for total DBI than what this revised guidance would imply, but adjusted EPS in 2019 was only $1.47. With the meaningful growth in our owned brands sales, the growth in athletic and top 50 national brands which require less discounting, and our digitally focused and targeted approach to marketing at our retail business replacing the broad-based direct mail discounts of the past, we continue to see sustained leverage in our gross profit rate versus 2019. This sustained margin profile change, along with our more strategically diversified revenue or profit streams across more meaningful business segments keeps me excited about what this means for Designer Brands as we move past these macro issues and continue to make meaningful progress towards our long term strategic plans. As we navigate this challenging environment, we will continue to lean on our strategic pillars, being adaptable, nimble and utilizing our D2C infrastructure to move inventory and grow owned brands. Great, thank you so much. Roger, if you could just talk about the change that youâve seen in the competitive environment and consumer behavior into the fourth quarter. Maybe just tell us a little bit more about the gross margin change in 4Q thatâs leading to the change in the guidance for the full year and what you expect in the fourth quarter relative to the third quarter. Do you think the fourth quarter will be a little bit more competitive than what youâve seen so far or do you see them about the same, or do you see it maybe getting a little bit better? Thank you so much. Thanks Jay. I think there are two major macro trends that weâve experienced throughout Q3 that we are clearly, I think with our guidance, showing that thatâs our expectation, that these trends will continue into Q4, and that is when you look at how the consumer is responding, they are looking for value, and obviously inflation has been a big driver of that. Doug can talk to this, but our DSW clearance business, which was planned to be up in a material way, it posted a 28% comp. The customer is voting that they want value pass, so thatâs number. Then the second one is just the amount of excess inventory that we see - again, whatâs out in the market and the amount of items being sold into the secondary goods market, and obviously you know we play there and try and sell things to some of those people, and when you see what offers are being given on product you have, itâs clear there is excess inventory. Iâm not quoting, Iâm directionally from the things that we get, when you look at the three big athletic players, the swoosh folks up over 60%, Skechers up over 40%, Adidas up over 50% in inventory, those goods are being pumped into the market and with their direct-to-consumer plays, that puts pressure on that athletic category in particular. Those are the two big things that we have seen happen, and we donât see that slowing down as we go through Q4. Got it, and then maybe if you can just talk about this, the slowdown that happened in the second half of October and the first half of November, thereâs some discussion if it was weather related, maybe the election was distracting to people, perhaps the compares were pretty tough from last year because of the pull-forward that happened because of supply chain issues and of omicron. Do you think thatâs really the reason that weâve seen the slowdown, or is it more the consumer is weakening because of inflation? Where do you stand on that? You know, we donât really allow our team to talk about weather, but whenever you look at how our business performed, and our sandal business was really strong in Q3, boots achieved our goals but it was still a negative comp for the quarter, so. You know, our sandal business was really good, so there was some weather but at the end of the day, it comes back to those two things I mentioned. The customer is clearly voting they are looking for value, and we are seeing it in what theyâre buying from us; and then the second piece is there is just a lot of inventory thatâs out in the market that is, frankly, competitive because those brands are competing with us through their D2C channels. Just wanted to circle back to that clearance customer again, thatâs been coming back into your stores. Just curious if you can dig into how thatâs impacting traffic and units per transaction. Thank you. Yes, hi Gabby, this is Doug. Again, we had talked about the fact that this was an opportunity for us, obviously, with regards to regaining that clearance customer back, and as we said in the transcript, we had a 28% increase in clearance sales in the quarter, so again thatâs actually a model that we can lean into. We definitely saw that accelerating as we moved throughout the quarter, so to Rogerâs point, customers are definitely migrating more towards value, so thereâs favorability obviously in our model with regards to the clearance customer. Then the other thing that is a key differentiator, which I couldnât be more proud of, is the results that we had with our owned brands. Obviously those connote significant value and those generated 22% of our overall volume at DSW in the quarter, and it was over a 30% increase, so those two factors we believe are going to be differentiators for us as we move forward, because again the customer is clearly focusing on value. Gabby, this is Roger. I think even to Jayâs question, if you think about what it is we do and how we respond to this, as Doug said, the big thing for us is lean into that clearance prop. Knowing that our customer comes to us, thatâs sort of rooted in who we are from day one, I think itâs one more opportunity for us to pivot assortment and our thinking and leverage that as a way to compete and grow share, and then obviously leveraging all of our owned brands, especially the ones that are exclusive to DSW, is a way to continue to pass value to the customer. To Dougâs point in the script, where weâre talking about our owned brands growing at 25% year-over-year, thatâs just remarkable, and thatâs been our game plan for the last three years and itâs continuing to work. But the competitive landscape is different, and weâre going to keep leaning into those things that weâve been doing now for the last three years. Got it. I just had a quick follow-up. I was wondering if you can discuss how youâre planning maybe your brand portfolio outside of DSW over the next couple quarters as weâre continuing to see retailers plan inventory pretty conservatively for next year. Yes, I donât want to get into the forward-facing view until we give you some guidance for next year, but what we do know is that if youâre more conservative in your inventory plan, you always have the ability to chase upside. Right now, weâre dealing with the pain of the industry being over-inventoried, and we will not let that happen. I think we have a history and tradition of managing our inventories in a pretty tight manner, and thatâs our approach as we move forward, is we will be much more conservative, I would say, in how weâre approaching our inventory positions specifically as we look at what weâre going to sell outside of our core DSW business and Shoe Company businesses. This concludes our question and answer session. I would like to turn the conference back over to Roger Rawlins for any closing remarks. Thanks everybody for listening in - I know we have a lot of associates, and I just want to recap. If you think about the big things you accomplished this quarter of growing your top line by 3%, and thatâs on top of--remember, last year we grew our business by 41%, so thereâs not a lot of folks I see out there in our space that had those kind of results for the third quarter. You grew our owned brands, meaning the things that we own and control, by 25%, and penetrated at 27% versus 22% last year - remarkable. Then you add into that our direct-to-consumer channels that grew by 33%, our gross margin rate up 370 BPs to where we were in 2019, and then just the amazing progress that Mary Jo and Nancy and the whole team up in Canada have demonstrated, growing 19% and grabbing huge market share. The strategies weâve put in place over the last four or five years are working, and just keep doing what youâre doing and I canât thank you enough. I hope everybody has a fantastic holiday. Talk to you soon. Thank you.
EarningCall_1914	Good day, ladies and gentlemen, and welcome to the Naspers and Prosus Interim Results Presentation. [Operator Instructions]. I'd like to turn the conference over to the CEO, Mr. Bob van Dijk. Please go ahead. I just want to make sure you can hear also right because we had some audio issues. Operator, can you hear us all right? All right. Thank you, and thanks, everybody, for joining the call today. I'll be relatively brief with my remarks today because we will provide an in-depth look at our business when we get together for Capital Markets Day on December the 6th. Vasileios will come off to me and will discuss our financial performance -- and then after that, I have the rest of my management team on the lines as well, so you can ask them any questions that you will have. So let's start on Slide 5 with the key highlights of a tough but successful year. And we navigated a quite volatile environment. So we drove solid execution with a strong balance sheet, which actually got progressively stronger through the period. So first, we delivered a strong set of results with just over 40% revenue growth across our e-commerce business. Second, times have fundamentally changed, and we are adapting quickly. As we told you we would, we invested in the future growth of our business during the period. This is fundamentally the right thing to do for the long-term health of those businesses. Now that we have achieved scale across our portfolio, we will accelerate the path to profitability while maintaining our leading competitive positions. So my ambition is for the consolidated e-commerce portfolio to reach profitability in H1 of financial year 2025. And this will require us to rethink priorities and adjust our investments accordingly. Third, we launched an open-ended buyback program that is unlocking tremendous value and I'll speak more about it shortly. Fourth, our financial position remains excellent. So we sit in a net cash position with plenty of liquidity, and we have very attractive rates on our debt. And I believe this will be a strategic advantage for us, while many others may face funding issues. Finally, we continue to make significant progress on our sustainability initiatives, which are core to our strategy. Now let's turn to Slide 5. It's one... Ladies and gentlemen, please hold. We are just reconnecting the presenters on a different line. Please hold. You can continue on the slide, please sir. All right. Sorry, folks. We had some audio issues here. Let me start again from Slide 6. Slide 6 is one that you've probably seen before, but it's worth repeating because it's really foundational to what you should expect from us as a group. So we have a unique portfolio of consumer Internet businesses that are led by great entrepreneurs and great leaders. And some we own and operate like OLX, like iFood, PayU and some our associates like Tencent or Delivery Hero. And in volatile times like this where the market struggles to form a consistent view on valuation. Our position as an operator as well as an investor is actually increasingly an important advantage. We have a strong track record of identifying opportunities at an early stage and then scaling that opportunity into really valuable and sustainable businesses. And going forward, as we drive our business to profitability, we will also be more structurally focused on how we best crystallize value and do this in a systematic and in a repeatable way. We are focused on growing net asset value per share. And as valuations have dropped globally, we have progressively repurchased shares. I'm very comfortable continuing to do this as long as our assets trade at a significant discount. The discount has created a unique opportunity for the group to leverage its returns in a low risk way. Longer term, we have grown our net asset value from a net invested capital base of around $15 billion to over $127 billion, and I'm confident we will continue to create and crystallize even more value over time. Now if we turn to Slide 7, you will see strong execution across our segments with each delivering between 30% and 64% growth. And this is despite tough year-on-year comparisons and a clearly weaker macro backdrop. Support to all of this is leveraging our online platforms to make off-line transactions more efficient, and we're building deeper ecosystems around our core products. All our large classified markets now operate fully integrated vertical service in real estate and autos. And in addition, we have well-established pay and ship options. This takes us beyond the position of facilitator and right into the heart of the transaction and recorded over 100,000 auto transactions in the last 6 months. We made similar progress in food delivery, where iFood and Swiggy are expanding beyond rents from delivery into groceries and convenience. And this helped our portfolio to drive $4.5 billion of GMV for more than 400 million orders in the first half. So our payments and ad tech teams are also making excellent progress showing revenue growth of 57% and 30%, respectively, with a clear strategy for scale and profitability. As I mentioned a bit earlier, we are adapting to a changing macro environment. And you can see here on Slide 8 that we have prioritized balance sheet strength and investments in our own business and stock over external M&A. So first, we deployed less capital overall, and we evolved our approach towards increased organic investments in areas of our business with highest potential, notably Autos, at OLX convenience and food and credit in payments. We will continue to look at all external opportunities, but the bar is high, and it will require great conviction and lower risk. And actually, a good example of this is our purchase of the remaining 33% of iFood. So I'm really confident this will generate an exceptional return. And as you can see from today's results, iFood is firing on all cylinders. And finally, we are investing in Tencent and the rest of our businesses by buying back our stock every day, and this is constantly enhancing our net asset value per share. Now we get often asked what we are investing in. And Slide 9 gives more detail on the specifics of this investment. So at the Capital Markets Day, we will dive into each of these initiatives in greater detail. So today, I'll just make 3 important points. So first, the investment is mainly in businesses we own and operate, which is where we have strategic control and the ability to calibrate spend. Second, in the past years, we invested to ramp up customer... I'm sorry about the -- we're having some real connectivity issues here in Capetown. We'll try to get a fix, hope it works now. So I think I just lost you at Slide 8 where we are. I think it's worth repeating actually investing in Tencent and the rest of our business by buying back our stock every day. And I'm sure you noticed, but this is actually constantly enhancing our net asset value per share. Now we move to Slide 9, we often get asked what we're investing in. And Slide 9 gives more detail on the specifics of this investment. And at the Capital Markets Day, we will dive into each of these initiatives in greater detail. So today, I'll just make 3 important points. So first, the investment is mainly in businesses we own and operate, which is where we have strategic control and the ability to calibrate spend. Second, in the past year, we invested to ramp up customer adoption to relatively underpenetrated markets. So that means that we invest in branding, we invest in incentives. We invest, for example, in marketing, in our Indian credit business. We also have been setting up new dark stores at iFood and new inspection centers at OLX Autos. But as these businesses are gaining traction, you will see operating leverage. And in cases where we're not successful, we'll make sure that costs will rapidly be cut. But either way, we see a clear cost to significantly lower spend over the next couple of years. Third, you can see we're generating great traction from this investment. So OLX Autos have seen revenues tripled over the last 2 years. PayU grew its credit revenues by close to 3x and iFood has more than doubled GMV on convenience orders. So as I mentioned earlier, I believe repurchasing our own stock is a great use of our capital right now, and you should expect the buyback program to continue for the foreseeable future. And Slide 10 shows you why. So each day, and you probably noticed that each day, we sell a small amount of Tencent shares and immediately buy Tencent, but also our own e-commerce assets back at effectively at 40% discount. That significantly improves our net added value per share and creates permanent value, which will compound over time. So to date, we've invested $5.8 billion buying back shares. And Prosus has sold 4% of its NAV and at the same time, reduced its economic share down by 7%, that results in a 3% net per share uplift so far. It's a good start, and as long as the discount remains elevated, the impact will increase cumulatively as we have shown on the left-hand chart. We are on pace to invest about $13 billion by June 2023, and that would bring the accretion to 7% for the first 12 months. And if we win the program at the same pace and discount level for another 24 months, the accretion will be close to 25%. Another important benefit is when conditions eventually approve when we start to grow NAV again, then the enhancement will be even greater. So on the right-hand side, we show that if our portfolio generated a 20% IRR for the next 3 years, the buyback program would enhance this to over 29% as we are reducing the share count at a faster pace than the NAV. Now finally, before I close off on the share repurchase program, I want to be crystal clear on one thing. So 100% of the value created by this program is from us arbitraging the value of our assets against our market capitalization. The bigger the discount, the bigger the benefit, and it has nothing to do with Tencent's prevailing valuation as we sell and buy almost simultaneously. In fact, the key benefit is that to date, we have increased our exposure to Tencent by 1.4 on a per share basis, as you can see in Slide 11. So Tencent is a phenomenal business. It has a unique position in the China Internet landscape. Has been led by a world-class leadership team and has a proven track record of operating through all types of environments. And from our perspective, we remain absolutely committed to being a very large shareholder for a long time, and we see still tremendous upside potential over the long term. On November 16, Tencent announced it will distribute Meituan shares to its shareholders in March in next year. When we receive these shares, we'll consider them as held for sale, and we will evaluate market conditions, timing and pricing to optimize value for our shareholders to any transaction. Now in summary, I'm confident with our execution in a difficult environment and the steps we take is actually get the company ready for better times ahead. In summary I'm confident with our execution in a difficult environment and the steps we take is actually get the company ready for better times ahead. And if Tencent remains grounded and we are confident that it will. The process should benefit in an accelerated fashion and there's basically 4 initiatives that underlie that become drivers of our valuation. So first, the compounding effects and the continuation of the share repurchase program; second, a consistently improving profitability profile of our e-commerce portfolio while maintaining our sale and competitive position; number 3, the crystallization of assets over time and 4 further simplification of the group's structure over time. So that's where I'll finish. I hope the call will be more stable from here, and I'll turn it over to Vasileios. Thank you, Bob. Hello, everyone, and thanks for joining us today. It's pleased for us to discuss. So I'm going to get right into it. On Slide 13, you'll see the highlights of the 6 months financial performance. First, I call up a stellar growth of 41% year-on-year of our e-commerce businesses. This is differentiated, given the macro backdrop. It delivers increasing scale in the e-commerce extensions, we are investing to build and progress their path to profitability. Our reported results and growth were materially impacted by negative foreign currency translation. Its impact on revenue was quite significant, 7% or $1.2 billion, but less renounced at 3% or $93 million for trading profit. To get a true operating view of the results, our speed to organic growth, excluding foreign exchange and M&A. Group revenue measured on an economic interest basis grew 9% to $16.5 billion. The strong e-commerce growth of 41% was offset by lower growth from Tencent. We too were not spared the impact of the sharp market connection, and we had to record impairments of $1.5 billion on our listed assets and a few private investments, too. Impairments are excluded from core headline earnings and trading profit. We remain confident in the long-term potential of Delivery Hero and other listed investees. Group trading profit of $1.4 billion and lower core headline earnings capture a reduction in caps and profits, the investment in the new e-commerce extensions and higher losses from e-commerce associates. Investment was primarily to scale and newer extensions in e-commerce subsidiaries. They are autos in classified, convenience in food delivery and retail and then credit in PayU. The fast growth is evidence of the rapid path to reaching the financial scale. As they scale further, our focus and attention is on delivering an accelerated path to profitability. We are prioritizing the strongest opportunities and taking action fast where things don't work. We are also very focused on driving efficiencies and cost reductions in our core consolidated businesses and driving margin expansion there. The benefits of these measures will be seen in the second half of this year and beyond. Finally, our balance sheet remains strong with an excellent liquidity, which is another significant strength given the broader market backdrop. Slide 14 shows an e-commerce revenue growth of 41%, which is significant given the market context and the scale base that we've already built over the years. Etail was the only business to decline year-over-year, pressured by a challenging macro environment in Eastern Europe as a result of the war in Ukraine. eMAG is scaling new initiatives to return the business to growth, while simultaneously driving efficiencies to limit the impact of the macro environment on its profitability. Turning to Slide 15. We break out the numbers -- the consolidated revenue and revenue from associates. Both sets grew nicely during the period. Consolidated revenue grew 33%, tempered by eMAG, as I mentioned earlier. Excluding eMAG, though, consolidated revenue grew by a very strong 55% year-on-year. On Slide 16, you can see the increased organic investment in our consolidated businesses and the higher losses in the associates. Very important to understand that the cash needs of our business are only on the consolidated businesses. Associates and investees take care of their own funding via fund raisers. The consolidated trading losses increased by $209 million to $449 million. This increase is driven by investment in the earlier stage e-commerce growth expenses on autos, credit and convenience delivery. The extensions account for $483 million of the consolidated loss, which means that our consolidated core businesses are, therefore, profitable in the aggregate. These extensions were all nascent businesses just a year ago and required investment to scale. They offer significant promise. They're growing very fast and with that driving operating leverage. We are tracking capital to the best opportunities. Stepping back from the individual points, I'd like to conclude my comments on this slide by emphasizing that our financial flexibility, particularly during these times is differentiated. Continued growth and cost action will yield benefits, which you will see in the second half of this year and in subsequent reports. Now let's turn to each segment. Our focus on the consolidated businesses, which we directly manage. Lets start with food delivery and iFood on Slide 17. iFood in Brazil continues to scale and is delivering profitable growth in the core and a significantly improved margin. Revenue grew 39% as orders grew 14% to more than 400 million orders. This order growth and the higher average order value grew the GMV by 23% to $4.5 billion. This is healthy growth and more notable for the fact that we're lapping COVID-19 tailwinds last year. Trading losses dropped by $38 million to $70 million as the core business became meaningfully more profitable. In the core restaurant food delivery business, iFood delivered trading profit of $45 million with a trading margin of 7%. So that's an 8 percentage point improvement year-over-year. Reduced customer acquisition costs, larger and average basket sizes and the benefit of introduction of new revenue streams drove this good improvement. In convenience, iFood operates a hybrid model of grocery marketplace and quick commerce delivery. iFood's new initiatives grew orders by 153% to $46 million and GMV by 102% to $715 million. Revenue moved to $57 million as we invested to scale the business. Quick commerce now accounts for 9% of iFood's revenues, and that's essentially from lapping a year ago. Trading losses for the new initiatives increased only by $9 million to $95 million despite iFood's increase in coverage to 55 cities and delivering around $1.9 million. Scaling revenue and gross margin improvements enabled expansion of the footprint without increasing losses too much. There is still work to do to get to profitability, but we're getting there faster due to tighter investment approach. We're incredibly proud of what iFood team have achieved, and we expect significantly more shareholder value to be both in coming years. Following takeaway shareholder approval, which was obtained last week, we have subsequently concluded the 33% minority buyout of iFood. So let's turn now to Slide 18, where classified for strong growth driven by OLX Autos. The graph from this slide exclude Avito, which was a discontinued operation due to its sale in October 2022 for $2.4 billion. Classifieds overcame several significant challenges in the past 6 months and demonstrated healthy growth at 64% year-over-year with the revenue for consolidated segment totaling $1.2 billion. Excluding Ukraine, the core classified business grew revenues by 20% to $217 million. Trading profit of $59 million represents a 9 percentage point improvement in margin to 27%. This was driven by strong execution and by the team beginning to monetize our paying and ship initiatives. Operating metrics across our core classified business remained stable with 89 million active listings, 80 million monthly app users and 2.1 million paying listers. OLX Autos grew revenue by a very strong 84% to almost $1 billion. The business benefited from an acceleration in OLX Autos B2C and consumer financing initiatives. During the first half of the year, OLX Autos supported 18,900 average monthly transactions. And that totaled 114,000 cars sold, so up 60% year-over-year. OLX Autos is still a young business, and we're investing to scale it. Trading losses increased to $206 million as we built out our retail B2C infrastructure, scaled our consumer financing and positioned the brand in key markets and scale the tech platform. We'll go about seeding the opportunity as we're dealing with everything else in the balance of thought for manner and will increase our efforts to improve productivity, efficiency and cut costs to both a sustainable long-term business. So moving to payments and Fintech on Slide 19, where we continue to deliver growth and are seeing very positive momentum in our credit initiatives. PayU revenue grew 57% to $412 million, driven by a strong performance in the payments businesses in India and Turkey and a scaling credit business in India. Total number of transactions grew 17% year-over-year, and total payments value grew to 49%. Sorry grew by more than 49% to $46 billion. Trading profit was negatively impacted by a once-off provision of $18 million related to a Brazilian merchant facing financial difficulties. We have adopted additional controls to ensure such events don't reoccur. Excluding this provision, the business reported a trading loss of $7 million compared to a trading profit of $9 million in the prior period. This decline reflects a change in the payment mix and investment to build additional revenue streams. PayU is focused on driving future profitability by further diversifying its revenue streams and reducing costs. In credit and new initiatives, the business continued to scale quickly to reported revenue growth of 227%, which is significant and is also delivering an improved margin. We see a fairly rapid path to profitability for this business. Metrics for the business remained strong with loan issuances growing 209% to a total of $678 million on the back of robust demand for our transactional credit and personal loan products. Meanwhile, the business also expanded our preapproved base to 66 million users and 52,000 merchants. With a sharp focus on risk, delinquency rates remained low at 3.25%. Credit now accounts for 8% of total payments from FinTech revenues, up from 2% in the prior period, and we expect that to continue to scale for GAAP. So let's turn to our apex segment on Slide 20. Here, we are reinvesting to expand our offerings. Fast overflow and good habits were acquired during the first half of full year 2022. The numbers in the prior year incorporate 2 and 4 months, respectively, of operating activity. Excluding the impact of M&A and foreign exchange, edtech revenue grew 50% to $63 million, and trading losses increased to $68 million as we invested behind new products and expand to more countries. Tech overflows metrics remained very strong with an average 200,000 new registrations to its community site every month. Total bookings growth was also very strong at 53%. The business grew revenue to 33% to $45 million, driven by stack overflow for teams, which contributed 49% of total revenue for the company. This compares to 32% in the prior year. Increased investment in engineering, product development and sales and marketing initiatives mainly to stack over local teams contributed to the trading loss of $42 million. GoodHabitz revenue grew 27% to $18 million, while its geographic expansion drove the trading loss high to $11 million. The business is now focusing on these existing markets and returning to profitability. Education remains a significant and high potential sector, and we remain very excited about the potential for value creation from here. Across the group, we are managing our costs. On Slide 21, I set out some of these initiatives. The first, we're focused solely on existing investments. We're not taking on new challenges or new business models. The focus is on solidifying our positions in the markets we already have leadership in and where we see the most potential to create value. On the back of good growth, we will drive profitability and cash flow generation. Second, we are optimizing our already breakeven and profitable core businesses to grow their profits and expand their margins. We are driving efficiencies, improving productivity and reducing costs. For example, at iFood, we're driving larger basket sizes via a minimum order value, incorporating dynamic pricing for delivery fees and becoming more targeted in our discounting. Our artificial intelligence capabilities are strong and are delivering significant financial benefits for iFood, but also our other businesses. Third, while we already run the lean corporate structure, we're examining costs and have committed to reducing costs at the corporate level. Our operating units are also doing the same and reducing their costs. Fourth, we will exit underperforming businesses. We have closed operations where we believe profitable growth cannot be sustained. We've closed food delivery business in Colombia and OLX Auto businesses in Peru and Ecuador and the focus is on optimizing our more successful businesses. The folks rolling all of this up with the measures we've put in place, we expect core classifieds will sustain revenue growth and improve its profitability versus the first half. This will be different to prior years. In the past, you will recall that seasonal trends drive lower profitability in the second half of the year. This will no longer be the case. iFood's core revenue and profitability will continue to expand in the second half of the year, and the core of PayU will return to profitability in the second half of the year. And as Bob mentioned, it's our ambition to reach aggregate consolidated e-commerce profitability in the first half of the financial year ending 2025. On Slide 22, we will reflect core headline earnings, which is an indicator of the after-tax operating performance of the group as it adjusts for nonoperating items. Core headline earnings decreased for 3 reasons: First, due to lower contribution from Tencent. Secondly, due to the investment to scale e-commerce expansions; and thirdly, due to increased investment from the eComms associates. So moving to Slide 23, where we deal with free cash flow. The decline reflects the investment to scale eComms expenses. Working capital investment reflected scale credit and auto businesses that we have both. Tax paid was lower, driven mainly by lower dividend taxes as no dividends were rescued from Avito. Increased CapEx reflects investment in E-Max distribution centers in Romania and Hungary. Finally, pension remains a meaningful contributor to our cash flow with a dividend of $565 million. Our efforts to accelerate profitability and added focus on lessening working capital investment will also improve free cash flow outlook in the coming years. So moving to the balance sheet and funding of the business on Slide 24. We have a very strong balance sheet, comprising $15.8 billion in gross cash, growing a net cash position of just over $600 million. We have financial flexibility and acquisition sides well through the current climate, but also over time to capture any excellent opportunities if they appear. Announcement on November 16 delivers a sizable $5.4 billion investment in listed makeline shares around March of 2023. As Bob mentioned earlier, we intend to classify them as held for sale, and we'll evaluate our options based on market conversions to optimize value for you, our shareholders. To conclude, I'd like to leave you with the following key messages. The period to end September 2022 represented the peak of investment. Moving into the second half of the year, we expect trading losses to reduce as we realize the benefits of our initiatives and of cost reductions. The opportunity for each of our business segments is significant, and we're investing in a focused manner. We will scale the earlier-stage extension and improve margins in these and in the core businesses. Our ambition is to deliver consolidated e-commerce profitability in the first half of 2025. These actions will be a catalyst to crystallize and return value to shareholders. Our balance sheet is strong, and we are well positioned for the future. Over time, while the bar is high, we will capture any additional opportunities that might appear. Finally, as Bob underlined, we will continue with the buyback program. It has created tremendous value. It's enhancing the NAV per share, and that will compound over time. With that, I look forward to seeing you at our Capital Markets Day in just under 2 weeks' time. We'll dive more deeply into all our businesses and discuss a path to profitability. I hand back to Bob to close us off on the presentation and open the Q&A. Yes. Thanks, Vasileios. And to summarize, let's have a look at Slide 26, our key priorities. So first, we will continue to be open in the buyback to take advantage of the discount permanently unlock value for shareholders, and we're committed to reducing the discount and will continue to both NAV and NAV per share. Second, the fundamentals of our business remains strong, and we will continue to invest in a focused way to go more valuable businesses. At the same time, we've taken significant action to reduce costs across portfolio, and we have already passed the peak. So you should expect a significant improvement in the second half of next -- and in next year. Third, we have adjusted to new market realities by setting an even higher bar for M&A returns and preserving liquidity and taking all actions to manage expenses and free cash flow generation. Fourth, we will work towards simplifying the group structure over time increase life value through a transparent, predictable and releadable process. And fifth, we'll continue to drive sustainability initiatives within our businesses. I'm excited about the prospects of our strategy, and I hope we'll see many of you in 2 weeks on Capital Market Day. We'll go into a lot of the needs of the business. We'll talk about capital allocation strategy and give more information on path to profitability and talk about how we think about. With that, I think we are done with this part, and we can open up the lines for questions. I have three questions, if that's okay. The first one is really on operations. Just wanted to understand which of the verticals you expect to breakeven first. Is that okay? And if you can just remind us the key drivers -- the second question is on M&A. So obviously, the balance sheet of the company is much stronger than it was in early 2022. And it will be even stronger since you've decided to put NetOne up for sale. I wanted to understand better the potential use of cash. Are you potentially going to take advantage of lower valuations for Internet assets and accelerate M&A? And then linked to that question, do you see new verticals that could emerge in the process portfolio? Or would any additional M&A be focused around the existing verticals? Yes. Thanks, for those questions. I will have the first go, and I'm sure Vasileios will complement in a few areas. So if you look at the drive to profitability, there's a few things to mention there. I think first of all, it's around scale, right? So I think important is to remember that our core key comments business are already profitable, right? So -- or breakeven. So that's the starting point. And then we have a number of adjacent businesses that are still in the investment phase. They were small before, but they're getting actually quite sizable now. And as they scale, you will see operating leverage. And I think that's a really key ingredient for us on our path to profitability. But we're also very actively managing our cost and has a number of components. So I think if you look at our history, and I know you follow us for a while, we've typically gone and invested in many more adjacencies and other businesses around our core. And our focus is now really to stay within the footprint where we are today. So a lot of our further investment results always from branching out much further into other areas. And we're seeing now quite deliberately that we want to focus on where we are and building out these business models and seeing the operating leverage come through. Now I think the other part is that we obviously addressing cost at all levels in the group. We're focusing on seeing where we can reduce indirect expenditure. And also, we have already taken action in recent months on some business we thought were subscale, we're not going to get there. For example, Food Colombia and there is a few other small examples. So a lot of our further investment results always from branching out much further into other areas. And we're seeing now quite deliberately that we want to focus on where we are and building out these business models and seeing the operating leverage come through. Now I think the other part is that we obviously addressing cost at all levels in the group. We're focusing on seeing where we can reduce indirect expenditure. And also, we have already taken action in recent months on some business we thought were subscale, we're not going to get there. For example, Food Colombia and there is a few other small examples So if you add that all up, we start from a profitable core, we are getting operating leverage in our adjacencies and addressing cost and not branching out into further say, externalities or adjacencies, then we're confident that we are going to get there. I think the -- those actually are the same drivers across all verticals, if I think about it carefully. And where exactly you'll see the quickest impact? I think it's not that useful, but I think all of them are relatively close, that's fair to say. On the second question, Vasileios, maybe you want to have a first go I can start, and then you can come in. So what we've always done, I think, is this be very deliberate and careful on capital allocation. You shouldn't expect that to change at all, even though we have a very strong cash position. I think the bar is high for investment at this point in time. Capital is more expensive than it was before, and we have to act accordingly. So I think what you can expect from us is a good example of something that fits a high return potential, relatively low-risk opportunities on buyout of the remainder of iFood, right? And I think we did it at a price of $1.5 billion, while a year ago, the price was -- the asking price was about $3 billion. Firstly, as you flagged the very welcome news that Tencent has announced plans to distribute their Meituan stake. With the buyback at capacity, how should we think about the potential use of proceeds? Could you distribute yourself with a dividend? Or is it going to be more M&A focused? And I suppose this is particularly important considering other states like Pinduoduo and Kuaishou we could speculate could come in due course. Secondly, within the OLX Autos business, the GPU was down notably in H1. Could you talk through the reasons behind that? Was it a mix of growth? I see the prices come down a little bit. It doesn't look sufficient to drive the entire move. And then finally, perhaps a bit of a wider question on the classified space. We have a big focus on the transaction opportunity, pay and ship and digital retailing in autos. Could we get an update on how advanced you are product-wise and investment-wise, as a kind of key growth priority for the future? Well, thanks for the question. I got the first one and the third one, and I'm going to ask Eoin to answer your third question, if that's okay. But would you mind speaking a little bit louder and repeating the second question because we didn't get it. Sure. Absolutely. Within the OLX Autos business, the GPU contracted sharply in the first half of the year. Could you talk through the reasons behind that? And was it the mix of growth? Was it pricing? Could you just kind of update the factors at play. Now I heard it. I didn't quite get it, but I think that question will also be for Romain. Let me talk a little bit about NetOne. So the decision was announced by Tencent the shares will be coming, I think, end of our first quarter or first calendar quarter. I think what we said today is that we hold those shares as an asset for sale, and we will look for the best way to find and crystallize value for our shareholders over time. And no, we have not announced any specific purpose for what we might do with it. Eoin would you mind having a go at the 2 other questions. Thank you. Sorry, I dropped. Are you done, Bob, I address the second question. GPPU has decreased this first semester versus last year. There are 3 main reasons for that decrease. One is mix of countries where -- the mix of countries have been de favorable. We used to have a bigger U.S. business. And as our other business grew more strongly and because our business is where we have lower margin, we have a negative mix effect on our GPPU margin. That is one reason. The second one is that you've seen the ISP upticking slightly in U.S. dollars. And finally, I would say FY '22 was an exceptional year, and we called it out last year, and that has been through the entire industry. So we had much higher ISPs and actually much higher margin. And what we're seeing in this first part of the year, and we expect that to continue probably in the second part of the year is a lower ISP and a contraction of demand, which put pressure on our margins. So if you put all of that together, that would explain this GPPU decrease year-over-year. The third question you had was around classified, and there was a question around transaction chip and our product, how do we -- how we were progressing on products. So let me address first PMC because that's a strategic enabler of our classified business and an amazing opportunity for us to access a larger profit pool and revenue pool. So I'm very pleased to report that PMC been showing very strong progress and both progresses, we are measuring against 2 criteria. One is, obviously, the number of transactions we're able to conduct every month, and we are now at a stage where we conduct 2 million transactions through our PMC network every month, which is a 65% increase year-over-year, which is quite impressive. The second thing I'll say, when it comes to transaction is that when we look at the number of our customers who are actually using PMC now in the category where it's eligible, we have now one customer out of 2 choosing PMC as the way to get their product home. That option rate in such a short time frame. Lastly, we made your success on unit economics. It is critical for us that we can deliver that product at a positive unit economics and positive margin. And I'm also very happy to report that we've done strong progress year-over-year, still working towards being profitable, but already have been able to triple the level of monetization and reduce our losses by 2 in percentage of our revenue. So very strong progress on improving our unit economics on PMC. Product wise, it's a very long discussion, but I'll summarize maybe in 1 or 2 sentence. As our products are becoming more technology enabled, as our customers asking for more services and more category-specific products. We are, as the rest of industry face with the need to develop more and more tailored products to our customers. As we do so, it is critical for us to make sure we leverage the scale of single platforms. We are making our tech evolve into a single platform. You might recall, we already have a single platform on auto. We're also creating a single platform for PMC across our 3 countries where we operate. So we have a unified single platform for PMC, which creates a tremendous leverage when it comes to pricing automation and experimentation. We are also very much advanced, if not almost there on creating a single platform for real estate and on the way of doing it for our auto vertical business. So you can see about on the product side, we are creating the technology that enable us to ship and deliver more product more efficiently and be for scale. I'll stop there because it's a very long topic. Thank you. I also have three. Regarding the trading profit progress in economies. So we are assuming that H1 was a big loss for all call segments so that we should polysequentially improve in terms of absolute last year. And age that are going to improve more rapidly perhaps within the midterm. Why? The second question about your ambition of consolidated economic profitability in 2025. Can you please discuss what assumptions as you factor tend to grow for the next 2 years given the current macro environment? And then third, do you put up talk a little bit more about the drivers of OLX before making the core classic business for countries that type Ukraine, maybe some color diabetic would be helpful. Okay. Excellent. Thanks for that. I'll ask Romain to answer that one. I'll ask Vasileios to answer the first one, and I will take the second one. Vasileios, you want to go. Your first question was whether the trading profit improvement in the second half of the year will be across each of the segments. And the answer is yes. We're looking to drive improvements in each of the core segments. I think you asked about the pace of improvement and there, I can't give you specifics, right? So we haven't put our specific number for each. As you know, we haven't -- we don't historically give guidance. But we do expect the improvement to be meaningful across the board. And I'll try to answer your very interesting question on sort of our growth outlook for the segments in the next few years. So to be fair, I think there's a lot of uncertainty in the world today, right? So we're looking at sort of a heavily inflationary environment, an increasing rate environment, predictability is relatively low. But what I think I can say is that several of our business models have turned out to be relatively resilient for inflation. So I can ask Laurent to comment, but actually one of our most successful payer markets is Turkey, where obviously, inflation is a very significant issue in the market and has been for years now. I think also in classifieds, even if sort of there is a recessionary environment. Typically, people still need to trade, and they still need to exchange goods. So while it does leave people worse of an economy as a whole, often classifieds ends up doing quite okay in a more difficult trading environment. And maybe the third sort of directional consideration is that most of our business grow a lot faster than the economies they operate in, right? So as an example, e-commerce grew 40%, while I think the average economic growth in the markets is probably 2% in the last half year. So most of our growth comes from increased adoption, better monetization, whether the market growth plus 2% or minus 2% is usually not devastating for our growth rates. So I expect growth where it exactly pans out, it's extremely hard to say, but most of our models, I would say, are reasonably robust for inflation and sort of at least mild recession. I hope that answers your question. And then Romain, as I heard the question from Silvia was around it, can you talk not so much about the Ukraine business, but about your other key markets in your core classified business. Here just about the rate performance. You talked about in the call, I was wondering if you had any other key in on development for the other verticals in the core classified. All my apologies, but you're coming -- it's very hard to understand the question. I understand you want to understand the vertical as part of a core classified and how the profitability of both will improve. So the first thing -- so a couple of things I want to stress out first. The first thing is really stress out the improvement in profitability we are seeing in the core classified when you exclude Ukraine and associate, we moved from 18% of trading profit last year to 27%, which is a strong improvement. I would comment in general stating that we see a lot of opportunity for further improvement of our margin as we strongly focus on profitability improvement and coming both from higher monetization. We will share with you during the Capital Market Day, the fact that we are, I would say, halfway in the monetization journey in countries where we have a very strong position and are now in a great place to further monetize our platforms. At the same time, we see a lot of opportunity for operating leverage on our cost. The mix of those 2 should lead us to be able to improve at an accelerated pace, the type of profit we're seeing on coclassified and bring us to the level of higher upper side of the range of peer companies within a couple of years time frame, and 2-year time frame. Now when it comes to vertical , this is always a very complicated question because the reality of the way we operate is we really operate as an ecosystem. Customers come from horizontal cross-sell them to our vertical. They come from vertical, they end up shopping in horizontal. So the way to look at OLX in the core classified is really a set of services and assets that really fuel in travel. Now historically, I would say from a profit margin standpoint, vertical business such as specialized real estate or specialized category have historically been more profitable because it's more towards business sellers and hence is have a higher monetization pool. Now when you look at the overall profit margin and the absolute U.S. dollars, horizontal plays a very important role in delivering our bottom line profit. I would summarize by saying our vision and our strategy is that both businesses are complementary, and we look at profitability as a whole. And we believe that through better monetization, better cross-selling, stronger leverage of our operating cost and scaling of our technology on unique platforms, we will actually achieve upper end side of a range for key company profitability in core classified. Good evening, everyone. Thanks very much for the opportunity. Just 2 for me. Does your acquisition of the iFood change the way you think about funding iFood's growth? And second question, just around your ambition to reach profitability in the consolidated portfolio. Does it require material restructuring costs? And perhaps you can contextualize the answer, giving us an understanding of what it costs to close, iFood's Colombia, OLX Autos in Peru and Ecuador and restructure eMAG's Hungarian operations. And then probably embedded within that answer, if you could just give us a sense of what percentage of revenue is at risk of rationalization sale or closure in the simplification plans. Yes. Thanks for those questions. Let me start. Let me have a go at both. I think now we have full ownership of iFood. I don't think we're thinking about changing anything in the way that business is funded. We see and very encouraging to see that both the 1P and the 3P food business is now profitable. We're still investing in the grocery sector, but also there, we think we are now getting to some meaningful scale and we can get that business to profitability over a reasonable time frame as well. So I would say, all in all, that won't change and the production business is on is also such that it will not be an endless funding scenario. The second question is around the cost that would go with any sort of changes in cost reductions we would do, I don't expect them to be changing our trajectory nor actually, are we going to see a very meaningful impact on our revenue growth. And the examples that we gave Colombia and -- or Food Colombia and autos in Peru, Ecuador are tiny compared to the overall. So I don't think you should expect very significant revenue impact of it, and there may be some one-offs involved in it, but also I don't think there will be a transformation. So to get there, our plans don't involve closing down businesses to be clear, right? So we've taken the action we need to take. We've got good businesses and now it's about scaling them and driving those margin improvements and managing our costs well, and that's the path for getting there. The first one is a follow-up on the question on capital allocation. So indeed, including NetOne, you're going to end up with close to $10 billion net cash. The assets also turn to profitability and will also require less cash as well and the Tencent obviously, is a buyback is obviously studied by the Tencent selldown. So I'm just wondering, like over the medium to long term, like at what point you would consider funding your buyback partly through your own cash as opposed to selling down $0.10 -- so that's the first question. Secondly, I think, Bob, you mentioned how the confidence you still were in the auto. Could you maybe just give us a bit more color in terms of what drives the confidence? What are you seeing on the ground today in China, what makes you optimistic? What do you think the market is missing today? And the third question, it looks like you're focusing more on consolidated profit as opposed to proportionate. Obviously, Tencent, you're basically selling it down gradually. What does this mean in terms of how you're thinking about your other associates over time? Like are you aiming to do something with them, gaining control, selling them down? How should we basically be the sort of changing focus to what's consolidated. Thanks, Lisa, for those questions. So on the first one, I don't think I have a lot to add with what we said previously. Yes, we have a strong cash position. We have no intention of changing our buyback program. So I can be very clear about that. We think it's the right thing to do, and we intend to continue it, going forward. And look, we're in a period of relative uncertainty and having a strong balance sheet, we think, is a real advantage. If you don't know exactly what the world is going to do, right? So if you look back in the last few years, we picked up a lot of debt at very attractive rates, and that allows us to be in this position now. And we're very glad we did it at the time and a great complement to Vasileios and team for making the move at the time when it was possible to raise long money at very attractive rates, which now shores up our balance sheet in a very, very nice way. It's not -- as I think we mentioned on the call, we will look at the right opportunities that the bar is high, and maybe there are opportunities for us to deploy capital in something like the buyout of iFood. So that much I can say, but we'll be diligent in capital allocation, and we should be sure that we can manage the risks well in the current environment of anything we would do. Then on the second question, we're actually lucky to have Charles here who is very close to it. And if I can give Charles an opportunity to answer. Thanks very much, Bob, and thank you Lisa for your question. Yes, I think as you had and you say we stated this sort of for many years, and this continues to be true. We're very strong believers in Tencent of the business, its management team, its ability to continue to innovate to drive change and to build growth throughout its long history. We that -- nothing has changed in that at all. The -- where is this positioned in terms of particular growth opportunity that might come through would be around business services and smart industries where they have potentially a real opportunity in terms of assisting the digitization of the off-line world within China. We remain positive around particularly in international markets and global markets and in new. And then within the existing formats, such as long and short-term shortfall, there are incremental monetization opportunities, which you've also heard about. All of this is taking place in a market which we are very firm believes that China remains a massive opportunity. The management team, we've been taking actions, as you know, to position the company for a return to growth on the revenue side as the Chinese economy starts to return to growth. So we think the company is very well positioned for the future, and we remain very excited about the business. On your third question around consolidated growth. Actually, in response to feedback we've got from the analysts and shareholders asking us to speak to put together the business that we manage and operate ourselves and the ones we invest behind. And you shouldn't read into that any change in strategy. We like to invest and we like to operate and that and our intention is to continue to do so. I think what we did call out is, and I think it was in your part of the presentation Vasileios. Obviously, we have a higher degree of control over our consolidated businesses. And I think that's also why people actually asked us to look at the business in this way. Firstly, just coming back to cash usage. I know you said you raised debt on a good rate. I just wondered if that's trading at a discount, whether that's something you would consider in terms of buying back debt? Secondly, I think in your concluding remarks, you talked about simplifying the group structure as one of the opportunities you're looking at. I Just wondered if you could just give any more detail on the options you have to endeavor to do that or the level of progress you feel you're making there? And then finally, on private markets or privately owned assets, I just wondered if you could give us any color on what you've been seeing in terms of behavior from some of those businesses where you compete any markets or verticals where you've seen a notable change either to your advantage or disadvantage? Would you mind repeating your last question because I heard the beginning of it, but not the end, to make sure we answer properly. Yes, it's on sort of, I guess, privately owned businesses that you compete with across your various businesses. I just wondered if you're seeing much of a change in behavior there and whether that's had any impact or created any advantage for some of your businesses in any of your verticals or markets in particular? Okay. Yes. No, I got it. Vasileios , do you want to take the first one and you can also take the second one, or I can take it. I'll take the first and you can start with the second. I'll see if I can supplement. We worked very hard to raise that debt and we -- that is an important position for us now, right? We have this cash on the balance sheet and times are turbulent. And as we've emphasized throughout the call, right, that positions us well for the future. So right now, we have a very healthy position. Our balance sheet is strong. Our investment-grade rating is solid. So our intention is to preserve the cash and see how things pan out over the medium and longer term. And so right now, no, there's no plans to buy back bonds. Okay. So let me start on the second question. I think -- what we are thinking about as a group and actually spending a fair amount of time on is to see how we best set up the structure for the group where it can last for years and decades to come. I think it's important to stress that we want to be very considerate about doing that, make sure we think through many different aspects around us and end up with a proposal that we think our shareholders will love. Again, we're spending time on it. But we want to do this work properly and come back to you when we have something that's done on us, then will take some time. So I can't tell you any more about that than that. I think it's a good question you asked around, hey, do we see a difference in our competition, which is you often privately funded. And I would say the short answer is yes. And I think one of the reasons why we're also comfortable on setting ourselves on an accelerated path to profitability is that we see that our investments go a long way. So some of the things, we even see that the growth we've delivered now, right, which is far in excess of market growth. We're seeing indeed that some of our competitors in private markets are pulling back and are being much more careful with spend. And I expect that situation to actually continue for a while. There is -- I think the funding climate in particularly late stage, private market is still, I would say, valuation is still higher comparatively than to public markets. And I think a lot of companies are actually not attracting capital because in order valuations would come down a lot. So I think there's a real type in available funds. Ryan, you want to comment on that? That the reckoning of the private markets will happen later. It hasn't happened yet. I would just echo what Bob said, our businesses are well positioned to take advantage of hesitancy that perhaps their competitors are expressing because they need funding because they're trying to be more disciplined. So we feel good on both dimensions. We feel good in terms of our businesses embrace our current portfolio because of that and also our ability over time, you heard every one of the bar is high to perhaps pick up some good assets when prices do fall. Just one for me, but an important one, I'd like to think. On one of the slides you suggest that you're trying to look at sort of building a simpler group structure. I mean there's no complexity of the group is a topic quite often. I'm just trying to pick your brain as to what sort of options you have. The exchange offer last year obviously created a bit of an issue. I would just really open question, pick your brain as to what you think you can do and over what period. Just one for me, but an important one, I'd like to think. On one of the slides you suggest that you're trying to look at sort of building a simpler group structure. I mean there's no complexity of the group is a topic quite often. I'm just trying to pick your brain as to what sort of options you have. The exchange offer last year obviously created a bit of an issue. I would just really open question, pick your brain as to what you think you can do and over what period. And maybe to add, in fact, we're looking really broadly what the opportunities could be. We're leaving no stone unturned. And I think that is something you can expect from us, and that's what we're spending our time and energy on. Thank you very much, sir. That concludes our Q&A session. And I would like to hand back to Mr. Van Dijk for closing comments. Yes. Thanks, everybody, for joining today. The connectivity was a little wobbly we got much better later. I hope you share my excitement about the path ahead. And I think we've really gotten the business in a place where we've gotten to scale. We are on a path to profitability. And we have a very strong balance sheet to weather the storm and deliver further value for our shareholders. So thanks for joining. Thanks for your questions. And I hope to speak to you soon. I hope to see all of you on December 6 in Amsterdam, where we go into a lot more detail on our segment businesses on crystallization, et cetera. So I think that will be all. Thank you.
EarningCall_1915	All right. So, we'll get started with the next session. I have Robert Falzon here, Vice Chairman of Prudential Financial. So, thank you for being with us. The format will be fireside chat. So, I've got a series of questions that I'm going to run through. The first one is a little bit more high level, and I just thought I'd ask, as part of your strategy to transform Prudential Financial, you've already taken a good amount of action. So, I thought maybe we could discuss what you've done so far and where you see it going over the next couple of years. Yes, thanks for that, Alex. Give me a chance to sort of do a broad tee up. So, let me just sort of talk about that strategy first, and then I'll speak specifically to what we've done and are doing. So, what we've said very publicly is that we want to become higher growth, less market-sensitive, and more capital-light as a business system, while meeting customer needs and creating a better customer experience focused on customers that are in three business areas, investments, life protection, and retirement protection, those three areas. In order to do that, what we recognized is that we would have to significantly change the mix of our businesses, the mix of the products that we're selling within those businesses, and invest in capabilities, capabilities that would result in both greater efficiencies for the company and better customer experiences as well. So, sort of going through that priority, from a product mix standpoint, we've been very successful at pivoting into - away from products that are more capital-intense and market-sensitive, both in our annuities and our life business, and introducing new products which have customer protections, but without the level of guarantees, and therefore it's less market-sensitive and less capital-intense as well. From a business mix standpoint, what we've done is some pretty significant dispositions, got out of Korea, got out of Taiwan. In the US, there are two businesses that we exited, closed on the sale of those two businesses in the middle of this year. And from a sort of investment standpoint, then that's generated like in excess of $7 billion worth of proceeds. From an investment standpoint, we've been very disciplined. We have been investing primarily in PGIM and in our emerging markets. Those are the two areas that we've identified from an inorganic standpoint we want to grow. And we've been successful at doing programmatic acquisitions in both those. So, we feel good about what we've done from a product mix standpoint, feel good about what we've accomplished so far from the shift in business mix. We also announced during the third quarter that we hit our target goal of $750 million of expenses being taken out of the business system. We did that a year ahead of when we expected to do so. And importantly, in doing that, we've created better customer experiences, and be happy to talk about what those sort of things look like. So, that's sort of sort of job done from an expense and customer experience standpoint. The expectation going forward, sort of the outlook as we think about what we want to accomplish on a go-forward basis is, frankly, think about it as kind of being more of the same. So, continuing to introduce products across our business lines. We're going to continue to look at the business mix and opportunities to de-risk on a go-forward basis. There's no must-dos there, but there are some nice to-dos. And if the market conditions are right, we would execute against that. And we're going to continue to look at how we create better customer experiences and investing in capabilities from a - both from - investing from PGIM and emerging markets, PGIM particularly in expanding out the set of capabilities that we have there, and then investing in capabilities which are transforming that customer experience for us. We're quite excited about the outlook for the company on a go-forward basis, particularly excited because the sort of investments we're making, particularly in the things that we're doing in the investment management world, are creating this sort of self-reinforcing business system. And that's key to our strategy on a go-forward basis. As we build capabilities in PGIM, it's not just to the benefit of third-party assets that we can then manage. It's also to the benefit of the competitive positioning of our businesses in insurance and retirement. The better we are at investing, the more capital we can attract into those businesses, the more successful we can be from a competitive standpoint in those businesses. When we're successful there, it generates a high level of AUM, which in turn then builds the investment management platform, and then that cycle continues to work its way through. So, quite excited about that and feel as if we've already begun to do that. The pension risk transfer transaction that we completed, $8 billion, that was not just a good transaction from a retirement standpoint, but it also took all that AUM and steered it over to our investment management platform. Got it. And over the last year, the transformation's really been sped up by some of this transactional activity you've done with Alec and so forth. I'd be interested in just your views on the private market and risk transfers broad category. Is that still a tool that you'll look to utilize to further de-risk? Yes. So, as I mentioned, it's sort of a - it would be nice to do, not a have to do. So, we accomplished two very large transactions, one of which was a de-risking in the annuities book, and we stated an objective with regard to how we're trying to bring that book down to more proportional size. Now, when we talk about that, it's really - it's focused very much on traditional variable annuities with living benefit guarantees. We like the annuities business. We just want to have products like we've introduced with FlexGuard that are less capital-intense, less market-sensitive, but are still meeting a customer need. And the success we've had with FlexGuard, we've sold $12 billion of it since we introduced it in 2020, I think is evidence to the fact that we are in fact meeting customer demand. So, we want to continue to be in that business, but we want to continue to look at opportunities to de-risk both the back book on annuities. We're looking at our life business as well. If we did something there, we'd likely be in sort of the SGUL space. We have dedicated teams within the company that we stood up that are focused just on managing the back book and looking at opportunities to de-risk. Now, I want to repeat also what I said, which is that it is a nice to do, not a have to do. We can get to the kind of business mix we're looking to get to organically if we need to. The ability to do things inorganically, both on the disposition and the acquisition side, is an accelerant to that. And in terms of growth areas of the business, I think you touched on it a little bit, but what are the areas of the business that are - you're looking for more organic growth? And what should we be looking for in 2023 as we look at - sort of track the progress on that? Yes, so a couple of things. One is, we actually have begun to benefit from a growth standpoint in the change in the economic environment. We've talked about low interest rates being a headwind for such a long period of time. We're actually seeing now with higher interest rates, our core earnings sequentially in the third quarter went up sort of nicely. And that's primarily driven by that higher interest rate environment. We expect growth from all of our businesses. If we did not think that there was an organic growth opportunity in any of our businesses, we would look to exit them, just as we did with the retirement full-service business, where we thought we were going to be challenged to grow that business on a go-forward basis. And so, highlights of that would be, obviously in our higher growth businesses, PGIM. In emerging markets, PGIM is - we've talked about it as being sort of a mid to high single-digit organic growth through the cycle. We've been - we've demonstrated that primarily through flows that we've been able to attract into that business. Emerging markets by definition are higher growth. But outside of those concentrated areas, we feel actually quite good about the institutional retirement business. So, pension risk transfer, longevity risk transfer. Pension risk transfer marketplace is a $3 trillion market in the US. Outside the US, it's a $4 trillion market. Each of those markets is sort of penetrated at around 10%-ish or so. There's a lot more to go. This year in the US, you'll probably see a $50 billion year in terms of the level of volume of PRT pension, prevention risk transfers in the US, and a similarly record level outside the US as well. We think going forward that this year will be 50, and next year will probably be 40 billion plus as well. So, we see that as - that trend is gaining more and more momentum and shows no sign of slowing, if anything, continuing to accelerate. So, we feel quite good about what that opportunity looks like in the institutional retirement market. I also would mention Japan, and I mention it because most people have this perception of Japan demographics slow growth market. From our standpoint, that is true. However, we continue to grow there organically because year in and year out, we capture market share. And in the traditional life business, which is sort of flat growth, we're able to grow in that market environment. But also importantly, there are growth sectors in both health and retirement. They're growing at 5% to 10% each, and they're pretty material profit pools as well. So, we see opportunities there. Across the rest of our businesses. I would say that we see organic growth occurring by virtue of being able to continue to expand out products there in group. It's voluntary products. In individual life, we just rolled out FlexGuard Life as a IVUL product. And in annuities, again, continue the growth of FlexGuard, as well as FlexGuard income and other products like fixed annuities that weâll be looking to position ourselves more competitively. Maybe we can drill into the Japan comments you made on growth. I mean, does the current environment and interest rates get a little bit of relief over there? Does that help in terms of the products you can sell? I mean, does it open up the array of products you can sell in Japan at all? Well, interestingly - so first, if you look at that Japan business, I know I alluded this before. It's a crown jewel for the company. It's one of the - I was just over there two weeks ago, actually. We're celebrating our 35th anniversary as a company in Japan. And over those 35 years, we've become one of the three largest. Itâs AISE, GIAJ, and ourselves. And we're either two or three, depending on the kind of metric that you look at. So, we've got a very significant competitive presence there. We're differentiated from the other players as a result - because of the distribution model that we have. That distribution model has allowed us to capture market share and actually to continue to sell really profitable products into that marketplace, despite the competition that exists there. As we think about the environment, I guess, Alex, what I would say is, interest rates are a tailwind from a return on the portfolio standpoint. But you almost have to look at that market with two lenses. The first is a very short-term lens, which is what the COVID experience has been. And for us, that's had two impacts. The first is, the entire industry was, in coordination with our regulators, we were paying out hospitalization benefits when individuals were not hospitalized, right? We had an accelerated payout on that. That policy is changing as of just this last quarter, and there's a higher standard that's associated with that. So, we've had some adverse claims experience as a result of that policy adjustment. The industry has now changed as regulator - itâs basically reverted, and the regulator has embraced that. The second is, from our model standpoint, the differentiation of our model is that it's a high touch model. We have life planners and life planner consultants, and our ability to recruit and their ability to be productive in an environment where you can't be face to face as a result of the COVID restrictions that were in place in Japan, meant that we had reduced productivity, and we were not adding to our headcount as rapidly as we'd like to. Again, as COVID is becoming more endemic, that should be mitigated, and then we feel good about the opportunity there. From a longer-term standpoint, the demographic trend probably is the thing to pay most attention to, as opposed to where interest rates are at any point in time. Life demand will be about flat. As I said - mentioned before, we'll capture market share. So, we'll continue to grow that as a result of the distribution system we have. But what's happening is, there are growth segments as a result of the aging population in health and in retirement. Those segments are growing 5% to 10% each. Together, the profit pool there is a - I'd want to say it's a 6 billion-ish kind of a profit pool, not revenue, but profit pool associated with those product areas. So, it's an area where we think shifting our product mix to include, or expanding our product mix to include not just the life protection that we've been known for in that marketplace, but more in the health and retirement protection as well, will tap into growth areas, and that probably overwhelms anything that's otherwise happening from an interest rate standpoint, although that is a tailwind. Got it. All right. I'm going to shift gears a little bit, and I'll probably come back to some of the growth questions, but I wanted to make sure we got to some of the capital questions that we've been getting from investors. In your 10-Q disclosure, there were some comments about capital having some negative impact from a symmetrical, non-economic accounting treatment, and potentially the year in actuarial review. Could you just unpack for us what those impacts are and the likelihood that it could actually lead to something like a share repurchase suspension? Sure. So, let me start with an observation, and I'll tell you why I started with the observation. First, we're in a higher interest rate environment, and that's a really good thing for business fundamentals, right, because we've got rollover in the portfolio. We're rolling it over at positive spreads now to where the portfolio is rolling down. We're rolling it over. New money rates are higher than our disposition rates. So, that's a positive impact. We have lots of product that has recurring premium, particularly in Japan. Investing that at higher rates is a good thing for us as well. And then the nature of our business is that we have the duration of our liabilities, by definition, is always going to be longer than the duration of our assets. You can only go out in the US 30 years from an investment standpoint. We sell products that - where the life of that liability is going to be beyond 30 years. And so, by definition, as good a job as we can do from an ALM standpoint, you're always going to be longer duration. In a higher rate environment, that means that your assets have gone down in value by less than your liabilities have gone down in value. And so, that's an economic benefit to us in a higher rate environment. I say all that, Alex, because none of that shows up in GAAP, and a lot of that also does not show up in STAT, okay? So, you have an environment where fundamentally, there's a really good economic thing happening to the business, but the manifestation of that and reported results isn't always obvious, at least not initially. So, one, from an economic standpoint, we did have the assumption update in the second quarter. And while we were able to absorb that reserve strengthening within the subsidiary operations that we have, there is an impact on then the flexibility that they have from a free cash flow standpoint. So, we would expect in the very near term that as a result of absorbing that, which we have the capability to do, and to be very clear, we needed to do nothing with regard to assets of the holding company, we were completely able to absorb that down at the subsidiaries, but it means that free cash flow coming out of the subsidiaries in the near term is likely to be a little bit reduced, and that has an impact on capital, some level of capital flexibility. Secondly, the rate at which rates have risen, has resulted in significant realized and unrealized gains within the portfolio. There's a non-economic manifestation of that in STAT that I'd be happy to get into if anyone wants to talk about things like IMR, but let's just leave it at, what happens is, when rates are going up and asset values go down, there's this asymmetric treatment within STAT where those losses are run through the income statement and affect your statutory capital. Whereas when interest rates are going down and you're getting gains on those, they don't run into your STAT. They're hung up and they're amortized in over time. That's a better construct. But that asymmetry is sort of manifesting itself. Now, it's non-economic. It's an industry issue. ACLI is talking to the NAIC about it, and the NAIC is open to visiting on what they should be doing about it. We're talking with our regulators. We're very comfortable that we've got a very strong financial profile. We have financial flexibility. And in terms of the implications of that from a buyback standpoint, to the latter part of your question, our board we - first, I think we committed that we're going to finish out the program that we've done this year, and announced so the buybacks through the end of this year. And then with respect to next year, we said the board's going to be visiting that - on that early in the year. I don't want to get ahead of my board on that. But I would say that a primary, not exclusive, but a primary consideration by the board, is really going to be around what the economic outlook is. How likely is it that we're going to have a very significant recession that could translate into a pretty severe credit cycle? And I think our concerns around financial flexibility that we want to retain and how much we want to do in the way of buybacks, is going to be influenced by that view more than anything else. So, I want to ask about the credit. I'll get to that on the next one. Before we leave the capital though, I did want to ask you about this Lotus reinsurance company you set up. I think a lot of people have kind of talked about it more in the context of it consuming some capital this year as you've funded it. But certainly, you're not doing it because it's going to be inefficient. It's supposed to improve efficiency. So, I'd just be interested in understanding that structure a little bit more. How does that sort of impact the end of the year RBC and so forth? Yes. And so, let me again broaden that conversation. What we seek to do is to actually, outside of emerging markets, we want to be active in three principle regulatory jurisdictions, Japan, US, and Bermuda. And what we want to do is essentially, regardless of where we're selling product, is to have that product financed in a regulatory regime where the economics of the product best line up with the economics of the regulatory regime. Now, that answer changes for all product - for every product. There's no one answer that says, Bermuda is better than the US. The US is better than Japan. Japan's better than - there's - what we find is that individual products, the regulatory regimes get things right and they get things wrong. And we work from an advocacy standpoint to try to - where we think there's a deviation from prudent reserving and that's driven by economics and where the statutory regime is, we work with our regulators to try to advocate for changes. But in the interim, we look to sort of - to house products where they're best aligned with the regimes as they exist today. And what we did in standing up Lotus Re, gives us the flexibility to do that. That's a long-term strategy. Weâre in act of conversations with our regulators as we move books of business around between those entities and where we write business from. So, again, I wouldn't want to speak to anything in the very near term, Alex, and get ahead of my regulators on that, but it is very clearly designed in order to allow us to optimize the return on capital that we're getting, while providing a prudent level of reserves and capital to back our liabilities and ultimately produce a higher ROE and level of free cash flow. Got it. And then maybe circling back on credit. When we think about your investment portfolio and how you've positioned it for weathering the storm, if we do have that with the recession, how do you think through that? Is there any kind of information you can help us with on stress scenarios and where you stand right now? Yes. So, portfolio management is a core strength of ours. We've always been quite proud of it, and we have a great track record. You can sort of see what losses have actually been through cycles. And even with the subprime cycle that everyone went through, our actual realized losses on our portfolio have been well under what we underwrite from a pricing standpoint. So, we feel quite good about our track record there. It's a large, well-diversified, high-quality portfolio. And in particular, what we benefit from is our investment management business feature. The - both from the standpoint of the security selection when we go to investing in picking specific bonds out, but also from the capabilities that they have in private asset classes, private placements and in commercial mortgages. They're each sort of 12% to 14% of the portfolio. So, a significant weighting of the portfolio in those. And what we've seen is that the performance of those assets through cycles is incredibly stronger. So, a BBB private placement performs like a single A public security. And we've seen that and done research on it and published that research. We've shared it with regulators, et cetera. So, we have substantiated that it's a better performing asset class for us, and we get that because PGIM directly originates that. They're number one in that marketplace. They're probably number one or the top in the commercial mortgage origination as well from an insurance company standpoint. And so, those capabilities, along with security selection, allow us to have what we think is a very resilient portfolio. You've seen that. I would expect that if we have a credit cycle, that our history of performance will continue into the future, that we'll do, relatively speaking, quite well there. But having said that, we are seeing no distress whatsoever in the portfolio today. In fact, if I look at a credit migration, it's been positive in the last quarter, not negative. And so, no signs of any of that distress yet. Understood. Okay. Maybe before we leave the investment portfolio, on interest rates, you mentioned earlier in the conversation the economic benefit that you're getting from higher interest rates, higher new money yields. Can you remind us of some of the sensitivities there and how we should think about how that rolls into your net investment income yield? Yes. So, if you look at the spread in the third quarter on new money rates against the portfolio, that would be between 70 and 90 basis points. So, let's think about it between 75 to 100 basis points in round numbers, of positive spread that we're getting on portfolio rollover. It's a similar order, maybe 20 basis points or so less when you look at disposition yields against new money rates, but same kind of positive spread. That's a relatively new phenomena for us. So, if you recall that we were having, up until a year or so ago, there was a $0.03 per quarter compounding drag associated with low interest rates. That got knocked down to around $0.02 share in - up into earlier this year. And then as a result of the rise in interest rates, we no longer have a drag. We're having a positive impact on it. So, and that manifested itself in the third quarter core earnings. So, we had noise around returns from alternatives and then the COVID experience in Japan that I alluded to before. But if you strip those things out and you look at core earnings, the operating earnings increased by about 4.5%, and core earnings per share increased by about 6.5% in these sequential quarters. So, it is manifesting itself in higher returns from that higher rate environment. And so, I think we're sort of well positioned to continue to benefit. Got it. Maybe moving over to PGIM. Can you discuss the outlook for flows? And just in the context of the macro environment that we're in, higher interest rates, et cetera, how do all those things funnel into what you're seeing in your pipeline? Yes. So, to describe PGIM, important to understand, really large and fixed. We have multi-asset class. We've got fixed income, equities, privates, real estate, real estate debt, and equity. So, it's a multi-asset class manager. In each of those areas, we're an active manager, and we're particularly large in fixed income. And now I say that because with the rise in interest rates, that's obviously had had a negative impact on PGIM's flows and actually assets under management. So, just the mark-to-market on the fixed income portfolio, down as a result of rising interest rates to worse, which are happening from a flow standpoint. So, we always focus on flows because it's a good indicator of the health of the system. But from an AUM standpoint, the flows really haven't had a material impact. It's been really the mark-to-market that's had the impact on core earnings out of that business. From a flow standpoint, as rates have risen, what you've seen is that from a retail standpoint, there have been negative flows out of fixed income, and in particular out of active fixed income, which is our area. There have been, at least in the most recent quarter, there was actually positive flows going into passive fixed income on shorter duration. We're not a player in passives. If you - and while we're looking at making sure that we can create some product line that could absorb that flow on a go-forward basis, if you're going to be in passives, you really need to be in passive and scale. And that's - we've chosen to be on the active end. And so, we haven't benefited by any of the repositioning into a short passive and that's been, as I said, particularly a retail phenomenon. So, we had $8.5 billion worth of negative flows in the third quarter, but we had $9 billion of positive institutional flows in that quarter. So, it was - the negative was entirely driven by retail. And we're not unique, and you can see that across industry statistics. That's what happened and we were just affected as everyone else was affected in that. Longer term, as we're at a higher level of interest rates, it's a very healthy thing for the fixed income franchise, right? It's getting higher returns from fixed income, which is going to mean that once the perception of the rate rise cycle is done, flows should be coming back into there and we'll benefit from that. And the flow should be disproportionate because you're now at a higher level of earnings, more attractive to have your money in fixed income than it was before, particularly for retail investors. I actually happen to personally believe we're at the very front end of that right now. It's beginning. You hear more and more pundits talking about, this is the time to beginning to get back into fixed income. And so, we could see the benefits of that. While that's the case, I would say in the short-term, we continue to see negative flow - industry flows from - on a retail basis for fixed income. In our institutional business, we've had - 18 of the last 19 years, we've had positive flows, $55 billion on average over the prior five years. So, $11 billion per year. Very strong positive flows there driven in large part by our institutional franchise. But in any given quarter, that can be choppy. We have 1,600 institutional clients, and we've got some really big institutional clients. And when they move, you could see billion-dollar movements from a single client. Now, net over time, that's been a big positive for us, but in any given quarter, you could see a move out or a move in. So, there could be noise from an institutional standpoint in any quarter going forward, but I think the trend on institutional is very healthy indicator, and the trend from a retail standpoint isn't - hasn't turned quite yet. So long as our performance holds up, and we took a little bit of a dip in the first part of this year because we were long on rates, but that's since rebounded. Our track record, our three, five, and 10-year track records are very competitive. So, as long as performance holds up, which it has been and has done over a long period of time, and so long as we continue to broaden out the product line that we've got, we feel very comfortable that we'll continue to be a net beneficiary of flows over time. So, next topic I have for you is in Japan, the yen exposure. So, you have this big Japan business. Can you help us think through the sensitivity economically to movements in the yen, and help us out a little bit with the ways you hedge that. And I'm particularly interested in the capital hedge you guys have, and I know there's some ways to facilitate â¦ I actually designed that capital hedge when I was a treasurer of the company, so I know all about it. Yes. I take pride in it. So, I'm interested about how that cash makes its way to the whole co as well as part of your answer. Sure. First, let me just talk about the business aspect of it, Alex, because that's important, and that's actually primarily where we see the impact of volatility in the yen. What's happened is, we sell a lot of US dollar product in Japan. We innovated that. We've been doing it for decades. There's a lot of demand for it. The Japanese investor, retail investor, does not take a lot of equity risk, but they're very comfortable taking FX risk, and it's been a good bet for them over the long term from an EM depreciation standpoint. And - but what happens is, when you have this level of depreciation in the yen, there are two manifestations of it. One is, some of the policies they have are way in the money and they cash out on that. And so, we've had an elevated level of surrenders in our Japan business of our US - shorter duration US dollar denominated product. We have surrender charges and things, which sort of make us whole from that standpoint, but that's profitable business where those future profits are now going away. So, that's not a good event for us when we get those kind of surrenders. Even if in the short-term there's some positive, there can - there are instances where we have a positive short-term impact. It's not long term healthy for the business. The other is, as they're looking to fill their needs on a go-forward basis, you need a lot less US dollar product to meet your yen expenses on a go-forward basis. And so, our sales are also impacted by the depreciation in the yen. So, when we think about the yen, we think about it sort of a product sales and product mix as the primary implication of it. From a purely financial standpoint, we have an income hedge and we have an equity hedge. Income hedge is a rolling 36-month hedge, where we're always at a point where the next four quarters are 100% hedged, and then it scales down to when you're in the 36 months - in the last set of quarters, you're like a third hedged or something like that. That just smooths out the volatility. So, in any given year, we can tell you, for the upcoming year, this is our exposure. This is our yen exchange rate. It's locked in and therefore it doesn't create any noise on a year-to-year basis. But to the extent the yen is depreciating over that three-year period of time, you will eventually see it there. Now, having said that, we have very little yen earnings, because if you think about the book of business that we're writing and have written, is US dollar, generating dollar profits. So, it's because the premiums are in dollars. 100% of our expenses are in yen. And so, if you take sort of the yen book-generating revenues and you allocate 100% of the expenses against that, there's a lower level of profit coming out on the yen side, and then all the dollars are flowing through. So, people think about us having this big Japanese business and a lot of yen exposure. No, we actually don't have - from an earning standpoint, we have very little yen exposure, and it's hedged. From a capital hedge standpoint, we look at that business as being, again, we want to protect the dollar value, the dollar economic value that we've got embedded in that business. So, what we constructed a number of years ago is that we would hold US dollar assets against the economic equity that we have, the value of the equity that we have embedded within that business. The challenge with that is, if we did that without any hedging, we would have very bad statutory outcomes in Japan, because holding those US dollar assets in an - under SMR, you get penalized for doing that. And so, we'd have bad SMR ratios. So, what we devised was an internal hedge where from the US holding company to our Japan business, we've entered into an FX swap. And so, for Japan purposes, those dollar assets get traded - get translated into yen assets and yen income. And then from a US standpoint, to the extent that the yen depreciates, the settlements on those hedges, meaning that cash comes out of Japan and up to the holding company, obviously the reverse happens when the yen appreciates. But at the end of the day, what we've done is, we've protected the dollar value of that business, given that we're a dollar traded company, and that's sort of how we wanted the economics to line up. So, it's a really good hedging program. It basically means that when you think about the yen, you can kind of ignore it in terms of how it works, how it affects us from a financial standpoint, and think about how it affects us from the product mix and sales that we've got. One part of the transformation strategy I wanted to circle back on is the M&A, the inorganic aspect of it that you guys have talked about. And I think as you were doing some of these de-risking transactions, there was a certain amount of money that was sort of set aside for M&A. So, I just wanted to get the update on what that M&A budget sort of looks like, and what are the opportunities you see out there? Sure. So, first, from a focus standpoint, M&A, as we've articulated, is going to be around asset management. So, PGIM and around emerging markets. In the case of asset management, very much focused on capabilities there. And within that, I'd probably highlight three things. One, continuing to build out. We've got about almost a quarter of a trillion dollars of assets under management in private alternatives. We want to continue to grow that. Two, we've got about $300 billion of retail assets under management. Of course, things changing, that may be a slightly stale number, somewhere around that order of magnitude. We want to continue to grow out retail on a global basis. And then third, we want continue to expand our international investing capabilities, which will then give us more access to international investors. We've got, I want to say three quarters or so of US pension funds are clients of ours. But then if you go on a global basis, that number would drop down to maybe 60% or something like that, because we have less of a presence with international investors, and that has to do with having international investment - we need broader international investment capabilities to attract more of that capital in. So, we think, we're at about 30% or so of our AUM comes from non-US institutions. We think we can push that to 40% to 50%. So, there's a lot of growth opportunity there if we can build the capabilities. So, it's focused on that. Emerging markets, we're not looking to plant new flags. We're looking to create scale in the markets we're already in by expanding those platforms. We have $5 billion worth of holding company liquidity. So, what we would call our highly liquid assets as of the end of the third quarter. Now, that number has been negatively impacted by the assumption update that we did earlier in the year, as I mentioned. And then we - the market impacts in terms of what that's done to our AUM and our earnings. Obviously, those are short-term impacts. That would've meant that that number could've been even higher potentially, as opposed to we didn't fund anything out of it, but does have an impact on how much cash came out of the system or could come out of the system. Having said that, $5 billion is at the upper end of our targeted range of three to five. And we have, therefore, we believe, all the financial flexibility we have, both on balance sheet and off-balance sheet, and through additional transactions that we can do, that if we find something interesting to do from an M&A standpoint, we'll be able to execute against it. We're very confident in that. Having said that, we have been incredibly disciplined about acquisitions, and we're going to continue to be so. We want to make sure that it fits well, what I just described from a capabilities or a scale standpoint, and we're very sensitive to making sure that the valuation works, recognizing you have this bar against balancing buybacks and M&A.
EarningCall_1916	Good afternoon and welcome to the QYOU Mediaâs Third Quarter 2022 Conference Call. As a reminder, this call is being recorded and all participants are in a listen-only mode. We will open the call for questions-and-answers following the presentation. On the call today are QYOUâs Co-Founder and CEO, Curt Marvis; Chairman and Co-Founder, Scott Paterson; and CFO, Kevin Williams. The company would like to remind everyone that various remarks about future expectations, plans, and prospects constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. QYOU cautions that these forward-looking statements are subject to risks and uncertainties that may cause their actual results to differ materially than those indicated, including risks described in the company's filings with the SEC. Any forward-looking statements made on this conference call speaks only as of today's date, Tuesday, November 29, 2022, and QYOU does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today. A replay of today's call will be available on QYOU's website at www.qyoumedia.com. With that, I would like to turn the call over to QYOU Media's Co-Founder and CEO, Mr. Curt Marvis. Mr. Marvis, you may go ahead. Great. Thank you very much [Sherry] [ph] and welcome all of you on the call who are QYOU followers and investors. Itâs great to have you on this afternoon. Just to repeat what we just said as we've got on the call myself, our Chairman and Co-Founder, Scott Patterson; and our CFO, Kevin Williams, and we'll have things open for questions at the end of the discussion here about our results. So, we're super excited today to share with you the results of the quarter, which ended September 30, 2022, which marks the end of our Q3 2022 for the QYOU Media business. Kevin and I will take you through some of the financial highlights and then share with you some of the activities that have driven the business growth and what we expect to happen going forward. At the end of this discussion, we'll open things up for questions. By the way, Scott, Kevin, and I are all in different locations today. So, if you have a specific question for one of us, please let us know when you ask it. And with that, we'll get on to the news. Hopefully, some of you have already seen the release that was just put out about a half hour ago. And today, we are reporting that Q3 2022 marks the highest quarter of revenue in the company's history. We recorded revenue of $7.24 million, a year-over-year quarterly increase of [$2,519,095] [ph] or 53%. For the nine months ending September 30, 2022, as compared to the same period last year, we have recorded total revenue of [$19,362,601] [ph] representing an overall revenue increase of $11,813,688 or 156%. Obviously, we're really happy with these results. The year-over-year adjusted EBITDA for the three months ended September 30, 2022 also improved by $514,396 or 42% and for the nine months ended September 30, adjusted EBITDA improved by $2,230,274 or 46%. This all of course is particularly encouraging given the significant investment that we have been making in the content and new product launches over the course of 2022. While we've not provided any formal guidance this year, we have set our own internal goals and currently that's at approximately $28 million in total revenue for the year. This is slightly below what our original goal was and is primarily due to the lack of us being able to make what we thought was a smart move on any of the originally intended acquisitions that would have resulted in a slight boost of that overall revenue figure. I'll talk more over the course of the call about our recently announced Maxamtech Gaming acquisition and give you some more details about that, but irrespective of that, because that won't close until sometime in the month of December, it will have extremely minimal or virtually no impact on 2022 revenues. Our overall pause this year on the acquisition front has been driven by what we're all aware of the fragile and turbulent nature of the public markets throughout the course of 2022 and really over the last 18 months and that's been coupled with our drive to become cash flow positive. Nevertheless, we're always on the lookout for highly accretive acquisitions that can help us springboard our business initiatives further and faster similar to what we saw happen with our acquisition of Chtrbox in 2021 and what we believe will happen with the acquisition of Maxamtech in 2023 and beyond. Nevertheless 2022 turned out to be a year where such an acquisition did not materialize or occur. In addition, while growth is always a major priority for us as we've noted, becoming cash flow positive is as well. Tis a major goal in 2023 and we'll be carefully managing the timeline between investment into new products that can take months and in some cases years to pay off and the focus on our large set of existing assets which have been launched and how we can maximize their ability to deliver positive financial results. This is the mindset of all management as we enter 2023 and we are very proud of the fact that we've been as conscious as possible as we possibly could while launching four new channels and various other products like QPLAY and QData in 2022, while paying a [indiscernible] to continuing to improve our adjusted EBITDA. I'll speak a bit more in detail about that momentarily and about how we intend to capitalize on the size and scale of our massive reach of the young India population and our continued plans to leverage this across all of our business â our projects that we've been launching to date. I'll also speak a bit more about our U.S. business, which continues to deliver amazing results. But first, I'm going to have our CFO, Kevin Williams, give you just a few more financial details. So, over to you, Kevin. Thanks Curt. Before Curt gets into a little bit more about the business I want to pass on, just a few more important financial details that we believe the investors will be interested in. The company concluded the quarter ended September 30, 2022 with a cash balance of $3,077,769 compared to June 30 at $4,181,414. The cash used for operating activities in the quarter is drastically down year-on-year and that's really primarily due to the increase in adjusted EBITDA and the collection of our trade receivables. Cash used in operating activities for the three months ended September 30, 2022 was 818,000, compared to the cash used in the prior year of 4.4 million. Cash used in operating activities for the nine months ended September 30 was $2,973,811 compared to the same time period last year where it was $8,762,864. So, a drastic decline in cash used for operating activities. I also think it's really important for investors to understand the improvements in our customer concentration risk and how much it was reduced. The company only had two customers that represented over 10% of the company's revenue in this past quarter, which is consistent with 2021, but more importantly, these top two customers percentage of total revenue declined from 25% to 21%. This broadening of our revenue base is a testament to the number of the new advertising partners that have been brought on board over the course of this fiscal year. We also think it is important to note that all of the new channels and other recently announced business units and activities have not had any material contribution to the Q3 revenue numbers. And those still will be relatively small through Q4 and we should see the significant uplift coming from these in 2023. At the same time, the cost of launching the channels and business initiatives is very much accounted for from initial cost and launch perspective, which also sets us up in the future for improved financial results. As a company, we have just completed the 2023 financial planning cycle with the key eye on the goal that Curt mentioned earlier and being cash flow positive in 2023. With the company exiting the quarter ended September 30, 2022 with $3,764,000 of positive working capital and the funds that were recently raised, we believe that we are well set up to achieve that goal. Okay. Thanks very much Kevin. One thing I'd like to add to that is, that we currently have approximately 77 advertisers on our television channels in India on our broadcast channels. In addition to that, when you combine the customer base of QYOU USA and Chtrbox, which adds another approximately 30 to 40 advertisers, we have over a 100 different, well over a 100 different advertisers that now are funding various activities of the company. So, we're really excited about having that base being a company. Obviously, it's being driven by products that are offered free to our customers and are driven by advertiser support. I think today you'll find a familiar theme and that's a big part of our strategy in the second half of 2022 and is going to become increasingly important as we shift and move into 2023 and that's to become cash flow positive business as an absolute priority for the company. This is essential obviously in any environment, but even more so in one that has the type of public market and overall economic challenges over the last year. We're obviously keenly aware of this and we've been initiating changing certain plans along the way and will continue to do so as required. Clearly, alongside all of that, growth is a priority to us as well. And what we're working hard on is achieving that growth with a more fiscally conservative eye towards certain projects that may take longer than others to breakeven or might take more capital than others to achieve. And I'll give you some examples of that in a moment. Let me give you a bit more flavor on what that looked like in Q3 and it will also provide a glimpse into Q4 2022 along with the forward look into how we're treating things in 2023. The first area I want to talk about is the area of connected and smart TV channels. We remain extremely bullish on the connected TV opportunity in India. It already has and continues change the landscape of television viewing around the world and it's just starting to gain speed in India. We want to be a leader in this area in India as we seen how the massive benefits â we've seen the massive benefits that have been [reaped] [ph] by those who went with the prize early on in North America and around the world. Iâm sure many, if not most of you are familiar with names like the Roku Channel or Pluto TV or Tubi TV or specific TV manufacturer apps like Samsung TV Plus. These are becoming dominant distribution platforms for what is becoming known as FAST channels, that stands for free ad supported TV. Now, of course, what's funny about that is that's exactly the same that TV was when we had antennas on our rooftops in the [1950s and 1960s] [ph] and got our TV for free back then before the advent of cable and satellite television. So, I guess technology does not always change everything the way that we think it does. Nevertheless, FAST TV is here to stay and we are big proponents of the future of it in India because it's free. And we know that in India free is the right price point for those who wish to reach the mass market, which of course we do. So, now we have five channels available on up to 70 plus different television OEMs in India, including most of the biggest manufacturers and dozens of other small white label television brands. We are very early in this business and we know and everybody else knows that this is about to take off in India very, very â I was going to use a [pun here, fast] [ph]. Sorry about that. Now, what is equally important here is that these channels are much slower to grow top line revenue than typical broadcast channel due to the ad rates and initial viewership levels, but they are also much less expensive to launch and ultimately overall faster to get the cash flow breakeven or cash flow positive position. So, I think you'll all as investors get the point here, we're looking at things that are cheaper to launch that have less overall initial revenue, but they're faster for a path to profitability. We did intend initially on launching three additional channels this year. We pulled back on that due to ensuring that the ones that we have launched, Q Kahaniyan, our animation channel; Q Comedistaan, our comedy channel; Q-GameX, our gaming channel joined on the connected TVs with our broadcast channels of Q Indian, Q Marathi. We want those all to be working on a profitable basis and then we're going to launch more. This underscores really the operating philosophy that I want you all to take away from where we're headed. [Big slightly smaller] [ph] swings, perhaps that has a little initial impact on top line, but it's a faster path to profitability on the bottom line. In this financial climate and perhaps in any climate, we strongly believe this is the right approach, which leads me to want to tell you more about QPLAY. QPLAY is our first foray into the direct-to-consumer market [in India] [ph]. Most of you have heard me talk about our loudspeaker that's in reference to the approximately 125 million largely young Indians that every week come into contact with Q branded content across our TV channels, our digital and fast and smart TV channels on OTT platforms, app-based platforms, and mobile platforms. It remains our goal to grow this to as many as 2 million weekly views over the next six months. We know that our reach to this many people is a huge part of our future in India. And what we're now doing is dipping our toe into the direct-to-consumer waters. But how are we going to do this in a fiscally conservative way? Initially, we will promote it only via our own owned and operated channels, i.e. leveraging our loudspeaker, and in some cases through connected TV or other partnerships on a barter basis, like we recently did with a promotion around the Cricket T20 games. Any of you who are familiar with the direct-to-consumer offerings know that the biggest expense is customer acquisition cost. We plan on [initially defraying] that through the methods I just described and to test the market, see what they like, find out how to improve it and understand everything we possibly can before putting any significant third-party customer acquisition [money is behind it] [ph]. We believe the new QPLAY app, which bundles all five of our current channels, all additional channels that are to come and any and all other products that could be around games or other things that we'll launch over time. It'll provide for both connected TV users and for mobile users a very seamless way to get at our content in one click with no registration. The monetization of QPLAY hasn't even begun, and as Kevin noted, the monetization on the connected and smart TV channels is just beginning as well, but these are super important pieces of our future and we're going to be building them responsibly from a financial point of view, which brings me to the Maxamtech Digital Ventures acquisition. It took us a year and a lot of convincing, but we finally got to a point where the Maxamtech founders all agreed that both companies had something that the other one needed and together we took the chance of building something really big. Maxamtech had a proven game platform that specializes in casual gaming and had every bell and whistle or has every bell and whistle imaginable across contests, leaderboards, pricing, and operational consistency across any type of mobile device. The platform has been battle tested through partnerships with companies like Sony and Vodafone. Hopefully, some of you are able to join us to get more details on it on the Live From Mumbai 2 to hear more about their amazing platform, if you weren't, that's available on our website. In addition, Maxamtech knew how big Tier 2 and Tier 3 rural and rural India were to their growth along with their audience of young kids and moms that they had for their casual games. Well, guess what? We come into contact every week with over 75 million of that exact demographic. This also ultimately fits our acquisition strategy and led to our agreement, which has three key points underneath it. One, does the company we're acquiring already have an operating business that has shown success, [Maxamtech Chtrbox] [ph]. Two, are the founders of the company we're acquiring, motivated by what happens post acquisition to make their money. The exact same thing that we've done with the founders of Chtrbox. And three , [in like] [ph] Chtrbox is the overall concept we like to call a 1 plus 1 equals 11. This acquisition checked all of these boxes and it took us literally the entire year of 2022 to get to a point where it made sense for both parties. In addition, as we've noted previously and according to KPMG, India is set to become one of the world's leading markets in the gaming industry where it's expected to cross over 450 million online gamers in 2023, which puts it only second to China. It's grown steadily over the last five years, is expected to travel and value and be a $5 billion business in 2024 or 2025, and driven by the rapidly growing younger population, which has smartphones, more disposable income, and an ability to play these games on their phones at will. We view this as a major opportunity for us in 2023 and beyond. We see it as an incredibly great opportunity to leverage and find out how we can use our so-called loudspeaker to its full advantage. And we really believe that the Maxamtech acquisition will prove to be one that we'll view in years from now as one that made a big difference in our company. Last but not least, in 2022, I want to talk about the amazing progress at QYOU USA and Chtrbox. It's a big priority for us now and in 2023 to start to [indiscernible] our own horn more loudly about both of these SaaS growing business units that continue to grow revenue and deliver annual EBITDA. Honestly, this discussion could go on for hours to talk about the achievements of both of these teams and how they're both benefiting from the overall power of the creator driven marketing movement. In short, digital content creators and influencers are now mainstream and go to components of any brand's efforts to market their products and services, particularly to a young demographic. We cannot imagine a young brand, a movie, a gaming title, an automotive brand that's targeting a younger demographic that would not put platforms like TikTok and Instagram in their first position for marketing efforts. We're seeing this daily in both businesses and know it will continue to grow in importance for more mainstream media spend. Chtrbox and the recently [indiscernible] hired in 2022 ChtrSocial have been executing campaigns for companies like Spotify, [Coaster Coffee] [ph], and HP that are trying to attract younger consumers. Chtrbox also as many of you know represents influencers for what we call chatter represent. We now have over 80 influencers that were directly managing through chatter represent, and they've been featured in magazines like VOGUE India and at events like New York Fashion Week. Our own Chtrbox founder, Pranay Swarup, was recognized this year in Business World as a Top 40 under 40 leader, and we beefed up the management team and the staff at Chtrbox in India and are continuing to have very, very strong growth and profitability across the board. Meanwhile, QYOU USA continues to have an equally and maybe more astonishing year. Glenn Ginsburg and his team will deliver over 40 campaigns this year that include campaigns for over a dozen movies that were Number 1 at the box office on their opening weekends. We've done a lot of work behind making that audience show up at theatres. The movie studios are now entrusting us to promote their biggest brands. And this year, we've done titles like Top Gun, Jackass, The Woman King, many others that are major franchises for the studios along with major gaming franchises like Call of Duty. We also did our first automotive campaign this year for Hyundai, which has already led to repeat business from them, and we've also gotten into computer products with brands like Transformers and Peppa Pig. Our list of clients continues to grow with companies like Paramount, Disney, Hasbro, Activision, Hyundai and many, many more. And best of all, the team is constantly delivering strong gross margins and annual profitability. So, we're extremely bullish on the progress being made across the board at both Chtrbox and QYOU USA. You'll be hearing more about each of those on a regular basis as we move forward and we expect them both to grow in size and profitability as business units in 2023 and beyond. In addition to all of that, they ultimately bring us closer to the influencers themselves, which enhances our ultimate ability to be strongly connected to the core creators that drive all of our major business initiatives at QYOU Media. So, I think my final note is this. Many shareholders were questioning our recent financing, the timing of it, the terms, etcetera. And my answer to all of you is this, none of us can predict the future. Certainly, what's happened over the last 18 months in the overall markets, but particularly in the small and microcap world has been shocking and surprising and disappointing, particularly to those of us like ourselves here at QYOU Media that have fast growing businesses like ours that are showing results, but it is the way it is. One thing we've learned and know at QYOU Media is that we're certain that we have no power over the overall markets in their trajectory. This financing in many ways was both an insurance policy against an uncertain future in the markets and an ability for us to execute and operate and build a critical gaming asset in Maxamtech that we believe will be a core part of our business going forward. This required a relatively small amount of capital to ensure that we can properly do that, build those assets that we've already launched and have a correct balance of growth and cash preservation until the company is self-generating through its own business efforts, something we expect to happen quite soon. These things are never easy decisions and keep in mind, [our management] [ph], myself, Scott, Kevin, and all employees are all shareholders to and we do these things carefully considering all the pluses and minuses on an overall basis before we make a decision to move. The same considerations were true with our move to hold off on any uplifting to NASDAQ in 2022 or some other senior market this year. The timing just simply was not right to do that. With all that said, we're super proud of the achievements that have gone on so far this year, and our progress is irrefutable. We continue to believe that we are building the foundation of an amazing business that can ride the wave of the creator economy in general and the massive opportunity of what will be happening in the country of India with its population of 650 million people, 25 years of age are younger and 850 million 35 and younger. It's literally the youngest country on the planet earth and it consumes digital content, short-form video in numbers that are only surpassed by China and in some categories will soon eclipse even China. So, we head towards the end of 2022 with tremendous confidence and enthusiasm and a strong focus on delivering increasingly successful bottom line results along the way. Most of all, all of us in the company want to thank you for your belief and support and what we're working on here day and night to accomplish, and we do take your support to heart. Now, over to any questions you may have, and please remember to designate if your question is for me, Scott, or Kevin. Over to the moderator. Wow, I can't believe we've stumped them all. Well, I'll just say again, we're extremely grateful for all of you that are shareholders in the company. Like you, we're all disappointed in the current share price, but I think if you guys know anything about me and us as a company as we never give up and we have plans to see our share price move up dramatically over the coming year and years and have all the faith in what we're doing as a business and company pay-off. So, appreciate all of your support and look forward to announcing our Q4 results at the end of February and having a great start to 2023. So, wish you all the best for the holiday period that's coming upon us and look forward to speaking to you all soon. Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you again for your participation.
EarningCall_1917	Thank you for standing by, ladies and gentlemen and welcome to the Tsakos Energy Navigation Conference Call on the Third Quarter 2022 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board; Mr. Nikolas Tsakos, President and CEO; Mr. Paul Durham, Chief Financial Officer; and Mr. George Saroglou, Chief Operating Officer of the company. [Operator Instructions] And now, I pass the floor over to Mr. Nicolas Bornozis, Chief President of Capital Link Investor Relations Advisor to Tsakos Energy Navigation. Please go ahead, sir. Thank you very much and good morning to all of our participants. I am Nicolas Bornozis of Capital Link Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the third quarter and 9 months ended September 30, 2022. In case you do not have a copy of todayâs earnings release, please call us at 212-661-7566 or email us at ten@capitallink.com and we will have a copy for you e-mailed right away. Please note that parallel to todayâs conference call, there is also a live audio and slide webcast, which can be accessed on the companyâs website on the front page at www.tenn.gr. The conference call will follow the presentation slides. So please, we urge you to access the presentation slides on the companyâs website. Please note that the slides of the webcast presentation will be available and archived on the website of the company after the conference call. Also, please note that the slides of the webcast presentation are user controlled and that means that by clicking on the proper button you can move to the next or to the previous slide on your own. At this stage, I would like to read the Safe Harbor statement. This conference call and slide presentation of the webcast contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties which may affect TENâs business prospects and results of operations. And before passing the floor to the Chairman, I would like to remind everybody and congratulate them. This year the company is celebrating its 20th anniversary of listening on the New York Stock Exchange, and on December 9, we look forward to having with us in New York the management of TEN and Dr. Tsakos of joining the Capital Link Invest in Greece Forum on December 9 in New York. And at this moment, I would like to pass the floor to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation. Please go ahead, sir. Thank you, Nicolas. Good morning, good afternoon to all. Thank you for joining our call today. Real congratulations to management for historical second best quarterly performance, just below the highest ever in Q4 â07 of $52 million. So this is a great result. It proves once again the strategy â TEN strategy model, protects us in bad times, fully response in good times and allows us to serve our obligations to pay dividends and generate cash for new business. And we are very happy that all this is reflected â now is beginning to be reflected on the stock price. And in particular, Iâd like to congratulate management for the successful new business with another blue chip customer, Total, on the first deal ever on very successful business. So without further ado, congratulations to Nikolas Tsakos and his team and offer the floor to him for the rest of the meeting. Thank you, Nikolas. Thank you, Chairman and good morning, good afternoon to all of you. Thank you for being here and supporting and following TENâs 20-year performance on the New York Stock Exchange and at 30 years, next year, which is going to be our 30th year anniversary since the company was established on the Oslo Stock Exchange. So â and hopefully, our share price will be above $30, we are hoping to be well above $20 in the remaining of the year. So, we worked on $10 or $20 in the next year, itâs going to be $10 or $30 at least, but thank you for bringing us where we are. As the Chairman said, this really was our best quarter in the last 15 years. We have not had such a high return in since the fourth quarter of 2007. So and â but I believe that if things continue to go and you know I am very conservative usually but I hope that we will break the record, Paul. Paul is working on it already and our chartering team at the same time in the fourth quarter of this year things look to be even stronger or rosier and this is a time that the TEN model proves it works, because we can work at difficult times, but also much better times. We have, as George Saroglou is going to point out, we have, this is our fifth crisis that we are coming out from, for the tanker market based on geopolitical events and market-related events and economic events and our aim is always to have a sustainable growth. We are able to fix business at the time and make sales of ships at the times at the high times that will carry us on to the next cycle. And I think this is the time we are doing. Now, we are enjoying 6-figure returns or revenue time charter revenues in a majority of our Aframax, Suezmax, and VLCC fleet which hopefully will be portrayed on the fourth and the first quarter. And what gives me comfort is right now, we are in a situation where very little new building supply is coming in and so this good market perhaps not at these high levels as always, but it will be sustainable for at least the next 3 years. In TEN, we use the low markets to be able to purchase new modern assets as we have done and then charter them out when the times are better for long-term to be able to cover the cyclical markets that we might â the cycle that the market might bring. And with this, I would like to ask George Saroglou not to take too much of his time to give us a little description of the last 9 months and focus on the subsequent events, which we will talk also after the â during the question time. Thank you, Nikolas. Good morning to all of you joining our earnings call today. Letâs go to the slides of our presentation. Starting with Slide 3, we see that since TENâs inception in 1993, we have faced five major crisis and each time, the company has come out stronger, thanks to its operating model. This time is no exception. We manage the COVID pandemic without any serious effects for both fleet and onshore operations and we are currently navigating the challenges created by the war in Ukraine. The market fundamentals, record low order book, and an aging fleet, even without the tragic war were positive for the tanker industry. The combination of self-imposed and mandated sanctions on Russian oil as a result of the war served as an additional catalyst to propel freight rates higher as long-established trade routes were disrupted and voyage distances lengthened. A new round of European sanctions on oil imports from Russia is expected in December. The full impact cannot be assessed until details are known. However, it is expected to sustain the lengthening of voyage distances which coupled with normal winter factors like weather delays and an increase in oil demand due to gas-to-oil switching as a result of higher natural gas prices in Europe is expected to keep the freight rates in the tanker market serve through this winter and the months ahead. Russia will need to reroute its oil exports away from Europe. In Europe, we need to backfill those short coal imports from other more distance locations, both of which will continue to create significant ton-mile demand for tankers. With record low order book and the redesign of the global energy map for both crude and oil product trades, we expect the tanker industry to go through a sustained strong markets in the years to come. In Slide 4, we see the fleet and its current fleet employment. 40 out of the 66 vessels or 61% of the fleet in the water has market exposure, a combination of spot contract of affreightment and time charters with profit sharing. 44 out of 66 vessels or 67% is in secured contracts fixed time charters and time charters with profit sharing. This means that TEN is well-positioned to capture the prevailing positive tanker fundamentals. And we have taken advantage of the good tanker market as our earnings release of today shows. Fleet was there, and it is a key element of our operating model. Year to date, we sold 2 vessels, 2003 built Panamax tanker and the 2006 built of our 2 Aframax tanker, and took delivery of 3 modern vessels. Two new buildings in January, we took delivery of LNG carrier TEN Energy and in July of the shuttle tanker quarter. In this month, we took delivery of it to build eco-friendly scrubber fitted VLCC which we have renamed as DS1, the Greek name for [indiscernible]. All 3 vessels are chartered against long accretive time Charters. In fact, today we announced the start of the three-year time charter with profit sharing for DS1 to a significant oil major. Asset prices continued to trend higher. Management is actively exploring opportunities to divest some of its earlier generation vessels and replace them with more modern eco-friendly greener vessels. On the newbuilding front, we announced today a project with a major energy concern to build and Time Charter up to 3 shuttle tankers against minimum 5-year up to 15-year contracts. This is in addition to a note that we have in place for 4 newbuilding Aframax tankers, which we expect to start taking delivery from the fourth quarter of â23. And which are part of the companyâs green ship dual fuel LNG powered initiatives. All vessels are coming with long-term employment attached. In Slide 5, we present the companyâs current and long-term clients. As you see, we have a blue chip customer base, consisting of all major global energy companies, refineries, commodity traders with Equinor currently topping the list as our largest charter with 9 vessels and 4 new buildings all on long-term time charters. On Slide 6, the left side presents the all in breakeven cost for the various vessel types we operate. We maintain as you see a low-cost base. We have a simple operating model. We try to have our Time Charter vessels generate revenues that cover the companyâs cost expenses, which means paying for the vessel operating expenses, finance expenses, overheads, chartering costs, and commissions and we will add the revenue from the spot trading fleet contribute to the profitability of the company. Despite the prevailing inflationary pressures, we want to highlight the purchasing power of our technical managers and the continuous cost control efforts by management to maintain a low OpEx average for the fleet, while at the same time keeping a high fleet utilization and quarter-after-quarter, year after year. Despite 14 special surveys, some are ahead of schedule in preparation of the anticipation and the anticipated market upturn we achieved an OpEx overall utilization of 93.7% for the fleet. And thanks to the profit sharing element, for every $1,000 increase in spot rates, we have a positive $0.29 impact in annual EPS based on the number of vessels we currently operate in the spot market. Slide #7. Debt reduction is also integral to the companyâs capital allocation strategy. The companyâs debt peaked in December 2016. Since then we have repaid $428 million of debt and we purchased $100 million in two series of step-up preferred shares we had outstanding. In addition to paying down debt, in Slide 8, we see that dividend continuity is important for common shareholders and management. TEN has always paid the dividend irrespective of the market cyclicality. $0.15 per common share will be paid in December â22 to shareholders of record on December 14. The December dividend payment represents a 50% increase from the July $0.10 a share dividend. The company has paid $0.5 billion in dividends since we listed the company in the New York Stock Exchange in 2002. Global oil demand continues to recover despite lockdowns in China as a result of the zero COVID policy and mounting global economic headwinds. For the year, oil demand is expected to grow by 2.1 million barrels per day. Next year, we expect growth to be 1.6 million barrels per day. Developed economies lead oil demand growth in 2022. In 2023, oil demand expansion is forecasted to come from the non-OSB countries. On the supply side, we have the recent OPEC+ cuts, the sanctions and self-sanctions on Russian crudes and that will play out in 2023, and further releases currently from the OECD strategic petroleum reserves. Global oil stocks continue to fall and are currently below the 5-year average in the periods 2017-2021. Non-OPEC 2023 production is set to rise coming mainly from Brazil, USA, Vienna, Canada, Mexico, and Norway. As global oil demand recovers continues to grow. Letâs look at the forecast for the supply of tankers. The order book starts â stands at a little over 4% over the next 3 years, which is the lowest that it has been in more than 30 years. At the same time, a big part of the fleet is 32% is over 15 years and we have 8.3% that is currently over 20 years. So, these are very strong fundamentals and as the next slide shows the scrapping activity since 2018. We have upcoming regulations and industry with decarbonization initiatives and almost 9% of the fleet over 20 years. So we think that all of these factors point to a very balanced tanker supply market for a couple of years ahead. And with that, I will ask Paul to walk you through the financial highlights for the third quarter and the 9 months of the year. Paul? Thank you, George. This is rather going to be a sort of super numbers starting with net income of over $51 million fully realizing our expectations for a strong quarter. In this quarter our vessels reaped an extra $92 million revenue over the prior quarter three, resulting in a total revenue of $224 million, a 70% increase, mostly from spot earnings of $103 million as rates surged. In addition, our time charter vessels in quarter three, including $14 million profit share generated over $120 million covering most of our operational expenses. The inflow of cash in the third quarter from our operations resulted in EBITDA of over $100 million compared to just $20 million in the previous third quarter. While in the 9-month period, EBITDA totaled $236 million. From the start of this year to the end of September, TENâs revenue reached $590 million, while net income in the 9 months amounted to over $130 million with profit share of nearly $21 million. Average daily TCE exceeded $32,000. Thanks to market conditions that allowed our fleet to achieve almost maximum utilization of 94% despite five vessels completing dry-dock in quarter three. The significant cash flow generated in the recent 9-month period and the abundant cash reserves generated as a consequence has placed us in a very favorable position. We anticipate these reserves will provide us new opportunities, such as those created by the company over the past months, such as, in particular, the new LNG carrier, the shuttle tanker, and more recently the new VLCC. These newly acquired vessels are already operating on accretive Time Charters and are expected to generate considerable revenue in their lifetime. These are the kinds of opportunities that we believe will continue to generate accretive returns and secure our cash flow and of course as George has mentioned to reduce our debt. George? Yes. Thank you, Paul. Reducing debt was always good and weâve been doing it quite drastically. Weâre not only reducing debt from the highs of 2016-2017 by close to $470 million. And then another $100 million of buying back our prep. So I think what we have accomplished is a bigger fleet, a much more modern fleet with much less obligations and weâve been doing this through thick and thins through the good times, the bad times, perhaps weâre one of the few companies out there that we have never delayed or renegotiated any of our banking relationships. Instead, and this is why we have always been offered very good terms, very competitive terms in growing the business at difficult times. I mean, the picture that Paul and George are showing to us is a picture of a strong market, a sustainable market going forward. This is what we want to do, but we always protect the companyâs downside as we have done in the past and we may need to further decrease our debt and increase our dividends to the shareholders. And with that in mind, it seems that the best is yet to come at least for the foreseeable future. I expect that â weâre happily there so I expect the fourth quarter to be there â to be a record quarter with the numbers that weâre seeing today. I mean our spot from Axis many of them are above the $100,000 a day level together with our Suezmaxes which is significantly higher, weâre in the third quarter was, and for sure the first 9 months. And with that positive note, I would like to open the floor for any questions. Thank you. Thank you. [Operator Instructions] Our first question comes from the line of Climent Molins with Value Investors Edge. Please proceed with your question. Good morning, gentlemen. Thank you for taking my questions. Given the improved outlook on the tanker sector, I wanted to delve a bit deeper into your capital allocation priorities. How do you plan on balancing shareholder returns be dividends, or share purchases, growth spending, and deleveraging? Yes. Well, as you know, we are a company in growth mode. And so we always want to come to have ample cash for growth. And again itâs not growth for growth, itâs growth for accretive transactions that will get our earnings that there are above the $3, $4 level per share, I mean. And then of course dividend is very important for us. We are big believers in rewarding our shareholders and the management is the largest shareholders here. To reward the management through dividends going forward. So protection of a strong balance sheet, which if you go back over the years, we always maintain a strong liquidity because the only time you actually appreciate your strong liquidity is required you do not have it and TEN has never been in this situation in 30 years, and increase in dividends. Alright. And regarding your financial position, are you comfortable with your current level of leverage or would you like to deleverage a bit, repurchasing prepared or repaying bank debt? Very good point. And as I said, I mean if you look on Slide 7, that was put up there in the presentation, we have done a dramatic deleveraging considering that in 2016 the company was â did not have the quality of the fleet that we have today, or the valuation of the fleet and we are determined to do this. And according to Paul, I think, by 2024 we will be a significantly under the $1 billion in debt. Our aim is to be above $1 billion in market cap and significantly under $1 billion in debt. And I think this is something we are working on that and I think you brought a very good point out there. We have one of our briefers, which is due for repurchasing at par in the next 6 months and that would be something that we might be using our excess liquidity to do. [Operator Instructions] It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments. Well, thank you very much. And itâs good when the news are good, I think we will get less questions. And I think thatâs understandable. Again, as I said, we are looking and I think this is the first time we feel significantly strong about that weâre looking at a sustainable positive future for the tanker and energy industries. We are proud to grow the business with first-class clients and relationships. We want to thank you for your support in that. We hope that our next â our next announcement, which would be in the first quarter coming up for the fourth quarter and first full year results we will have even better news and better prospects. And looking forward, we will be visiting New York in the next couple of weeks. Looking forward to meet many of you face to face and talk about the industry and the company. And I would like from all of us here to wish our American friends and everybody around the world, a Happy Thanksgiving and Happy peaceful, and with you and your family, and thank you very much. Ladies and gentlemen, this does conclude todayâs teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
EarningCall_1918	At this time, all participants are in a listen-only mode. If anyone should require Operator assistance, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Alex Wasserburger, Vice President, Deputy General Counsel. Please go ahead, Alex. Good morning and thank you for joining us. We issued our Q3 earnings release earlier this morning. If you do not have a copy, it is available through the News section of our IR website at imediabrands.com. This release is also an exhibit to the Form 8-K we filed this morning. A webcast recording of this call will be available via the link provided in todayâs press release as well as on our IR section of our website. Some of the statements made during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of todayâs date. We undertake no obligation to update or revise these forward-looking statements. We believe the expectations reflected in our forward-looking statements are reasonable but give no assurance such expectations or any of our forward-looking statements will prove to be correct. For additional information, please refer to the cautionary statement in todayâs earnings release and our SEC filings. Finally, we will make references to non-GAAP measures on this call such as adjusted EBITDA. Please refer to our earnings release for further information about these measures, including reconciliations to the most comparable GAAP measures, where possible with reasonable efforts. Iâll start today with the obvious - itâs a tough environment out there. Some challenges we expected, like the struggling U.S. economy, and some we did not, like the extended Russian conflict. Although we intellectually understand all of these are short term in nature, it still significantly rises our risk radar, right - risks in job security, risks in fundamental consumer-centric business models, risks in our investments and our loans. Therefore, today Iâd like to start with three topics that I know our investors prioritize today: debt, liquidity, and working capital. In February, we explained our debt and liquidity management plan and Iâm excited to say that we are positioned to exceed all of our goals stated then. From a working capital perspective, year-to-date this year we have generated $5 million in positive working capital. Last year at this point, we had used $41 million in working capital, which means this year we have improved our working capital management by roughly $46 million. From a debt reduction perspective, during our capital markets day in February, we talked about a $25 million target for debt reduction by year end. To date, we have reduced our debt by $7 million. On November 8, we executed an LOI with a real estate firm to sell three of iMediaâs four buildings for $48 million in a sale-leaseback transaction. Because of our roughly $380 million in NOLs, our gain on this transaction will seem tax-free. We remain confident we will close this transaction in Q4 and our goal is actually to close in December. In terms of our use of the $44 million in estimated net proceeds, we plan to retire the $28.5 million Green Lake term loan and use the remaining $16 million to reduce our ABL loan, which in short increases our working capital to fund our growth. This means combined, we are positioned to reduce our debt by roughly $50 million or 200% of our target. Our interest savings alone next will be over $4 million. With that important update complete, letâs turn our discussion to our core, our television networks: ShopHQ, 123tv, Shop Bulldog TV, and ShopHQ Health, and how we are engaging our customers in this challenging environment that will likely be here for several quarters. From an overall company perspective before we move into each network, our customer report card is great. For the seventh successive quarter, iMedia posted year-over-year customer file growth in Q3, this quarter by 15%, and as we discussed in our last earnings call, our strategy to increase the upcoming Q3 promotional activity turned out to be very successful. Today, unlike many of our previous earnings call, Iâd like to start our conversation talking about 123tv, our vibrant and growing television network in Germany. In spite of the Russian conflictâs ongoing negative impact on the German economy and its energy resources, under the new leadership of Michael Hoinka, President, and Eberhard Kuom, CFO and COO, Iâm pleased to share their progress today as they continue to successfully optimize merchandise margins, increase price points, drive viewership engagement, and improve profitability. A couple KPIs that will demonstrate their success: Q3âs net revenue per customer was â¬132, which was a 4% increase over Q2. Q3âs average selling price was â¬21.4, a 14% over Q2 and one of the foundational elements of what the companyâs doing today to improve its profitability. Q3âs ending inventory was 23% lower than Q2âs ending inventory, which means not only are they doing it with margin and with balance, theyâre doing it in a very fast turning inventory environment. In addition, Q3 staffing costs were 15% lower than Q2 staffing costs, so hats off to Michael and Eberhard, who are doing a great job. In addition to growing the core business, Michael and Eberhard are also working with their technology team, headed by Manuel - Iâm going to make this an attempt - Margianna [ph], who is their technology lead, and they are doing an amazing job bringing their shopping auction widget to ShopHQ for a soft launch in December or early January. Weâre very excited about this opportunity and we can talk more about that during the Q&A session. Letâs now turn our attention to ShopHQ as the team there is well prepared for the holiday season with a great level of inventory, an unbelievable schedule of great shows, and a number of new brands and returning brands for our customers. As a matter of fact, we continue to attract former brands who are returning to us, including Joyce Giraud, Gems En Vogue, Naturally Danny Seo, and Elizabeth Grant International. In the past, these brands in aggregate generated over $50 million in annual revenues for ShopHQ and we feel great about their return. Our strategy to drive consumer engagement in Q4 will be based on the same type of promotional activity that we did in Q3. It wonât dominate our selling efforts like it has done with other retailers, but it will be an important component. Also related to ShopHQ, as we did in Q2 with some of our smaller online marketplace businesses that we decided to either sell or shut down, we completed a very disciplined capital allocation process with the ShopHQ teams in Q3 and as a result, we made the decision to end our relationship with Shaquille OâNeal. Sometimes in this business you are surprised, and this is really one of those times. Back in early 2020, we felt Shaqâs products would be a perfect fit for our audience; however, rather than force a fit that was just not there, we felt an amicable parting was best for both sides. I have nothing but absolutely great things to say about Shaq and the ABG team, and we wish them the best. In conjunction with this contract termination, we incurred a one-time non-cash charge of $10 million in Q3. Finally, as Iâm sure you read in our recent release, ShopHQ re-launched on Dish yesterday on the very same two channels we occupied before, channels 134 and 244. I canât say enough good things about the Dish team and we are excited to be engaging again with some of our best customers on the Dish platform. Revenue was a little softer than we anticipated and our adjusted EBITDA was a little bit better. From an operating expense perspective, our general and administrative costs were up about $10 million, driven by the Shaq write-off. In terms of our selling and distribution costs, the $4 million reduction this year is related primarily to the content distribution costs from Dish and charter carriage of Bulldog and Health last year that were not present this year. Our third quarter net loss was $21.3 million or $0.72 per common share. This again included the $10 million Shaq charge. Regarding liquidity and capital resources as of the end of Q3, total unrestricted cash was $9.1 million. As I previously mentioned, we expect to complete the $48 million sale-leaseback transaction in Q4. We plan to use our NOLs to offset the tax gain and our planned use of proceeds is to reduce debt and increase working capital. Regarding our outlook for the fourth quarter 2022, we expect the holiday season to be challenging and promotional; accordingly, we anticipate reporting net sales of approximately $177 million, which is a 9% decline over the same prior year period. We anticipate reporting adjusted EBITDA of approximately $16 million, which is a 6% increase over the same prior year period. We continue to expect to post positive quarterly earnings per share in Q4 2022. For the full year, we anticipate reporting revenue of approximately $588 million, which is a 7% increase compared to full year 2021. We expect to report full year 2022 adjusted EBITDA of $39 million, a 7% decline compared to prior year. As a final reminder, from a tax perspective we have approximately $380 million in federal NOLs that should be available to us to offset future taxable income. As a long time follower of the video retailing category, historically thereâs been more resilience, the customers held up better than, call it the target Wal-Mart customer. Can you compare how this environment is affecting your core customer versus other periods that were challenging, such as the Great Recession in 2008 - 2010, or any other periods of macroeconomic weakness that you think are applicable? If you take a step back and say, what are we doing here, which is weâre really building television networks today that have three supporting revenue streams: advertising, T-commerce, and e-commerce. That by itself is very different than in 2008 and 2009, at least for this company and T-commerce in general, because as we think about our performance this year, our advertising arm, IMDS, continues to outperform expectations and really although we believe even more outperform, theyâve certainly done better than previous year and are growing well, so that has not been affected and that helps our television networks as a balance, and also as a catalyst offering advertisers that come on, as well as brands, this opportunity for digital advertising and on-air television. So number one, the revenue streams are more balanced, that gives us the opportunity to withstand some of these things that are very centric to TV retailing and very centric to retail. When you take another step back and say, okay, how is it that we, for example, were able to maintain our margin in this environment, right - that was a very challenging environment we just went through in Q3. We had margins year-over-year that are the same. Iâve already talked about how ShopHQ was more promotional in Q3 and therefore its gross margin was going down, but that was balanced by an improvement in margin from our Germany TV network, 123tv, by Christopher & Banks, and certainly by IMDS, so the durability of our business model to withstand surprises like a Dish disruption in carriage, or even macroeconomic pressures like we have in the U.S. or in Germany, is pretty solid, and the results speak to that. A 6% decline in revenue and flat margin while getting a surprise disruption from Dish and facing down these promotional environments, we feel very good about it, so thatâs the reason that we have spent the last three years constructing this framework to have four television networks each supported by three revenue streams. Thank you, and then as a follow-up, now that youâre back on Dish, how do you think about your carriage again for ShopHQ and how do you think about your opportunities in the future to potentially improve the cost of carriage? As weâve talked about, Tom, the entire secret of ShopHQâs profitability growth is around reducing our percent of--well, really our content distribution costs as a percent of net sales. Our Dish renewal was an important step forward for us in the future. Each of our renewals is centered to reducing the cost in the future but also in increasing the productivity. We work with our distributors to make sure that weâre being promoted, to make sure weâre in the HD neighborhood. It isnât just always about cost, itâs about both cost and about driving the core productivity of ShopHQ. In addition, itâs about our smaller networks - ShopHQ Health, Shop Bulldog TV. All of those contribute to drive down the content distribution costs as a percent of net sales. It is a journey that we began, as you know, two years ago, and each year weâre making progress in bringing it down because all three of those strategies - our smaller networks, cost as a percent--you know, cost from the distributor, as well as revenue productivity in our flagship, ShopHQ is critical. For example, 123tv already has a content distribution cost as a percent of their net sales in the mid to low single digits, so theyâre already in the place that ShopHQ will be, we believe in the next 12 to 18 months. Hey Tim, just a couple quick ones. Was hoping you could peel the onion a little bit, it looks like units were up pretty nicely on a year-over-year basis, ASPs are down, customers up. Maybe just talk a little bit about what youâre actually seeing with the customers right now as you move into the holidays. Sure thing, Mark. The numbers youâre seeing are aggregated between 123tv and ShopHQ, so there is--thatâs the first point we need to make, is that 125tvâs units, theyâre average--you know, when we talk about ASP or AOV, the ASP - average selling price is not even half of what ShopHQ is, and that was one of the core things that was important for us to fix at the 125tv business and their customer profile, was we need to make sure that the ASP is growing in a way in categories that they do well in, so that when we do promotional events or we do free shipping, or we engage the customer and we have to pick, pack and ship it, weâre not doing 10 units to get to $100, weâre doing five units or four units. That critical business model shift is what you see every single quarter from us, and youâll see that the units will start to calm down again and move--the ASP will start to move up again. Thatâs just simply fixing the challenges at 123tv, which were exactly the same as they were at ShopHQ when I returned in the middle of 2019. These are fundamental things we know how to fix. That was one of the exciting things we saw in the opportunities with 123tv beyond the strategy and what I would call the catalyst of bringing their expertise from gamification into ShopHQ, which as Iâve noted weâre doing a soft launch of their auction shopping widget - Iâll give away the secret sauce of it is todayâs top auction instead of todayâs top value, but both will be featured on ShopHQ as we tweak that model and that consumer experience and we head down the path for the spring of next year around doing the same thing and disrupting travel. Just a follow-up on the domestic business from an inventory perspective, how are you feeling about your mix of product relative to what you think consumers are gravitating towards here and some movement into holidays? Great question. Always one thing, you have to read the room. I think that the most important thing we discovered in the last, call it four years, was that that idea of capturing what the customer wants and the imagination of the customer thatâs timely, and that you can often bet wrong on, is around consumer electronics and the big items like that of what youâre taking in. Those customers, the reason itâs so risky is that if you get it wrong, youâre sitting on a lot of inventory and those customers only come around once. You saw us really move out of consumer electronics for the holiday season in â19 and â20 and â21 and we really only focus on our core wearable strategy. The elements that we do have, some of the gaming stuff and some of the fun stuff we do have is stuff that we sell year round, from the drones and the cars and these other things, and we do those internally so we can avoid the other mousetrap of consumer electronics, which is the low margins. We feel like we have a great selection of products for ShopHQ, and some of the brands on ShopHQ weâre in better position as well - Christopher & Banks, for example. Last holiday season, we had some late shipments still because of the logistics. We were able to get all that in, in the first quarter and itâs just been waiting to be sold for nine months, and that is--so we feel like weâre in great shape there in the holiday season for Christopher & Banks. Last question from me, you had talked a little bit about capital allocation and prioritizing--you know, liquefying the balance sheet as much as possible. Is there anything that would prohibit you guys from potentially doing a buyback of any sort here? With the equity at market cap of roughly $15 million, even a small amount of dollars would go a long way there, but is there anything thatâs prohibiting you guys at this point now, hopefully once you get the deal closed on the sale-leaseback, from potentially buying back some stock? Great question. It is one that we wrestle with all the time. No, right now weâre focused on obviously the debt reduction and closing the transaction. In terms of the additional liquidity and what the IRR would be on that additional liquidity and how itâs deployed, we talk about all the time with our board and our stakeholders, and weâll make that call when it comes up. But certainly there is an opportunity, a very large--as I would call it, a large disconnect between the equity value, the enterprise value as it relates to the business, what weâre doing and what weâve done, so we think thatâs going to work itself through. In certain circumstances, at one-time events, buybacks do have impact - I am a subscriber to the book, The Outsiders 8, where they--I think that was the name of it, where they talked about certain opportunities for stock buybacks. A couple questions. I guess first off on the sale-leaseback, can you maybe kind of talk about how that played out versus what you may have expected when the board first approved going forward, that if [indiscernible] anything come out better, worse than you may have thought, and then is there a plan--you know, the press release alludes to a fourth building that was not included in this. Any plans for that separately? Taking a step back again, when did we start? We started in, I would say, August-September, we were looking at the large disconnect in our market cap and some of the risks out there in the market, and obviously there was a concern at that time that we felt around our liquidity and debt, and even though weâd pre-announced that we were going to be moving forward to reduce our debt by $25 million, my belief was thereâs two ways to walk out of the woods when thereâs such a large disconnect, and thatâs continue to operate and then demonstrate that the balance sheet and the companyâs liquidity is much stronger than what the marketâs giving us credit for. Taking buildings that were a fair market value of $45 million, all four of them, and turning that into cash and deploying that cash at a higher return was obviously the answer, and so we moved into that time frame of August-September and as we had more and more inbound traffic and interest in our buildings, particularly in the Bowling Green area where, as you know, those distribution centers there are very valuable, thatâs the one area of the country where you have all the distribution networks because thatâs the area of the country that reaches the highest percent of customers in the U.S. in one day. Those were driving all sorts of velocity of offers. We partnered with B. Riley, who obviously their real estate firm has sold many of the buildings, believe it or not, right around us in Eden Prairie, so having them partner with us and then even expand the reach and make it more competitive was where we moved into in the October--really the September-October time frame, so weâre very happy with the partner that we have, thatâs also very important. Weâre with this partner for a good chunk of time, so you want to make sure itâs a partner that you know and that has a good body of work that you can trust. Once we had that and we had a good price, and remember, when you look at a price, you have to look at the balance between the price of the sale-leaseback and the lease payments that youâre making. Weâve restructured our business in Q2. We always continue to maximize our cost structures to make sure that when we bring that lease in, itâs not really lowering our margin level. But as we move into closing, youâre right - we are doing a sale-leaseback transaction with three of the four buildings that we own. Thereâs a second building here in Eden Prairie, Minnesota, office that we really donât need, and we will be putting that up for market in Q1, and that has not been part of the sale-leaseback transaction because it doesnât need to be. Weâre just going to sell that building outright. Got it, helpful. Then secondly on inventory levels, obviously it moved up in Q3, expectations for inventories in Q4. I guess more specifically, as you think about--youâre reaffirming positive EPS in the fourth quarter and EBITDA in the $16 million range, can you connect the dots between that EBITDA and what you think cash flow, operating cash flow could look like in the fourth quarter on the core business? Sure. When you think about working capital, thatâs something we--as we talked about earlier, something we feel like we do well even in tumultuous times, so the year-to-date working capital increase of $5 million, we also think that weâll do the same type of working capital management in Q4 and that will really be driven by the inventory levels and the inventory levels will come down. If you note on our first three quarters of 2022, a lot of our working capital management was around the decrease in accounts receivable, and thatâs been a three-year effort of ours to reduce the amount of Value Pay and what our customers use Value Pay, so weâre--you know, weâve moved our percent of sales under Value Pay, which is our installment sales basis, from as high as 60, 65 down into the 50 range, so that is producing more cash up-front, something that weâre intentional about and we donât believe is affecting sales either. When you think about Q4, our strategy there is really the reduction of the inventory that weâre carrying, and that is also going to--you know, thatâs going to be the driver for the working capital management in Q4, if that answers your question, Eric. Thanks very much for taking my question. Tim, I wanted to ask about the return to Dish. Can you give us a sense of how that process unfolded - you know, how long you would have expected to be off of Dish for, and now that youâre back in your original channel placement, can you talk about how that customer has come back? Is it performing in line with how you were in those channels originally, or I imagine it probably takes a little bit of time to bounce back to full productivity, but any color you can provide us with the return to Dish would be very helpful. Sure thing, Alex. Weâre good but weâre not that good, right? Weâve only been live now for 24 hours, so I would say that itâs too early to tell the velocity of migration back to the performance levels. But weâre very encouraged by it, and when you think about where we are and how we are today with Dish, youâve got to go back a year from now, really. Jessica Gregory, who runs our content distribution, has done a great job in terms of managing all the different elements of our distribution, and we knew the renewal coming up with Dish in June of this year was going to be a tough one because, as we stated, we have to lower our content distribution costs. Itâs a critical component of our strategy to lower the content distribution costs as a percent of sales, so we knew it might be a challenge. We spent a year making sure that we would be prepared for the worst case scenario, which we didnât expect, which would be the non-renewal, so when that happened, then we knew that we had to stick to our guns about the terms that we were seeking, and obviously Dish felt like they needed to stick to their guns about the terms they were seeking. Iâve seen this before. Itâs traditionally--and thatâs why Iâve guided to the end of the year, it traditionally takes time to not only then--for both partners to realize that there is a place in the middle that we can get to, but also once that decision is made, it doesnât happen overnight. These are--you know, weâre a small company but Dish is a big company and they have much bigger networks, so what you have to face, and Iâve seen this before at my time at IEC with USA Network and SyFy, where we had the biggest networks and we have the fastest treatment, or even in scripts with HDTV and Food, you get priority treatment when theyâre very big like that. Weâre not as big as Disney and a lot of these other channel conflicts that Dish was going through, so we were able to sit down and really talk with Dish. Like weâd said, weâre been partners with them for 20 years, nobody wanted to go through what we were going through, so once we resolved it, then there was just the process of going through the sign-up again and getting all the slots right, and making sure weâre on the same channels as we were before. I have to say that it happened faster than I expected, even though it was a painfully long five, six months, but that was something that we were expecting and that we wanted to guide to. I canât say enough again about the customers that are there and the team at Dish. We were all working towards the same strategy of finding a place that we both felt good about, and thatâs what we were able to do. I know itâs early to talk about numbers for â23, but just as it relates to the sale-leaseback, what is that going to do to the numbers in aggregate as you consider the lease payments and presumably a reduction in debt-related interest expense? Yes Alex, when you think about our business and our performance, this is like weâre at the tipping point, if you will. A year and a half ago, I talked about being EPS positive in Q4, and that is an important thing for 2023 as well. We first had to fix the revenue--first we had to fix the expense structure, then the customer file, then the revenue, then we put our pieces together and now weâre off to the races. If you think about our year-to-date performance and you say, well, I hear all that good news but year-to-date, weâve lost whatâs the net income, in the $40 million range year to date, but if you break those pieces down and you think about the core business and then the below-the-line costs or the integration costs, itâs a very compelling picture and it works something like this. Call us a year-to-date net income loss of $40 million, whatâs not going to be there next year? Well, we have about 20--you know, of that $40 million net income loss, about 22 of it is related to one-time costs related to either the integration of the four acquisitions weâve made in 2021, or really half of it is the Shaq write-off that I mentioned earlier. That does not happen again next year. The other chunk, the next biggest chunk would really be the $14 million, $15 million in non-cash depreciation, amort, stock comp - again, non cash, not an issue. But as you mentioned earlier, the $16 million in interest that weâve paid year to date, itâs too high, and thatâs why we talked about it in February and thatâs why weâre doubling the target that we established at the beginning of the year of 25 and coming in at 50. We expect to see our interest alone drop in the $4 million to $6 million range, depending on the complexities of how we use the additional sale proceeds from the sale-leaseback, so all of those elements along with the core business--you know, if you peel the onion that way, you look at the elements I just mentioned, the core business is profitable today and weâre fixing these other one-time events, so the multiplier effect of that next year is pretty significant. Thatâs why weâre as excited as we are, as fixing the balance sheet also fixes the profitability and the capital structure from an interest perspective. It also means that as Iâve talked about before, the players are on the field here in terms of assets and our strategy. Weâre not seeking any more acquisitions - that was what was important about 2021, to get the durability of having three revenue streams together for our four television networks. Thatâs what weâve done. Itâs messy, we are through that phase, and thatâs why we are excited about 2023. Thank you. Weâve reached the end of our question and answer session. Iâd like to turn the floor back over to Tim for any further or closing comments. Thank you. That does conclude todayâs teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
EarningCall_1919	Good day, everyone, and welcome to the Fourth Quarter 2022 HP Earnings Conference Call. My name is Emma, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Good afternoon, everyone, and welcome to HP's fourth quarter 2022 earnings conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations web page at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K and Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings for the years ending October 31, 2022 and 2023 and the quarter ending January 31, 2023. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year ago period. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. Thank you, Orit, and thank you, everyone, for joining the call today. I'm going to focus my remarks on three key topics: First, I will recap our Q4 and full year results. Then I will discuss actions we are taking to position our business for the future, including a new three-year plan focused on structural cost reductions that will drive the next phase of our digital transformation and the investment in our growth businesses. And I will close by talking about our outlook for 2023. But let me start by setting some important context. It has now been three years since I became CEO. From the day I took over, my top priority has been to deliver long-term, sustainable, profitable growth while transforming our business for the future, and we have made important progress. We started by launching an aggressive plan to unlock value. We implemented a new global operating model that brought us closer to customers and helped us significantly reduce structural costs. We initiated actions to rebalance profitability in our Print business. And we began to diversify our portfolio to capture more value per customer. We expanded into adjacent growth categories such as peripherals. We extended our services and solutions offering, and we shifted more of our business to subscription and contractual models. These changes helped us to improve our operational performance. They also position us well for the disruption caused by the pandemic, which we were able to use as a catalyst to accelerate our transformation. And our track record over these past few years provides a window into what you can expect from us moving forward. We have proven to be resilient in the face of changing market conditions. We delivered strong free cash flow, controlled our costs and scaled our growth businesses. At the same time, we will continue challenging ourselves to do better regardless of the external environment, and there are areas where we need to do better. When we see things that aren't working, we will fix them, and we will embrace every opportunity to improve our performance because our customers, shareholders and other stakeholders deserve nothing less. You can expect us to take the same approach in 2023 and beyond. Revenue was $14.8 billion, down 11% nominally or 8% in constant currency. This reflects macro headwinds in the market and is very consistent with what we described last quarter. We continue to focus on what we can control. We managed our pricing mix and cost to deliver non-GAAP EPS of $0.85, which is towards the high end of our previously provided outlook. And we delivered strong free cash flow of $1.8 billion, while returning $1 billion to shareholders. Very importantly, we also maintained our momentum in our growth portfolio. In short, we did what we said we were going to do last quarter. Turning to our Q4 business unit performance. Personal Systems revenue were $10.3 billion. That's down 9% in constant currency year-over-year, but up 2% sequentially or 4% in constant currency, including two months of Poly's results. The Poly integration is going well so far with the business performing better than expected. We continue to receive very positive feedback from the market about the opportunity ahead. We are well positioned to accelerate our peripheral growth, and we expect Poly to be accretive to non-GAAP operating profit and EPS in fiscal year '23. Our PS operating margin was 4.5% in the quarter, below our long-term target range due to increased competitive pricing, particularly in EMEA. Still, we remain confident in the long-term trajectory of PS as we navigate near-term volatility in the market. The PS TAM remains above pre-pandemic levels, and we are making progress against our long-term strategic priorities. This includes shifting more of our mix to high-value segments. In Q4, our Commercial business continues to account for more than 2/3 of our overall PS revenue. However, we are not satisfied with our PS market share results this quarter. We know we can do better, and we will. We see many opportunities to improve our execution and gain share in key segments of the market. In Print, revenue was $4.5 billion. That's down 7% year-over-year or 6% in constant currency, largely due to continued softness in the Consumer market, both hardware and supplies and supply constraints. That said, our operating margin of 19.9% was well above our target range, reflecting disciplined cost management and pricing. Our Commercial business made a good recovery during the quarter, with office hardware revenue growing double digits year-over-year and sequentially. This was offset by declines in home and supplies, both of which were in line with our expectations. We also made progress against our plan to rebalance system profitability and further reduce our reliance on transactional supplies. HP+ and Big Tank printers continue to become a larger portion of our portfolio mix, representing about 55% of our printer shipments. And we had another good quarter in Industrial Graphics and 3D, both of which grew revenue year-over-year and sequentially. Now turning to the full year. Our Q4 results capped off a solid 2022 in the face of tough market conditions in the second half. Fiscal year '22 revenue was $63 billion. That's down 1% nominally and up 1% in constant currency. We exceeded our full year revenue target for our key growth businesses, each of which delivered double-digit organic growth. Collectively, they generated more than $11 billion in revenue. That's $1 billion above our target and reflects the strong momentum we are building. We delivered non-GAAP EPS of $4.08. That's up 8% year-over-year and within our target range. We generated free cash flow of $3.9 billion, and we returned $5.3 billion to shareholders in the form of share repurchases and dividends. We also continued to advance our sustainable impact agenda. This is a key differentiator for our brand, and I am proud of the work our teams are doing to make it a competitive advantage. This year, we were the only technology company globally to receive an A rating from CDP, one of the world's leading NGOs dedicated to environmental sustainability reporting. And almost all the new printers, laptops, notebooks, displays and workstations we launched in 2022 included recycled materials. Sustainable impact will remain a key strategic priority moving forward. Fiscal year '22 also marked the completion of our three-year value creation plan, and we exceeded all the key targets we set. In addition to delivering on our financial commitments, the plan drove important investments in our future. Most notably, we invested in our digital infrastructure to begin replatform in the company. And we invested in both R&D and M&A to accelerate the growth of our businesses. These investments have strengthened our resilience and positioned as well for the volatile market ahead. I now want to talk about what comes next because while we have delivered on our value plan, we are not done, and we have initiated the next phase of our transformation. Our ultimate goal is to create a Future Ready HP. Future Ready is our strategic framework that we are driving across the company. It has two primary objectives. One is to develop the portfolio and operational capabilities needed to drive sustainable growth. The other is to further reduce our cost. Marie will talk more about the cost side of this transformation. Today, I am going to walk you through three key elements of our Future Ready plan, digital transformation, portfolio optimization and operational efficiency. They are also the major drivers of savings of the plan we are announcing today. I will start with digital transformation. We are continuing the process of digitizing the company. We plan to capitalize on the infrastructure investments we made over the past three years to simplify and accelerate many processes through automation and end-to-end management. For example, we are launching end-to-end initiatives that will enable faster conversion from lead generation to free cash flow. Our digital transformation will also drive productivity, speed and quality of our execution across supply chain, customer support and go-to-market. In addition, our new digital backbone will enable us to scale key growth businesses by delivering new customer value propositions such as personalized services and solutions that allow us to capture more value per customer. The second area of focus is on optimizing our portfolio. In the current environment, I believe it's essential that we zero-in on businesses where we can drive significant competitive advantage and market leadership. We have an opportunity to create a more focused and more growth-oriented line of businesses based on innovation that meets the changing needs of our customers. We also have opportunities to simplify our portfolio. For example, in Personal Systems, there is an opportunity to significantly reduce our number of unique SKUs. And we plan to significantly reduce complexity and cost in businesses where we don't expect to achieve growth but can drive value. A significant portion of the savings we generate is expected to be invested to drive innovation in our key growth businesses to increase the lifetime value of our customers. I'll give you some examples. In hybrid work solutions, we intend to leverage the combined strength of Poly and HP to drive attach, while expanding in software and services to deliver differentiated hybrid work solutions for meeting rooms and home offices. In gaming, we see significant opportunity to drive better collective experiences through both software and hardware. And we will create seamless experiences across PCs, displays and peripherals. Through our newly informed workforce services and solutions business, we will simplify IT management for customers through new Device-As-A-Service offering tailored for hybrid ecosystem. We will also expand our consumer services offerings beyond Instant Ink to include new areas such as paper and print hardware. In Industrial Graphics, we will continue to lead the industry in innovation that drives that analog-to-digital transformation. And in 3D, we will continue to invest in our own 3D end-to-end printing applications and in our metals portfolio. And we expect these businesses collectively to continue growing organically double digits next year. The third area of focus I'm going to cover today is delivering operational excellence. We plan to continue to optimize our performance by driving efficiencies, simplifying organizational structure and removing unnecessary costs. This work will build on our previous transformation initiatives to unlock new structural savings. We will be taking actions across the company to reduce our variable spend and structural costs. For example, in our Print business, we will further reduce our core fixed cost structure and align it to post-pandemic market sizing. And our consumer subscription offerings will allow us to be more efficient in simplifying our portfolio. The cost actions of our Future Ready plan will generate at least $1.4 billion in gross annual run rate structural savings by year-end fiscal year '25. They will allow us to mitigate near-term market headwinds, mitigate softness in the core businesses; and just as importantly, to maintain investments in long-term growth. As part of the actions we are taking, we will be reducing the size of our workforce over the next three years. We expect to reduce it by 4,000 to 6,000 people. These are the toughest decisions we have to make because they impact colleagues we care deeply about. We are committed to treating people with care and respect, including financial and career services support to help them find their next opportunity. But while these are difficult decisions, we are doing what's best for our business. Let me now provide some color on our outlook for the year ahead. We expect to operate in a challenging macro environment during fiscal year '23. In our guide, we are not assuming a significant economic recovery over the next 12 months. We expect our second half performance to improve, mostly driven by the cost-saving measures we are implementing. We plan to maintain our current capital allocation approach, applying the same framework we have used during the last three years. We plan to continue to return at least 100% of free cash flow to our shareholders over time unless opportunities with a better return on investment arise and as long as our gross leverage ratio remains under 2x. Given the volatility of the market, we believe it's important to maintain a healthy balance sheet through prudent financial management. Therefore, we will temporarily reduce our share repurchase activity in the near term. We are confident in the actions we are taking to navigate current market conditions and drive long-term value creation. And today marks the start of the next phase of our strategic journey. While our growth trajectory may be uneven in the face of volatile market conditions, we remain confident to grow low single digits over the long term. Based on our track record over these past three years, you can count on us to deliver on our commitments. Thank you, and good afternoon, everyone. Our Q4 results were impacted by many of the same macroeconomic challenges we highlighted last quarter, including a significant slowdown in consumer demand, FX and inflation. That said, we are adapted quickly to the current environment and have demonstrated disciplined cost management to deliver solid results to finish out the year. In addition, we returned significant capital to our shareholders while successfully closing our acquisition of Poly. We continue to believe in the long-term opportunities across our business and are confident we have the right strategy and portfolio of assets to drive long-term value creation. Today, I will cover our Q4 results and a recap of FY '22 followed by details about the cost transformation component of Future Ready, building upon the foundation we laid in our previous program and then finish with our outlook for Q1 and FY '23. Turning to our Q4 results. Net revenue was $14.8 billion in the quarter, down 11% nominally and 8% in constant currency. Gross margin was 18.4% in the quarter, down 1.2 points year-on-year driven by FX and increased pricing competition, particularly in PS. Non-GAAP operating expenses were $1.6 billion or 10.7% of revenue, down 18% year-on-year. In Q4, we installed further rigor at our cost management with OpEx down sequentially, excluding Poly. Year-on-year, we reduced our OpEx spend by nearly $350 million by prioritizing our spend and reducing variable compensation, while also capturing additional structural cost savings under our transformation plan. At the same time, we made and expect to continue to make prudent and targeted investments where we anticipate significant opportunity to drive growth, including our key growth areas, which Enrique outlined earlier. Non-GAAP operating profit was $1.1 billion, down 15%. Non-GAAP net OI&E expense was $128 million for the quarter, up sequentially, largely as a result of our acquisition of Poly. Non-GAAP diluted net earnings per share decreased 10% to $0.85 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes net expenses totaling $855 million, primarily related to acquisition-related charges, amortization of intangibles, tax adjustments and restructuring and other charges, partially offset by non-operating retirement-related credits. As a result, Q4 GAAP diluted net earnings per share was zero, mostly due to onetime noncash tax expenses. Now let's turn to segment performance. In Q4, Personal Systems revenue was $10.3 billion, down 13% or 9% in constant currency. This compares to the 3-point headwind we had expected. PS revenue includes just two months of Poly's results following the successful completion of the acquisition in late August. Total units were down 21% on tough compares. We also saw pricing competition increase sequentially due to high-channel inventory across the industry. And while supply availability has improved significantly, constraints persisted in some pockets of the business. Drilling into the details, Commercial revenue was down 6% or 2% in constant currency. Consumer revenue was down 25% or 21% in constant currency, with FX remaining a significant headwind this quarter. As an example, currency was an approximate 6-point headwind to our Personal Systems business in EMEA this quarter, increasing 1 percentage point sequentially. By product category, revenue was down 23% for notebooks, up 1% for desktops and up 9% for workstations. We saw a strong recovery in gaming sequentially with revenue up solid double digits due to better product availability. We have cleared most of our outstanding backlog and finished the quarter at a level consistent with pre-pandemic levels and with most of the remaining backlog reflecting higher value units. Personal Systems delivered $458 million of operating profit with operating margins of 4.5%. We ended the quarter below our long-term range for operating margins, largely as a result of particular weakness in EMEA Consumer revenue. Operating margin declined 2 points year-over-year due to currency and increased promotional activity given elevated industry channel inventory levels, especially in the Consumer business. These headwinds were partially offset by mix, lower commodity costs and variable compensation. We are pleased with the strong execution by the Poly team. They delivered just above breakeven operating profit and exceeded expectations for the quarter. In Print, our results reflect our focus on execution and the breadth of our portfolio as we navigated the highly dynamic environment. In Q4, total Print revenue was $4.5 billion, down 7% nominally or 6% in constant currency, driven by lower Supplies revenue and lower home hardware units combined with increased pricing competition in the home business. This was partially offset by higher office hardware units and ASPs and growth in Industrial Graphics and Instant Ink services. Total hardware units declined 3% driven largely by continued supply constraints for certain IC components and lower Consumer demand. We have taken mitigating actions that are beginning to yield improvements in our supply availability at a pace consistent with our plans. While this has enabled us to make progress on reducing our backlog, we still expect print hardware constraints to extend into FY '23. By customer segment, Commercial revenue increased 1% or 5% in constant currency, with units up 5%. Consumer revenue was down 7% or 4% in constant currency with units down 4%. Office continued with its gradual recovery, while pricing remained disciplined even as supply constraints eased incrementally. Home hardware demand softened further sequentially, particularly in the EMEA and Americas regions impacting ASPs as competitive pricing increased during the quarter. In Q4, Commercial recovery remained slow due to the gradual and uneven pace at which the return to office is progressing. There were pockets of strength with commercial hardware units up 5%. And in graphics, our Indigo business closed its largest deal to date for 50 digital presses with ePAC, a leader in the flexible packaging market. Supplies revenue of $2.7 billion declined just under 10% in constant currency, slightly better than expected as demand weakness appeared to stabilize in the quarter. The decline was driven primarily by continued Consumer weakness, particularly in the EMEA region and the slow recovery in the office, partially offset by favorable pricing actions and continued market share gains in ink and toner. Supplies finished FY '22 down nearly 7% on a constant currency basis. Adjusting for approximate 1-point headwind related to the exit of our Russia business, the year-on-year decline in Supplies came in consistent with our original guidance range of a decline of low to mid-single digits. Print operating profit increased $73 million to $903 million, up 9%, yielding an exceptional operating margin of 19.9%. Operating margin increased 2.9 points year-on-year, driven by favorable overall pricing and OpEx management, including lower variable compensation, partially offset by unfavorable mix and higher commodity costs. Now turning to cash flow and capital allocation in Q4. Q4 cash flow from operations and free cash flow was $1.9 billion and $1.8 billion, respectively, exceeding our guidance for the quarter. The cash conversion cycle was minus 29 days in the quarter, flat sequentially as lower days payable outstanding and higher days sales outstanding was offset by the decrease in days of inventory. In Q4, we returned approximately $1 billion to shareholders. This included $750 million in share repurchases and $249 million in cash dividends. At the end of FY '22, we successfully finished our transformation plan, generating better-than-expected structural cost savings. Our strong performance and our value plan over the past three years, including our capital return and broader capital allocation priorities were made possible in part by the transformation journey we have been on. In 2019, we launched a three-year plan to unlock significant value and become a leaner, simpler and more digitally enabled company. We took decisive actions aligned to the principles of our value creation plan to become closer to our customers by simplifying our operations and replatforming the company. In total, our transformation program delivered growth annualized run rate savings of over $1.3 billion and reduced our headcount by approximately 7,700 as expected. As part of our simplification journey, we changed our operating model, moving to one commercial organization, and created strong centers of excellence to drive efficiency and faster decision-making. In addition, we optimized our real estate footprint, creating efficient digital workspaces as we transitioned to a hybrid work model. We also made significant progress in optimizing our manufacturing footprint and continuing to enhance resiliency while reducing our cost structure. Digital replatforming was another defining enabler of our transformation efforts. We built a new digital backbone for the company with the deployment of one ERP system, creating the ability to deploy additional tools and capabilities. In addition, this new platform provides the foundation upon which we can drive incremental cost savings as well as build new businesses with different business models as we move into FY '23 with the launch of our Future Ready Transformation Plan. We are now launching cost action efforts as part of that Future Ready program, continuing to the next phase of our transformation. We'll continue to take actions to reduce structural costs across COGS and OpEx to drive efficiencies while protecting the investments necessary to accelerate our transformation, ensuring we are well positioned to drive long-term growth. This program is expected to run for three years, and we expect to generate at least $1.4 billion in gross annual run rate structural cost savings by the end of FY '25. We expect at least 40% of the run rate savings or approximately $560 million to be achieved by the end of FY '23. We have line of sight to these savings, and we also have a good funnel of additional cost savings opportunities that we are betting to help us exceed these targets. The total expected restructuring charge is approximately $1 billion, which includes approximately $200 million in noncash charges in FY '23. We anticipate approximately $600 million of the total charges to be in FY '23 with the rest split roughly equally in FY '24 and FY '25. As Enrique mentioned, we take workforce reductions very seriously and with the utmost care, but they remain critical to the long-term health of HP. In total, we expect to reduce headcount by 4,000 to 6,000 over the next three years. In addition to labor-related restructuring charges of roughly $700 million, we expect additional non-labor charges related to IT, real estate and other corporate charges. We anticipate the gross savings from this next phase of transformation will partially offset the challenging macro in the near term and incremental investments in growth opportunities we discussed earlier. In summary, these actions will help enable us to build a stronger HP. Looking forward to our Q1 and FY '23 outlook. We continue to believe in the long-term opportunities and growth in our end markets, including our key growth areas and our strategy to create value for shareholders over time. Given the current macro environment, we do expect near-term volatility, in particular, keep the following in mind related to Q1 and FY '23 financial outlook. Given the challenging macro environment driven by the headwinds I've described, we are modeling multiple scenarios based on several assumptions. For FY '23, we see a wide range of potential outcomes, which are reflected in the outlook ranges we are providing today. Consistent with our Q4 results and ongoing strategy, we will continue to rigorously manage our OpEx spend while continuing to prioritize investments where we see opportunities for growth. This is made possible in part by the decisive cost actions we are announcing today. We expect currency to be about an approximate 5% year-over-year headwind in Q1 and 5% for FY '23 reflecting the current strength of the U.S. dollar. In Personal Systems, we expect the overall PC market to see an approximate 10-point unit decline versus FY '22. Many of the recent challenges we have seen in FY '22 will likely continue into FY '23, including softer demand in both Consumer and Commercial and higher channel inventory levels across the industry. We anticipate these factors will put continued pressure on overall pricing at least through the first half of '23. We expect Personal Systems unit mix to continue to improve as we focus on higher-value categories, including commercial premium and hybrid work solutions. We expect Personal Systems margins to be below the low end of our 5% to 7% target range through at least the first half of FY '23 driven by the high normalization of industry channel inventory levels and then improve into the second half as channel inventory normalizes and our transformation-related cost actions start to more meaningfully impact our cost structure. And regarding Q1 Personal Systems revenue, we expect to be down mid-single digits sequentially. In Print, in terms of the overall print market sizing, we expect it to be down approximately 3% year-on-year driven by the challenging macro environment and slower-than-expected return to the office. In the office market, we continue to expect the market sizing to be approximately 80% of our pre-pandemic projections. In home, we expect the market to be down in '23 versus the exceptional performance during COVID, but still above our pre-pandemic projections. We expect continued softness in Consumer demand and favorable pricing in Commercial units, offsetting some normalization in Consumer pricing, particularly in the first half of '23. In terms of our print hardware supply chain, we expect constraints to continue, particularly in office hardware, at least through first half of FY '23. We expect Print margins for FY '23 to be at the high end of our 16% to 18% range, driven by the resiliency of our portfolio and disciplined pricing and cost management including our transformation efforts to reduce our print fixed cost structure, as Enrique mentioned. And finally, regarding Supplies revenue, we expect to decline low to mid-single digits in FY '23 in constant currency, consistent with our long-term outlook. For FY '23, we expect to be within that range in aggregate. But for the first half of '23, we expect to be at similar levels to Q4 given the macro environment and tough compares. We expect free cash flow to be in the range of $3 billion to $3.5 billion, which includes approximately $400 million of restructuring cash charges. From a seasonality perspective, we expect the second half to be stronger than the first, largely consistent with our net earnings combined with the fact that our first quarter is typically lower given the timing of prior year variable comp. Furthermore, normal, quarterly sequential seasonality does not apply for FY '23, given the dynamic macro environment. But we do expect some improvement in our revenue trajectory in the second half of '23. That said, we expect our key growth businesses collectively will continue to grow double digits organically in FY '23 as we continue to invest in innovation and adjacent market opportunities. With regard to OpEx, we expect to rigorously manage our overall cost structure as part of our transformation, particularly in our core businesses, where we expect OpEx to be down year-on-year. However, including Poly, we do expect total OpEx to be up year-on-year. In addition, for FY '23, we expect OI&E expense will be approximately $0.5 billion, consistent with our Q4 exit run rate. Moving to capital allocation. We are not making any changes to our capital return framework. As we have discussed in the past, we are committed to our strategy of returning 100% of free cash flow to shareholders over time as long as our gross leverage ratio remains under 2x, and there aren't any better return opportunities in order to maintain our credit rating. Given the challenging current environment, consistent with our disciplined financial management, we expect share repurchases will be modest near term based on our FY '23 outlook today. Lastly, we announced today that we are raising our annual dividend by 5% to $1.05 per share, reflecting confidence in our long-term outlook for the business. We have raised our dividend every year since separation in late 2015. Taking these considerations into account, we are providing the following outlook: We expect first quarter non-GAAP diluted net earnings per share to be in the range of $0.70 to $0.80 and first quarter GAAP diluted net earnings per share to be in the range of $0.47 to $0.57. We expect full year non-GAAP diluted net earnings per share to be in the range of $3.20 to $3.60. And FY '23 GAAP diluted net earnings per share to be in the range of $2.22 to $2.62. For FY '23, we expect our free cash flow to be in the range of $3 billion to $3.5 billion, which is net of about $400 million in restructuring cash outflows. Before we open for Q&A, I want to leave you with the following thoughts: First, as part of our Future Ready plan, we are taking clear and decisive actions, which includes aggressive structural cost reductions as we have just shared. Second, we are adapting to these challenging market conditions with our Future Ready cost transformation program, which includes plans to drive significant cost savings. Third, we're confident in the long-term growth opportunities and are capitalizing on these opportunities by investing to become a more digital company with a more growth-oriented portfolio. Fourth, we have an experienced management team with a proven track record in up and down markets. We deliver on our financial commitments. We are disciplined in our capital allocation and committed to a strong balance sheet. In short, we are steadfast in our commitment to deliver long-term value creation. We are building a stronger HP, and I look forward to sharing our progress with you at FY '23. I guess, Enrique, I'm hoping you just start off talking a little bit more about the transformation plan. And then what I'd love to understand is what do you think HP looks like after the transformation plan is done, maybe in terms of the growth rates on the operating margin profile versus what you've seen historically? I want to just to understand what would be different about HP post the current transformation plan? And then if you can also just touch on, how do we think about net savings, the gross numbers you're talking about through this transformation? That would be helpful. Sure. Thank you, Amit. So first of all, we -- because of the transformation, we think that we will continue to support the guide that we provided last year about sustained revenue and profit growth year-over-year. This has been the goal that we had before and continues to be the goal that we have now. From a business perspective, this will allow us to continue to accelerate our subscription and services business. We will be a more efficient company because we will be leveraging our digital infrastructure to support and to -- we will have transformed many of the key processes that we have and the mix of our business between the core businesses and what we call the growth businesses will also be different. This will be the key driver that we will expect to achieve through the transformation. Amit, maybe I will just add a comment, and good afternoon, regarding the savings. So we do expect at least $1.4 billion of gross run rate structural savings by the end of '25 and approximately $560 million of that by the exit of '23. Just to add, it will be a mix of both COGS and OpEx. And we look at this over time, as Enrique said, and we expect that these savings and investments that we're making are going to provide that significant flow-through over time. Got it. And if I can just follow up on the Print margins. They've held up really well despite the decline we see on the supply side of the business. As you think about the performance especially in the last three, four quarters on Print margins, what are the two, three things that you think made margins to sit at 20% right now, near 20%? And then what do you think is the durability of this margin level at least in the first half of next year? Yes. No, thanks very much, Amit. So look, as you said, we're really pleased with the Print margins that were at 19.9% in Q4, which is actually at the high end of our expected range. And that increase, if we look at it from a year-on-year perspective, is a combination of things. Firstly, we've demonstrated disciplined OpEx management that's contributed along with overall pricing durability, as you mentioned. And I think both of these factors combined have really helped to sort of play into our performance. As we look into next year, we do expect once again to be at the high end of the range. And it's really contributed by both the resiliency of the portfolio, our strategy, a combination of that pricing management. I think that we've really mastered along, obviously, with the benefits of the Future Ready Transformation program that we just announced today as well. Yes. If you remember, we announced a plan to rebalance profitability between hardware and supplies [three] (ph) years ago. We have been executing on that. This quarter, we shared that more than 50% of the printers were profit upfront. So all this has also helped. But as Marie said, we expect to build a business within range during 2023. My first question is looking at your growth areas. I think we understand where there's pressure on your model. But maybe if you could talk a bit more about the $11 billion in revenue that you've generated, and I'm not sure if that's like pro forma for Poly or it doesn't include Poly. I think it is excluding. I'm sure it's very small print. But if we can think about each one and their potential growth contributions, and maybe how to think about the margin potential for each one of those? And then I have a follow-up question. Sure. So yes, you are right, Shannon. The $11 billion does not include Poly so this will be on top of $11 billion that we explained. And the goal that we had at the beginning of the year was for them to be about $10 billion. So this is almost $1 billion more than what the plan was. I think what we can say at this point is all of them grew double digit during 2022, and we expect collectively to grow again double digit in 2023. And as we share, if we look at the year, the gross margin was above the gross margin of the company. In some of them, we are still in investment mode, and we know we need to continue to invest to continue to accelerate the growth. And this is one of the reasons why we have been working on the transformation for a few months now because we know that we need to both compensate for some of the challenges that we see on the market side given the slowdown in some of the markets, but we also need to continue to invest on the growth initiatives because they will carry the growth of the company and the value of the company in the future. Okay. And then Marie, if you can talk a bit about on the cash flow side of things. I mean, you're guiding $3 billion, $3.5 billion. I assume that includes restructuring. Maybe it doesn't. But just in general, how do we think about sort of normalized cash flow for this model after you go through or as you go through the restructuring plan and areas where maybe you can draw down in terms of working capital? And just again, I think people are trying to understand maybe when you would get back to where you can buy back stock, just your comfort level and what you're seeing in terms of cash flow? Absolutely. And good afternoon, Shannon. So as you said, the cash flow guide is $3 billion to $3.5 billion. And just a clarification, that actually does include the $400 million of restructuring cash flow. So just take that into account in your model. Now in terms of how to think about free cash flow, as you know, it tracks with net earnings. But in any quarter, as you've seen just in our results, in the last couple of quarters, it's driven very much by the mix of business that we see in the quarter and changes in working capital. And those items include everything from the restructuring, the bonus, et cetera, and also just adjustments that we make to our inventory level. So you're going to expect that there's going to be a level of seasonality around it as well. And then as we're thinking -- specifically about the first quarter that's coming up, we would say it's going to be -- we're going to guide here to a lower number because we expect typically from a seasonality perspective, that's when we pay out the bonus that we accrue in the prior year. And also, we expect specifically in Q1 just due to the fact we've got this combination of both the unfavorable business mix from the top line pressure of Personal Systems, you combine that with the bonus payout and restructuring and with the increase in AR from contract manufacturers, which is partially offset by continued reductions we're taking at inventory level, we expect that our cash flow in Q1 is probably likely to be negative towards breakeven. So I know I've said a lot there is definitely a lot of factors going into driving the linearity in our cash flow. But once again, still very confident in the guide that we've given for the year of $3 billion to $3.5 billion. And then I'll just turn it to Enrique if he wants to comment at all with respect to our repo strategy. Sure. We can talk about that. We also shared in the prepaid remarks that we are not changing our capital allocation plan. But as we have said before, we are going to be returning to shareholders 100% of free cash flow unless better opportunities arise and always within the our -- where we will stay within our leverage rate. In Q4, we completed the acquisition of Poly. We did it one quarter before we were planning, and therefore, during the beginning of the year, we are going to slow down or moderate our share buyback to -- in alignment with our plan. But our plan is to go back to the original plan in the second half as we will have more stronger situation for a free cash flow perspective. And that's our plan. Yes. I'll just add, it is important that we're going to ensure that we at least offset dilution from employee benefit plans as well. Yes. I'm wondering if you could specify how significant the backlog drawdown was in the quarter, just so we can get a sense of what kind of baseline normalized order of revenue growth was. And then you provided some context on your expectation for Q1 revenues for PCs to be down mid-single digits sequentially. I'm wondering if you can comment on your revenue expectations for Q1 overall and for fiscal '23. For the next four quarters, Dell is calling for revenues to be down in the teens. I'm wondering if you see a more optimistic outlook than that? And I have a follow-up, please. Sure. I'll take the question on market and then Marie will talk about Q1. So from an order and projection perspective, Toni, the way we are modeling the PC market for next year is to -- we are expecting that it will be declining by 10%. And from a backlog perspective, we basically cleaned the majority of our backlog during Q4. And we are back to where we were before the pandemic, which is one of the reasons why we expect the market to be in the minus 10% range in -- during 2023. Marie, do you want to talk about Q1? So just on the revenue per PS, we do expect it to be down mid-single digits sequentially. And obviously, that's driven by all the conditions we've talked about earlier today. And as you know, we normally don't guide revenue, but we do expect that normal seasonality won't apply in '23. So we'll see some improvements in the overall revenue trajectory in the back half. But overall, we do expect to see PS revenue down here in Q1. And the situation is different on the print side, especially on the Commercial side, we continue to have some shortages as we were expecting. So backlog for Commercial print remains elevated and we expect to clearly during the first half of 2023. Okay. I still don't feel like we have a pretty good sense of what your range of outcomes is for revenue growth for 2023. But -- maybe you can address that. But just following up with the second question, you said Supplies would be back to your traditional model of down kind of low to mid-single digits. But you pointed to minus 10% growth in the first half. So that means you're expecting Supplies to grow in the second half. That's pretty well the simple math. And why did we have this big perturbation from model the last couple of quarters and maybe the next couple of quarters. Is this just channel inventory correction? Or why do we have a sudden reset off of model that is minus 3% to minus 5% and minus 10% and then it kind of bounces back. Sure. So as I explained in the last call, the changes in the performance in the supply business is really driven by a slowdown of Consumer demand. We started to see this at the end of Q3. And as we were expecting, we have continued to see that in Q4, and we project that this will continue. Of course, as demand gets adjusted, there is an inventory adjustment, but this is not the reason why we are seeing -- the impact in supply is really driven by adjustments in user demand. . For the full year, as we said last quarter and we continue to say, we expect the business to go back to our original guide. And this means that the second half will have stronger performance than the first half. I think as we look at quarter growth as one of the key metrics, I think it's important to realizing that adjustments done in previous quarter have a lot of impact on growth. So we don't think it's the best way to measure the health of the business because anything that happened a quarter ago will have an impact on what is the next quarter. But again, the big impact is driven by a slowdown on Consumer demand. And I think it's also important to highlight that our channel inventory is in a very good position today. I mentioned last quarter that it was slightly above where we wanted it to be. We are now totally within the position where we like to be. Yes. I've got two as well. Just going back to kind of Toni's questions a little bit. I guess on the context of the revenue side, just correct me if I'm wrong, the 10% number with regard to PCs being down, that's a unit number. So as we see ASP pressure come into play, would the assumption be that revenue declines more? And then also, on the revenue context, I think there was a comment thrown out there about 3% with regard to print. I'm curious, was that 3% sequential down in this quarter? Or was that kind of the commentary for the full year? I was just confused by that comment around 3% decline in Print. And I got a follow-up. Sure. Let me start with the print side, and then Marie will talk about PC. On the print side, the minus 3% is the expected decline in the overall market for print between fiscal year '23 and fiscal year '22, and there are different dynamics behind that number. We are expecting the Consumer number to -- the Consumer market to go down year-on-year, the office market to go slightly up and the industrial market to continue to grow like it has been growing during 2022. The net effect of all these three is a minus 3% growth year-on-year. Marie? Yes. No. With respect to revenue, I think as I said earlier with Toni's question, we do expect to see down mid-single digits sequentially. And as we mentioned earlier, I think Enrique commented in the prepared remarks, down 10% on units, and this is obviously with an environment where you've got higher channel imagery, there is going to be some ASP pressure. So we do anticipate though, as you get into the second half, that should clear out the inventory that we'll see some of the revenue adjust. But I think the way to think about it is that certainly the first half of PCs is going to be challenged. But obviously, we will be doing our best to offset all of this with an improvement in our mix. And I think we've demonstrated that over the last couple of quarters. Yes, that's very helpful. And then I guess the follow-up was on the channel inventory discussion. I guess, do you see that channel inventory is the assumption right now that channel inventory normalizes as we get towards the mid part of calendar '23. Any context of how you would currently characterize your own channel inventory in that? Sure. If we're talking just Personal Systems, absolutely. We expect that the inventory will remain elevated through the first half, but then normalize in the second half. And then as I think Enrique said earlier, Print is in really good shape, both supplies and hardware. I have two as well. Maybe Enrique I start with you. This is your third consecutive kind of three-year cost cutting or transformational plan, I should say, HP's third consecutive at more than kind of $1 billion of gross cost savings, each plan. So I guess if you take a step back and you think about the last maybe almost a decade in that context. Why have the prior plans, I guess, not been enough? Or what are you doing with this specific plan that you haven't necessarily already done, given even last summer, you talked about portfolio SKU rationalization and digital transformation. So just maybe if you could help us understand that. And then Sure. Thank you, Erik. I would say there are two things. First is the world is in a very different position now than when it was three years ago, but also the company is in a very different position. In fact, a significant part of the savings that we are going to be able to achieve now are really driven by the investments that we have made during the last 3 years that really are enabling a significant part of it. For example, when we talk about continuing to work on the digital transformation, we can do it now because of all the investments that we have made during the last three years. Additionally to that, when we look at the return on this investment, it really brings -- has very good results. We are going to be investing $1 billion, and we will get, as Mario was saying, $1.4 billion of run rate savings at the end of '25. So really very solid return. And on top of that, this will also help us to continue to invest in our growth businesses. We think that it is important that as we go through a challenging marketing conditions during the next quarter, we continue to invest in the future businesses of the company, and this transformation is going to enable us to do that going forward. Okay. And then maybe Marie, this one would be for you. Net debt is up a little $4 billion to $5 billion year-over-year. Obviously, Poly had an impact on that. Your gross leverage is creeping towards the higher end of your 1.5x to 2x range -- target range. And so would you be willing to go over 2x temporarily? I mean the math says, you could technically get over 2x over the next 12 months. So are you willing to let leverage get over 2x? And/or why not try to work down some of that just given the more uncertain macro backdrop, rising interest rates, et cetera? Yes. No worries. No, we're very much committed to the strategy. I think we've articulated of staying inside our range. So absolutely, we'll continue to execute against our strategy. We think that the world is, as we have said, very volatile and having a strong balance sheet is really important. So this is why we will stay below 2, keeping investment-grade rating is critical for many of our big deals with large corporations. So this is one of the big reasons why we want to stay there. And if everything we will deliver, we are not planning to go beyond the range. It's Ruplu filling in for Wamsi today. I have two questions. Enrique, one on PCs and one on print. In the prepared remarks, with respect to Personal Systems, you said that you're not happy with the share performance. It looks like HP lost some share, both sequentially and year-on-year. But I'm sure you've already done in this quarter what other companies are doing, which is reducing price. And with the inventory -- channel inventory remaining high for half of fiscal '23, can you talk about your strategy in Personal Systems. How do you think you can gain share? And what are some of the things that -- you talked about execution. So what are some of the things you can do better to gain share in this year? Sure. As we have explained in the past, our strategy and our goal is profitable growth is not to gain share for the sake of gaining share. And therefore, we are very judicious and very careful as we look at deals in different geographies, different segments to make sure that the deals make financial sense for us. This quarter, we saw very aggressive pricing in many countries in the world, especially in the Consumer segment, especially EMEA. And in many cases, we decided not to participate. But we also know that to maintain a strong leadership position in this market, we need to regain share. And this is -- and we think that the cost reduction activities that we have been working on for some time are going to be part of the Future Ready plan, are going to help us to be more competitive and help us to win share during 2023, which is our goal. And that's really the key -- this will be the key driver of the share growth that we expect to have. Okay. Can I ask a follow-up on the Print segment? As people are going back to work, how do you see the relative growth rate of your home subscription business in spending versus the commercial Managed Print Services business are either one -- is one more profitable than the other? And then just as you look at print margins throughout the year, you guided for the full year to remain at the high end of the range. But should we think that the first half going to second half, your Print margins normalize somewhat towards within that range. So can you just give us your thoughts on the relative margins of those two subscription businesses? And how do you see the growth rates for them as well as the margin progression this year? Sure. From a margin perspective, similar to what happens on the transactional side, the home, Instant Ink program is more profitable than the Managed Print Service program. Thatâs driven by the fact that we own almost all the technology stack. From a growth perspective, though, they are not related. We have a lot of opportunity to grow the consumer subscription business and to grow as well the Managed Print Service business, especially as we start seeing some slow but some recovery on the office side. And just on the margins, as I said in our prepared remarks, we do expect to be at the high end of the range. But in terms of just how to think about it half-on-half, just in the first half, we do expect a little more softness in Consumer due to some of the favorable pricing. So we'll see that probably in the first half, some normalization. I have two of them. First one, either for Marie or Enrique, on your cost reduction plan. With the portfolio optimization, how should we think about the TAM opportunity for HP in FY '25, given that I understand you want to do profitable growth. But do you think with the portfolio optimization and the headcount reduction, you're prioritizing one over the other? And then I have a follow-up. Yes. So our portfolio optimization have many different elements. Let me highlight a couple of them. First, we are going to maintain, and in some cases, increase our investment in the growth businesses. As I said before, we expect to get double-digit growth in 2023. And going forward, they will continue to become a more relevant part of the company. On the other side, we also know we have opportunities to optimize some of the businesses in the core side. For example, during 2021 and '22 because of the component shortages, we have to duplicate many SKUs. We had to duplicate investments in boards, in many different parts to compensate for component shortages. This is clearly now an opportunity to simplify, to rationalize and to reduce investment and cost in the cost side. And there are many other things, but these are two good examples of the things you will see us doing. Got it. Got it. Super helpful, Enrique. And then a quick follow-up, actually, a two-part follow-up. On the 10% PC units down, is that for FY '23 or is it for calendar '23? And can you just help us understand what your calendar '22 baseline is? And then the second part of the question is, I think, Marie, you mentioned how second half of FY '23 should get better as inventory digest for PCs. I'm just kind of curious, is that really a function of inventory digestion and you expect demand to improve? Or is that -- because it seems like most companies expect a second half 2023 recovery, but with an uncertain demand environment, what is the confident level on that improvement? Sure. So let me start with a minus 10%. The minus 10% is what we expect the unit decline to be during our fiscal year that goes from November '22 to November '23. We are using that number because we think it's more relevant to understand the guide that we provided today. Marie? Yes. And just on the second half, just bear in mind that not only the channel inventory will be in better shape, but we also will see the impact of the Future Ready Transformation program. So we'll expect to see those gross run rate structural savings that I mentioned about $560 million kick in, in the back half as well. So that's another driver along with -- we should see supply chain improved, particularly in print and high-end PCs. And I'd just add that at the high end of the guide, the upside is really coming from a better macro, but we're not counting on it. So that's what could drive us to the high end of the range. Thank you, everybody, for joining the call today. But you can see that we are taking the actions under our control to manage the situation and to improve the situation. Clearly, we know that we need to both continue to reduce our cost structure, but also to invest for the future of the company because I don't think anybody can predict when the rebound of the economy will happen. But what we want to make sure is that we have a stronger HP when this happened, so we can take advantage of that. So really thank you, everybody, for joining. And Happy Thanksgiving for those of you in the U.S. Thank you.
EarningCall_1920	Good day, ladies and gentlemen. Thank you for standing by. Welcome to Kuaishou Technologyâs Third Quarter 2022 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. The English line will be in listen-only mode. And please be noted that we have been recording. I would now turn the call over to Mr. Matthew Tao, VP of Capital Markets and Investor Relations at Kuaishou Technology. [Interpreted] Thank you, operator. Good evening, and good morning to everyone. Welcome to our third quarter 2022 financial results conference call. Joining us today are Mr. Cheng Yixiao, Co-Founder, Executive Director and CEO; Mr. Jin Bing, Chief Financial Officer. Before we start we would like to remind everybody 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 discussion. The company does not undertake any obligation to update any forward-looking information, except as required by law. As for the important information, including the forward-looking statements, please refer to the company's public information or the announcement of its third quarter 2022 results of the period ending 30th of September of 2022 published earlier today on the company's IR website. During today's call, management will also discuss certain non-IFRS financial measures for company's purposes only. And for a definition of non-IFRS financial measures and a reconciliation of IFRS to non-IFRS financial results, please refer to our results announcement for the third quarter report ended September the 30th, 2022 issued earlier today. For today's call, management will use Chinese as the main language. A third-party interpreter will provide simultaneous interpretation into the prepared remarks session and consecutive interpretation during the Q&A section. Please note that English interpretation is for convenience services only. In the case of any discrepancy, management statements in their original language will prevail. Finally, all references to currency units in the conference call are in Renminbi unless otherwise stated. Now I'll give the floor to Yixiao. [Interpreted] Hello, everyone. Welcome to Kuaishou's Third Quarter 2022 Earnings Conference Call. The third quarter of 2022 was full of challenges for our company and our organization. Like everyone else, we faced multiple headwinds, such as macroeconomic slowdown and resurgence of COVID-19 pandemic. Amidst these challenges, we continued to achieve breakthroughs in both business operations and financial performance by making our unremitting efforts to overcome external difficulties. In the third quarter of 2022, our domestic DAUs increased 13.4% year-over-year to a record high of RMB 363 million. At the same time, operating profits for our domestic businesses in the third quarter remained positive for the second consecutive quarter, increasing by nearly three times compared with the second quarter. Our Group's adjusted EBITDA also continued to improve in the third quarter of 2022. Before going into detail about our business progress in the third quarter, I would like to share with everybody the consideration behind our regional organization and personnel adjustments and my thoughts now that I am directly responsible for our e-commerce business. Over the past few months, we have reviewed our organizational capabilities, structure and personnel with respect to construction of our commercial ecosystem and made corresponding adjustments to continue shifting our efforts and resources to a sustainable and healthy development of our ecosystem of our commerce. We established a company-wide commercial ecosystem committee. We also named a new Head of Online Marketing appointing the algorithm experts to meet Kuaishou Apps products and operations and upgraded our local services unit into independent business department. We made these adjustments based on our plan for Kuaishou's future development and transformation. Specifically, the Commercial Ecosystem Committee will facilitate the coordinated development and integration of our monetization avenues, including e-commerce, online marketing, and live streaming. It will promote collaboration and resource sharing among business units, achieving the goal of healthy and sustainable commercialization through in-depth collaboration. Our adjustment with respect to the Head of Online Marketing was intended to better respond to a quickly evolving and increasing tough challenges in the online advertising market. Through the Commercial Ecosystem Committee's coordination, we realized the tremendous potential of integrating our traffic ecosystem and commercialization. [Indiscernible], our new Head of Online Marketing is deeply involved in the Commercial Ecosystem Committee and is very adaptive at identifying problems and opportunities. He has also profound customer insights and understanding of traffic monetization. We believe he is well equipped to dissect complex problems and create synergy between online marketing and traffic and the company ecosystem. In addition, [Indiscernible] as a recommendation algorithm expert and head of algorithm team has named understanding of our community-based ecosystem, also, our algorithms have always been one of the key drivers for our DAU growth. Going forward, as [Indiscernible] takes charge of Kuaishou's Apps products, operations and algorithms, we can further unlock the technological power of algorithms and product operations and our content ecosystem, thereby discovering more business breakthrough opportunities. At the same time, we will seek to reinforce our organizationâs competency and efficiency by implementing cross-departmental rotation for our mid-level managers. This will help them expand their capabilities and, at the same time, enhance our abilities to cross-business collaboration through sharing practical experience in different businesses. As for the e-commerce business, you may be curious as to why I am heading it directly. E-commerce is one of the key growth engines for the future development and the center of our commercial ecosystem. I am in charge of it directly not because anything is wrong with the business and the CEO is coming to rescue. And on the contrary, we recognize and appreciate the unrelenting efforts that our e-commerce team has made, as well as their own standing achievements. It is precisely because our e-commerce business has quickly grown to its current size and scale that we need to think about its development direction and model from a long-term perspective. We also need to make the right choices that will truly elevate our user experience and promote merchants' healthy development. When it comes to making choices and trade-offs, I am in a position of strengthening in terms of courage and confidence than others in our organization. As a result, in addition to my responsibility as CEO to oversee strategy, business decision-making and organizational management, I will spend most of my time and efforts on the e-commerce for a considerable period of time. I have to work with the teams that our e-commerce business can play a greater role in Kuaishou's commercial ecosystem by better servicing our users and empowering merchants, brands, and KOLs. We believe that although the e-commerce industry has entered a mid- to late-stage of intense competition compared with the traditional shelf-based e-commerce, content-driven live-streaming and short video e-commerce still holds immense potential that can be tapped into through innovation. First, we need to build a merchandize system among the three key elements of e-commerce buyers, merchandize and platform, we need to continue to enhance our outstanding and control of the merchandise elements. We will build out a merchandize system to strengthen our knowledge in this regard and that cost-effective valuation of merchandize to our traffic allocation logic. At the same time, we will improve our merchandize distribution library to guide and help KOLs to choose the right high-quality products. As a result, we will postpone the official launch of our shopping mall service until we further develop our merchandize understanding and control and cultivate our users' mindset and the time spent on merchants or brands. Second, we will establish our listed public domain traffic allocation logic. Right now, we allocate traffic relatively independently and evenly for advertising and e-commerce. But we need to consider these two holistically when deciding on traffic allocation. For example, merchants can leverage advertising traffic to make recommendations to potential buyers. Consequently, we will align the advertising traffic allocation mechanism with the e-commerce needs and direct traffic with the same angle, gradually forming a positive cycle from the public domain to private domain. In the meantime, we will strengthen e-commerce own traffic allocation mechanism through top-down planning. We will pay attention to the competition mechanism and business health indicators and continuously improve our merchandize mix and revenue structure. Third, we will continue to optimize user experience and LTVs through algorithms. In the past, our e-commerce algorithms mainly focused on user interest exploration and the matching between buyers, sellers and merchandize before orders were placed. Going forward, we will place more emphasis on algorithm's continued contribution along the entire e-commerce value chain, such as enhancing mid to long-term conversion by modeling the relationship between long-term high-value users and merchants. In addition, we will incorporate key experience indicators such as the product return and nature of user feedback and complaint rates into our recommendation algorithm to constantly enhance user experience and the overall e-commerce ecosystem. In the future, we'll make persistent efforts in these areas and I will share my strategic thinking on the e-commerce business with you from time to time. Next, I will discuss our key business developments in the third quarter. First, user growth and ecosystem constructions. In the third quarter of 2022, we achieved high-quality user growth. We seized opportunities during the peak user growth season including summer vacation to implement our effective user acquisition and retention strategy and achieve healthy ROI. In the third quarter of 2022, average day use of Kuaishou App increased by 13.4% year-over-year to reach a new high of RMB 363 million, and average MAUs grew by 9.3% year-over-year to record setting RMB 626 million. The DAUs to MAUs ratio remained relatively high at 58.1%. Average daily time spent per DAU increased by 8.6% year-over-year to 129.3 minutes, demonstrating robust user stickiness and vibrant community activity on our platform. In addition, continuing the momentum from last quarter, our total video views grew at a faster pace, compared with total user time spent in the third quarter. Notably, our daily peak video views passed the milestone of 100 billion. Thanks to our refined management and improved efficiency of our user acquisition system, we reached our expected user growth target while continuing to strictly control our investment scale and user growth. Specifically, we expanded our efficient customer acquisition channels through algorithm strategy optimization and retained users at a constantly low cost per DAU by refining our recurring-based operations to target different user groups. In addition, as we reinforce our differentiated social platform and user mindset as our mutual followers on Kuaishou App grew substantially by 63.1% year-over-year in the third quarter to reach a cumulative 23.5 billion. Our original short video content ecosystem is the foundation of our platform. As of September 30, 2022, we had more than two million creators who had more than 10,000 followers each and our creators had accumulated a total of nearly 300 billion fans. The number of works released by our creators and a total number of generated interactions have both increased considerably. At the end of third quarter, the number of cumulative video uploads on Kuaishou App exceeded 550 billion and during the quarter, our short videos sparked more than four billion interactions on a daily basis, up 40% year-over-year. Meanwhile, strengthened by our supported policies, the commercial value of our creatorsâ content continued to grow. Over the past year, more than six million creators have received traffic support on a scale of RMB 100 million and in addition, we have 20 million creators earned revenue every year for three consecutive years. In July, we hosted our Annual Photosynthetic Creators Conference and going forward, we will continue to upgrade our services, resources, and products for creators. We will also subsidize outstanding creators through attractive incentives and revenue opportunities to maximize the flywheel efforts in the creator ecosystem. We have also been actively expanding sort video content supply in various verticals. In the third quarter of 2022, we continue to tap into the potential of short plays and explore more diversified themes such as benevolence, a portrait of the professional lives of medical staff, which has ramped in more than 170 million streams since its launch. Our sports vertical has been growing in its diversity. For example, the collaboration with NBA, we launched a unique IP in September, the Village, Basketball Championship Cup of the Village Basketball Association, which registered 120 million live-streaming viewers and 244 million total streams. By organizing Village Basketball content, we connected gross KOLs with top-tier competition events, promoting basketball in rural Chinese areas. At variety show vertical, our self-produced generational interactive experience reality show, Let's go Mom, our users more diverse video companies through a narrative and dissemination format that combines non-video, short video and live-streaming. When the show ended September 25, committed video views on our platform surpassed 524 million, now generating 94.34 million cumulative interactions. In addition, our ability to constantly optimize and iterate our content algorithms is a key to enhance user experience and satisfaction. In the third quarter, we optimized user retention and long-term content consumption satisfaction rates by moderating usersâ long-term interest. We also used reinforced tools, combined with the on-device interaction technology. Meanwhile, we sought to motivate users to break through their information cocoons and further improve the experience by leveraging methods that foster diverse interest and also promote exploration. Second, our progress in commercialization at each of our business lines. In the third quarter of 2022, revenue from online marketing services was RMB 11.6 billion, up 6.2% year-over-year. Macroeconomic headwinds compounded by various external factors have challenged the online advertising industry as a whole and we are no exception. Due to the muted rebound in the advertising market, year-over-year revenue grew from the online marketing services decelerated with third-party advertising particularly impacting in the third quarter. As customers slash their marketing budgets, we sought to unlock usersâ commercial intent by constantly improving our product commercialization and utilizing content and user labels. The usersâ commercial intent then feedbacks to our content recommendations, thereby establishing a virtuous cycle of user content and commercial ecosystem. With these efforts, our monthly active advertisers increased by more than 65% year-over-year in the third quarter. We also continue to improve advertising ROI on our platform through algorithm optimizations. And as such, the advertiser retention rates continued to increase. As our e-commerce business expands, the advertising services that we have provided on native e-commerce merchants have maintained healthy growth momentum. Thanks to our platform's massive traffic and high conversion efficiency of our closed âloop ecosystem, we encourage advertisers who were leading live-streaming consumption, but below average in short video consumption to increase the short video usage and vice versa. By doing so, we promoted major advertising merchants, combined usage of short video and live-streaming as a brand advertising. We capitalized on customized promotion projects such as over Older 28 Car Shopping Super Festival and the Blooming Chinese Ingredients Beauty and Skin Care promotion events. These promotional projects served to explore brand advertising tailored to advertisersâ specific needs and to open more possibilities for advertisers to increase their marketing effectiveness. Our product integration and enhancements advantage in traffic, content and KOL ecosystem were key assets in efforts resonate with service team for various industry verticals, with deeper insights into industry characteristics and more data analytics along the value chain, we aim to meet the precise needs of advertisers in different industries. We also aim to improve our overall service capabilities and drive higher ROI for advertisers ultimately, boosting our overall commercialization efficiencies. In the third quarter of 2022, our e-commerce business grew at a faster pace than the market and continued to gain market share. Our e-commerce GMV reached RMB 222.5 billion, up by RMB 26.6 billion year-over-year - 26.6% percent year-over-year. On the supply side, we attracted more merchants by leveraging our traffic advantage, conversion efficiency and our constantly improving promotional policies. In the third quarter, new merchants joining our platform increased by nearly 80% year-over-year. We also enhanced our merchant empowerment system through strengthened merchant services and governance, which in turn improved the operational capabilities. Meanwhile, more efficient traffic allocation strategies and more precise buyer/seller and product matching allow us to actually increase conversion efficiency and the operational environment of our platform. As a result, the number of active merchants on our platform grew at a high-double-digit rate year-over-year in the third quarter of 2022. In addition, we made progress in helping the new merchants with co-starts by establishing a dedicated traffic pool for the startup merchants, which have enhancing efficiency quarter-over-quarter. We also consolidated service provider resources to facilitate rapid merchant growth and sales ramp up. Furthermore, we have been identifying new efforts and brand e-commerce. We continued to post a distinctive acquired brand to bolster their operational service capability through dedicated and also supported policies providing customers with products and services with a high value experience ratio. Powered by these initiatives, the number of acquired brands grew by double-digit growth over - quarter-over-quarter in the third quarter of 2022, accounting for an increasing loss share of e-commerce GMV. In addition, we have brought in more well-known brands and teamed up with established brands to launch Super Brand Day during the August 18 brand promotions. Our brand merchants GMV increased by 192% year-over-year. On the consumption side, we are constantly emphasizing the trust-based community advantage to elevate usersâ shopping experience with trust as our cornerstone of our e-commerce ecosystem. We upgrade our user review system to improve feedback collections, monitoring, and handling and more effective by identifying users and scenarios with superb experiences. These allow us to build up the positive and proactive service capabilities, corrugating user mindsets and recognizing of the utmost user protection on our platform. We also integrated our shop experience, scoring system in the third quarter to help us discover high-coverage merchants with a widened coverage of our user system, including trusted purchase, we effectively improved out the sales service fulfillment on our platform and increased our repeated purchase rate by 1.1 percentage point in the third quarter of 2022. Furthermore, our e-commerce proposition and also penetration and coverage and conversion deepened further, driven by continuous upgrades in our merchant supply, content, and merchandize user matching. In the third quarter, we focused on expanding usersâ consumption that was beyond our traditional live-stream and to short videos to boost the user activity. Meanwhile, we offered the payer shopping guidance across the different merchandize categories, as well as more refined subsidy processes. Initiatives drove a number of monthly e-commerce paying users to over RMB 100 million in the third quarter along with the continuous expanding our book quarter-over-quarter. Regarding traffic use and matching, we have also strengthening our public domain traffic efficiency to create a dual-engine model driven by both public and private domains to increase accuracy of merchant users measured by Data Exploration of the user experience. And also thanks to Zapote GBV of the public domain e-commerce live streaming and short video maybe doubled in September compared with that of the June. In the third quarter of 2022, our live-streaming business discovered â delivered a stronger performance that exceeded our expectation. Our revenue increased by 15.8% year-over-year to RMB 8.95 billion, driven by contributed refinements to our live-streaming operation, we further increased diversity and also entertainment value of our interactive features in live-streaming and fulfill user social needs. Meanwhile, we've got to user life cycle management mechanism to improve lasting paying ratio. In the third quarter of 2022, monthly paying ratio continued to expand year-over-year on average MPUs for the live-streaming rose by 29.3% year-over-year to RMB 59.6 million on acquired apps. And also on the supply side, our collaborative strategy with the talent agencies created to evolve by become more diverse. Through joint operations and onboarding external streamers, talent agencies that become more deeply involved in our live-streaming ecosystem, increasing the number of monthly active streamers that managed by more than 200% year-over-year in the third quarter empowered by talent agencies, the live-streaming frequency and average daily income of the streamers in joint operations increased by about 10%, relatively preparing the growth in both scale and total income for streamers managed by talent agencies. In addition, we further expanded the contextualized live-streaming user scenarios such as Kwai Hire, Ideal Housing and Kwai Date providing users with a richer live-streaming content and meeting their service needs in more scenarios. Finally, an update on our overseas business, building a solid foundation with every penny well spent that remains our deciding principle. Built by our customer adherence to ROI-based growth strategy and disciplined spending, we achieved effective and healthy user growth and our user retention continued to improve in the third quarter of 2022. And the average time spent per DAU in all these markets remain a high level of over 60 minutes drastically, the key markets thatâs been focusing on the Brazil and Middle East and Indonesia. In Brazil, cultivating user mindset through a differentiated content strategy that diversify internal results and initial results to build on this success, we are expanding the number of content verticals to further enrich the content ecosystem as well as enforcing the virtuous cycle between content generation, consumption and creator monetization. With respect to monetization capabilities, thanks to our commercialization team's continuous optimization of products and service capabilities and our efforts to promote acquired brands, awareness among the advertisers, our revenue from advertising services grew rapidly. For live-streaming, we have constructed a more comprehensive set of ecosystem infrastructure enabling collaboration with talent agencies to further diversify content supply and enhance the content quality and hosted diverse operating activities across various regions, all of which have driven a continuous increase on live-streaming revenue. Going forward, we will also actively explore cooperation opportunities for local e-commerce partners. By simultaneously increased revenue and control expenses, we seek to further enhance the operational efficiency of our overseas business and gradually reduce negative impacts on our Group's overall financial performance. In conclusion, looking back to our performance, and looking forward, we have and will always uphold and practice our core belief at Kuaishou being customer-obsessed despite the many internal and external challenges faced creating value for creators and to customers at the starting point and end point for everything that we do. We firmly believe that we started to improve our commercial ecosystem through unremitting efforts. We will undoubtedly create sustainable value for our users, partners, employees and shareholders. [Interpreted] Thank you, Yixiao, and hello, everyone. We will have a closer look at our financial performance for the third quarter of 2022. Despite the ongoing macro headwinds, we continue to drive healthy traffic and top-line growth while sustaining the upward trend in profitability. Our domestic business delivered operating profit for the second consecutive quarter, which reached RMB 375 million with a quarter-over-quarter increase of nearly three times. Meanwhile, enhancements to our monetization capabilities in our overseas markets and our ROI-based approach to user acquisition and retention spend narrowed our operating loss margin with our international business. Our revenues for the third quarter grew by 12.9% year-over-year to RMB 23.1 billion. This increase was mainly driven by revenue growth in our online marketing services, e-commerce business and live-streaming business. Revenue from online marketing services reached RMB 11.6 billion in the third quarter of 2020, up 6.2% year-over-year, which was largely driven by the growing advertisers on our platform. We are constantly working to improve the effectiveness of our App products and services, as such, drive ROI for advertisersâ partners. This allow us to achieve positive growth in an uncertain macro environment. In particular, as the e-commerce business on our platform expands, the advantage of our closed-loop system and the conversion efficiency and traffic has become even more evident underpinning the resilience and healthy growth of our online marketing services provided to our e-commerce merchants. Other services revenue for the third quarter of 2022 increased by 39.4% year-over-year to RMB 2.6 billion, mainly due to the strong growth in e-commerce revenues. Through leveraging our unique trust-based e-commerce models to attract and empower more merchants including both well-known brands and acquired brands and expanding user consumption scenarios beyond traditional live-streaming to short video and more, we gained further market share in e-commerce and our e-commerce GMV increased by 26.6% year-over-year to RMB 222.5 billion. In the third quarter of 2022, revenue from live-streaming grew by 15.8% year-over-year to RMB 8.9 billion. This was primarily attributed to the continuous improvement in both our live-streaming, content quality and user content management efficiency, which boosted the average live-streaming MPUs by 29.3% year-over-year to RMB 59.6 million. Our cost of revenues for the third quarter of 2022 increased by 3.7% year-over-year to RMB 12.4 billion, representing 53.7% of our total revenues. The year-over-year increase was mainly due to the increase in revenue sharing costs and relative taxes, which were in line with our revenue growth. We particularly â we partially offset this by optimizing the efficiency of our bandwidth usage and reduction of bandwidth expenses and server custody costs. Gross profit for the third quarter of 2022 reached RMB 10.7 billion, growing 28.5% year-over-year. Gross profit margin in the third quarter of 2022 was 46.3% improving 4.8 percentage points year-over-year and 1.3 percentage points quarter-over-quarter. Our year-over-year increase in gross profit margin was primarily a result of further optimization of bandwidth and server efficiency, which drove a decrease in the ratio of bandwidth and depreciation to revenue. The quarter-over-quarter improvement in gross profit margin was mainly due to the reduction in other costs. Selling and marketing expenses decreased by 17.1% year-over-year to RMB 9.1 billion for the third quarter of 2022 or 39.5% of total revenues. This marks a significant improvement from the prior year period in which sales and marketing expenses were RMB 11 billion or 53.8% of the revenues as we adopted more disciplined and efficient user acquisition retention methods, while sustaining strong traffic growth. Research and development expenses for the third quarter of 2022 were RMB 3.5 billion, decreased by 16.2% year-over-year, primarily due to the decrease in employee benefit expenses, including the related share-based compensation expenses. Administrative expenses for the third quarter of 2022 were RMB 1.1 billion, increasing by 16% year-over-year, primarily due to the increase in employee benefit expenses, including share-based compensation expenses. Our operating loss for the third quarter of 2022 continued to narrow, improving to RMB 2.6 billion from RMB 7.4 billion in the third quarter of 2021 and RMB 3.1 billion in the second quarter of 2022. As a result, our operating margin expanded by 24.8 percentage points year-over-year and 2.8 percentage points quarter-over-quarter, improving from negative 36.1% in the third quarter of 2021 and a negative 14% in the second quarter of 2022 to negative 11.3% in the current reporting quarter. Adjusted net loss for the third quarter of 2022 was RMB 0.67 billion, narrowing substantially from RMB 1.3 billion in the second quarter of 2022 and RMB 4.6 billion in the third quarter of 2021. This resulted in the adjusted net margin improvement from negative 22.5% in the third quarter of 2021 and negative 6% in the second quarter of 2022 to negative 2.9% in the third quarter of 2022, representing an increase of 19.6 percentage points year-over-year and 3.1 percentage points quarter-over-quarter. We maintain a healthy balance sheet with cash and cash equivalents, time deposits, restricted cash and wealth management products of RMB 43.5 billion as of September 30th of 2022. In conclusion, we will further monetize our massive user traffic that is continuing to grow by promoting a tighter integration between our user content and commercial ecosystems and providing expanded opportunities for advertisers and merchants. We will also continue to focus on the cost control and operating efficiency to advance our domestic businesses operating profit and close the gap on our loss in the overseas businesses which will further enhance our resilience and brings us closer to our goal of long-term sustainable profitability. Thank you management for taking my questions and congrats on the solid quarter. I have a question on advertising monetization. What has management seen so far from advertisers in form of the budget and sentiment? How should we think about the advertising market outlook for the next six to 12 months amid the challenging macro, any active measures that we are doing? Thank you. Thank you for your question. As we move through the second half of the year, the recovery in the advertising market has been relatively weak. According to the third-party forecast, online advertising growth rate will be around mid-single-digit in 2022. The declaration in the year-over-year revenue growth of our online marketing services in the third quarter reflected this dynamic. But as I mentioned previously, we will better respond to the market environment and make breakthroughs by improving our commercial products and infrastructure capabilities, as well as refining our management and services based on industry verticals. Advertising from our e-commerce merchants maintained healthy growth due to our traffic advantage and the strong conversion rate in our closed-loop ecosystem. We have continuously encouraged native advertisers to adopt short video plus live-streaming formats for merchandize promotions. In addition, we have upgraded our product strategy and optimized our advertising performance by iterating our recommendation algorithms and driving traffic acquisition through short videos, among other strategies. In terms of advertising services for external advertisers, the key industries in which we used to focus such as online services, e-commerce and games were all impacted by the macroeconomic environment in the third quarter. Since the beginning of this year, many customers in these industries have been controlling costs and improving efficiency and as a result, their ad budgets declined fairly significantly in the third quarter. At the same time, industries such as FMCG, food & beverage and transportation have recovered more quickly on a relative basis. And these industries, we will continue to intensify our efforts however, given the industry-wide slowdown in growth, we believe that we can only gain more opportunities and budget allocations in this foreseeable future when the market improves and consumption recovers by continuing to cultivate our strength from within and solidifying our underlying commercialization capabilities. Specifically, our initiatives are as following: first, we have continued to promote the growth of our advertiser base and attract local customers through location-based traffic support and customer acquisition channels. Second, we have constantly optimized our ad products, performance and infrastructure. Our initiatives include strengthening our user commercial label systems, improving our algorithm model and enhancing the accuracy of our ad recommendations, all aimed at enhancing conversion efficiency. Third, we will continue to expand our traffic resources and promote native advertising for external advertisers. Native advertising can attract more traffic to external advertisers, which will in turn, drive an increase in both exposure and ECPM. We will also continue to optimize our traffic strategy to improve our sales funnel conversion rate, as well as our ad exposure and performance. For example, we changed the order of users' browsing contacts to re-caliberize the advertising exposure, click-through and the conversion forecasts, thereby improving our model's accuracy and conversion efficiency. In short, we continue to monitor the recovery pace of the overall online market or I mean, advertising market and also hold a strong confidence in the long-term market development. No matter how the short-term market fluctuates, through honoring our team and strengthening our foundational and fundamental capabilities, we firmly believe that our share in online advertising market will continue to increase in the long run. My question is about the e-commerce. So I want to understand more about the third quarter trend in terms of monthly active customer, purchase frequency and average ticket price. As we enter the fourth quarter, how is the singles day performance and any change in terms of the annual GMV targets? Can management also share the rationale for opening our Taobao JD external links and what's the implication for our closed-loop e-commerce ecosystem? Thank you. Thanks for your question. First, regarding our e-commerce data on the consumption side in the third quarter, the number of monthly e-commerce paying users surpassed the 100 million milestone with a paying user penetration rate of over 15% thereby sustaining year-over-year and quarter-over-quarter growth momentum. The main growth drivers were; first, a focus on increasing multi-scenario penetration by expanding short video scenarios beyond traditional live-streaming and strengthening our infrastructure, such as Kwai Shop and the Guess What You Like feature to boost user activity. Second, implementing a more precise and granular subsidy strategy; and third, continuing to reinforce our energy channel strategy for active e-commerce paying users, enhancing the user review and feedback system, optimizing user experience and actively identifying users with subpar experience or targeted reactivation and user care. Our usersâ monthly order frequency maintained an upward trend on the quarter-over-quarter basis and average order value on our platform continued to grow both year-over-year and quarter-over-quarter. Although users' purchasing power has been somewhat impacted by short-term weaknesses due to the COVID-19 pandemic and the macro economy, users shopping mindset has been gradually strengthening. This improvement has been driven by our effort to continuously enrich supply, cultivate Kwai brand, strengthen our e-commerce ecosystem, further optimize mention and conversion efficiency and continuously convert users to high-quality buyers. Second, on our double level performance, during the Kuaishou 116 E-Commerce Festival, we continue to unlock the potential of short video e-commerce. We increased short video e-commerce orders by over 500%, the number of buyers buying more than 40% and the number of orders resulting from searches by more than 70%, all compared with the same period last year. In addition, we have been accelerating the growth of Kwai brand merchants and improving their service capabilities through policy and traffic support. Kwai brands produced outstanding performance with year-over-year GMV growth of more than 80% during the 116 Festival. Furthermore, brands are building a strong foundation on our platform for their long-term operations through in-store live-streaming. This will serve to effectively attract and retain private domain traffic. During this year's 116 Super Brand Day Event, many brands fostered deep connections with users through various marketing strategies such as creative gameplay in live-streaming rooms, short video recommendations and customized competitions. GMV generated by brand self-operated live-streaming increased by 238% quarter-over-quarter. And we recently resumed affiliated links or external links to Taobao and JD. This main â the main backdrop for this decision is that as our e-commerce ecosystem matures, we hope to further enrich its supply and fulfill our users' diverse consumption demands during the e-commerce promotion season by enabling these links. In the short-term, the external linksâ contribution to overall GMV will be very limited and it will not be the primary driver for GMV growth. In the long run, we will make further evaluations based on the users' experiences and maintain flexibility with respect to future cooperation. My question is regarding our financial margin performance. Can management share with us our progress on cost efficiency so far this year? And whether we will continue to proceed these efforts into next year? And the time table for Group breakeven for the overall Group? Thanks very much. Thank you for your question. Looking back on the first nine months of this year, our cost reductions and efficiency enhancements produced positive results. Our domestic business became profitable at the operational level two quarters ahead of schedule with constantly improving operating profit sequentially. This was primarily a result of our optimized cost structure and improved operational efficiency. As Yixiao discussed, we recently made organizational and personnel adjustments. I believe the Commercial Ecosystem Committee's leadership will further facilitate ecosystem developments and integration within our monetization avenues, including e-commerce, online marketing and live-streaming. This will enhance our businesses resource utilization efficiency allowing us to better match our spending with various businessesâ development needs. As to the timetable for us to reach profitable at the Group level, we are in the middle of making our 2023 annual budgets. We will have more details to share next March when we release our fourth quarter and full year results. Thanks management for taking my questions. My question is about our new business initiatives, for example, online equipment and local service strategies. Thank you. Thanks for the question. Having upgraded our local services unit to an independent business department, we are focusing on our following areas for its development: first of all, we are still in a validation phase for this business following our recent organizational adjustments. Second, we will improve our local services operational efficiency through continuously optimizing our transaction progress â or process, our recommendation algorithms and our users' transaction experience. Third, we will focus on regions with rich merchant resources where Kuaishou already has an advantage and where we can further satisfy users' needs. In short, we will build local services and VP cities. Fourth, we will tightly manage the magnitude of our investments. Currently, our investments for local services primarily include personnel costs, user subsidies in the early stage of local services development and revenue sharing with service providers. In the future, we plan to continuously and dynamically adjust the investment scale for local services according to its business progress. We upgraded Kwai Recruitment to Kwai Hire in the third quarter, aiming to enhance its brand influence among users and merchants. We also enriched diversity of our job postings, improved our applicant resume quality and sought to better match applicants and positions, raising the number of active positions for which users submitted resumes by over 30% quarter-over-quarter. In addition to manufacturing workers, active positions in the catering services, housekeeping and cleaning, and supermarket and retail categories grew by more than 70% each in the third quarter versus the second quarter. Job promotions via short video also achieved good results in the third quarter with the percentage of resumes submitted through the short video channel rising to about one-third in the third quarter from about 10% in the second quarter. As for monetization, since we are still in the process of building our data infrastructure, refining our content and validating our business model, we have yet to engage in large-scale monetization. In summary, short video and live streaming are still in a higher dimensional position in a content and social networking field of the overall Internet industry. They have very strong penetration capability and could generate more diverse social interactions and scalable user case scenarios. In addition to local services and recruitment services, we will continue to provide users with richer short videos and live-streaming contents by exploring platforms such as real estate brokerage services and dating services to fulfill users' needs in a more different types of scenarios. Thank you once again for joining us today. If you do have any further questions, please contact our Capital Market and Investor Relations team at any time. Thank you.
EarningCall_1921	Amex is focused on improving its long-term growth profile through a differentiated customer acquisition strategy and value [prop] (ph), particularly with Millennials and Gen Zs. This, along with an industry-leading high-end brand, has positioned it well for what we believe will be a long runway of double-digit revenue growth. Here to tell us more about how they're going to accomplish this is Chairman and Chief Executive Officer, Steve Squeri. Excited to have Steve back here. Today's presentation is going to be fireside chat. So, Steve, maybe just to start off big picture. The last year has proven to be very strong for the company. Revenue growth in the 23% to 25% range, even higher on an FX adjusted basis, and almost every part of your business is producing at above pre-pandemic levels given very strong customer acquisition. So, while this has clearly been a strong year, there's obviously some uncertainty on the horizon. So, with that as a backdrop, how are you just broadly thinking about '23? And what gives you -- can you give us a sense of how the company is positioned to win into next year? Yes. So, it's good to be back. It's been a long time for me, 2019. So glad to be here. Look, back in January, we put out our new growth plan, which basically said we would grow 18% to 20% this year, we'd be mid-teens revenue next year, and then we get to a steady state in 2024 of double-digit revenue growth and mid-teens EPS growth. And look, we'll be 23%, 25% as we changed our guidance. So, what gives us that confidence? And I think we're in a great space. Premium consumer segment, small business both on a on a global basis, which is important. I'm very pleased with the investments that we've been making in our brand, coverage, value propositions, technology and talent. But what's driving my -- what's really fueling my confidence is the success that the strategy has had, the momentum that we've gotten, and then there's been a structural shift, I believe, in the payment space. And when you look at the success we've been able to get to become more generationally relevant, you look at our acquisition, we're bringing in younger and higher-spending consumers. B2B, we're penetrating even more B2B. Even though we have a really good position from a small business perspective, we're penetrating a lot more. We continue to make coverage gains. And I think one of the things that sort of goes a little bit unnoticed is our retention. We've got higher engagement with our card members right now and we're retaining more. And when we think about that, I think that's really an outgrowth of the virtuous cycle that we talk about, which is really our membership model, where we're signing up high-spending card members, we're getting more and more merchants, they're engaging, and we've got this sort of flywheel going. And you put that against a backdrop of changing a structural environment in the payments landscape, more digitization of payments, more small business formation, and the premium consumer group is actually growing, I believe, at a faster pace than the consumer group in general. So, maybe just to build on some of the things that you touched upon. You talked about the success of the strategy. How does all this translate into better than 10% revenue growth beyond 2023? And then, you touched on a couple of things, maybe dig a little bit deeper on what is giving you the confidence in the strategy? Yes. Well, I mean, look, we've had six straight quarters of 24% revenue growth, so that will give you a little bit of confidence. But I think everything that I just said -- and we're staying focused. We're staying focused as a company. I think our business is a lot stronger after the pandemic than it was pre-pandemic. I think we learned a lot. We invested a lot in our customers. We've changed our model in terms of retention. We've changed value propositions. And we stood by our customers. And they've rewarded that with higher spending and more engagement. And so, for everything I just said, gives me the confidence that, that 10% in 2024 is possible. And as we said sort of mid-teens revenue growth in 2023, we think is very probable. So, in each of the presentations that we've had thus far, there's obviously been discussions about a lot of uncertainty as it pertains to '23, particularly in the back half. Your customer base is obviously a bit unique, but you're talking about revenue growth, as you just said mid-teens for next year. Can you maybe just talk about some of the drivers of the above-normal growth and as well as your degree of confidence given all the uncertainty on the horizon? Yes. Look, yes, there's uncertainty, but there was uncertainty in January of this year. And I think if we've sort of played into that uncertainty in January, I don't think we would have had the growth that we did. It hasn't played out. When you look at sort of where we are as a company right now, we've got record acquisitions, we've got record engagement, and our credit losses and credit profile is better than it's ever been. I think when we look at 2023 from a momentum perspective, it really is the core business that is driving it, and I'll talk about that in a second. But when you think about it and you look at our business model right now, 70% to 80% of our billings growth is really driven by transaction growth. And then, we've got a lot of transaction growth that is out there. You've got some inflation obviously in there, and you got some normal uptick in some of the billings that we get every year. But when you look at the tailwinds that we came in this year, we came in with tailwinds in international. International was really hurt by -- in the pandemic. Corporate was another one, and it didn't have as much travel; travel haven't recovered. So, I don't think you're going to have those tailwinds going into 2023. You'll have a little bit of a growth in the first quarter, because international came back a little bit later, travel came back a little bit later, because we were dealing, I guess, with Omicron in January and February of last year -- this year. But -- so, I think it's really core momentum, and that core momentum is generated by engaging existing card members. We also had record acquisition. We've had record card member acquisition, and they are spending at a higher level than previous vintages for us. And maybe just -- so it sounds like you have a lot of confidence in the intermediate to longer term. Maybe just bring it home. In the short run, we've had a couple of other issuers of card talk a little bit about decelerating growth trends in the fourth quarter. Now that we're two months through the quarter, maybe just give us a high-level update on billings performance? Maybe what your expectations are for the holiday season? And given that your customer base is a little bit -- is a lot different than what we're hearing for some others, maybe talk about any big changes you're seeing, where there's discretionary, big ticket, nonetheless. I mean, we still see record months for us. And obviously, I think you will see year-over-year deceleration because last year what happened at this time, you were starting to see growth. And -- but overall, the consumer is strong. Small businesses continue to be strong for us. International is strong. And I'm talking about two months in here. We're talking about October and November. And so, we're really pleased with the momentum that we've seen, and we're not seeing any change in sort of that credit profile. What you have seen is you've seen some small businesses that have slowed down some of their advertising spending. You've heard about retailers talking about a decrease in sort of discretionary spending. But these are small sort of hits to our business at this particular point in time. And just looking at October and November, results are exactly what we would have expected, and very, very strong at this point. Steve, there's a handful of drivers across the company that are expected to impact the above pre-pandemic revenue growth. One of the biggest ones being the international growth and acceptance. If you think about it pre-pandemic, international SME was the fastest-growing part of the business. More recently, international consumer has been a big part. At the Investor Day, you laid out a strategy for 75% coverage in what you labeled as 48 priority cities. Maybe just talk about how the international growth is progressing? And how should we think about contributions to growth over the next few years? Yes. So, when you think about sort of international coverage, which is we get lots of questions on, just to put things in perspective, from 2017 to 2022, we've doubled the locations in international. We came out with a very focused strategy a few years ago about priority cities. We've increased those priority cities over time, and we introduced that up to 48. And what we did is we figured out those cities where either our card members are or card members travel to. I mean, international is a big place, right? And so, we said by 2024, our objective would be to have 75% coverage. Well, by the end of this year, we'll be halfway through. We'll probably be more than two-thirds through by the end of next year. And what we're really talking about there is 75% location coverage. We're not necessarily talking about spend coverage. And they're a little bit different, because the bodega and the Walmart, both count as one location. And we do a lot more spending, obviously, in a Walmart than we do in the local bodegas. So, we're really pleased with that 75% number because we think it translates into high spend coverage. As we continue to drive coverage internationally, that does a couple of things for us. Number one, pre-pandemic, international small business and international consumer were the two fastest-growing pieces of our business with suboptimal coverage. As we continue to get more coverage, we expect that, that will continue to fuel that growth. As people travel into those cities where we are addressing those -- some of the coverage concerns, we expect that to continue to fuel growth. And the other thing that we've done even within those priority cities is we've looked at tourist destinations, obviously, hotels, restaurants, airlines, and so forth and have set targets much higher than that. And then for local, we've set targets around e-commerce sites as well, because that is the fastest-growing part of that business in international as well. So, we feel really good about the approach. It allows us to gain a lot more focus with our investment, because, again, as I said, international is a big place. Not that we won't take coverage everywhere, but if you can focus your resources there, it will make things happen a lot quicker for us. Maybe the thing about small business, domestically, this has obviously been a big area of focus given the high levels of business formation. You talked at the Investor Day and recent earnings calls about secular shifts like digitization. So, can you maybe just talk about the strategy in both the U.S. to grow this business despite what is already leading share? And maybe just talk about some of the things you're doing to really own the relationship with your small business customers. Yes. I mean, so look, we've had a very strong small business presence for [a lot of years] (ph). We created the category years ago after the corporate card business. We saw a space between personal and corporate for small businesses. And so, while we're very pleased with where we are, it's a highly competitive market, just like a lot of the other markets that we participate in. And what we felt was not only is there opportunities with 23% more small business formations going on, digitization of B2B payments. And so, we felt there was more opportunity to own the overall relationship, which really led us to the acquisition of Kabbage. And that Kabbage really gave us a platform so that small businesses not only could have a transaction banking account with us, they could possibly have a debit card with us, can do online direct lines of credit, working capital loans, and really view the entire relationship on that Kabbage platform. So, it gives us an ability to deepen our relationship with those small businesses as they continue to digitize their payments. And some of the things that we do, that we'll send not only card payments, but you'll hear us talk about beyond the card and we'll send ACH payments. And so, what we want to do is really own that entire working capital relationship, but we felt we needed a platform to do that. And that allows us to grow not only with existing customers, but it also allows us to acquire new customers with a wider variety of products and services. And international is a little bit different. International is a little bit more of a nascent opportunity. And there, it's a traditional lead with the card product. And we've just combined our international issuing businesses, and we believe we're going to get a lot more scale and we'll maybe able to adjudicate a lot better, because sometimes a small business will come in through our consumer channel and sometimes a person will come in our small business channel. We'll be able to give people the right product with the right spending. Because when you look at us vis-a-vis our competition, the value propositions are a little bit different. There, you see the Platinum Card starting to diverge in terms of value within the cards, and you're also seeing spending levels that we give vis-a-vis the competition are a lot higher, giving people the purchasing power they need to run their businesses. Maybe thinking a little bit about the consumer business. So, Millennial and Gen Z spend was up 39% year-over-year in the third quarter. Growing the younger cohort has been a big strategic push of yours over the last couple of years. Can you maybe just talk about how these cohorts are performing relative to your initial expectations? And maybe just help us understand the potential runway of growth for these over the next few years. Yes. I think the big surprise here with sort of Millennials or Gen Z, and not just for American Express, I think for the industry as a whole, was that they'd be willing to pay a fee, and that everybody used to attack this segment with a fee-free product. And the reality is, as we talk about, 60% to 70% of our cards that we're acquiring, fee-based cards, are Millennial and Gen Z, because they're willing to pay for the service, they're willing to pay for the value, they're willing to pay for the experience. And they're very discerning consumers. Having three Millennials and one Gen Z at home, I can tell you they are very discerning consumers. And what's been interesting for us is having the strategy pre-pandemic, they were the first ones outspending. They were the first ones out traveling again. They were the first ones engaging back into the real world. And so, having Millennials and seeing them grow at 39% -- and we're seeing that on both sides; we're seeing it from existing consumers that we have, we're seeing it from an acquisition perspective. What we're also seeing is loyalty is a lot higher. We're getting a higher share of their wallet. They're relatively high FICO consumers for us. They're also, as I said, very loyal in that -- the second biggest acquisition channel we have other than affiliates is Member-Get-Member. And so, they are very focused on getting their friends with the product. But what gives me a lot of sort of confidence longer term is not only are we getting a high share of their wallet, not only are they a loyal group, but they're starting on their lifelong journey. And so, we're in with them early. Their wallets are going to expand over time, and the lifetime value of these card members will be a lot higher than the lifetime value of you and I, if we went to acquire at this particular point in time. So, we're very pleased with how that's played out, probably moderately surprised at how well, especially from a spending perspective and from a loyalty perspective, but certainly very pleased. No. I guess a question on card acquisition. So, you've been seeing record growth in platinum and gold given continued strong customer acquisition and strong pricing. Can you support this level over -- of growth over the intermediate term? And do you think you can continue to do product refreshes over time and continue to increase the price, particularly as the card member base shifts around towards the younger cohort? Yes. Well, doing product refreshes over time is non-negotiable. You have to do product refreshes over time. I mean -- and I think we lost that discipline for a while, but we've been doing those product refreshes. When you look back at the third quarter, in the third quarter, we had record consumer Gold and Platinum acquisition. We had record small business Platinum acquisition. And if I take you back, when the Platinum Card, probably back in 2017 was $450, it's now $695. The base has doubled. And so, now would it have doubled with a $695 fee if we hadn't added the value? And the answer is no. But we've added the value. And so, if you do sort of back of the envelope and look at $1,400 worth of value versus $695 fee, and as a consumer, you can figure out how you can navigate that $1,400, and I could tell you, Millennials and Gen Z figure that out pretty quickly; that works. And so, we'll continue to add rational value. We'll continue to add emotional value. We'll continue to add experiential value. And as far as how high it goes, look, in Mexico, we charge $1,000 for the Platinum Card. So, the reality is it will go as high as the value allows us to go. And what's interesting for us is that -- I mean, I talked about that virtuous cycle. I talked about that membership model. And we think about the membership model, we just don't think about that membership model from a consumer perspective. We think about the membership model from a merchant perspective as well, and they provide so much value into the Platinum Card, whether it's fine dining and hotels, whether it's a credit from Saks, Walmart, whatever it may be, we work with our merchant partners to do that to deliver high spending card members to them. One of the things, Steve, that has changed since pre-pandemic is you made a big strategic decision to increase marketing from, call it, mid- to high-$3-s billion, roughly, let's call it, low- to mid-$5-s billion this year to increase customer acquisition also relevance across your customer base. Can you maybe just talk about what drove this decision, and where do we go from here? And is the opportunity set big enough that you can accelerate marketing and customer acquisition further? Or do you think we are going to move back to a more normal pattern of growth? No. Look, I think we took our acquisition spending on overall marketing spending from about $3.8 billion, $3.9 billion to about $5.5 billion. And we did that because we felt we were leaving good investments on the table. There were many times when Jeff and I would say that we have a load of investments to fund and we just don't fund them, and then we said to ourselves, well, why not? And I think the pandemic gave us that opportunity to sort of take a step back. And I think as we came out with the growth algorithm, we made a commitment that we said we were going to spend that kind of money to go get it. But we have a very analytical process. We push our marketing teams on efficiencies. So, we look at that $5.5 billion of acquisition, we look for 10% efficiencies within that. So, we try and make that $5.5 billion, $6 billion, we try and make that $6 billion, $6.5 billion, and so forth until it runs out of a little bit of gas. And we set our ROI thresholds, and we feel, right now, we have line of sight into good acquisition. One other point that I didn't make with the Millennials is that -- and the Gen Z-ers is that you have over 4 million college graduates in this country every single year, and that's a very good pool for us to go after. And so, one of the concerns people used to have with American Express, would the customer base die off, would the base just -- I'm not insulting you, again. Yes, I'm a lot older and I'm in that category. But -- and so would that customer base go away? And the reality is, I think we've shown that -- and this is why I talk about generational relevance, that generational relevance, we can be just as attractive to an old guy like myself, more of a middle-aged guy like yourself and a Millennial and Gen Z-er, making you feel better now. And so, I think there's a lot of runway for us. And as long as we have that line of sight, if it makes sense to invest, we will invest. Look, we run this company for the mid to long term, and that may not make everybody happy all the time. But it's a 172-year-old company. We are looking to make sure we're around another 172 years. And what's really important is it's silly for us to leave good investments on the table. That's very different than saying, I need to just do something to keep up. And so -- because we've fallen behind. So, it's much more from an offensive perspective than a defensive perspective. And I think that's an important distinction. Yes, me too. I was at the Giants game. Steve, maybe to talk about one of your favorite topics. So, there was a poll on, I think, 93% of our economists said they think some sort of recession is coming next year, whether it's technical or a deeper one. On the earnings call, you talked about the recession playbook the team has. Can you maybe just about how does it differ if we get a smaller shallow recession versus the potential for just a deeper economic one, obviously, nothing like a pandemic, but just a deeper economic -- hopefully not, nothing like a pandemic? Look, we had -- look, the first two quarters, right, you had contraction from a GDP perspective, you had a little growth. So, you could say, hey, we were in a recession at first -- the first couple of quarters. I think it becomes a little bit self-correcting for us. And so, we do a number of things. Our underwriting models will adjust, and we'll adjust that based on line of sight that we have, just what's going on. Obviously, you saw during the pandemic, we had no line of sight into the consumer. Basically, we didn't know what was going to happen and we pulled back completely. So that's what I mean about self-correcting. We've already started to bring our sort of ROI hurdles up a little bit. I think the nice part about having a $5.5 billion marketing budget, and you don't have line of sight, you can drop that back down or you can do what we did during a pandemic, which is put into value proposition enhancement, which led to higher retention. So, we have that degree of flexibility. And finally, we have, obviously, the financial relief programs that will play. We don't have an in-house economist. For us, I think what drives overall spending is going to be unemployment, and, obviously, bankruptcies. And so, we'll just see. I can't tell you how deep it's going to go. I can tell you the levers that we're going to pull. We've got the playbook. The playbook worked really well for us during the pandemic, it wasn't a pandemic playbook because nobody -- other than [Wimbledon] (ph), I don't think anybody else had a pandemic playbook. And so, for us, that winning through the cycle really helped us in terms of engaging not only with our colleagues, but our customers and keeping ourselves profitable. Maybe one other on the topic that's more hypothetical. When I talk to investors, I think there's a concern about what billings growth could look like in a recession just given how strong your customer base has been, but obviously, higher inflation and the risk of white-collar layoffs, we're all reading the same headlines. Maybe can you just talk about how you think about the slowdown in spending on maybe one of the most vulnerable areas? And you've talked a lot about pent-up demand for travel. Is there a potential we could see consumers -- your high-end consumer spend through a downturn? Well, I mean, look, there is still that pent-up demand to travel. If I look three months out, I'm still seeing record travel bookings, right? And so, you're also seeing a little bit more of a shift from goods and services to travel. And I think you could see some of these consumers wind up going through. Let me take you back historically. When I think about sort of three major events as I've been here over the last 38 years, there was 9/11, and spending fell off a cliff for four months or so, and then it came right on back. Then we had the financial crisis, and maybe that was six to eight months, maybe three quarters, and then it came on back. And then, we just had the pandemic, where if I sat here April 15, 2020, we're down 50%. And now, we're at record levels. So, I think the thing is, is that it will always come back. The trends always come back. What I focus on in those times, and I've been around now for a number of these things, it's really all about retaining the right card members. Because the spending can't come back if you don't retain the card members. The spending can't come back if you don't service the customer. The spending can't come back if the brand doesn't mean what the brand meant. And so, for us, and this is what you saw during the pandemic, we didn't worry about what the spending is. But I can't tell you how much the spending is going to go down. But what I can tell you is if you don't support your customers, they will not come back and they will not spend. In terms of our base, when you look at our base, it is a high premium base, one that is probably not impacted all that much by inflation because they would have already been impacted by inflation. It is one that does get affected by layoffs and so forth. So, you could see a little bit of a hit there. From a small business perspective, and I've said this many times, when a lot of people think about small businesses, what they think about is the restauranteur who goes out of business, the yogurt store just opened up across the street, from seven yogurt stores and one just why they went out of business. That's not our small business base. Our small business base is made up of professionals, it's made up of some restaurants, it's made up from some retailers, but it's made up of dentists, lawyers, doctors, plumbers, electricians, so forth and so on. And so, there will be segments of that small business base that will probably get hurt, but people still need to go to the doctor, they need to go to dentists, they need to go to the lawyer. So, we'll see. But our focus has always been on making sure to retain the customer, treat the customer well in times of crisis because traditionally, it comes back. Maybe shifting to spend a little bit of time on lending, which is obviously a much smaller part of our business, less than 20% of revenues and a high-end consumer. Growth rates have obviously been fast at over 30% in recent quarters. Can you maybe just talk about what has driven the outsized growth given the spend-centric model? And where do you see this headed over the intermediate term, talking about given some things you noted regarding the ROI model? Yes. I mean, look, pre-pandemic, we were probably growing at about 11%. The industry was growing probably about 6%. And remember, while we may have about 50% or 45%, whatever that may be of our consumer's wallet, we don't have that percent of their spend. It may be a blend. It may be 20% to 25%. And so, we're making that available. We're making that available with Pay Over Time. We've put -- obviously, we've had Buy Now, Pay Later on our cards since 2017. We put Pay Over Time on our charge products. But I think what people aren't looking at is the relationship between our revolving balances and our spend. Our relationship between our revolving balances and our spend right now is lower than it was in 2019. We are not back to where we were. So, we don't have our fair share at this particular point in time. So, I'm not concerned about that. But what I will tell you is you can expect us to grow slightly more than the industry will grow because our consumers are borrowing from other people. And I really don't want them to borrow from other people, especially I have line of sight. And most of our increase in lending is from existing customers who we know. You're not going to see balance transfers. You're not going to see outsized lending to new consumers. You will see this predominantly with people that we've had in our franchise. I went back and checked my records. I think in all the years I've interviewing you and Ken, I've never asked a question about the allowance, but I guess it's a sign of the times. And not to get too far into the weeds on CECL. But one common question, I guess, from investors that has been an area of concern is just the fact that the allowance today at 3.3%, 3.4% is below where it was when CECL was implemented. We understand that, that was just a point in time. But you and Jeff have talked about the credit profile. Your book is stronger than it was back then. Can you maybe just talk about what some of the changes that have happened within the portfolio, why the allowance is lower? Yes. I mean, if you look at the portfolio now, it's even more premium than it was pre-pandemic, higher income. If you look at our credit numbers, we were always better than our peers. We've widened that gap. When you look at our write-offs and so forth right now, you're at a situation where we're still under one, delinquencies are still there. Now, that's going to come back, right? And especially as we grow our AR, you're going to have more provision. And we expect those numbers to come back, but we'll probably don't see it coming back to 2019 levels for quite some time. So, you've been able to generate outstanding customer acquisition. But we all know that acquiring and maintaining premium customers are expensive, I'm sure you have a lot of customers in the room here. And if you think about it, we've seen rewards business development, Card Member services costs rise from $37 to $42 from pre-pandemic to post-pandemic. Can you talk about what is driving this? Is this competition? Is this customer mix? And given the competitive forces you're seeing, where do you think this goes from here? Yes. I mean, look, you're constantly investing. We talked about, do you see the refreshes continue? Well, the value propositions need to be invested in, we're continuing to invest in that range of Card Member services rewards and so forth. And we're still able to maintain our margins. So, I think the -- it's a competitive environment. We try and stay ahead of our competitors with this. I mean, you've asked me the question before, because we pivoted so quickly when a Sapphire came out, well, we're not that good. We pivoted way before that. And so, you're going to constantly see us invest in invest in Card Member services, invest in value proposition, investing in rewards in a thoughtful way because it's part of the overall value proposition that not only exists for existing customers, it's part of the value proposition that also acquires new customers for us. And look at our growth and look at our earnings power, and I believe it's working for us. We've got a few minutes up here. I just wanted to hit on two or three more questions. So, Steve, you've had a lot of successful bolt-on acquisitions over the past few years, including the technology from Kabbage, which you referenced earlier; Resy, which is helping customer acquisition, contributing to the brand more lifestyle-oriented and helping me secure reservations on the weekend. Just given how valuations have come in, are you more willing buyer of fintechs to add capabilities, whether it's a fintech or B2B? And what are the areas you're most focused on? Yes. I mean, we're -- as you know, we have a venture group. We've got 50 different sort of investments at this particular point in time. It's how we wound up acquiring things like LoungeBuddy and Resy and Mezi and a bunch of other things. We're always out there looking, and you want to buy things at the right price. But if things are strategically important, there is no right price. It's really always the right price. And so, what I say to the team all the time is what are those capabilities that we need to have and what's the best way to get those capabilities? Is it partnership? Is it organic build? Or is it acquiring? And for us, we hit on the areas. I mean, it's more about adding to the overall value proposition for card. What people don't realize Resy has been an outstanding acquisition for us. And it's been outstanding for two reasons. Number one, it's provide access to our card members, it has provided value to our restauranteurs us. What people don't realize it is a huge card member acquisition vehicle for us as well because it's an open platform that is used by non-card members. And so, we're constantly looking at those things, whether it's LoungeBuddy or Resy that can add to the overall travel experience, add to the overall card member lifestyle experience. The same thing on the B2B side, Kabbage was a great opportunity during the pandemic and as an example of being offensive versus defensive and keeping your head in the sand during a pandemic, and you look at acompay which is automating B2B. So, we're looking at those kinds of things as well. And we're always on the hunt for them. And again, is it partnership, is it acquisition or is it organic build, and that's the mindset that we have. So, a good one to end with here, Steve, I've asked a couple of players in the space. I'm curious, when you meet with investors, I know you meet several times over the course of the quarter, what part of the story do you think is still at this point misunderstood or the perception relative to your expectations do you think you're still miscalibrated? Well, I think the one I always laugh about is, let's say, well, in -- have you seen the slowdown in spending? And then, I just turned around and say, "Well, you're my customer. Have you stopped spending?" No. And everybody in the room. No, I have and I'm traveling. You go to Aruba, right? And you're a customer. Yes, but I heard you added whale watching yourself. So -- but no, I think that's always the thing. It's like, âOh, they're going to stop.â Are you stopping? And I said this to Caroline Hyde and Bloomberg, I said, âIf you stopped?â No. And so, I think that -- but I think what people really don't understand, and they have a hard time understanding it is the premiumness of the base and I think the diversification of small business and the power of the membership model. And I think intellectually, you can all understand it from your own personal perspective, but you have a hard time looking at that at a macro level. You understand it from a micro level, but you don't understand it from a macro level. And the reality is, there's lots of people, thank God, like you. And I'll end it with that.
EarningCall_1922	Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Third Quarter 2022 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon. Please go ahead. Thank you, and good afternoon. Welcome to Lululemon's third quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website, www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site where you'll find a summary of our key financial operating statistics for the third quarter as well as our quarterly infographic. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. Thank you, Howard. I'm happy to be here today to discuss our third quarter results, which, as you've seen from our press release, continue to be strong and resilient, while we navigate an external environment that remains challenging. At Lululemon, innovation is at our core. We create apparel, footwear and gear that offers technical solutions to our guests as well as versatility and comfort with a variety of end uses, but that's just the starting point for us. Lululemon is a brand that stands for community with connection firmly at our core. We connect with guests through our educators and ambassadors, through our well-being offerings and local events and now through our new membership program in Lululemon Studio. It is this combination of innovation and connection that differentiates Lululemon from our peers and contributes meaningfully to the continued and sustained momentum we see across the business. Over the next few minutes, I'll highlight for you the trends we've experienced over the recent Thanksgiving weekend on what we're seeing in our business at the start of the holiday season. Then I'll discuss quarter three and speak to the balanced strength we continue to see across our business in terms of geography, channel and merchandise categories. Next, I'll update you on the supply chain environment and our inventories, and then I'll speak to our product pipeline. And finally, I'll speak to the benefits of our direct-to-consumer model and several of the unique ways we enabled connection with our community. So let's jump in. I will start with our performance over Thanksgiving as I'm sure it's top of mind for all of you. I'm pleased with our results and performance over the extended Thanksgiving weekend and as we start the holiday season. Over the past two weeks, I have traveled with several senior leaders across North America to cities, including Phoenix, Tampa, Orlando, New York and Toronto. We visited several stores in each market and saw a tremendous level of engagement from our team members, our guests in every store. In fact, Black Friday was the biggest day ever in our history in terms of revenue and traffic, driven by our results in both North America and around the world, with guests responding well to the innovation we offer across our product assortment. Our performance across markets and geographies shows that consumers are seeking brands like Lululemon that offer innovative, versatile product and a strong community connection that they can't find anywhere else. We also recognize that the external environment remains challenging with several high-volume weeks still in front of us. That being said, I'm encouraged with the beginning of our holiday season and I am confident in how our brand is positioned in the near and long term. Now I will speak to our performance in quarter three. Meghan will go through the details in a few moments, but I'll share with you some of the financial highlights. Our revenue growth remains strong and balanced across several drivers as follows: all on a three-year CAGR basis. Stores increased 16%, while e-commerce grew 46%. By region, North America grew 24% and international increased 42%. Revenue in Mainland China grew nearly 70% and we experienced strength across merchandise categories with men's up 28%, women's up 23% and accessories growing at 52%. Adjusted earnings per share increased 23% versus last year and 28% on a three-year CAGR basis. And our market share gains continue. While the adult active apparel industry decreased its U.S. revenue by 4% in fiscal quarter three '22 compared to the same period last year, Lululemon gained 1.5 points of market share in the U.S. over this time, the most of any brand in this market according to the NPD Group's consumer tracking service. These results are only possible due to the strength and dedication of our people around the world. To our teams in our stores, in our distribution centers and call centers and in our store support centers, I'd like to express my gratitude on behalf of the entire leadership team. You connect with our guests every day, execute against our growth plan and continue to support one another, all of which enable the financial results we deliver quarter after quarter. Turning now to supply chain and our inventories. We continue to see improvements across our supply chain. Our factories have now returned to pre-pandemic levels of production efficiency. In addition, ocean delivery times are continuing to improve from the 70 days we experienced last quarter. I'm also excited to share that we recently opened our Tilbury distribution center located near Vancouver to support demand in Western Canada. This DC is a great example of our ongoing investment in strategic foundational infrastructure projects that will help fuel our Power of Three x2 growth plan. In terms of inventory, we ended quarter three with dollar inventory up 85% on a one-year basis and units up 38% on a three-year CAGR basis, both metrics in line with our expectations. As we discussed, our inventory levels were too lean last year, and we made the strategic decision to build inventories this year, which enabled the strong top line growth we have delivered. Meghan will share additional details, and we remain comfortable with both the quality and quantity of our inventory. We continue to leverage our core styles, which account for approximately 45% of our total inventory and carry limited seasonal markdown risk. I'd also note that quarter three will represent the high point for our inventory on a one-year dollar basis. And as we enter quarter four, we are well positioned to be in stock throughout the holiday season. I will now spend a few minutes speaking about product. As you know, innovation at Lululemon is fueled by our Science of Feel development platform. Our team's focus first on identifying the unmet needs of our guests and then we view them through the lens of activities to develop new franchises and other hero items that are versatile and innovative. Quarter three had some great examples of how we bring this strategy to life. In footwear, we launched our fourth style Strongfeel. Like the other technical styles rolled out this year, Strongfeel was designed for women first, which differentiates us from many of our peers who create shoes for men and then adapt them for women. Strongfeel is a technical training shoe designed to keep the foot anchored and secured during workouts and we're encouraged by the initial guest response. As I've mentioned before, footwear is a test-and-learn category for us, and it represents a small portion of the growth we anticipate over the next five years. This allows us to build into the potential at an appropriate pace as we learn and make adjustments. That being said, we're excited about the potential opportunity in this category, and we were pleased to be recognized by Footwear News with the Launch of the Year Award presented during their 36th Annual Achievement Awards last week in New York. Turning now to franchises. It's great to see how our teams continue to build out our range of Wunder Puff offerings. We started with a single women's jacket and have expanded into 11 styles within this outerwear franchise across women's, men's and accessories. Our results show that our guests respond extremely well to the breadth of options. While last year, we were constrained in terms of inventory, particularly in outerwear, we are well positioned with Wunder Puff for the holiday season and expect to meet guest demand. As we look forward, franchise development represents a unique and distinctive opportunity for Lululemon with Align, Scuba and Define as a few examples, all of them beginning with a singular style and then expanding into popular multiple style offerings. And this is just the beginning. We will continue to introduce, expand and grow our franchise business into the future. Let me now shift gears and speak to another one of Lululemon's key competitive advantages, our D2C model. Our ability to connect directly with guests in real time and across both our physical and digital channels gives us a number of ways to engage beyond a purchase transaction. In quarter three, we launched our new membership program, began to hold local 10-K races for the first time since the pandemic began, and we brought focus to World Mental Health Day around the world with a notable activation in China. Some highlights are -- in early October we successfully launched our new two-tier membership program in North America. The Essentials tier is free to everyone and offers unique benefits to members, including early access to product drops, exchange or credit on sale items and invitations to virtual community events. The premium tier of the program, Lululemon Studio represents the evolution of Mirror into a much more engaging hybrid fitness offering. We've extended our collective by partnering with some of the best fitness studios and instructors to bring even more classes to our members, both digitally and in real life. To join, members purchased a Lululemon Studio Mirror agreed to a $39 monthly subscription and received many exciting new benefits. Another way we engage with guests is through our 10-K runs. We sponsored two races in Atlanta and in Houston and we're excited by the response. We paused these experiences during the pandemic. So I'm thrilled that we have been able to hold these large-scale community activations once again, bringing together our guests, local teams and ambassadors to extend our community connection. And in China, we brought attention to World Mental Health Day in October with a month-long campaign aimed at inspiring people to take positive actions towards improving their physical, mental and social well-being. This included in real life events focused on wellness, media partnerships and the launch of a digital well-being hub on WeChat. These examples bring to life the unique ways we connect with our guests and our communities across the globe. This enduring strength of Lululemon demonstrates our ability to be globally strong and regionally relevant as we foster a deeper relationship with Lululemon for existing and importantly, new guests. All of this increases brand awareness, drives traffic to our stores and websites and ultimately results in higher purchase consideration engagement with Lululemon. Before handing it over to Meghan, I wanted to speak further about our international business. As you know, our plans call for a quadrupling of international revenue over five years from 2021 to 2026, and I'm very pleased with how our leaders and local teams are executing against that goal. This was reinforced for me during my recent visits to the United Kingdom and Australia. I toured both markets with our local leaders and team members and got to experience firsthand the energy and excitement of our stores in our recently optimized locations in Australia. It's also exciting to see how we are elevating the guest experience in these markets with the recent rollout of ship from store and enhanced endless aisle capabilities in both regions. With strong leaders in each of these markets and across our international business, I'm energized by our ability to continue to strategically expand Lululemon across geographies. The potential is considerable. And building upon the momentum from our recent market entry into Spain, we opened another iconic location in Europe just last week with a store on the Champs-ÃlysÃ©es in Paris, in the heart of one of the city's main shopping districts, this store will enable us to grow brand awareness, both in France and across Europe, given this is such a popular tourist destination. While our growth prospects are balanced across geographies, international represents a key piece of our Power of Three x2 growth plan. We're off to a great start, and I look forward to sharing more with you on future earnings calls. Thanks, Calvin. I'm pleased that our momentum continued in Q3, and we were able to deliver both top and bottom line results, which exceeded our guidance. The holiday season is also off to a good start with strong traffic over the extended Thanksgiving weekend, and a positive guest response to our holiday merchandise assortment. In addition, we're in a much better inventory position this year to meet guest demand. However, I also want to acknowledge that we have several large volume weeks ahead of us, and our teams remain focused on connecting and engaging with our guests. Let me now share the details of our Q3 performance. I will also discuss specifics on our balance sheet, including our inventory and cash position. Please note that when comparing the financial metrics for Q3 2022 with Q3 2021, the adjusted operating results for Q3 2021 exclude $0.18 of expense related to the acquisition of Mirror. You can refer to our earnings release for more information and reconciliations to our GAAP metrics. For Q3, total net revenue increased 28% to $1.86 billion, ahead of our guidance. Comparable sales increased 25% with a 17% increase in stores and a 34% increase in digital. On a three-year CAGR basis, total revenue increased 27%. In our store channel, sales increased 28% on a one-year basis and 16% on a three-year CAGR basis. Productivity continues to trend above 2019 levels. And although we had 22 stores closed in Mainland China in the last week of November, we currently have 99% of our fleet open globally. We ended the quarter with a total of 623 stores across the globe. Square footage increased 19% versus last year, driven by the addition of 71 net new stores since Q3 of 2021. During the quarter, we opened 23 net new stores and completed seven co-located optimizations. In our digital channel, revenues increased 46% on a three-year CAGR basis and contributed $767 million of top line or 41% of total revenue. Within North America, revenue increased 24% and within international, we saw a 42% increase, both on a three-year CAGR basis. And by category, men's revenue increased 28% on a three-year CAGR basis. Women's increased 23% and accessories grew 52% on the same basis. I'm also excited that we continue to see strength in traffic across both channels. In stores, traffic increased nearly 25%. And in our digital business, traffic to our e-commerce sites and apps globally increased nearly 50%. On a three-year CAGR basis, traffic is up 9% in stores and over 41% in e-commerce. This speaks to the strength of our omni operating model as we engage with our guests and we have most convenient to them. Gross profit for the third quarter was $1.04 billion or 55.9% of net revenue compared to 57.2% of net revenue in Q3 2021. Our gross margin decrease of 130 basis points relative to last year was driven primarily by 60 basis points of deleverage from foreign exchange within gross margin, which was somewhat offset by a 20 basis point FX benefit within SG&A. A 40 basis point decrease in product margin, driven primarily by higher markdowns and inventory provisions relative to low levels last year, partially offset by lower air freight expense. And 30 basis points of deleverage on fixed costs, driven primarily by investments in our product teams and distribution centers, offset somewhat by leverage on occupancy and depreciation. When looking at markdowns versus 2019, they were relatively flat and in line with our expectations. The decline in gross margin was larger than our guidance of 50 to 70 basis points, driven predominantly by FX and regional revenue mix. From a regional standpoint, while revenue growth in China was strong for the quarter, it was below our expectations due to COVID-19 impacts. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were $684 million or 36.8% of net revenue compared to 37.6% of net revenue in Q3 2021. The leverage in the quarter versus Q3 2021 resulted from leverage in our stores and other channels on corporate SG&A and on foreign exchange. This was offset somewhat by an increase in depreciation and amortization. Operating income for the quarter was $352 million or 19% of net revenue compared to adjusted operating margin of 19.4% last year. Tax expense for the quarter was $97 million or 27.6% of pretax earnings compared to an adjusted effective tax rate of 25.1% a year ago. The increase relative to last year is due primarily to an accrual for withholding taxes on a portion of fiscal 2022's Canadian earnings and a decrease in tax deductions related to stock-based compensation. Net income for the quarter was $255 million or $2 per diluted share compared to adjusted earnings per diluted share of $1.62 in Q3 of 2021. Capital expenditures were $176 million for the quarter compared to $123 million in the third quarter last year. Q3 spend relates primarily to investments to support business growth, including our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments. Turning to our balance sheet highlights. We ended the quarter with $353 million in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory at the end of Q3 was $1.7 billion, in line with our expectations. This reflects one-year dollar growth of 85% and a three-year unit CAGR of 38%. In-transit inventory is up relative to 2019 and is contributing approximately three percentage points to the three-year unit growth rate. I'd also note that core seasonless product continues to make up approximately 45% of our inventory. We remain pleased with our inventory levels, which position us well to fulfill guest demand in Q4. Looking forward, on a one-year dollar basis, we expect the inventory growth rate at the end of Q4 to begin to moderate and increase approximately 60% relative to last year. On a three-year CAGR basis, we expect unit growth to be approximately 39% at the end of Q4. During the quarter, we repurchased approximately 55,000 shares at an average price of approximately $311. At the end of Q3, we had approximately $812 million remaining on our recently authorized $1 billion repurchase program. Let me now shift to our guidance outlook. We're pleased with the start of the holiday season. However, the environment remains dynamic, and we still have approximately 2/3 of the quarter ahead of us. For Q4, we expect revenue in the range of $2.605 billion to $2.655 billion, representing one year growth of 22% to 25% and a three-year CAGR of 23% to 24%. We expect to open approximately 30 net new company-operated stores in Q4. We expect gross margin in Q4 to increase 10 to 20 basis points relative to Q4 of 2021. We expect to see an improvement year-over-year in product margin, driven by lower airfreight expense which will be partially offset by continued FX pressure and the timing of expenses related to our supply chain investments. We expect markdowns to be in line with 2019 levels. In Q4, we expect our SG&A rate to leverage 30 to 50 basis points relative to Q4 2021. Turning to EPS. We expect adjusted earnings per share in the fourth quarter to be in the range of $4.20 to $4.30 versus adjusted EPS of $3.37 a year ago. For the full year 2022, we now expect revenue to be in the range of $7.944 billion to $7.994 billion. This range assumes our e-commerce business continues to grow approximately 30% relative to 2021. When looking at total revenue, our guidance implies a three-year CAGR of 26%, which continues to be higher than our three-year revenue CAGR of 19%, leading up to 2020 and higher than the target of approximately 15% growth we set forth in our new Power of Three x2 growth plan. We now expect to open 79 net new company-operated stores in 2022 up modestly from our prior guidance of 75. Our new store openings in 2022 will include 45 to 50 stores in our international markets and represent a square footage increase in the low 20% range in total. For the full year, we forecast gross margin to decrease between 100 and 140 basis points versus 2021. The reduction relative to last year is driven predominantly by foreign exchange. A more normalized level of markdowns relative to the low levels we experienced last year and increased investment in our DC network. Turning to SG&A for the full year. We forecast leverage of 100 to 140 basis points versus 2021 driven predominantly by increased sales. And when looking at adjusted operating margin for the full year 2022, we expect it to be approximately flat versus last year. For the full year 2022, we expect our effective tax rate to be 28% to 28.5%. For Q4, we expect our effective tax rate to be approximately 28.5%. For the fiscal year 2022, we expect adjusted diluted earnings per share in the range of $9.87 to $9.97 versus adjusted EPS of $7.79 in 2021. Our EPS guidance excludes the impact of any future share repurchases and the gain on the real estate sale we realized in Q2. We now expect capital expenditures to be approximately $630 million to $655 million for 2022. The increase versus 2021 reflects increased investment in our supply chain, digital capabilities, new store openings and renovations as well as other technology and general corporate infrastructure projects, including our multiyear project to increase our distribution capabilities to support our future volume and growth. And we are also ramping up our square footage growth relative to last year and now intend to open 79 stores versus our prior expectation of 75. Our range of $630 million to $655 million is approximately 8% of revenue in line with our current Power of Three x2 target of 7% and 9%. Thank you. Thank you, Meghan. In closing, I just want to reiterate how pleased we are to see the continued momentum in the business and our strong start to our Power of Three x2 growth strategy. As we look to quarter four and into 2023, I am confident in both our near- and long-term plans that will enable us to deliver on our goals while continuing to successfully navigate whatever comes our way. I look forward to taking your questions now. Operator? And may I say congratulations, very well done. Calvin, I wanted to focus a little bit on China. You talked about kind of strong growth there. You're opening a broad throughout the stores kind of they're committed to it this year, and obviously, I think probably for next year. What are you seeing then -- what is the breakdown between stores and e-commerce and what percent is it for the total business at this point? Hi, Adrienne, thanks for the question. We're seeing very good growth across both store channel and our dot-com channel. We don't share the ratio between those two but both contributed to growth in the quarter. And as you indicated, the market continued to grow very strongly for us even with their ongoing challenges with COVID where we saw store closures, reduced operating hours comparable to what we saw in quarter two. They're improving, but just recently, and the team is doing a wonderful job managing through that. But the momentum in the brand across the categories in both genders and both channels remains very strong. And we're very excited about the potential of the brand to be able to continue to drive it through this year as we have and how the guest is responding to it. So we remain very, very excited about the potential and the role that will play in quadrupling our international business with Mainland China playing a big part of that performance. Great. And of course, congrats on another great quarter. I wanted to just start with what you mentioned on the early holiday performance. It sounds like you guys have been delivering a really impressive result compared to what we've heard across other specialty retailers this earnings season and even at our conference earlier this week. So you guys are really kind of bucking the trend here. What would you attribute Lulu's quarter-to-date outperformance to so far? Thanks for the question. I'll break it into two parts that are driving the momentum both in Q3 as well as to the start of Q4, where our guest metrics have been consistent, as I've shared and remain very healthy across traffic, new guest acquisition, dollar spend, and the balance across our regions, our channels, our categories and activities. But I think one of the primary drivers of our brand and momentum relative to others really sits with the brand positioning and the uniqueness of our brand with product focused on technical solutions, fabrics through our innovative approach of science of feel and the versatility of how the guest uses our product from not just sweating but through on the move. Our D2C model and community and that connection that we have with the guest in quarter three, we were able to turn some of those physical connections back on and connected to the launch of membership. So they're really distinct aspects of the brand that separate us from many others in this space and within the athletic, within retail, hence, I think the share gains and the overall success. I also think some of the decisions we made as a management team early on. Decisions around pricing, decisions around balance of air to have the products and our decision around inventory has allowed us to continue to deliver on the demand side that we're seeing as we continue to see new guest acquisition strong and the pricing decisions to really manage pricing. To not move pricing aggressively has allowed us to continue to sell our regular price not be forced into unnecessary markdowns or course correcting with promotional play like we're seeing happen in the marketplace. So great products, regular price is still selling, driven off of the uniqueness of the overall brand and position in the market. That's super great color. Maybe one just final one for me. I wanted to touch on inventory. Similarly, juxtaposing you guys against some of the peers, we've seen many be able to work inventory levels down on a year-over-year basis. Can you just talk about why Lulu's is more similar to the last quarter? And then also I think you may have taken the fourth quarter outlook up a little bit on inventory, maybe from 60% to 55% from 55% to 60%. So I think a little bit higher than last time. Correct me if I'm wrong, but can you guys can just talk about that dynamic for us. Yes, absolutely. So end of Q4 inventory was in line with our expectations. We were under inventory last year. So as Calvin mentioned, we strategically positioned inventory to be able to capture guest demand this year. We've really been focused on that three-year unit CAGR, which is 38% at the end of the quarter with three points driven by in transit. We are continuing to experience supply chain environment improving and vendor readiness improving. So the team is adjusting to that new reality. That is reflected in the 60% color that we gave for year-end. So as we said, a little bit higher than the 55% to 60%, we gave at the end of last quarter for end of year inventory driven by that improving supply chain environment and vendor readiness. Good afternoon and thank you so much for taking our question. Calvin, the innovation pipeline at Lululemon has been particularly strong this year. I was wondering if you could talk a little bit more about that into next year? And where you think the product resonance can really improve as you think about managing consistent growth across your business and particularly in North America. Maybe within that, you could reflect on the glide path between the very strong one- and three-year CAGRs that you're performing now versus the longer-term target of 15% and how you think about that growth may be normalizing over the course of the next few years to that long-term target? Great. Thanks, Brooke. So in terms of the product pipeline, this year was definitely an exciting year across both our own categories and activities, our play activities, launch of footwear, Q3 like the first half of this year saw a number of new innovations, both in new fabrics, fabrications into our proven franchises like the Align. And Q4, equally, we have some exciting innovation that has hit and will continue to, and the guest is responding very well. That's a proven formula for us. And when I look forward to 2023, we continue to and will continue to drop innovation across the core activities that we've identified of run, train, yoga of the play tennis, golf and hike, and it's both new franchise or here items as well as extensions of some of our proven very successful franchises. A great example of that is the Align franchise, one of our strongest with the Lulu fabrication and there's Lulu Ribbed that dropped at the end of Q3, available now in Q4 and the guests are responding incredibly well to that. So, we have a number of innovative opportunities across creating completely new items and category extensions through franchise as well as building on the ones. And '23 is another very strong year of innovative launches, which I'm excited about continuing to bring to market. And as you mentioned, we are after the first three quarters of this year, trending above the guidance of the Power of Three x2 growth plan, which we're excited to see how the brand is responding and the guests are reacting to the newness in our new guest acquisition. We haven't changed our outlook and the commitment on the Power of Three x2, but obviously, very pleased with our performance to date and as we look forward into next year. And if I could just squeeze one more in for Meghan. Meghan, can you help us with the approximate sizing of the airfreight FX and supply chain investment that is going into the gross margin in 4Q? And remind us how much of those pressures will be persisting into 2023. Yes. So as we look at Q4, we do expect that overall operating margin will have similar pressure as we did in Q3 in terms of FX. So we had a net pressure of 40 basis points in Q3. We're expecting something similar for Q4. When we look overall at our operating margin for Q4, we see it expanding year-over-year in the 40 to 70 basis point range with our guidance versus last year in gross margin. We gave color of 10 to 20 basis points. We're seeing a benefit on product margin driven by lower air freight, which will be partially offset by normalized markdowns in line with our 2019 levels and then also mix of business. We also had that negative impact from FX. And then we'll also have some pressure in gross margin related to fixed costs, particularly the timing of our DC investments, which are really positioned to enable our scale of the business over the next five years. And then on the SG&A side, we're expecting 30 to 50 basis points of leverage, which would be driven by higher sales as well as a little bit of a benefit on the FX side within SG&A. Great. Congrats on another nice quarter. So Calvin, on the material market share gains that you cited, where do you see the largest share opportunities remaining maybe across categories? And then just to elaborate on the start of the fourth quarter, could you just provide any color on the cadence of shopping that you're seeing, maybe stores versus digital? And then just given the comments on the encouraging start of 4Q, is it fair to say you've embedded moderation in the growth CAGR for the remaining 2/3 of the quarter relative to your start? Thanks, Matt. So on the last piece in terms of the start of the quarter and what we're seeing, traffic was very strong for us across both our online channel as well as stores in Q3, and we're pleased with the continuation of strong traffic numbers into this quarter. And there's still a lot of the quarter ahead. So as we shared, we had a very strong Thanksgiving shopping weekend and saw good results of our regular priced merchandise and there are some critical weeks ahead. So the teams just remain focused in managing accordingly as we get ready for the holiday season. So that's our approach and how we're monitoring and managing through. And the first part of the question, oh, right, market share, got it. When I look forward in terms of our continual opportunity to grow market share, it's a combination of both in men's and women's categories and our key activities that we've identified across run, train, yoga, tennis, golf and hike. We shared at our Analyst Day our opportunity in unaided brand awareness with him. We have seen an improvement in that, but it's well below what the potential is and other brands in our category space. So we know as we continue to drive awareness behind the brand in consideration, it's having an impact on our men's business, pleased with the growth in the quarter of 28% but really just getting started in terms of the potential of more being aware of and considering Lululemon in addition to, as we continue to build out some of the assortment and unmet needs that we have around those core activities that we focused on. And for her, although we have a better unaided brand awareness, we are still below, again, others in our category space. So we still have opportunity. And women's OTM for us is an exciting opportunity to expand that relationship share of wallet and continue to drive market share. So market share gains, one through unaided awareness and improving that to continue to drive our new guest acquisition, innovating within our core activities as we've identified. As I mentioned before, we're still early innings on the unmet needs and the potential that we see to continue to bring to market and then the option and the opportunity we have around women's OTM is a really exciting one for us, for her as well, so a lot of opportunities that we have to continue to drive market share. Just wanted to ask a few more follow-ups on gross margin. Do you still expect air freight to be a 10 basis point benefit to the full year? And have you changed your view at all on markdowns for the fourth quarter given the more promotional environment? Lorraine, so we are expecting airfreight to be slightly better for the full year. So we had said 10 basis points last time, and it's come up to 50. That is being offset by a negative impact from FX both for Q3 and Q4. And then in terms of markdowns, we've been expecting markdowns to be in line with 2019 levels. We did see that in Q3, and that remains our expectation in Q4. And we view that as a more normalized level for us as we compare to 2019. And still, as Calvin mentioned, very healthy full price sell-throughs and no changes in plans for markdown cadence. Can you help us think about profitability by region? I'm just curious how that's tracking given your strong demand globally versus strategic investments that you're also making and where you see the most opportunity as you look out to the next year. Thanks, Rick. So we are profitable across both our international and North America regions. We were pleased that Europe hit profitability last year. We continue to see opportunity across both North America and international over the longer term. We're obviously in earlier stages in our international business. So we'd expect to see more expansion there as we scale, but the opportunities with scale across both regions. I was wondering if you had any category commentary. I know that last year, you were significantly under inventory in some categories like outerwear, but any shifts you're seeing there and then maybe commentary on Everywhere Belt Bag. Yes. I would say in terms of categories, we are seeing pretty balanced growth across our men's women's and accessories business, all in the double-digit range. We did have pockets of inventory where we were under last year, notably, I call it outerwear where we've seen more positive performance and believe we're in a strong inventory position as we enter Q4. In terms of the Everywhere Belt Bag, it's been a great style for us. Accessories growth, obviously, very strong, it's our number one cell. We continue to innovate across all of our assortments as we move into Q4 and then into 2023 as well. Congrats on navigating a tricky environment. Thanks for all the commentary on gross margin and inventory. I guess when we look at the level of units but also the cost on the balance sheet, is there anything lingering in the cost of goods sold into next year from some of the higher sourcing costs earlier this year that might be a source of pressure on gross margin? Or do you -- are there offsets to that as we -- from supply chain as we go into next year? Yes. Thanks, John. I would say we're pleased with the inventory level as we move into Q4, we're obviously seeing some improvement in the supply chain environment. In terms of airfreight, we have seen that moderate throughout the year. We do have a large portion of our inventory that is core, about 45%, so that benefits us. We're not putting a fine point on margin for next year but remain committed to modest operating margin expansion over the longer term. And we'll come back and share more details on our outlook on our March call. Got it. I guess just a quick follow-up. Would supply chain cost being more of a benefit this year or next year, excuse me, as some of the container costs come down, airfreight, obviously, already coming down. Our supply chain costs have benefited this year. Yes. So, I -- there's two pieces of the supply chain cost. So one is usage and then one is CPU. We are seeing lead times improve. We had called out 70 days on average last quarter. We're seeing them improve modestly, I'd say they're still not back to historical levels there. But where we are seeing some positive movement is on the CPU front. So we continue to view that as an opportunity as we move into next year. Great. I'm curious what the early takeaways have been from the broader rollout of the like new initiative? What are you seeing in terms of guest spend for those who have turned in used product. And similarly, curious if you can share anything else regarding the Lululemon Studio launch and maybe shed some light on your expectations for the Studio Mirror revenue for this year and next. Great. Thanks for the question. So with the like new, it's currently live in 50 states in an approximately 390 stores and we're not sharing specific performance details, but where we are pleased with the results we're seeing is really on twofold one, guest acquisition on the resale side, new to the brand and the opportunity to enter at a different price point. And then with our current guests, their spending based on trade-in, where they come in and get a variety of different trade-in values and gift cards. We are monitoring and seeing a positive response to that. So it's a new pilot rollout initiative for us, and we're pleased with the early results, and we'll continue to monitor. But early, it's been positive. And from -- sorry, on the Studio side, I'll break it down into two. From the essential membership tier, which is our free membership program, if you remember on Analyst Day, we indicated that we aim to have 80% of our guests to sign up for the program. And based on our glide path to that as guests come into our channels, be it online or in store, we're running ahead of that. So we're very happy with the sign-ups at this point. And it's going to allow us to engage with that guest base through a variety of new benefits that we offer in a very -- an exciting positive way. And with the introduction, the rebranding of Mirror into Studio as well, very pleased with the response, continuing to test and learn but we're excited how the platform fits within community fits within our essential membership program and allows us to continue to innovate behind community and the connection with our guests. So it's early only a few months, but encouraged with the results we're seeing. Congrats on a great quarter. Meghan, I guess just a housekeeping one. When do you think FX pressure to the gross margin can start to get better here given where rates are moving lately? And then I guess I'm just curious if you could help us unpack the gross margin a little bit more for next year. I know you answered it a little bit, but it seems like the industry is looking to get clean on inventory. So there should be some recapture opportunity there. Obviously, of freight, you spoke about a little bit and I'm curious how long you think that pressure on the fixed cost line within gross margin that flipped over to a negative this quarter on a nice comp. Does that roll forward with us for a few quarters? Great. Thanks. I would say in terms of FX, our outlook is that Q4 is more similar than not to Q3. I think hard to put a fine point on next year, but I would view it as an opportunity over the longer-term time horizon. In terms of gross margin next year, again, do view airfreight as a benefit but we're also committed really to that bottom line operating income expansion on a modest basis. We'll continue to balance opportunities and investments in the business, really focused on driving into our long-term goals, both of revenue growth and being able to scale with the business and support that long-term opportunity that we see. And then I would say fixed costs, particularly on the DC side, we have some upfront investments in our DC capabilities and footprint in order to support that long-term volume. So we'll see some pressure in the near term and then see that start to leverage over time as we move through our five-year plan. It is a multiyear road map. So we'll continue to offer some color there as we move through that. If I could sneak one in on the fourth quarter just -- I think you embedded in the comp for fourth quarter, particularly between the channel stores and e-comm, considering where traffic is, how much it's up based on some of the metrics you gave us and how busy your stores get over the next few weeks here. Maybe just a little bit on how you're thinking about the two channels. Yes, we didn't break down the channels for Q4. What we did offer was 23% to 24% sales growth overall. And we did give some color for the year on e-commerce at approximately 30% growth, which would embed both our Q3 results and our expectations for Q4. I wanted to ask my first question on pricing, actually. I know you guys have been -- haven't been too aggressive or haven't had really the need to use pricing lever even in this inflationary environment, but as you see COGS inflation, freight, FX impacting the gross margin. Maybe talk about your appetite and the brand strength and the brand's capability to use pricing as a tool as needed? And then maybe also dive in deeper on China. It seems like the form they were pretty solid despite all the COVID closures going on there? Maybe talk about what the outlook will be once -- what your expectations are for that business once the -- who knows when it will be, but once the kind of market and economy and consumer spending and retail environment opens up there? Omar, on pricing, as we've stated, we only increased around 10% of our assortment mix this year as we priced in and we continue to evaluate and look for opportunity. And we separate cost of goods and any pressure we're seeing there with short-term cost of supply chain logistics. And what we don't want to do is react too aggressively and create any impact on the demand of our product. And we're going to continue to take that approach, comfortable on the inflationary pressures we're seeing on cost of goods and how we're priced in. And as I said, we'll adjust on the other. And I think as we've seen through the three quarters of this year, the decision so far has been the right decision, where others that priced up are now heavily discounting and giving away any of that perceived gain and more so and having to mark goods down where we're able to continue to sell our product at regular price, not react and our markdown performance has been in our guidance in line with what we indicated we would be from a 2019 perspective. So I -- we continue to monitor it, but our pricing decisions, I think, have helped to fuel our momentum this year, and we'll continue to take a similar approach as we look out to next year. And on China, we remain very excited. Our new store openings, we opened nine stores in the quarter in Mainland China. We have 88 now in market. Their performance continues to exceed -- beat expectations. In markets where we don't have constraints related to COVID, the store performance and online performance is very strong. So we remain very excited about the market, committed to the market and know that it will play a strong role in our growth of quadrupling international through our Power of Three x2 growth strategy. Thank you, Calvin. Just to clarify, in terms of pricing, so it's not that you don't think the Lululemon brand has the pricing power, but you just don't see the need given some of the transitional nature of some of the inflation going on there to chase pricing given the environment. Is that a fair characterization? It's a fair characteristic, but I'd also indicate when we mentioned the 10% of assortment that we've moved pricing on, throughout this year, we've looked at our new innovation and priced it accordingly relative to where we see opportunity in the marketplace. So we absolutely know that this is a premium brand. We have pricing power. We're able to launch and introduce exciting new innovation that is priced to support the technology and the innovation that is into the product. And we are being cautious in managing our regular pricing accordingly with the promotional nature of the market so that we're able to continue to sort of drive the demand at regular price that we're seeing, and we'll manage accordingly. But absolutely, it's not a reflection of what we believe the pricing power of the brand is. In fact, I think the way the brand is performing in a heavily promoted environment actually supports the power of the pricing position that we have at Lululemon. Great. Calvin, I'm just wondering if you could talk a little bit more about what you've seen from the footwear business when you think about the Strongfeel versus Blissfeel versus Chargefeel. Have you seen the consumer adopt one style versus the other? I mean, have you seen certain colors or SKUs do better? And are you looking to expand the assortment as you get into next year? Thanks, Jay. We're pleased with the results to-date. As you indicated, we have four SKUs within our footwear and each have performed well. It's a combination. We're seeing certain guests purchase multiple styles, and we're seeing new guests enter either into Blissfeel or Chargefeel or into Strongfeel or Restfeel. Restfeel being our first dual-gender offering for both him and her and the other three being specific for our female guest built off of a last design on her foot. As we look forward, I'm excited about continuing to test and learn as we indicated, it doesn't play a big role in our Power of Three x2 growth plan that we shared on Analyst Day, and it's an exciting category for us. And we have the ability and we'll take the ability to pace, to learn but we started with a very innovative unique positioning, and we'll build from that. And colors -- from the Color Wave side, she's been responding very well to the colors. I think that's one of the unique positionings of it is our core colors and black and white are strong, but a lot of the unique Color Waves, she's responded very well to. So it's early for us excited about the results, and we'll continue to test and learn and share more.
EarningCall_1923	Good day, everybody, and welcome to the Movado Group, Inc. Third Quarter 2023 Earnings Conference Call. As a reminder, todayâs call is being recorded and may not be reproduced in whole or in part without permission from the company. At this time, I would like to turn the conference over to Rachel Schacter of ICR. Please go ahead. Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer and Sallie DeMarsilis, Executive Vice President, Chief Operating Officer and Chief Financial Officer. Before we get started, I would like to remind you of the companyâs Safe Harbor language, which I am sure you are all familiar with. The statements contained in this conference call, which are not historical facts, maybe deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the companyâs filings with the SEC, which includes todayâs press release. If any non-GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure to this non-GAAP financial measure will be provided as supplemental financial information in our press release. Thank you, Rachel. I would like to welcome you to Movado Groupâs third quarter conference call. With me today is Sallie DeMarsilis, our Chief Operating Officer and Chief Financial Officer. I will first review the highlights of the quarter and the current operating environment. Sallie will then review our financial results in greater detail as well as our outlook for the balance of the year. We would then be glad to answer any questions you might have. Since we last spoke to you in August, we have seen a substantial change in the operating environment. Globally, we have experienced high inflation and the unfavorable currency rates and unfavorable currency rates, both of which further intensified during the third quarter. In addition, we have seen European and American consumers begin to reduce their purchases of discretionary items as inflation has taken its toll on their buying power. Within this environment, our teams have done an excellent job of executing against our strategy and managing our expenses to deliver strong results, particularly on a currency-adjusted basis, despite the prevailing headwinds. For the third quarter, our sales were $211.4 million versus $217.7 million last year. On a currency-adjusted basis, our sales actually grew by 3.4%. We delivered strong gross margins of 57.3% despite the currency headwinds. Adjusted operating profit declined by 7.8% to $38.9 million, however, would have increased on a currency-adjusted basis. Our adjusted earnings per share for the quarter were $1.31. Additionally, our balance sheet remains strong with $187 million in cash and no debt at quarter end, while returning $51.8 million to our shareholders through share repurchases and dividends since the beginning of the year. In the United States and Europe, we have seen inflation of everyday goods and higher energy prices begin to take a greater toll on consumersâ purchasing power and we expect that trend to continue for the balance of this year and into next year. While our U.S. sales declined by 5.9% as consumers and retailers pulled back on their purchases, our international sales grew by 10.2% on a constant currency basis. Our international sales are now almost 2x larger than our U.S. wholesale business. In our outlet business, which includes both our brick-and-mortar businesses and our digital format, we saw a mid-single-digit increase in sales. Given prevailing currency rates, economic challenges in Europe, certain in the uncertain retail environment and continued challenges faced by consumers, we are approaching the fourth quarter with caution. In addition, last year was a particularly strong holiday season with less competition from travel and dining. The consumer was in fantastic shape, and they were being urged to buy early or take the risk that retailers would run out of best-selling products. Today, the environment is completely different. As we enter the important holiday season, we will continue to support our brands with strong marketing campaigns to make sure that we maximize sell-through for our watches and jewelry during the most important selling period of the year. In Movado, we are excited to introduce our new Alpha collection, which represents the Pinnacle product in Movadoâs assortment. Alpha is inspired by the rich heritage of the Movado brand and incorporates luxury features, including ceramic bezels and Movado automatic chronograph movement. As part of our elevation strategy, we will continue to expand our most aspirational product offerings, particularly in Swiss-made mechanical movements. To support our bold assortment, we have also introduced our first ball automatic versions in bold Fusion automatic. We are excited about our holiday television campaign that we launched just last week featuring our BOLD Verso watches for him and her. This campaign will be complemented with our first major influencer campaign that was launched last month and will run through the holiday season. On the digital front, our movado.com website continues to play a significant role in the ongoing development of the Movado brand, even as consumers return to brick-and-mortar locations. For the first 9 months of this year, our movado.com sales were down 14%, but up 56% ahead of 2 years ago. In our licensed brands, we delivered 11.6% sales growth on a constant currency basis against the background of slowing economies in our largest markets in Europe. We continue to offer compelling innovation across our brand portfolio and we are driving demand, both online and in-store. We continue to see strong results in Mexico, Brazil, and the Middle East, and India as well. In China, we are still seeing the impact of the ongoing pandemic closures. In Tommy Hilfiger, we continue to drive results with regional influencers and associations in key markets. We received a strong reception on our advertised family miles and with a vintage-inspired multi-eye blue dial on a mesh bracelet and Luca, a 50-millimeter sport-inspired family. In HUGO BOSS, we have continued to see the momentum of the parent brandâs repositioning and it continues to resonate with our consumers as exhibited by the successful introduction of two new families, Spear and Purity. We continue to collaborate with the BOSS influencers, the connect with the consumer in our visual associations as well as venues like TikTok, where BOSS watches are being worn by Khaby, who is one of the most followed individuals on the platform. In Coach, we introduced the Katy tank family, which is modeled after Coachâs iconic badge logo and is worn by Coach Ambassador, Jennifer Lopez. We are continuing to drive our Coach online business in China with associations with key online digital influencers. We are excited to introduce the third generation of our iconic 1212 family in Lacoste during the third quarter. 1212 is inspired by the iconic Lacoste polo shirt. This new collection is already off to a fast start. In addition, we just introduced Lacoste jewelry, and we are already seeing strong sell-through. We continue to roll out the launch of our Calvin Klein brand in watches and jewelry, and we are seeing a strong response from consumers, especially on the watch front. Womenâs represents about 50% of the watch sales. Menâs watches about 33% and are for everyone segment, about 17%. We will support our key European markets with billboard advertising as well as digital efforts for the holiday season. We continue to make progress in developing our strategic plans for MVMT and Olivia Burton and in building out our teams in an evolving retail market. We are encouraged by the progress that we are making on the innovation and product component of both brands at higher price points. In MVMT, we have seen success with our Raptor automatic, which at $500, is our most expensive MVMT ever, and we will sell out our collaboration with the Hello Kitty brand, which includes watches and sunglasses. In Olivia Burton, we are also elevating price points. And while the UK continues to be economically challenged, we have gotten a strong response from retailers to our newness that is arriving for the holiday and additional newness that will be arriving next spring. As we think about the balance of the year, we believe that the intended consequences of central banks to tamp down inflation are beginning to take effect and economies around the world are beginning to slow. There continues to be a heightened risk of a recession and retailers and consumers are becoming increasingly cautious. The level of uncertainty makes it more challenging to forecast results for the upcoming holiday season, and we have revised our outlook to reflect our cautious posture. Within this context, we are navigating a retail environment with reduced visibility, and we will focus on controlling the things that we can control. We will tightly manage expenses while continuing to support the long-term growth opportunities for our business. We will protect gross margins and focus on continuing to drive profitability and positive cash flow. We have managed our balance sheet very effectively, and it puts us in a strong position to navigate an increasingly volatile retail climate. Our teams have done an excellent job of executing against our strategic objectives and our focus on managing our inventory, expenses, and gross margins while maximizing our sales. I would now like to turn the call over to Sallie. Thank you, Efraim, and good morning, everyone. For todayâs call, I will review our financial results for the third quarter and year-to-date period of fiscal 2023, and then I will provide an update to our outlook for the year. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the third quarter and year-to-date period of fiscal 2023 and fiscal 2022 in our press release issued earlier today, which also includes a reconciliation table of GAAP and non-GAAP measures. Additionally, given the significant currency impact on our results, where appropriate, sales will also be provided on a constant currency basis. We are pleased with our overall performance for the third quarter of fiscal 2023 despite being negatively impacted by the continued strength of the U.S. dollar and by intensifying economic pressures in certain key markets as the quarter progressed. Our financial performance was highlighted by an increase in global net sales on a constant currency basis, strong gross margin, and operational discipline. We once again ended our quarter with a strong balance sheet. For the third quarter of fiscal 2023, sales were $211.4 million as compared to $217.7 million last year, a decrease of 2.9%. In constant dollars, net sales increased 3.4% to $225.1 million. This increase in constant dollars reflects growth in our licensed brands, which included Calvin Klein and in our company stores was partially offset by a decline in our owned brands. U.S. net sales decreased 5.9% with decreases in both the companyâs wholesale customers in the owned brand category and an online, partially offset by an increase in company store sales. As Efraim mentioned, we are seeing the effects inflation is having on the consumer in the U.S. as well as in key international markets. International net sales decreased 0.7% as compared to the third quarter of last year. On a constant currency basis, International net sales grew by 10.2%, with strong performances across all international regions, although we started to see softening in key markets as the quarter progressed. Gross profit as a percent of sales was 57.3% compared to 57.7% in the third quarter of last year. The 40 basis point decrease in gross margin was primarily driven by the unfavorable impact of foreign currency exchange rates and increased shipping costs, offset by favorable channel and product mix. Operating expenses were $82.1 million as compared to $83.4 million for the same period of last year. The decline was driven by a decrease in performance-based compensation and lower marketing expenses, partially offset by an increase in payroll-related expenses. For the 3 months ended October 31, 2022, fluctuations in foreign currency exchange rates related to our foreign subsidiaries positively impacted operating expenses by $1.7 million when compared to the prior year period. As a result of the decrease in sales and gross margin, partially offset by the decrease in operating expenses in the third quarter, operating income was $38.9 million as compared to $42.2 million in the third quarter of fiscal 2022. We reported income tax expense of $8.6 million in the third quarter of fiscal 2023 as compared to $9.7 million in the third quarter of fiscal 2022. Net income in the third quarter was $29.8 million or $1.31 per diluted share as compared to a net income of $32.1 million or $1.36 per diluted share in the year ago period. Now turning to our year-to-date results. Sales for the 9-month period ended October 31, 2022, were $557.6 million as compared to $526.4 million last year. In constant dollars, the increase in net sales was 10.9%. International sales increased 13.1% or 22.3% on a constant currency basis, U.S. net sales declined by 2.3%. Gross profit was $324.6 million or 58.2% of sales as compared to $298.2 million or 56.7% of sales last year. The increase in gross margin rate for the first 9 months was due to favorable channel and product mix, partially offset by unfavorable changes in foreign currency exchange rates and increased shipping costs. For the 9 months ended October 31, 2022, operating income was $96.4 million compared to $81.8 million in fiscal 2022. As a percent of sales, operating income was 17.3% in the first 9 months of fiscal 2023 as compared to 15.5% in the first 9 months of fiscal 2022. Net income was $73.5 million or $3.19 per diluted share as compared to $62.2 million or $2.63 per diluted share in the year ago period. Now turning to our balance sheet, cash at the end of the third quarter was $186.7 million as compared to $201.8 million of the same period of last year. Accounts receivable were $135.6 million, down approximately $800,000 from the same period of last year. Inventory at the end of the quarter was up $44.3 million or 25.9% above the same period of last year, primarily due to the timing of receipts and the addition of approximately $8 million of Calvin Klein inventory. We are comfortable with the level and composition of inventory at the end of the third quarter. And based upon anticipated receipts and net sales in the fourth quarter, we expect inventory levels at year-end to be more in line with historical levels. In the first nine months of fiscal 2023, we repurchased approximately $28.2 million or 795,000 shares under our share repurchase program. Capital expenditures for the nine-month period were $4.7 million and depreciation and amortization expense was $8.2 million, which included $2.1 million related to the amortization of acquired intangible assets of Olivia Burton and MVMT. Now, I would like to discuss our outlook. In addition to currency headwinds, we are also experiencing a weaker spending environment in key markets. Although we are strongly positioned heading into our fourth quarter, we are revising our outlook as a result of the uncertain retail environment. Our net sales are currently expected to be in the range of $740 million to $750 million. We continue to expect gross profit of approximately 58% of sales for the year. Given the strong first nine months and our focus on profitability, we currently expect operating income in a range of $120 million to $125 million. We now anticipate a 23% effective tax rate. This updated outlook does not contemplate significant further impact of increasing inflation or geopolitical unrest and assumes no further significant fluctuations from prevailing foreign currency exchange rates. Thanks for taking the question. On the gross profit guidance reconfirmed at 58%, could you guys elaborate on that given the lowered revenue guide? What efficiencies do you expect in targeting this? And additionally, with regard to FX, how do you expect that to impact revenue and gross margin over the following quarter? So, I will start with the gross margin question, and Efraim will pick up. So, we have had a very strong gross margin all year. We will continue that into the fourth quarter, which is a heavy direct-to-consumer period for us. But we have had a very strong mix and expect that our â to not be heavily promotional in the fourth quarter. So, we expect a very strong gross margin to continue. We are anniversarying tough numbers from last year. So, we are guiding to 58% for the entire year. And your question onâ¦ Right. So, I will take that, and I am sure Efraim will pop in a little bit with a fill. So, we are using the current FX rate for our guide for the fourth quarter. We know we have had a very significant shift in currency, most significantly in the third quarter. And heading into the fourth quarter, we are using what we are aware of today. FX does impact our gross margin significantly, and that also is in our outlook guide, if you will, most certainly because of the complexity of our international business, multicurrency and having our supply chain also being in Switzerland and in Hong Kong. And currency, as I stated earlier in the call, has had an effect â a material effect on our sales this year because all of our European sales get translated back into U.S. dollars at a stronger dollar rate. And that shift throughout the year and especially in the third quarter, has been material. Great. And then could you guys talk a little bit about gas prices and retail traffic trends you are seeing across channels and geographies? We have seen some slight moderation in gas prices in the U.S., but just curious as to how you expect that to play out? Sure. So, I think you have a combination of variables and factors playing into the consumer this coming holiday season. One is last year, they were told to buy earlier, they would be â or they would run â people would run out of products. So, I think you are going to see a later Christmas this year than we saw last year, which was not the regular pattern of the past. I think gas prices have moderated, but there are also â consumers are also now seeing inflation continue on the food side. Eventually, I believe all of these factors will moderate, but itâs just going to take some time. And particularly, I think at the middle income and upper middle income consumer inflation has taken a toll as a greater part of their income is focused on required goods like gas and food, and rent versus discretionary items. And one last question. On a sequential basis, inventory growth appeared relatively flat. Can you speak to the freshness of your inventory and then provide some details on pricing trends ahead of the holiday season? Sure. So, our inventory is in very good shape. And the â so we did get receipts in early throughout the year. And we expect it to drop in the fourth quarter, but it is a very clean inventory in terms of newness and quality of inventory. So, we have no concerns about that. What was the second part, pricing trends, so we did pass some price increases early in the year and that did help offset some of the currency headwinds that we were facing, especially in Europe. And I believe that now it will stay stable for a while, and I donât anticipate any more of that. I think you will see a more promotional holiday season from retailers. But our own intention is not to be more promotional on our side. There are no questions at this time. I would like to turn the conference back over to Efraim for closing comments. Okay. Well, thank you very much everybody and I wish everybody a great Thanksgiving holiday, and we look forward to talking with you again after our year-end. Thank you again. Thank you. This does conclude todayâs conference. You may disconnect your lines at this time and thank you for your participation.
EarningCall_1924	Excellent. Thank you guys for joining us. We have tons to review today. Thank you Andy and Bill for joining us. And it's not Bill Anderson, it's Bill Grossman but I'm clearly not getting enough sleep. But let me turn it over to you first Andy and Bill to kick things off and we'll jump right in. I'll start on our side. Thanks for having us, Umer. It's always good to catch up and I appreciate the opportunity to join the conference. Maybe and really, would it be helpful just to start with kind of setting the stage for 2022 and where we are and where we see the business going, or do you want to jump right into some of the questions [ph]? Look, at a high level, as most of you have heard from us and know, it's been a fantastic year for Gilead. I mean we feel that we're really starting to see the culmination of all the hard work for the last many years and the changes in our organization, the build-out of the pipeline, the investments that we've been making in both our virology business and oncology in particular, as well as Kite. So when we look at where we are, what really is the first kind of tangible evidence of the strategy and action playing out. In particular, I'd highlight the strength in the HIV business which has really recovered. We've had 5 straight quarters of growth where, as you know, in the HIV business coming out of the pandemic. Obviously, there's a lot of news this year in the HIV business when you think back to kind of our guidance at the beginning of the year for the HIV business to be at a minimum flat, if not growing in the second part of the decade. That didn't assume that we would have the TAF patent settlement that we announced earlier this year and also it assumed that there would be greater competition from some other agents in the market, in particular, islatravir, than it's probably likely now. So when we look at the HIV setup here for the HIV business going forward, it's a great setup for us in terms of the strength of the business and the performance and the long runway that we believe that we have, growth ahead of us. And then the oncology business is really performing. You saw that in the first 3 quarters of the year, the third quarter was fantastic. The number of shareholders have commented on the fact that the oncology business is now a bigger business than the HCV business and it's growing substantially. Obviously, Kite has really performed this year and is a clear leader in cell therapy and Trodelvy is clearly moving in the right direction, both with the clinical data and commercially. So we're pretty excited about where we're going. Maybe I'll pause there. And Umer, you can take us wherever you'd like to go. Sounds great. So maybe at a high level Andy, I feel like there are several sort of high-level issues. Maybe just starting with -- so obviously, the TAF settlement was very important. It actually cleaned up the numbers and more importantly, the visibility through 2030. And I guess one of the questions that comes up is when I look at the numbers and the way Gilead has modeled, effectively modeled flat on top line through 2030. And when I think about that and compare that with the script trends on Biktarvy, when I compare that with sort of the improved manufacturing and Yescarta coming through, Trodelvy has got more indications to come. Like -- I wonder, how do you think about some of the pushes and pulls? And do you think there is some top line growth potential? Maybe not 5% plus on an annualized basis but some? No, absolutely. Actually, in fact, I think we expect -- maybe I'll just step back to what we're guiding to this year and start from there. So for this year for the base business, we're guiding 5% to 6% growth for the year. And what we've said is that the growth we think that the pipeline is going to deliver, improved growth profile over time and that you should really see an inflection in the mid-part of the decade and that the growth should improve from that point on as well. So we like where we are and we think we have the pipeline that's going to deliver improved growth. So Umer, what you're highlighting is disconnect between the market view and our view, so whether it's just for the HIV business, you can focus on that or whether it's for the business overall. I would say that there aren't that many analysts that have a long-term model and it seems to us that many of them are in the process of updating their models as a result of some of the recent announcements, including the TAF patent settlement as well as the progress that we've made this year on the commercial side. So I expect the disconnect between kind of our view and what we expressed at the beginning of the year at JPMorgan and with all those subsequent events that have like further strengthen the outlook, I expect that disconnect to kind of close over time as people update their models. Got it. So maybe -- and let me just stick to this high-level picture for a second Andy. Do you anticipate or you guys in this sort of forecast between now and 2030 anticipate Biktarvy and perhaps some other products like Yescarta to be in the IRA basket? Well, I guess kind of maybe not because itâs cell therapy butâ¦ Yes, exactly. Yescarta is unlikely because it's cell therapy. Conceivably, part of it could be Part B [ph] in the future but it's unlikely. Biktarvy is possible, yes. I mean it's too early to say definitively that Biktarvy would be one of the products that's impacted. If it was, the earliest it would be impacted is 2028 and we think that the impact is manageable. So when we look at the IRA overall, obviously, there's a lot that's going to be worked out and to determine over the coming years. But yes, I mean, the answer is Biktarvy could be one of the products that's impacted. I think when we look at the pipeline overall, whether it's the oncology pipeline or lenacapavir and the other products that are coming in HIV, we don't expect it to change kind of the overall course of the growth profile of the business in being a top-tier growth company through the end of the decade. Got it. And perhaps extending that same logic over to EPS line item then. Consensus is obviously sort of in the mid-7s or so. If the growth trajectory really is what youâre talking about Andy, it sounds like itâs going to be well north of 10,000 earnings power here. Is that a scenario youâve seen in internal modelling? And Iâm not necessarily asking for a guidance. Yes. We don't provide long-term guidance. I do think what we've said and will continue to say is that we have a very efficient capital structure. And we're a small -- a much smaller company than other companies of our size in terms of revenue. And as we grow the top line and the way that we expect to grow the top line over the coming years and through the end of the decade, we'll have a lot of leverage in our model and a lot of that will fall to the bottom line. So weâre kind of in the final period Umer, as you know, of the build-out of the company in terms of especially the oncology piece of the business, whether itâs on the R&D side that Bill and others are leading or on the commercial side. And youâve seen that in our -- both our R&D expenses and our SG&A expenses, weâre in the final couple of years of that. And as we continue to grow the top line, assuming that the pipeline continues to deliver in the way that we expect, you should see a lot of leverage in the model and increasing EPS growth over time. Makes sense. What about BD? And I know you're talking about build out several times but presumably, that doesn't mean BD is going to stop completely. Some baseline level should continue, especially given your background Andy, when I first saw you. Yes. No, absolutely. You're absolutely right. It's going to continue but it will be very different, Umer, than it has been over the last 5 years, right? We had a very different need 5 years ago than we have today. So you're going to continue to see us do what I'd call ordinary course business development deals where we'll do small acquisitions similar to the MiroBio acquisition that we announced earlier this year, or partnerships similar to the Dragonfly partnership. Remember, we reacquired rights to Trodelvy in Asia from Everest. That gives you a good sense of kind of where we're focused and what we're doing. Obviously, we'll continue to look at Kite and building out the Kite business as well given the strength in our cell therapy business. But I don't expect that we're going to do medium or large M&A deals in the way that we did historically as we are building out kind of our late-stage pipeline. I mean, we really believe that we have everything we need to be a top growth company in the sector in our pipeline today. And anything that we do, we will continue to supplement that over time in a healthy fashion but itâs a very different kind of progression on the BD side from here than it was over the last 5 years. Yes. I mean, again, I would never draw a line. I mean most of the deals will be even well below $1 billion in terms of ordinary course business development upfront on licensing deals. So again, if you look at the 3 deals that I highlighted, collectively, I think they were probably $1 billion or maybe even less than $1 billion in upfronts. So that -- could we do a small acquisition of that size? Sure. Iâm not sure that we need to and it's really not where the focus is. So it all depends on kind of what comes with it. Okay. Okay, got it. Got it. So you're not saying no. And the other one, just to maybe round that out also is one of the questions that's come up is, as you're continuing to build out Kite further, obviously, Kite doesn't hit all the popular targets in the cell therapy space, would you be open to cell therapy BD? And I asked that because some of those might actually require outlays more in the $2 billion to $5 billion type range, not necessarily sub $1 billion. Yes. I mean we're absolutely open to building out the Kite business. And we've done a lot of corporate development deals for Kite since we acquired the company 5 years ago and that's not going to stop. I still think it fits more in the kind of ordinary course licensing and small acquisition bucket versus larger deals like the ones that you mentioned. But weâll look at everything in the space. I mean, itâs always been a space, Umer, that we assumed would consolidate over time and that we have a very clear leadership position today that we expect to maintain. Part of that will come through our internal R&D and part of that will come through continued business development. So more to come. But yes, weâre absolutely going to continue to look at building out the Kite business. Got it. Okay. And then just before we get a little more product specific Andy, tenofovir litigation, this has been a topic that's sort of been on the back burner ever since the hearing got stayed. But presumably, you'll start seeing more buzz around this again and as we go into the first half next year. How are you guys thinking about that broadly as a framework? And Iâm not necessarily asking for legal arguments but more just wondering, is this something you guys want to settle at some point and move on? Or is this something you guys want to litigate all the way to the appeals level? Well, I mean, I think it's like a lot of the other litigation that Gilead has faced over the years. I mean we have a lot of confidence in our case. And we believe that we have the right arguments here and the winning arguments. So we are not afraid to litigate as we need to going forward. So I mean, again, thereâs not much that I can say beyond what weâve said previously and what you can see in the public pleadings. There will be a number of additional developments in the cases next year. We have a great legal team. We have great internal and external counsel and feel really strongly that we have -- weâre on the right side of this argument. So thereâs not much more than I can say at this point in time, Umer. Got it. And Andy, from an accounting perspective, what has to happen for you to take a legal charge? Because -- and I asked because the number of plaintiffs in this case is so unusually large versus even many of the multi-district litigation. Yes. Well, we have to think that thereâs the probability of a negative outcome and that itâs readily determinable in terms of potential amount. And neither of those is true at this point in time from our perspective. So as I mentioned on our quarterly call, we have not taken any reserve for this litigation. Got it. Okay. Makes sense. Excellent. So maybe as we turn to some marketed products and this ties into this discussion we're having on growth products through 2030 and maybe to loop in Bill on this first one, perhaps. Bill, one of the questions that comes up is, you have Trodelvy. Itâs a real product now. Itâs a sizable part of the portfolio. But now with Enhertu out in the market, presumably even within the triple-negative breast, at least half of that is exposed to Trodelvy competition. Do you guys anticipate some shrinkage in the triple-negative side before we open up the additional future indications? Well, I think -- again Trodelvy is definitely a cornerstone for our oncology pipeline. It's going to be -- and it's already turning into that pipeline in our product where we're continuing to expand across multiple indications, including obviously, breast cancer and moving that up in the lines of therapy. For us, it's too early to say how Enhertu is going to really impact Trodelvy. We're the only one that has a positive large Phase III trial in TNBC and 65% of the TNBC patients really don't -- are the IFC 0 [ph] patients that was not studied in the HER2 population for addressing a breast cell 4 [ph]. So we think we have a lot of growth opportunity to happen there. Right now, weâre only about 1 in 4 patients and thatâs largely in third line. So we think the growth in TNBC is still a great opportunity for us in the marketplace. And now that we have tripled our field forces, including our commercial field force, we think that weâre in the right trajectory for Trodelvy to continue to be a cornerstone in breast cancer as well across TNBC and now hopefully HR-positive breast cancer as well. Got it. So is it fair to assume then and maybe Andy to loop you in too, that Enhertu is a growth product from your perspective next year? Yes. I mean we expect that Trodelvy is a growth product, not only next year but for years to come. I mean we have even more confidence today in Trodelvy than we did when we acquired the product and we had a lot of confidence at that time. So we like the clinical data, we like this setup. Weâve recognized that Enhertu is a really important product for breast cancer patients as well but so is Trodelvy. Theyâre both fantastic options, as Bill said. So itâs a pretty exciting time but absolutely for years to come, we expect Trodelvy to grow. Got it. And Bill, it sounds like from the clinician feedback you're hearing, you're not necessarily hearing a segmentation of Enhertu ahead of Trodelvy and going down that sort of HR, the way they define the Enhertu positivities on the lows? Yes. I mean maybe first just kind of contextualizing the marketplace itself, that HR-positive breast cancer is the largest segment, 70% of patients are in that segment and very different patient populations that were studied between addressing breast cell 4 [ph]. So I think that the physicians, KOLs really view this as different lines -- different studies in different patient populations. And Enhertu again, as a reminder only had to be in 1 prior chemotherapy versus a median of 3, 4 topics with the requirement for CDK4/6. So there will be a question around sequencing, especially as the patents do progress. We think that weâre well situated for, again, the IHC-0 population in the TNBC population. But again, from a TNBC population, we believe that weâre the only ones so far has shown clear clinically and a significant study for PFS and OS. Sorry, sorry, I meant market share. Like how many -- I don't know if you guys would have that off top or we can save that for Johanna for another time. Okay. No problem. Okay. So perhaps one more then while we're on Trodelvy. One the other question that comes up, obviously, is on the comparisons versus -- into lung cancer. And one of the things Iâve always been somewhat scratching my head on is as much as TROPiCS-02 ADC data for Trodelvy, for Enhertu is very, very good in lung as well. But I find that Daiichiâs HER3, the asset has been stronger, at least on a reported response rate. Now granted, theyâve had some dosing step down, et cetera, as well. How do you think about that and the competitive positioning versus the HER3 ADC construct in lung? Yes. I mean, right now, the HER3-ADC is really, again, in a different patient population, primarily for both studies that EVOKE-01 and 02 are really targeting those eGFR mutant patients. And that's very different than the patient population that we've been targeting which is the non-driver mutations. So that will be another potential differentiation that we're looking at. They did -- as you -- I think you were referring to, they did have a very small study, population that reported out at ASCO this year, looking at patients with second line plus without eGFR mutant and that was a decent response rate. We think weâre very comparable. Obviously, weâre going very fast and furious into the lung space with Trodelvy. We have the second line readout. We have EVOKE-01, 02 and 03. Two of which are Phase III study is already underway. So weâre pretty confident in what weâre seeing already in the lung space. Got it. And maybe just to touch up briefly then on EVOKE-01 and I was having this e-mail exchange with Jackie and she corrected me on something I was confusing myself on. So in EVOKE-01 trial, the comp would be -- on OS at least, the comp would be the 9.5 months we saw on ITT basis and I think it was 14.6 months in patients with prior IO. Would that be the comp from prior data? Just -- I think you're referring to our Phase I data. That was a very different patient population. Again, that had -- around 60% of the patients had 3 or more prior therapies and it was kind of performed in an era pre and post checkpoint inhibitors. So the vast majority of those patients actually were heavily pretreated patients as well and versus EVOKE-01 is coming in right after chemo checkpoint requirement. So thatâs a pure kind of second line patient population. We would believe that [indiscernible] of what weâve seen which is, again, pretty encouraging in that third line plus patient population in that early Phase I trial that would perform better. So Bill, the base case should be maybe a mid-teens OS for the active arm and maybe closer to 10 on Docetaxel. Itâs hard to give any clear estimates or guidelines for our experimental population. But Docetaxel has been performing historically, very consistent pre-checkpoint now in a post-checkpoint era. I think that what you look for, for meeting PFS, there has been an OS of around 11 months is what youâd want to target for a comparison. Yes. Got it. Got it. Okay. Makes sense. Which then is a nice segue into another update that came out yesterday and that's on the TIGIT program. But just before we do Andy, one of the questions that comes up often and this is a question I get often is when you ask Gilead, what are the top 3 pipeline programs, what does Gilead say? Before I go in to my next topic. Well, I think, I mean, itâs relatively clear. I mean itâs -- on the Gilead side, setting aside Kite, itâs Trodelvy, itâs lenacapavir and itâs TIGIT from my perspective. Bill, what would you say? Okay. Got it. Okay. Okay. Well, I was going to ask on TIGIT. So okay, that's helpful to know. So maybe then let's jump right in. And we saw the update yesterday. And one of the points and I've discussed this, Bill, with your prior company's management team, too. I feel like one of the challenges heading into this ARC-7 update has been -- it was kind of like a no-win situation of sorts because of how much Roche fluctuated between their Phase II and Phase III. So going from 0.25 to, I donât know, 0.8 or whatever theyâre landing in Phase III. So wherever you land between that range, so expectation is it will only phase into Phase III. So in your mind, do you think you have to get to a Rocheâs Phase II like 0.25, 0.3 hazard ratio for it to be taken Roche like. Because Iâm just very confused on whatâs the number that actually makes it Roche like because Roche numbers are all over the place. Yes. I mean I think the exciting thing for us is that we'll be presenting this data -- kind of full data set from the last interim analysis, number 4 for very soon. So as was noted in the press release, we're having a full live presentation by Melissa Johnson of our data set for this last interim analysis where we're going to have a very good patient population, almost double the size of CITYSCAPE. And I think what weâll want to again look at and highlight is how well the dom-containing arms are compared to the monotherapies. And from a historical perspective, some of the studies that we always refer back to is KEYNOTE-042 and CheckMate-026. These were performed quite a while ago but those are still kind of the PFS standards that we would put out there as typical ones for this patient population. Yes. Okay. Okay. But Bill, back to whether -- like do you need to be at a 0.3 or 0.4 hazard ratio for it to be considered Roche like or not? Or does that not have to be the case? Because I donât know if we can really comp to Phase II only because Phase III is so different. Yes. I'd say it's really hard to compare it across the 2 trials. Again, we're going to have a bigger data set. And I think the consistency between the 2 arms and how they're performing against monotherapy will be key to the people's evaluation. I think most KOLs will hopefully see it in the same light that our KOLs and ourselves are seeing for the data set. So we just reemphasize that what weâre seeing we believe is really clinically meaningful for both dom-containing arms and what weâll be presenting is actually quicker and a little bit more full data set than we had anticipated by the end of the year which is, again, looking at the landmark 6-month PFS as well as median PFS even though itâs a little bit more immature at this time. But I think all that data that weâll be presenting is going to be hopefully a very [indiscernible] for TIGIT itself. Bill, the other thing is I always felt like this Phase III is progressing much lower than people anticipated. And I felt like part of the reason was there was no KEYTRUDA in the trial and a lot of patients want that. So now that youâve added that in, it should presumably help with recruitment. I think youâve opened up more sites, too. But thereâs one change that was not made on the active arm, I thought you might change from the internal PD-1 plus TIGIT to KEYTRUDA plus TIGIT instead. Like is that still a consideration or not? Yes. I think maybe your first reference is to ARC-10 which is in the PD-1 high population. That was a recent change to the protocol. It was a 3-arm design. Just to recall that, that was also designed to get a mono label for Zim against chemotherapy. That restricted where we can actually enroll patients globally because of standard of care, of course, being checkpoints but not accessible in many countries throughout the globe. So -- and then with the recent change now down to a slimmer 2-arm design and going against pembro standard of care that opens up the ability now to go into other markets, including in the U.S. and Western Europe, where we can have more enrolment where we wouldnât be able to go before. For STAR-121, I think part of your second -- part of the question there, that is against pembro standard of care. So we are taking in the all-comer situation with chemotherapy with TIGIT and Zim will be taking nonstandard of care with pembro chemo. So I think thatâs one to look for. I think itâs a little bit early for us to give estimates on our time lines and enrollments but weâre excited about the STAR-121. Okay, excellent. And then any specific expectation you would put out on some of the adenosine readouts coming up or the HIF-2? I know there are some trials that are getting posted on that as well. Yes. Maybe Iâll start with HIF-2. HIF-2 has been advancing really nicely with Arcus. We havenât opted in on HIF-2 yet but weâre watching itâ¦ Yes, we're watching very closely with Arcus and have obviously a lot of close collaboration with Arcus across all the programs. But for HIF-2, we're pretty excited about what they recently presented at a conference where at least the clinical and pharmacodynamic characteristics of their HIF-2 alpha was very -- potentially favorable to what's currently out there with [indiscernible]. And so that could put us in a potential best-in-class situation with that molecule. And now theyâve advanced that into oncology patients as well. So weâre excited about the progress theyâve made with that in a very short time period. And we continue to watch that really closely as a potential opt-in program for us. And then for the adenosine programs, as weâve stated before, for both etruma and quemli, the A2a, A2b receptor antagonist and the CD73 small molecule inhibitor. We have multiple proof-of-concept studies that are underway, including ARC-7, that youâll see the data soon but I kind of want to emphasize that we have this spread across multiple different tumor types, including prostate cancer, in combinations as well. We think the combination across the portfolio that we have that Gilead is going to be really important as well to continue to show benefit through the adenosine pathway. So in that case, Bill, like -- and maybe this is thinking more from a devil's advocate perspective, if Merck is out there, Roche's out there and they have an established PD-1 or PD-L1 component as well, like how do you guys see yourselves positioning competitively, especially given the scale of KEYTRUDA, Merck will be looking to transition patients on a fixed dose formulation. Like isn't there more commercial question marks than not? For the lung space, I think weâre really well positioned. I mean that is an indication in space that we are very much going after, as you can see from our clinical trials across the board for [indiscernible]. We have multiple employs just kind of maybe in review. We have PACIFIC-8 thatâs in conjunction being executed by AZ [ph] in stage III lung cancer with dom, TIGIT. We have there are [indiscernible] which is in the PD-L1 high population with TIGIT and Zim, that is again a chemo-free option that would bring benefit, theyâre still high unmet need in that high population. And then weâre looking at the full boat, so to speak, the all-comers in frontline metastatic non-small cell with STAR-121. And that builds on our confidence that the TIGIT pathway is clearly an active pathway. And I think with the ARC-7 data set will be presented in a few weeks, weâre excited to show that our continued confidence in the TIGIT pathway. Okay. Andy, is it your perception from the sort of biz dev and from the CFO perspective that on a return on investment, perhaps Arcus is tracking at the highest end of all the deals you guys have done in the last 5 years? And I think -- well, it's hard to say. I mean, first of all, we think we're making progress with most of the deals that we've done. So Kite obviously is starting to show what we think it can do in the long run. Umer, we're pleased with where the Kite business is and expect that again to be a really important franchise for decades to come for us as we grow of it. The Arcus collaboration is certainly going really well. And as Bill mentioned earlier, we're really excited about not just the TIGIT program but in a number of the programs that they're developing. And we really like the deal structure with Arcus as well. It's the best of both worlds. You have a great team, great people, great scientists, close collaboration, there's incentives for them to continue to evolve other programs so that we have the option to opt into and to share with them going forward. And so the setup for that collaboration in terms of creating value for both sets of our shareholders is really great from this point forward. And then the other one on Trodelvy, again, to be clear, we think the return on investment for Trodelvy is going to be fantastic for our investors over time. Part of that is what Trodelvy does as a product in and of itself. The other part that's harder to quantify is what it does for us in terms of becoming a leader in oncology and building the infrastructure around it that allows us to more efficiently and effectively take programs forward like the TIGIT programs or the CCR8 antibody or any of the other multiple programs that weâre bringing forward. So to answer your question, I think the Arcus collaboration is great. We expect a significant return on investment for both sets of our shareholders. But itâs not just that deal. I think whether itâs the Trodelvy deal or the Kite deal in particular, theyâre all tracking in a way that gives us a lot of confidence. Makes sense. So -- and maybe just to sort of go through a couple of the things you mentioned, a, on Trodelvy. So some of that confidence is presumably because of future indications like lung but then there's also the muc [ph] indication. Is there an interim or anything like that possible on that trial in 2023? Yes. We havenât given any updates on the time lines yet for TROPiCS-04 which is a conversion study for accelerated approval for bladder cancer. But just as a reminder, that is -- the primary end point there for TROPiCS-04 is OS. Thatâs gold standard, of course, in oncology for most indications. Right, right. Okay. Okay. Thatâs a good -- itâs a good point. And then also then on cell therapy. Andy, can you remind us what was the manufacturing capacity when you guys bought it? And how has that changed over the last -- because it looks like it was still like working its way through a bottleneck on manufacturing, not so much as demand was limited. No. I mean we've never really had any significant bottlenecks in manufacturing at all. So I kind of break manufacturing and we're into 2 pieces on the viral vector where we had a single source viral vector, recognizing, again, there are viral vectors, a gamma retroviral vector instead of a non-antiviral vector. There's less competition in the market for that. But we have always had a good partnership with the supplier there. We've recently opened our own internal supply in our Oceanside biologics facility. So we've never had any issues on viral vector supply which some of the other companies in the cell therapy space and the gene therapy space are struggling with today. And then in terms of like manufacturing when the cells are harvested and shipped, we started out at -- the Kite team had done a great job of really focusing on manufacturing as a core and differentiating competency. They had the manufacturing facility in El Segundo right by LA exit they had developed and built out. They did it in a really thoughtful way where you could keep adding suites and building that out over time as the demand grew which is what we've done. And we then -- the team had the foresight to develop and build out 2 additional manufacturing sites, 1 in Holland that opened 2 years ago, if I remember correctly, 1.5 years ago and then 1 that opened this year in Maryland. So we now have 3 separate manufacturing facilities, 1 on the West Coast, 1 on the East Coast, 1 in Europe that can more than adequately supply the market, not only today but for the foreseeable years. The biggest issue for us and others Umer, is adding people because it is still a very labor-intensive process. And Christi and the team have just done a great job of thoughtfully hiring in advance and kind of anticipating where supply is going -- where demand is going, I'm sorry, including with the ZUMA-7 and second line approval in DLBCL. And so we have never had a supply issue to speak of. The only -- and what weâve said publicly is the only scenario when we look forward and we expect the business to continue to grow, the only potential scenario that you see is if the second line approval really increased usage beyond our current expectations. So we expect it to be kind of from here consistent, slow, impressive growth. We didnât expect it to kind of be parabolic growth. And thatâs what weâre seeing. You saw the big uptick in the second quarter with the approval in second line which led to increased usage in both the third line as well as usage in the second line. And now we expect that cell therapy market will continue to lift over time from there. But we feel great about our supply. Thereâs not been an issue. So that wasn't like a onetime. I don't know for whatever reason I thought that ZUMA-7 immediately after approval, it was a bolus, they came in and that was that and it's kind of not been growing since in ZUMA-7 indication but that doesn't sound like what you're seeing. No. I think what we guided to and maybe what you're referring is we guided both in the third quarter and now in the fourth quarter for people to be cautious because of the fact that you saw such a significant uplift in cell therapy in the second quarter as a result of that approval. And with our cell therapy business, we expect that youâll -- as we continue to expand in new indications and larger indications over time, youâll see that from time to time. And then the business will continue to grow nicely and steadily from there. So the business still grew in the third quarter. We had a great third quarter actually that exceeded our expectations and guidance. Weâve guided because of 2 things: one, other competitors are working through some of their supply issues. So we want to see what that means for the fourth quarter and there is a shortage of one of the agents thatâs used to condition patients for cell therapy and we wanted to get a sense of where that plays out in the fourth quarter. So we provided some appropriately cautious guidance for the fourth quarter. We still expect the business to minimum be flat or to grow as you see for the year. But we -- long term, we expect the business to continue to grow nicely. I see. Okay. So it's growing but it wasn't quite a one timer. Okay. And then maybe my last one Andy, before we start to bring it towards a conclusion would be -- so Biktarvy is doing $9 billion run rate right now by my math already. And consensus peak is below $10 billion. And I almost wonder this looks to me like this is ripe for meaningful consensus estimate revisions. And as you think about sort of modelling this franchise, thereâs volume and price both thatâs helping. Do you envision between volume and price, why it shouldnât continue to grow mid- to high-single digits in volume alone plus some price which sounds like if itâs 10% plus growth, this could easily be a product that could be $14 billion, $15 billion in sales in the next 5, 6 years. Yes. I mean we haven't provided specific guidance but to your comment, yes, we -- I mean it's a great franchise. It's an incredible product. It's the clear gold standard for treatment, both for new patients and switch patients and we expect it to continue to grow over time. The same thing is true for Descovy in the prep space where we expect significant growth going forward. So -- and it goes back to maybe one of your earlier questions, Umer. I mean I think that as people are -- as the market overall, including the analysts are appreciating kind of Gilead today versus Gilead historically and are revisiting their models, weâre getting a lot of thoughtful questions. People are asking the same questions that youâre asking here and kind of relooking at their models and expect those to evolve over time. So we have a lot of confidence in Biktarvy both in the short run, continued growth and in the long run. And then coming behind that, as you know, we have lenacapavir, both in prep and we expect in treatment, at least one, if not multiple different products that should be coming through that are really exciting as well. Got it. Okay. Makes a lot of sense. It makes a lot of sense. Excellent. Well, thank you guys so much for joining. Let me just make sure there's no outstanding one-offs in my e-mail. Otherwise, we're -- you know what? Oh, there's one question. Let me just ask this before we wrap it up. Investor question. Can you ask why they're mentioning CheckMate-026? The trial was not done in PD-L1 above 50%. I think you were referring to the cut-off, the subgroup within that, right, Bill? Exactly. Yes. No, no, thatâs exactly right. Okay. Sounds good. Okay. Excellent. Thatâs what we got. Thank you guys again for joining and looking forward to being in touch. And sorry, I missed you at New York Andy.
EarningCall_1925	Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the ATRenew Incorporated Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after managements' prepared remarks. Please note today's event is being recorded. I will now turn the call over to the first speaker today, Mr. Jeremy Ji, Director of Corporate Development and Investor Relations of the Company. Please go ahead, sir. Thank you. Hello, everyone, and welcome to ATRenew's third quarter 2022 earnings conference call. Speaking first today is Kerry Chen, our Founder, Chairman and CEO; and he will be followed by Rex Chen, our CFO. After that, we will open the call to questions from analysts. Our third quarter 2022 financial results were released earlier today. The earnings release and investor slides accompanying this call are available at our IR Web site, ir.atrenew.com. There will also be a transcript following this call for your convenience. For today's agenda, Kerry will share his thoughts of our quarterly performance and business strategy, followed by Rex, who will address the financial highlights. Both Kerry and Rex will join the Q&A session. Let me cover the Safe Harbor statement. Some of the information you will hear during our discussion today will consist of forward-looking statements and I refer you to our Safe Harbor statements in the earnings press release. Any forward-looking statement that management makes on this call are based on assumptions as of today and that ATRenew does not take any obligations to upgrade our assumptions on these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB and all comparisons are on a year-over-year basis. Hello, everyone, and welcome to ATRenew's third quarter 2022 earnings conference call. in the third quarter, we faced a challenging macro environment, and then the control measures remain strict and consumer demand for new phone [indiscernible]. Responding to these challenges, our teams proactively adjusted their operational strategies to meet consumer demand for convenient and trustworthy recycling services. As a result, revenues reached the high-end of the guidance range we provided last quarter and we achieved our non-GAAP operating profit compared to a non-GAAP operating loss in the second quarter. I'd like to take this opportunity to express my gratitude to our staff for their efforts and perseverance in the face of adversity. Let's start by taking a look at our revenues. During the third quarter, we achieved growth in line with our expectations as our revenue increased 29.2% year-over-year to RMB2.54 billion. Revenues for our 1P business rebounded significantly increasing by 33.7% year-over-year. This increase was driven by our steady progress in store openings and recycling operations, increased a revenue contribution from self-operated 2C retail products and stronger pricing power from big data analysis. The growth of service revenues flattened as we put tighter control over products that were in authorized or in poor condition. We believe this helps the sustainable growth of our marketplaces. As a result, the overall commission rate of our marketplaces with 4.45% in the third quarter, remaining stable compared with the same period last year. Turning to efficiency. During the quarter, we continue to increase our fulfillment efficiency by further improving our inspection process and continuing to reduce operating costs. Our non-GAAP fulfillment expenses, and selling and marketing expenses as percentages of total revenue declined to 10.7% and 9.8%, respectively. This represents respective decreases of 290 basis points and 63 basis points compared to the same period of last year. These improvements reflect the effectiveness of our initiatives to continuously improve our cost structure. In the third quarter, we achieve a non-GAAP operating profit of RMB10.8 million. This was in contrast to the loss-making performance in the second quarter. In an unfavorable market environment and facing various headwinds, our monetization capability once again demonstrates the counter cyclical nature of the circular economy. We also improved our inventory and cash flow management. During the third quarter, we improved inventory management as our business especially our 1P, 2C recycle and retail business recovered from the adverse impact of the COVID resurgence. The inventory turnover days were reduced to 26, marking a year-on-year and a quarter-over-quarter improvement. As at the end of the third quarter, our comprehensive cash reserves totaled RMB2.67 billion. We obtained a cash inflow from operating activities of RMB101 million during the third quarter, making a third consecutive quarter with positive operating cash flow. With abundant cash on hand and continuous positive operating cash flow, we have sufficient resources to consolidate the main businesses and invest in the strategic development areas. Going forward, we keep our core strategic focuses clear and consistent. We will continue our commitment to the four focuses as we've discussed during the previous earnings conference call. First, we will continue to promote our city-level service integration model. Second, we will continue to expand the service coverage and fulfillment capability of the multi category recycling offering. Third, we will continue to convert more of our 1P product supplies to consumer retail through our value-added capabilities including refurbishment. Lastly, we will further increase our operating efficiency by continuing to deploy automation technologies. Let's start by discussing the implementation of our city-level service integration strategy, which will solidify the foundations of our business growth and further increase our penetration rate. During the third quarter, our city-level service integration strategy continues to support a healthy growth of our core business of mobile phone and consumer electronics recycling. By integrating our front-end recycling capabilities between C2B and B2B offerings, we were able to better serve the highly localized market demand of the electronics category. Complex pandemic control measures during the third quarter have affected of our operations in cities that contributed a significant proportion of our business, such as Tianjin and Chengdu. However, we also saw a delightful rebound in GMV among 42 city clusters compared to the second quarter. 31 city clusters achieve GMV growth on a year-over-year basis, a greater number than last quarter. In addition, 26 cities outpaced our national average in scale expansion on a yearly basis, while our quarterly basis 20 city clusters outpaced the national average recycling penetration rate. Of now [indiscernible], the first two pilot cities which we monitor through the north [indiscernible] cluster and North Hubei cluster, respectively, are still recording a healthy year-on-year growth rates in GMV. The number of recycling orders from our C2B business increased notably achieving better year-over-year growth than the national average in 34 city clusters. As consumer spending faces downward pressure in this economic cycle, it was the willingness to recycle increase in some cities. On the recycling end, we further deepened our strategic partnership with JD. In August, we facilitated JD to upgrade its trading services to support cross category trading for cellphones, computers, digital devices and home appliances. After the upgrade, users can also trade in a mix of up to six electronic products for new ones. JD becomes the first in the industry to support both cross category and multi device ratings [ph], providing users with best-in-class experiences, while promoting recycling. In September, we fully incorporated the trading function into the main JD app in preparation for the launch of the iPhone 14 line up. Users can enjoy the trading solution seamlessly on the product page in the shopping cart or on the checkout page without time consuming and unstable page redirection, thus improving user experience when placing orders. Leveraging JD's leading market share of home appliance sales and other categories in China, we aim to further promote trading scenarios and provide more convenient trading options to consumers. Secondly, we will continue amplifying the brand value and service capabilities of our [indiscernible] AHS Recycle brand. The goal of this efforts is to expand recycling services to cover more high value categories. You might ask why would recycle use non-electronic products from consumers? We believe that AHS Recycle [indiscernible] is the unique and widely recognized brand in the recycling industry. We have spent 11 years building a reputation for quality recycling service and gaining strong consumer awareness through our nationwide offline stores. What's more, consumers may have many options to buy new products online and offline, but they don't have many good choices for recycling services when needed. AHS Recycle has dedicated itself to being consumers go to brand for recycling electronic devices. And we aim to build our reputation further as we embrace multi category recycling going forward. This echoes our mission to give a second life to all idle goods. You may wonder while we're capable of launching this multi-category recycling business, on one hand, we have 1,800 AHS stores, which provide a reliable and convenient recycling destinations on consumers, manage under our tiered store and fulfillment system. Since June, we started implementing this tiered storage system by designating a number of those located in regional commercial centers as the core facilities and adding new category services to those stores. Those located in local communities remain at consumer electronics service stations. At the core storefront, we upgrade branding and training our staff to accommodate both our core electronic recycling services and our new category initiative. Having done so, we began to offer recycling services for pre used products with high residual value such as luxury bags, washers, camera equipment, gold and vintage wine. On the other hand, we are capable of constructing inspection and distribution abilities through collaborations with our partners. We have established our supply chain offering on smartphones and consumer electronics and now we're seeking jointly build [ph] or jointly the operative supply chains for new categories. Take luxury goods as an example, which wanted to be with the quality inspection and selling channels with an MFP [ph], for gold and vintage wine we introduced an open platform and selectively chose partners to ensure a reliable recycling choice for users. You may also wonder what is the differentiated experience that we could offer with multi-category recycling. Why is quick online press [indiscernible] based on structured data, user only need to simply click and check on AHS Recycle app through our product navigation. The traditional method requires users to take pictures by themselves for quality [indiscernible] to offer quotation. The experience is relatively cumbersome, time consuming and lacks standardization. Another difference is that face-to-face transactions at physical stores are more convenient than traditional logistics and mailing methods where users have a stronger sense of trust in services and the conversion rates of high value products is higher. At a physical store, we reduce miscommunication of product conditions and pricing and consumers are protected from malicious bargaining, which they might also encounter during online recycling. After a month of operation, our multi category recycling business generated an extra RMB300,000 of transaction value and over RMB20,000 of profit per month for each of the 50 core AHS stores. User satisfaction with the recycling experience and price quotation has been improving. User profiles showed similarities. 11% of our users who saw luxury goods came back to recycle their idle electronic devices in 30 days. 40% of those who sold luxury goods have already sold consumer electronics through AHS Recycle in the past 12 months. The third strategic priority is to continue improving our value-added refurbishment capabilities and further expand profit margin along the value chain. We continued our conversations regarding compliance and intellectual property rights protection with foreign manufacturers and participated in opinion of collection process before the peoples [indiscernible] released a guidance for compliant refurbishment in April. Since the publication of the guidelines, the previously and regulated electronics refurbishment industry began to standardize and thrive and came into official regulation. This development allowed us to upgrade the quality of supply both from 1P and from PJT marketplace, and so aligned with our strategy to expand profit margin. After preliminary inspections on the preowned mobile phones we received, we leverage technology to identify suitable devices for refurbishment. Then in compliance with [technical difficulty] official or certified third-party parts and components to repair the phones, including polishing and replacing screens and replacing batteries. We keep customers informed and provide warranties to boost consumer confidence. The production capacity is currently undergoing a rapid development. Since the second quarter, we have doubled the number of devices and refurbished in compliance with regulations on margin compared with to be distribution. The additional operating margin contribution from value-added refurbishment services is 4%. This is in line with our expectations. Going forward, we will continue to strengthen the coverage of the entire value chain. The operating margin could be further improved as we increase the efficiency in selecting suitable devices. In 2023, we anticipate a larger service coverage of more SKUs of smartphones, and including laptops and tablets into our service scope. We also plan to expand refurbishment capacity from southern China to eastern China. Our long-term goal is to provide stabilized high-quality products directly to consumers, while fulfilling merchants demand by providing them with diversified sources of supply and services. We will continue to develop the RERE refurbed [indiscernible] brand and increase our profit space. For the fourth and final strategic focus, we will continue to invest in technology to improve our automation capabilities and consequently our overall operating efficiency. Since the beginning of this year, we devoted to the installation trial operation and adjustment of our second automated operation center in China, which was officially put in use in Dongguan. It has realized improvements in many aspects, including sorting efficiency, inspection, accuracy and inspection efficiency. Thanks to an innovative and digitalized management process and the use of AGV unmanned transport vehicles. The transportation [ph] efficiency of our Dongguan automated operation center is 15% higher than that off Chengdu. We have implemented the next generation matrix 3.0 Automatic Quality Inspection System to further upgraded precision of device locating capabilities and robotic assistance capabilities. The accuracy and efficiency of our quality inspection process are further improved by 10% and 50%, respectively compared to the previous generation. The loss due to product return is expected to be reduced by 15% approximately. Based on these improvements to our automated quality inspection capabilities, the 8-hour production capacity of the Dongguan automated operation center exceeded 10,000 units. This having had the scale effect of our quality inspection operations and has reduced the cost of performance for order, which is necessary to consolidate our operational capabilities at the group level. Lastly, I want to provide an update on ESG. We received a low ESG risk rating from Morningstar Sustainalytics in September this year, a testament to our ESG risk management capabilities in the online and direct marketing retail sector. This rating confirms our contributions to environmental protection, carbon emission disclosure, sustainable product and service development, data privacy and security, tax compliance and other aspects of responsible corporate governance. It also stands as a testament to our sustainable development capabilities. We believe that a company with strong ESG practices can contribute greater value to society and is less at risk from changes in policy and regulations. Our responsible governance grants ask more flexibility as we navigate our growing business through an uncertain microenvironment. As China set carbon neutrality growth on the way to its carbon peak and the circular economy begins its development in earnest, we are confident that we will create best-in-class recycling experiences for consumers and create long-term value for society and for shareholders. Hello, everyone. We are delighted to report that our third quarter revenue was at the high-end of our guidance. Even though COVID-related challenges remained in the operating environment. In the face of these headwinds, we leveraged our city-level service integration strategy and maintained our prudent spending. I will start by sharing some of our financial highlights. Before we go into a more detailed look at the numbers, please note that all amounts are in RMB and all comparisons are on a year-over-year basis, unless otherwise stated. Total net revenues increased by 29.2% year-on-year to over RMB2.34 billion, mainly driven by the rebounding 1P product sales revenue growth. Total GMV grew by 14.5% to RMB9.5 billion, driven by the growth in both product sales GMV and online marketplace GMV. Please note that we will retire the reporting of GMV starting from the fourth quarter of 2022. GMV has been a parameter to access our periodical business expansion as we inclined to [indiscernible] skill expansion. However, as we become more obsessed with providing our users with safe, convenient and fair recycling experience and quality assured products, we incrementally prioritized the solid growth of our 1P business where generally becomes less refractive of the bigger picture. We're also keen to maintain a healthy cash flow from operating activities and a positive operating margin. As a part of our tactics, we removed some [indiscernible] related merchant users from our marketplaces, and titled our resources towards self-sourced products, including 1P, 2C products [indiscernible] refurbished with compliance. In terms of profitability, we had another profit-making quarter with non-GAAP operating income of RMB10.8 million. This was primarily attributable to improved cost efficiencies in logistics and the main parts that have resulted from [indiscernible] effects. In the future, we will continue to improve cost efficiency, especially in fulfillment and marketing by leveraging automated inspection facilities to further realize scale effects, and accurately capture recycling and shopping scenarios. In the third quarter of 2022, we have a [indiscernible] from operating activities of RMB101.3 million, [indiscernible] securing us for the consecutive quarter with positive operating cash flow. Now let's take a detailed look at the financials. In the third quarter, total revenues increased by 29.2% to RMB2,536 million. Net product revenues increased by 33.7% to RMB2,225.7 million, while net service revenues increased by 4.4% to RMB310.3 million. Growth in net product revenues was primarily driven by an increase in sourcing volume, and the corresponding sales of preowned consumer electronics through Paipai Marketplace, PJT marketplace and our offline channels. So increasing 1P, 2C distribution of compliance to refurbished devices also contributed to this growth in product revenues. Growth in service revenues was primarily driven by increases in transaction volumes and improvements to the monetization capabilities of PJT Marketplace. So, overall, commission rate of our marketplaces were 4.45%. We further optimized operational strategy by cutting down the base to merchant users as we became more comfortable to change commission fees based on the established trust and user stickiness. Next, turning to our operating expenses to provide greater clarity on the trends in our actual operating based expenses. We will also discuss our non-GAAP operating expenses, which better reflect how the management view our results of operations. The reconciliations of GAAP and non-GAAP results are available in our earnings release and the corresponding Form 6-K furnished with the SEC. Merchandise costs increased by 33.8% to RMB1,932.2 million. This was in line with the growth of the 1P product sales revenues. Gross margin at Group level was 23.8% in the third quarter. Gross margin for our 1P business was 13.2%. Fulfillment expenses increased by 1.4% to RMB277.1 million. Excluding share-based compensation expenses, which we will refer to as SBC from PR, non-GAAP fulfillment expenses increased by 1.7% to RMB271 million. And the non-GAAP measures, the increases were primarily due to, first, an increase in personnel cost operation center and self-operated store-related expenses, which were in line with the increasing sales of prolonged consumer electronics and the addition of 103 self-operated AH stores compared with the second quarter 2021; and the second, an increase in personnel cost in connection with the company's growing business. And second, an increase in technology expenses in relation to upgrade of technology server which was partially offset by a decrease in operating center related expenses as the company optimized its strategy for its city-level operation stations. The non-GAAP fulfillment expenses as a percentage of total revenue reduced to 10.7% from 13.6% of the same period last year. Selling and marketing expenses increased by 14% to RMB340.8 million. Excluding SBC expenses and the amortization of intangible assets, non-GAAP selling and marketing expenses increased by 21.4% to RMB249.7 million. Under the non-GAAP measures, the increases were primarily due to first increase in personnel cost in connection with the company's growing business. And second, an increase in marketing expenses related with business development. The non-GAAP selling and marketing expenses as a percentage of total revenues decreased to 9.8% from 10.5% in the same period last year. G&A expenses increased by 51.4% to RMB63.6 million. Excluding SBC expenses, non-GAAP G&A expenses increased by 76.7% to RMB46.3 million, primarily due to first an increase in personnel costs in connection with the company's growing business; and second, an increase in professional service fees. The non-GAAP G&A expenses as a percentage of total revenues slightly increased to 1.8% from 1.3% compared with the same period last year. Technology and content expenses decreased by 23.2% to RMB50.1 million. Excluding SBC expenses and amortization of intangible assets, non-GAAP technology and content expenses decreased by 26% to RMB43.9 million. Under non-GAAP measures, the decrease was primarily due to the change in personnel cost in relation with the companyâs adjustment to its spending in research and development. So non-GAAP technology and content expenses as a percentage of total revenues was 1.7% compared with 2% in the same period last year. As a result, our non-GAAP operating income was RMB10.8 million in the third quarter of 2022. Non-GAAP operating margin was 0.4% compared with negative 1.5% in the same period last year. And once again, we had a cash inflow from operating activities during this quarter which totaled RMB101.3 million. As of September 30, 2022, cash and cash equivalents, short-term investments and funds receivable from third-party payment service providers totaled RMB2.67 billion. So sufficient cash on hand safeguards a sustainable growth outlook. As a recap, we announced a US$100 million share repurchase program on December 28, 2021 out of management's strong confidence in the company's solid fundamentals and growth momentum. During the third quarter of 2022, we have repurchased 7.5 [ph] million ADSs in the open market for a total cash consideration of US$1. million. Now turning to outlook. For the fourth quarter of 2022, the company currently expects its total revenues to be between RMB2,930 million and RMB3,030 million. The highly transmissible Omicron variant might impose adverse impacts on the operation of our stores and facilities as well as the transaction activities of merchants in 2022. Thus, this forecast already reflects the company's current and preliminary views of the market and operational conditions, which are subject to change. Let me translate for myself. Congratulations for another solid top line growth. And my question is about the future growth driver and under the COVID impact together with the consumption down trading pressures, how should we look at the future growth drivers and also regarding the [indiscernible] revenue values, we see that there was some motivation in the growth phase. But in the future how much will be contributed from 1P revenues and how much will be contributed from the 3P part? And also, regarding the multi category recycle and how much contribution are we expecting from the categories outside the phone? Thank you. Okay. Thank you for the questions. Let me answer first question first. Overall, after being negatively affected by pandemic control measures in core 1P recycling business locations, such as Shanghai and Beijing in the second quarter, our recycling business recovered to a normal growth track during the third quarter. Notably, our 1P business grew beyond our expectations, demonstrating the countercyclical nature of the circular economy were a part of. The recovery of 1P business growth rate is due to two factors. First, we essentially within standard operating hours at our offline stores as pandemic control measures are lifted. This grants us a more abundant supply of products. Second, in 2022, we started shifting our strategic focus from a consignment model to a 1P, 2C direct retailing model. This was an effort initiated following the launch of the first compliance guidance for intellectual property rights in the electronics refurbishment industry, as published by the People's Procuratorate [indiscernible] in April this year. Before the launch of this guidance, we did not have a sufficient supply of high-quality preowned products. As such, our strategy was to prioritize marketplaces and help our merchant partners to sell their products. Since the launch of the guidance, we further leveraged our supply chain capabilities and started to refurbish preowned electronics and sell these products directly to retail customers. This brings additional profit margin over the value chain and also provides more supply of high-quality better priced preowned electronics to consumers. During the third quarter, we utilized our refurbishment supply chain to distribute RERE refurbed branded products to retail customers. Our success was demonstrated by over RMB90 million in sales and the ASC [ph] increase to RMB2,600. In terms of platform business, we adjusted our business strategy and focus on high-quality and profitable growth. On PJT marketplace, we took the initiative to remove merchants with substandard supply and service quality. In addition, we provided more protection for intellectual property and consumer rights. On pipeline, we took the initiative to scale down third-party consignment business and pursue better quality control measures which leaves at a higher proportion of 1P sales for its products and refurbished and sold to retail customers with quality assurance and maintenance services. This will give us strong pricing power over the consumer electronics value chain. In addition to this strategic development, we also optimized our operating efficiency compared with running our company purely as a platform, which leaves at prioritizing monthly business is more beneficial to the company's long-term development facing challenges from the pandemic resurgence and [indiscernible] consumption. Our trustworthy recycling services and quality assured preowned products are becoming increasingly popular among consumers. Our business -- our 1P business is demonstrating greater growth prospects and we believe the growth of 1P business is worth investing in for the long-term. Let's now turn to discuss our future growth. On one hand, this growth will come from the stable development of our core business of consumer electronics devices recycling and sales. And on the other hand, it will come from the new revenue stream of our multi-category recycling business. This effort is an extension of our service capabilities. In an attempt to cater to consumer demand for multi-category recycling, we applied a tiered store operating system to 1,800 stores, readily introducing multi-category recycling services in these locations. During the third quarter, we piloted this service across 50 stores located in Shanghai and Beijing. On average, we generated an additional monthly GMV of RMB300,000, and a profit of RMB20,000 for each store. During the fourth quarter, we will continue to ship their idle goods out. [Indiscernible] during the fourth quarter, we will continue to refine our structured SKU database, enhance user experience, and including price inquiries and improve the conversion rates, we expect to have further breakthroughs in terms of CD coverage, extending our consumer ratio across over 160 core AHS stores across China, and we aim to share more detailed color about our multi-category recycling business in the fourth quarter. Thank you for the question. Hi. Thank you for taking my question. Now I will translate myself. The first question is, could you please comment the recent consumption momentum during Double 11 Shopping Festival and including impact from the COVID disruptions in China recently? And second question is about could you give us more color on the path to profitability and medium to long-term margin expectations? Thank you for the questions. I'll take the first one and CFO Rex will take the second. This year the [indiscernible] promotion showed moderate growth. Promotions have now became regular and straightforward. When preparing for this grand promotion, we collaborated with JD's home appliances business unit to provide our trade-in services across more product categories. Users first using new home appliances on JD could trade-in [indiscernible] consumer electronics to reduce the economic burden. JD has been reporting steady growth in its core revenue stream from electronics and home appliances. Leveraging JD's traffic in electronics and home appliances, we further diversified our trade-in scenarios. This can increase the penetration rate of our [indiscernible] mobile phone and consumer electronics recycling business. During the first 28 hours when the Singles Day Grand Promotion kicked off at 8 pm on October 31, the number of JD customers who traded in their used devices for the new increased by 310% year-on-year. Home appliance cross category trade-in orders accounted for 20% of all the paid trade-in orders during the Grand Promotion. This year, we further advanced our service capabilities to satisfy consumer demand for economic shopping options. Thatâs mutually benefiting consumers and JD's new product sales. In addition, excluding frontline personnel costs and platform expenses, [indiscernible] realized an overall operating margin of 2% as we prioritized profit and supplemented 1P refurbished product. In terms of brands we support, Apple has maintained its industry-leading market share. When other smartphone brands were entered downward pressure, Apple retained its growth in new device shipments in the third quarter. Mobile phone -- mobile phones account for 70% of our total transaction value, whereas Apple's products account for 45% of our overall transaction value. Although the supply chain of the iPhone 14 line up was under pressure recently, consumer demand for Pro and Promax models remained strong. We believe that as Apple gradually resumed its production capacity, trade-in demand can rebound and we are confident that we will fulfill that demand with a better and more seamless service process. For Android for [indiscernible], in the context of declining consumption, consumers need a stronger incentive to shop for new products. We believe that our cost-efficient trade-in solutions could be that incentive that manufacturers also find encouraging. Okay, [indiscernible]. Over to your second question related to the profitability. There are two main drivers for our mid-term to long-term profitability. First is the improvement in 1P gross margin, in particular, due to the contribution from our new business initiative compliant to refurbishment. Our 1P business was less impacted by pandemic control measures during the quarter as our operation of offline stores gradually resumed, we were able to meet consumers recycling demand and with stable pricing. In addition to a strategic shift from the consignment model we mentioned in the last quarter, has allowed us to transfer -- provide high-quality 1P product sales. This will allow us to continue to improve the quality and the reputation of the preowned products that we commercialize. Meanwhile, we are on track in developing compliant to refurbishing capabilities by replacing components in poor condition with certified third-party batteries and screens. We recondition these 1P products and better satisfy retail buyers needs as our lead [ph] refurbed business skills will improve our product mix, thus further widening our gross margin. Secondly, our operating efficiency has continued to improve during the third quarter. We realized our non-GAAP operating profit of RMB10.8 million. This was attributable to our optimization of fulfillment expenses and the selling expenses. So non-GAAP fulfillment expenses as a percentage of total net revenues decreased by 2.9 percentage points year-on-year to 10.7%. This was mainly due to the refinements made to the management's structure in our offline stores and the implementation of a new system for operating [indiscernible]. As we [indiscernible] above the mentioned refurbishment [indiscernible] and further achieve cost efficiency improvements, we anticipate our top line to be between RMB2.93 billion to RMB3.73 billion in the fourth quarter. We would also anticipate our non-GAAP operating income in the fourth quarter and realizing a profitable year on a non-GAAP basis as we forecasted. Looking ahead, we expect our total revenues and profitability to further escalate in the coming quarters. Thank you. As there are no further questions at this time, I would like to hand the conference back to our management team for closing remarks. Thank you. Thank you all again for joining us. A replay of today's call will be available on our Web site shortly, followed by a transcript when ready. If you have any additional questions, please feel free to directly email us at ir@atrenew.com. Have a good day.
EarningCall_1926	Good day ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Inc., Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. Thank you very much, operator. Good evening, ladies and gentlemen, and thank you all for joining us tonight for Gaotu's third quarter 2020 earnings conference call. Gaotu's third quarter earnings release was published earlier today and is available on the Company's IR website at ir.gaotu.ca. On the call with me tonight are Mr. Larry Chen, Gauto's Founder, Chairman and Chief Executive Officer; and Ms. Shannon Shen, Gauto's Chief Financial Officer. Larry will give the general business overview for the quarter, and Shannon will discuss the financials in more detail. Following their prepared remarks, Larry and Shannon will be available for the Q&A session. I will translate for Larry. Before we begin, I'd like to remind you that this conference call will contain forward-looking statements as we file in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current beliefs and expectations as well as the current market and operating conditions, and they will involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict, many of which are beyond the Company's control and may cause the Company's actual results, performance or achievements to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks is included in the Company's filings with the U.S. SEC. The Company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this conference call will be available on Gaotu's IR website. Thank you, Sherry. Good evening and good morning everyone. Thank you for joining us on Gaotu's third quarter 2022 earnings conference call. I would like to take this opportunity to convey my gratitude for your continued interest [indiscernible] and the education industry. Before I start, I would like to remind everyone that all financial information that I mention later is based on RMB unless otherwise noted. In 2022 sort of gradually deepening our understanding of customer needs, we have been actively exploring new business models and expanding their naming. Undeniably, business transformation is a very challenging process, as we have overcome numerous causes. Thanks to our outstanding operational skills and the extensive educational experience we have accumulated in the past 80 years, we have united and more powerful organizations with a deep passion for education. At some time, our capital and kind of reserves will remain strong. These assets have given us a strong edge, when confronting and knowing external risks. We're confident that as long as we remain patient and persevere, while remaining true to our original aspirations, we will eventually achieve a significant breakthrough in our business and evolve into a greater organization. In this quarter, we divided our business into two categories. One is renewal services and the other is educational content and digitalized learning products. The new strategic directions within our learning services include educational services for college students and adults, overseas study related services, non-academic tutoring services and others. With our new businesses continuance their steady development supports the restructuring, we are glad to report that during the quarter, our net revenue the increased 12.7% quarter-over-quarter to RMB606.2 million and our net loss has significantly narrowed year-over-year. As we are still in the process of business transformation, the gradual and the stable increase of our net revenue is solid evidence that these new businesses are growing continuously and sustainably, which boots our confidence in our future and indicates that our strategic choices are right, our organization is resilient and our operations are efficient. Due to differentiating and testing seasons, market demand and the cost scheduling, our new businesses exhibit different season and maintain patterns. Guided by the strategy of profitable growth, we expect as a growth momentum of our business data to continue and we, the bank, to see a sizable positive net operating cash flow in the next quarter. Amidst the complex macroeconomic environment, we firmly believe that it's essential to persistently seek progress and sharpen our scale while maintaining a steady pace of development. After a year of exploration, we have accumulated a fair amount of insight into our new businesses. We have made a decent advance savings in this quarter and we will continue to propel our long-term effective growth. Now, I will present the progress we made during the quarter from three aspects. First, we will continue to play as our fundamental emphases good teachers. Good teachers are at the core of education, and the service and professionalism are the prerequisites for good teachers. Our recruitment efforts have always focused as a principle that a good teachers should not only be able to improve a students' academic performances and learning capabilities but should also serve as inspiring role models and the mentors who will provide emotional support. Take our post-graduate entrance exam preparation business for example. More than 50% of our tutors in this business line have graduate degrees a high ratio relative to our peers, and we are aiming to further increase the ratio. In our opinion, teachers who had successfully passed the exam can be more compassionate to students who are going through the same experience. They can better understand business needs and therefore can offer more constructive surveys and achieve better results. During the quarter, our post-graduate entrance exam prep business recorded roughly 76% quarter-over-quarter increase in net revenues and at over 46% quarter-over-quarter increase in growth billings, which was partly driven by the good branding gradually established by our top notch teaching guidance and their high quality services. Second, we will continue to focus on improving our operational efficiency. In the quarter, our gross margins reached the 72.2% higher than that of last quarter of the same period of last year. Our efficiency for customer acquisition also improved with our ROI for customer acquisition achieved quarter-over-quarter increase. Considering that in terms of seasonality, the third quarter is peaked season for drawing new enrollments. We see the market opportunity to increase in size by slightly raising marketing expenses that result in small scale losses. However, as our customer acquisition efficiency improves and our business expands, we expand to see higher brand exposure and a greater market share and ultimately more profitability in the mid to long-term. Third, we will continue to fulfill our corporate social responsibilities as we strive for effective growth. During the quarter, we co-organized the third Gaotu rural education support program with the China Youth Development Foundation. Through the program, we provided financial services and training courses to principals of rural primary schools to help improve their teaching quality, provide assistance for more needy children in these areas, and in this way aid rural revitalization. Further, our Board of Directors today authorized a new share repurchase program under which we may repurchase up to US$30 million worth of our ADS in three years. Our cash positions remain strong. As of September 30, 2022, our cash, cash equivalents, restricted cash and the short-term investments totaled approximately 3.3 billion. I also intended to purchase up to US$20 million worth of our shares, demonstrates our management's unwavering confidence in the future development of our company. Finally, I'm very happy and proud to share with you that on October 19, 2022, we received a closing letter from the SEC regarding its investigation related to a number of short sellers' reports from approximately early- to mid- 2020, and that we had a previous disclosing our annual report for the fiscal year of '20 and '21. In the letter, the SEC notified us that it had concluded its investigation into our company and that based on the information it had as of the date of its letter, the SEC did not intend to recommend an enforcement action against us. Integrity is our core corporate value. As a public company, we are fully dedicated to value creation for shareholders and have always ensure that the timely and truthful disclosure of financial and operational information. Going forward, we will continue to stay true to our original aspiration to educate, continue to nurture talents for our society and to continue to contribute to the educational development of China. Thank you very much for listening. I have concluded my prepared remarks. Now, I will pass the call over to our CFO, Shannon to walk us through our financial and operational details of this quarter. Thank you, Larry, and thank you everyone for joining our call today. I will now walk you through our operating and financial performance for the third quarter of 2022. Please note that all financial data that I mentioned later is based on RMB unless otherwise noted. As we continued to explore new businesses post restructuring against the backdrop of external challenges and uncertainties, we are pleased to report that our business sustained its continuous and healthy growth as we expected, driven by our deepening and understanding of the new vertical markets, relentless efforts to optimize our operational efficiency and a constant investment in teaching quality. During the third, quarter, net revenues increased 12.7% quarter-over-quarter to RMB606.2 million. Gross billings more than doubled compared to that of last year, with a sharp year-over-year increase of 101.3% and a slight quarter-over-quarter a decrease of 0.8% to RMB607 million. This solid performance well in part due to favorable seasonality was driven by the decent progress of our businesses, which consists of learning services as well as educational content and digitalized learning products. Using learning services, our new business mainly includes educational services for college students and adults. Overseas that is related to services, non-academic tutoring services and others. Now, I will elaborate their progress we made in each of these business lines during the quarter. First, learning services, which accounted for about 90% of net revenues in the quarter, it's still the biggest contributor of our revenues. Of the 90%, approximately 30% of the net revenues were contributed by educational services for college students and adults. School holidays are typically high demand seasons for our businesses related to college students and students from junior to high school, including our post graduate entrance exam preparation business, and overseas study related services as the holiday coincides with the tax preparation period. Correspondingly, we are glad to see our related businesses achieved high double-digit quarter-over-quarter growth in revenue during the quarter. Further, we have noticed that as the overall number of exam registers goes up students' willingness to participate in preparation courses escalates. And as a result, the market for services related to college students further education and job searching is booming. Take the post graduate entrance exam prep business for example, according to multiple market research, the number of applicants for China's 2023 post graduate admission exams is predicted to exceed a record of 5 million, representing a year-over-year increase of at least 10%. Additionally, more and more students are starting their preparations as early as their freshman years. We will continue to serve students preparing for such exams with dedicated teachers and a comprehensive application planning. At the same time, we have also witnessed course registration by students for other career enhancement courses such as financial certificate preparation courses or civil services examination preparation courses, which could reduce our customer acquisition costs and improve operational efficiency. Our financial certificate preparation business has achieved profitability for two consecutive quarters. Apart from our educational services for college students and adults, the rest of the rapidly 60% of our learning services revenues came from services targeting the group of students from primary to high school, including non-academic tutoring services and others. This sector exhibits a more silence seasonality as course retention and the corresponding sharp increase in gross billing normally happen in the second and fourth quarter. However, the third quarter is the season for acquiring new students. And as a result, during the quarter, we strategically increased our investment in sales and marketing to improve our market penetration rate. As you may have noticed, even though the third quarter is not a peak season for cost retention, our gross billing for the quarter remained at the same level as that of last quarter, indicating that the gross billings contributed by new students are taking up a higher percentage due to our effecting new customer acquisition strategies. This increasing effect will snowball and pull provide more leverage to next quarter's gross billings. Thus, we expect to see a sizable positive net operating cash flow in the fourth quarter. The remaining 10% of the quarter's net revenues came from educational content and digitalized learning products. This segment mainly includes smart textbooks, learning devices, and other digital products for students. These products serve as supplements to our courses satisfying students diversified learning needs and will boost user retention on our platform through better user engagement. Next, I will present our financials of the quarter in more detail. Our cost of revenue this quarter decreased by 76.4% year-over-year to RMVB168.8 million. Our gross profit increased 9.4% year-over-year to RMB437.4 million. Gross profit margin was 72.2%, a 190 basis point increased compared to that of last quarter and a significant year-over-year improvement. Non-GAAP gross profit was RMB439.3 million and non-GAAP gross margin was 52.5%. The increase in gross profit margins is largely due to higher service delivery efficiency as well as an increase in the average number of students served by each tutor for our businesses related to college students and adults. Operating expenses decreased by 65.8% year-over-year to RMB506.9 million. Now let's break down our OpEx. Selling expenses decreased 59.2% year-over-year and slightly increased quarter-over-quarter to RMB336.8 million. The quarter-over-quarter increase in selling expenses was mainly due to seasonality. The some occasion is usually the peak new customer enrollments from growth of our learning service businesses. We allocated marketing investments proportionate to the soaring on demand we observed in the market. Through improving operational efficiency in ROI of our marketing expenses, we can gradually increase our brand exposure and market share. We are also exploring various new and cost effective customer acquisition channels including but not limited to live streaming classes, test banks and other exam practice applications to attract high intent customers at a lower cost. As a company with a long-term orientation, we will continue to focus on brand building and recognition to reduce our customer acquisition costs by heavy reliance on word of mouth referrals and to enhance user conversion rate and selling expenses ROI through better using targeting and in this way achieving sustainable growth. Moving on, research and development expenses decreased 68.3% year-over-year to RMB106.5 million, accounting for 17.6% of net revenues, which was 1.7% lower than last quarter's R&D margin. This was mainly due to the greater economic of scale as the increase in net revenues outpaced the growth in R&D expenses. We allocated most of the incremental R&D budget to course content development including recording curriculum design experts with significant experience and influence in their respective views. General and administrative expenses decreased 61.4% year-over-year to RMB63.6 million accounting for 10.5% of net revenues. Loss from operations for the quarter was reduced by 93.6% year-over-year to RMB69.6 million. Non-GAAP loss from operations was RMB53 million. Net loss for the quarter was significantly reduced by 94.1% year-over-year to RMB61.4 million. Non-GAAP net loss was RMB44.8 million. If we exclude the 17.5 million losses on our offshore R&D reserves up by exchange rate fluctuations during the quarter from our net loss, the actual net loss margin would be 7.2%. Our net operating cash flow this quarter was RMB34.7 million. We expect effect net operating cash flow to turn significantly positive in the next quarter. Turning to our balance sheet. As of September 30, 2022, we had RMB909.5 million cash, cash equivalents and restricted cash and RMB2.4 billion short-term investments which totaled approximately RMB3.3 billion, providing ample resources for continued business development. Further as of September 30, 2022, our deferred revenue balance was RMB638.4 million, which primarily consists of tuition collected in advance. As my speech comes to an end, I would like to take this opportunity to emphasize our management and saving efforts in pulling our responsibilities to shareholders. Our Board today has authorized a three-year share repurchase program up to US$30 million. Our founder and CEO, Larry has also promised to increase his shareholding by purchasing up to US$20 million worth of our shares personally. Our management would like to demonstrate our faith and firm confidence in the long-term development of our companies. Moreover, the closing letter we received from the U.S. SEC eliminated potential external negative effects and it's a perfect testament to the high standard in corporate governance, information disclosure and a compliance that we have always abided by. Going forward, we will focus more on satisfying customers' needs and continue to provide value for our shareholders. Before I provided our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements, which involve risks and uncertainties which are beyond our control and could cause the actual results to differ materially from our predictions. Based on our current estimates, total net revenues for the first quarter of 2022 are expected to be between RMB608 million and RMB628 million, representing a decrease of 50.7% to 52.3% on a year-over-year basis. This concludes my prepared remarks. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Li of Citi. Please go ahead. Hi management, congratulations on the result and thanks for the share repurchase and the increase efforts. This is Mark Li from Citi. My I ask for our non-academic education. Could you share about our recent key development and perhaps outlook for the next year? Thanks Mark. Thanks for your question. Our non-academic tutoring services is one of the new businesses we focus on after our restructure, and this business line is still in the process of optimizing our course products and gradually winning recognition among students and parents. So, after the double deduction policy, the students have more spare time during their weekends and holidays, which had spurred a huge demand for academic tutoring services especially among first and second tier cities. So, we currently offer a variety of non-academic tutoring services including programming, chess, international chess, humanity and also science courses exactly that our students were online education and interaction. These courses are very constructive in sparking children's interest and intellectual curiosity. Our non-academic courses could enhance students' learning skills and at some level can indirectly improve students' performance back in school. So it has one the trust and support among parents. And also the non-academic tutoring services follow a progressive and systematic curriculum design. This sector exhibits seasonality as well. Our course retention normally happened in second quarter and the first fourth quarter. So in the second and fourth quarter, usually has a large increase in the gross settings. We just finished the Q4 retention in November, and the retention rate was as high as 78%, which actually exceeded our expectation and also inspired us. And also the ASP for non-academic tutoring services is a proportionate to the market demand. So, it unit economics is more healthy with a high gross profit margin and as you may have noticed that our gross profit margin also increased this quarter. So based on what we see now, the development of this sector matches our expectations as this sector is still in the early development stage. We will disclose more information on enrollments and revenues as it matures. So going forward, we'll continue to focus on optimizing the products and enhancing our learning experience and continuously improving our course curriculum. So for as the expectations, we're more preferred to provide a more short-term instruction. So, we do so see like the gross billings in a first quarter to increase meaningfully and also we'll be having a sizable positive net operating cash flow in the fourth quarter, and that majority was contributed by our academic education, learning service and others that may serve the students from junior school to high school. Hope that addresses all your questions. Thanks Mark. Thank you, Shannon. I have a quick follow up. You mentioned about increasing gross billing and positive cash flow in Q4. May I know for our profitability, is it likely to see also better margin or perhaps like up or even performance in the Q4? Thank you. Yes. So, we'll foresee Q4 we will be profitable. So, the net profit margins will be higher than breakeven, maybe still in a rank of a single digit, but it should be a meaningful net profit margins. Thanks. Thank you very much, operator. And thank you everyone for joining the call today. If you have any further questions, please don't hesitate to contact our Investor Relations department or management via email at ir@gaotu.cn directly. You're also welcome to subscribe to our news alert on the Company's IR website.
EarningCall_1927	Good day, and thank you for standing by. Welcome to the UGI Corporation Q4 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Good morning, everyone, and welcome to UGI Corporation's fiscal 2022 fourth quarter earnings call. Joining me today are Roger Perreault, President and CEO; Ted Jastrzebski, CFO; and Bob Beard, Executive Vice President, Natural Gas, Global Engineering & Construction and Procurement. Roger and Ted will provide an overview of our results, and the entire team will then be available to answer your questions. Before we begin, let me remind you that our comments today include certain forward-looking statements, which management believes to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release, our most recent annual report and our quarterly reports on Form 10-Q for an extensive list of factors that could affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations. We will also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available within our presentation. Thank you, Tameka, and good morning, everyone. I hope that you've all had the opportunity to review our fiscal 2022 year-end earnings release. On today's call, we'll review our financial results and several key accomplishments for the year, discuss our outlook for fiscal 2023 to 2026 before concluding with a question-and-answer session. Now let's start with fiscal 2022. We are pleased to report strong financial results, which were the second highest EPS on GAAP and non-GAAP basis in our history. Despite a challenging macroeconomic environment, we saw record earnings at our regulated utilities businesses and in our Midstream and Marketing segment. Our LPG business at UGI International continued their strong performance and this helped to mitigate the impact of headwinds faced at AmeriGas and in the European energy marketing operations. The geopolitical situation and extreme variation in natural gas and electricity prices in Europe had a significant impact on this year's European energy marketing results. Without this headwind, we would have been well within our original guidance range. I am proud of our dedicated employees who have worked tirelessly to execute against our 3R strategy, which is to deliver reliable growth, invest in renewables and rebalance our portfolio. Their commitment, as we deployed record levels of capital and focus on margin management, expense control and serving our customers and communities each and every day culminated in the strong fiscal 2022 results. Ted will provide more details on our financial results. But first, I'd like to highlight some key accomplishments and the important progress we've made across the business. In our Natural Gas business, our regulated utilities had an outstanding year. We deployed a record level of capital, investing $562 million to replace and upgrade our gas distribution infrastructure as well as our critical systems. This year, we replaced roughly 155 miles of pipeline, and the outlook for capital investment across our utilities is robust. We expect to continue a similar investment profile, driving reliable earnings growth. Our Utilities business also added more than 14,000 new residential and commercial heating customers, continuing a strong track record of annual customer growth. Also, with increasing spread between oil and gas prices as well as the 250,000-plus homes within 150 feet of our gas mains in Pennsylvania, there are continued opportunities for attractive customer growth. Next, at fiscal year-end, we received approval of our Pennsylvania gas base rate case that included an increase in base rates of $49.45 million in two phases, $38 million that went into effect on October 29 of this year and another increase of $11.45 million in October 2023. We are also pleased to have received approval to implement a weather normalization adjustment rider at our PA gas utility beginning in November 2022. For our PA residential and small commercial customers, the adjustment provides bill relief in severely cold months and provides for more stable gas bills overall. The weather adjustment is applied as a surcharge or credit to monthly bills during the heating season when weather deviates more than 3% from the 15-year average. Going forward, our Utility segment will have more predictable earnings as a large portion of our margin is now weather protected in support of our objective to generate reliable earnings. For instance, in fiscal 2022, our PA utility saw weather that was approximately 8% warmer than normal. With the weather normalization adjustment, this would have been an incremental $0.05 of EPS. The midstream and marketing team had a tremendous year as we strengthened our position as an important midstream operator. We expanded our interest in natural gas gathering systems in the Appalachian basin with our January 2022 acquisition of Stonehenge, now referred to as UGI Moraine East as well as the acquisition of the remaining interest in tenant. These investments performed well, and we are pleased with the strong production volumes during the fiscal year. We also continue to realize a significant amount of margin from fee-based income with roughly 84% of the margin in this segment generated from fee-based arrangements, including take-or-pays and minimum volume commitments. Moving to the global LPG business. UGI International's LPG business had an excellent year with higher unit margins amidst increasing volatility in commodity costs and a modest increase in volume despite warmer than prior year weather. Our LPG business in Europe remains strong and is well positioned to take advantage of new opportunities that may arise. At AmeriGas, we saw strong national account volumes and sustained ACE volumes when compared to pre-pandemic levels. We also continued to expand our cylinder home delivery service, Cynch, now offered in 25 cities in the U.S. Lastly, fiscal 2022 concluded our business transformation initiatives where we achieved total annual benefits of approximately $150 million at AmeriGas and â¬30 million at UGI International. These benefits helped to mitigate the impact of the inflationary cost environment that we experienced during fiscal 2021 and 2022. Turning to our progress in advancing our renewable strategy. During the fiscal year, we entered into several strategic partnerships with the intent to produce renewable natural gas and bio LPG, bringing our total renewables commitment to over $300 million to date. Our RNG project at Spruce Haven Farm in New York was commissioned on September 30. Once fully operational, we expect to produce approximately 50 million cubic feet of renewable natural gas that will be sold to a local utility, the environmental credit separately marketed by our subsidiary, GHI Energy. The Idaho RNG project, in which we have a minority interest, was also commissioned on September 30, and this facility is expected to produce roughly 250 million cubic feet of renewable natural gas annually. The RNG will be sold into an interstate pipeline and similar to other RNG projects and the environmental credits will be marketed by GHI Energy. We made important strides with these initial renewables commitments and look forward to additional investments that support our 3R strategy. Lastly, in June, we were pleased to issue our fourth annual ESG report entitled: Transparency, Action and Progress. We've made important progress against all of our ESG commitments and in advancing on our belonging, inclusion, diversity and equity by initiative. As part of these efforts, in fiscal 2022, we sustained investment in our employee resource groups and expanded our women's impact network across our global footprint. We also continued our partnerships with organizations such as the United Way, Big Brothers Big Sisters and The Human Library Organization. In addition, with the humanitarian crisis stemming from Russia's invasion of the Ukraine, we were honored to partner with a global non-profit organization, The World Central Kitchen, to assist Ukranian refugees by providing funds for food and food supplies as well as propane to fuel their kitchens. With all of these challenges, I am proud of our employees who have performed admirably in the workplace and in the communities that we serve. Thanks, Roger. As Roger mentioned, UGI delivered adjusted diluted EPS of $2.90, which was the second highest result after a record in the prior fiscal year. This slide provides a reconciliation of our GAAP and adjusted diluted EPS for fiscal 2022 and 2021. As you can see, our adjusted diluted earnings exclude adjustments, totaling $2.07 related to a number of items. First, the impact of mark-to-market changes in commodity hedging instruments, a gain of $2.11 versus $4.72 in the prior year. Adjustment for a $0.17 gain on foreign currency derivative instruments versus $0.03 in fiscal 2021. $0.03 of expenses associated with the corporate functions transformation in comparison to $0.35 in the prior year for all of the business transformation initiatives. $0.12 for the impairment of other assets, primarily related to Pennant, a natural gas gathering system in which UGI Energy Services had a 47% membership interest through to the fiscal third quarter. Next, in Q4, we had a $0.09 of tax benefit related to a tax legislation enacted in Pennsylvania to reduce the state's corporate net income tax rate. The legislation resulted in a $20 million benefit being recorded in fiscal 2022 based on the Company's analysis of future reversals of net deferred tax liabilities. We had a $0.03 loss on the extinguishment of debt associated with the refinancing at UGI International in Q1 and $0.12 of expenses associated with restructuring costs, which are largely attributable to a reduction in workforce and the related costs. On this slide, we provide additional color on the year-over-year performance by segment. I'll speak to the drivers for each segment shortly, but at a high level, in global LPG businesses, there was continued focus on margin management and expense control actions which partially offset net volume loss at AmeriGas and the effect of unprecedented volatility in natural gas and power prices on the energy marketing business in Europe. As mentioned previously, the reduction in UGI International's results was driven by the lower EBIT from energy marketing. Our natural gas businesses reported stellar results from incremental income from Mountaineer, increases in the distribution system improvement charge, or DSIC margin at UGI Utilities that were largely driven by record deployment of replacement and betterment capital, solid customer growth and increased gas gathering margins in our Midstream and Marketing segment. Turning to the individual businesses. AmeriGas reported EBIT of $307 million versus $385 million in the prior year, resulting from lower retail volumes and the effect of significantly higher inflation. Retail volume declined 8%, primarily as a result of the continued tail effect of last year's customer service challenges, staffing shortages and key delivery-related positions and conservation efforts in the higher commodity cost environment. This decline in retail volume, a $100 million impact to total margin, was partially offset by higher average retail unit margins and increased fuel recovery and tank rental fees. Operating and administrative expenses increased by $20 million, reflecting the effect of the rising cost inflation on vehicle fuel and bad debt reserves as well as increases in insurance claims and telecommunication expenses. These increases were partially offset by lower employee compensation and benefits of $22 million as we rightsized our workforce as well as reduced advertising and vehicle lease costs. UGI International reported EBIT of $254 million compared to $317 million in the prior year as headwinds from the energy marketing business and the effects of inflationary pressures were partially offset by higher total margin from the LPG business. Retail LPG volumes had a modest pickup over prior year despite weather that was roughly 5% warmer. This uptick was largely due to the recovery of certain bulk and auto gas volumes that were negatively impacted by the COVID-19 pandemic as well as favorable crop drying campaigns. Total margin declined by $118 million due to weaker foreign currencies and lower energy marketing margin, partially offset by higher LPG margin. Looking first at the LPG business. As I mentioned, there was an increase in total LPG margin due to higher volume and higher average LPG unit margins even in an environment with a 53% increase in average propane cost in Northwest Europe. Operating and administrative expenses were down $11 million due to the impact of the weaker euro, largely offset by the effect of inflationary pressures on distribution, personnel and maintenance costs. Turning to UGI International's Energy Marketing business. As we've seen, fiscal 2022 had unprecedented volatility, which led to margin pressures and the decision to pursue a strategic review of the European Energy Marketing business, which Roger will provide an update to shortly. Year-over-year, $63 million of the EBIT decline was attributable to energy marketing, and this primarily resulted from higher costs from purchases on the spot market and increased balancing cost. Next, Midstream & Marketing had record EBIT of $269 million, up 42% over last year due to increased natural gas marketing activities, higher earnings from renewable natural gas activities and incremental contributions from UGI Moraine East, the legal entity holding the Stonehenge assets acquired in January of this year. The $77 million uptick in total margin came from several aspects of the business. First, we had a $38 million increase in gas marketing activities, which includes peaking and $16 million from capacity management. The increase for capacity management was largely driven by the settlement timing of certain multiyear hedge contracts for store and volume, and this is expected to reverse when the gas is extracted from storage during the upcoming winter. Next, $15 million in incremental margin from UGI Moraine East, $9 million from renewable natural gas activities, which includes the impact of higher average pricing for RINs and LCFS credits and $5 million in higher retail power and generation margin. Our Utility segment also had a tremendous year with EBIT of $336 million, 39% higher than the prior fiscal year. This increase was largely attributable to the incremental earnings for Mountaineer, benefits from the DSIC mechanism and the continued strong growth in residential and large delivery service customers. The increase in operating and admin expenses as well as depreciation expense were mainly a result of the incremental expenses for Mountaineer. We've been delighted with the performance of Mountaineer, which was acquired in September 2021. It has exceeded our expectations and strengthened our diversified portfolio. Liquidity. At the end of the fiscal year, UGI had available liquidity of $1.7 billion, which was affected in part by $398 million of cash collateral received from derivative counterparties. Our attractive cash generation and strong balance sheet supports UGI's disciplined investment approach. Thanks Ted. Before we pivot to fiscal 2023 and beyond, I would like to reiterate the strong performance of UGI in fiscal 2022 despite the macroeconomic challenges that we faced. I am proud of how our teams have been committed to maintaining safe operations, serving our customers, identifying commercial and operational efficiencies and supporting the well-being of the communities we serve. We have a solid underlying base business, a strong balance sheet and the financial flexibility that enables growth investments. This foundation has led to an attractive track record of paying dividends for 138 years, consecutively increasing dividends in the past 35 years and delivering on our long-term financial targets with a 10-year EPS CAGR of 8.8% and dividend CAGR of 7.2%. Over the last few years, we shared our intent to rebalance our portfolio to an even distribution from natural gas and renewables in comparison to global LPG. As you can see from this slide, this year, we attained a rebalanced portfolio driven by both headwinds in the global LPG business that led to a reduced earnings contribution, along with record performance from our natural gas businesses. And now, we'll move the conversation to fiscal 2023. There is no doubt that our world is facing several obstacles such as rising inflation, higher commodity prices, labor shortages and supply chain challenges. We expect that these conditions will continue into fiscal 2023. And so as always, we are working on controlling costs and passing along higher costs where appropriate. I am confident that we are well positioned to optimize shareholder value as we have a differentiated and resilient portfolio, one that supplies essential energy solutions to a large customer base in both the U.S. and Europe, providing geographic diversification to our earnings stream. As we saw in fiscal 2022 and throughout our history, this diversification, when coupled with our discipline in managing margins, controlling expenses and driving operational efficiencies, has proven our ability to manage through challenging economic cycles. In addition, we are thrilled to operate in constructive regulatory environments that support investments to improve pipeline safety and reliability with attractive rates of return, and our robust supply and distribution network provides optionality and flexibility, enabling us to meet customer needs. With that backdrop, I would like to share with you our strategic priorities for fiscal 2023. At the core, our 3R strategy is unchanged as we execute to create sustainable value for shareholders and build even greater resiliency across continuously evolving economic cycles. I will speak to each of these priorities in more detail, but at a high level, our focus will be to: execute on the strategic review of the European Energy Marketing business, ignite market share and EPS growth at AmeriGas over the coming years, drive reliable earnings growth at utilities through capital spend and weather normalization, expand our renewables portfolio, advance on our ESG journey and continue our support functions transformation to achieve best-in-class services. Now let's start with the European Energy Marketing business. At the beginning of fiscal 2022, UGI International marketed natural gas and electricity in four European countries: France, Belgium, Netherlands and the U.K. Stemming from the strategic review that we initiated in the third quarter, we divested of our U.K. operations in October, and if all goes to plan, we intend to sell the business located in France in the first quarter of fiscal 2023. The remaining two businesses operate in Belgium and the Netherlands are expected to wind down with contracted volumes running through to the first quarter of fiscal 2026. Using those assumptions, we have provided the projected volumes and earnings impact for fiscal 2023 and 2026. Separately, our teams continue to take operational actions to mitigate the impact, including entering into negotiations with our customers for early termination of their contracts or more favorable terms and conditions, given the geopolitical situation. Moving to our growth strategy at AmeriGas. As we mentioned earlier, we completed the business transformation within the global LPG business, which provided some noticeable benefits such as additional sales channels, a new digital customer self-service platform, centralization and consistency of critical business processes, including routing and logistics. While there were some clear operational financial benefits, as previously mentioned, we also had some stumbles along the way, which impacted customers. As a result, we are focused on making strategic and operational improvements to enhance the customer experience and drive growth. This growth strategy is two-pronged. First, leveraging our scale and the enhanced operating model to create exceptional customer experiences, while we've made meaningful improvements in elevating the customer experience since the challenges we experienced in fiscal 2021, we are determined to drive further improvements through programs related to telemetry, more effective hiring and retention, enhanced call center processes, optimization of delivery routes and realign KPIs, amongst others. In addition, over the years, we have demonstrated a track record of effectively managing margins, and we intend to continue that history by optimizing our pricing strategies in the competitive markets where we operate to grow margin, while focusing on customer retention and satisfaction. Secondly, engaging in key strategic acquisitions. Our intent is to acquire great companies, integrate and capture synergies that are aligned with our margin expansion approach and realize greater benefits from the density of our service territories. These strategic actions are expected to drive market share growth over our planning horizon. As you are aware, we are the leading propane distributor in the U.S., but this is a highly fragmented market with close to 4,000 independent retailers who hold in aggregate more than 3/4 of the market, exclusive of regional and national retailers. We intend to gain a higher market share, increase volumes and grow EPS by roughly 8% by fiscal 2026. In addition, our intent is to reduce leverage at AmeriGas while keeping in mind the targeted long-term leverage ratio of 4x to 4.5x. Next, Utilities. We operate in a constructive regulatory environments in both Pennsylvania and West Virginia that support the modernization of infrastructure to promote safety, reliability and growth. With over 18,500 miles of pipeline and a long track record of attractive customer growth, we have a great runway of opportunities to deploy capital. Our plans to invest approximately $2.4 billion over the next four years demonstrate our commitment to investing in the business and infrastructure replacement. Our team continues to deploy record amounts of capital, both safely and effectively. In addition, with these investments, there is minimal regulatory lag as we recover approximately 90% of the costs incurred in less than 12 months at attractive rates of return. On the next slide. In fiscal 2023, we intend to further progress on our commitment to investing in renewables. Investing in renewables will support our objective of delivering reliable earnings growth while providing lower carbon intensity energy solutions to customers. We are pursuing investments in a number of key renewable energy areas, including RNG, Bio-LPG, renewable dimethyl ether, among us. Since we made this commitment in fiscal 2021, we have earmarked over $300 million for renewable projects, primarily those producing renewable natural gas in the U.S. Starting in this fiscal year, we are excited to bring several of these RNG projects online, beginning a steady cadence of placing new renewables projects in service over the next several years. ESG is at the core of our overall strategy. And over the past few years, we have made measurable progress given our strategic focus and sustained investments in infrastructure that lowers methane and greenhouse gas emissions, enhances system integrity and improve safety. In addition, we continue to invest in people, technology and processes to enhance the quality of life of our employees, customers and the communities we serve. Our fourth annual sustainability report issued in June 2022 highlighted a summary of the progress we made against previously established targets. A key emphasis for fiscal 2023 will be further advancing our goals of providing stakeholders with greater insight into our ESG goals and commitments, with the intent to release our first TCFD task force on climate-related financial disclosures aligned climate report. We are pleased with the tremendous progress in our ESG journey and are committed to the continued advancement of our sustainability program. Thanks, Roger. Yesterday, we announced our fiscal 2023 guidance range for adjusted EPS of $2.85 to $3.15. This guidance range assumes normal weather based on a 10-year average, the current tax regime and selling the French Energy Marketing business in the first quarter of fiscal 2023. As you can see, we're using a broader range for our guidance than the historical approach because of the uncertainties we are seeing with inflation, commodity price volatility and the potential impact to the remaining energy marketing businesses in Belgium and the Netherlands. On the slide, you'll see a comparison of the midpoint of our fiscal 2023 guidance of $3 to the fiscal 2022 adjusted EPS of $2.90. First, fiscal 2022's results were impacted by several non-recurring items. One, we had $0.06 benefit from capacity management margins that are expected to reverse when the gas is extracted from storage in the upcoming winter and another $0.07 due to certain onetime items, including asset sales at UGI International. Next, there are a few notable items to call out for the next year. As Roger discussed, we expect reduced headwinds from Energy Marketing at UGI International, given the anticipated volume reductions in latest forward curves. The estimated $0.10 reduction assumes divesting of France in the first quarter of the fiscal 2023 and winding down operations in Belgium and the Netherlands. Next to $0.12 pickup from the gas base rate case that was approved at the end of the year and a $0.09 headwind from increased interest expense given higher rates on short-term debt that is typically used to manage seasonal working capital needs. Lastly, we have other drivers, which are expected to provide an incremental $0.10 over fiscal 2022. This includes benefits from the strategic priorities that Roger discussed as well as the return to normal weather across our service territories. In establishing our guidance, we've also taken into consideration the sustained impact of inflation, which has affected employee compensation and benefits, vehicle fuel, maintenance expenses, among other charges. We expect that a disciplined approach to expense and margin management will continue to help us mitigate the impact of these global challenges. Next, I'd like to briefly discuss our longer-term outlook. While we view fiscal 2023 as a foundational year with some key strategic shifts as we address growth at AmeriGas and continue to exit the European Energy Marketing business, we are confident in the resiliency of our business and our ability to increase shareholder value. For the four-year period from fiscal 2022 to fiscal 2026, we anticipate that adjusted earnings per share will grow by 6% to 10% in alignment with our long-term financial commitment. The primary drivers for the anticipated increase in EPS through fiscal 2026 are: our planned investment of roughly $2.4 billion in pipeline replacement and betterment in our regulated utilities, which will also drive the need for new base rates; approximately 8% EPS CAGR at the AmeriGas business based on the strategic and operational actions that Roger mentioned earlier; the sale and wind down of the European Energy Marketing business; increased renewables earnings as we continue to invest in new projects while achieving attractive rates of return; disciplined M&A activity; and modest tax credits from the Inflation Reduction Act. On our capital allocation plan for fiscal 2023 to 2026, our outlook for strong sustainable cash flow growth over the coming years is unchanged. We expect to generate $5.7 billion to $5.9 billion in cash, which when coupled with debt will support new strategic investments. This slide walks you through how we expect to deploy the targeted $7 billion to $7.4 billion of capital between fiscal 2023 and 2026. Using the midpoints, roughly $1.3 billion will be used to meet our shareholder commitment on dividend growth, while maintaining a competitive payout ratio, $900 million for normal maintenance capital across the business, $1.6 billion in our regulated utilities businesses, which combined with M&A investments and other growth investments totaled approximately $5 billion, and this is expected to deliver stable returns. On the right, you see another view of how we expect to allocate the growth, M&A and regulatory capital over the plan period. We expect to invest roughly 24% in the global LPG businesses, primarily in acquisitions at AmeriGas as we look to drive EPS and market share growth. And overall, more than 75% of this capital will be invested in the Natural Gas business and renewables, helping us to maintain a rebalanced portfolio and create sustainable value for our shareholders. When we look at overall liquidity in the balance sheet, both remain strong and leave us with flexibility to execute our strategy. At the end of fiscal 2022, on a consolidated basis, over 90% of our long-term debt was at fixed rates are effectively hedged at fixed rates via interest rate swaps. In addition, we have no material debt maturities until fiscal 2024, providing protection in a rising interest rate environment. Lastly, our leverage ratio has been fairly consistent for fiscal year-end '20 and '21 and '22. And as we move through the plan period, we expect to pay down debt while keeping in mind our targeted leverage ratio of 3x to 3.5x. Thank you, Ted. As I stated at the beginning of the call, I am pleased with our solid results for the year. While there are uncertainties in this business climate, I am confident that we are resilient and well positioned for growth, consistent with our proven track record. I view fiscal 2023 as a year where we will be strengthening our platform and leaning into the strategic priorities that I discussed earlier. Over the long term, I am confident that we are well positioned to continue delivering reliable earnings growth given our foundation and the investments that we are making in our regulated utilities, midstream and marketing, renewables and global LPG. We have a robust pipeline of attractive investment opportunities, which gives us confidence to deliver strong earnings growth in future years. Thank you for your interest in UGI and your participation in today's call. Now, we'll open the line for your questions. It's actually Julien on here for on behalf of my team. If I may, just to pick up on the domestic side of the business first. Can we talk a little bit about the propane side on AmeriGas? And just how are you thinking about the volume trends? Obviously, nicely done here, you talked about some reversals, post-COVID, et cetera. How do you see that evolving? Again, I know we've talked at times in the past about the tension between price and volume. Just can you say a little bit more on expectations, especially if you look at '23 and onwards, around volume expectations considering what you've already just seen here in the latest quarter? Thank you for your question. Yes, quite a few items that I certainly would like to highlight. First of all, Julien, as we've talked about in the last several earnings calls, we have been seeing our continued improvement in our operating metrics. When you look at delivering on time, our ability to serve customers quickly when they're calling in, answer their issues or their -- the opportunities we have, we've been able to see a continued improvement in trends on many different operating metrics. When we look at growth, specifically, also an area that we've seen continued improvement. With our new operating model that we've described several times, we are now able to absolutely drive that growth engine with the 75% market share, the 75% of the market that is currently served with moms and pops. So, we are able to really get out in front of that potential customer base, and we have seen good results with our ability to bring in customers. That being said, we've also seen continued churn. We've also seen a higher degree of customers leaving, which we attribute to some of the teething pains we had when we deployed the new operating model. We see that stabilizing. So we see that starting to turn around. What we've been doing overall to really address it is everything from making sure we're hiring drivers, getting drivers in our trucks, enabling us to deliver on time, routing optimization and pushing for efficiencies. We are adding digital tools in our operations around telemetry, for example, where we can better forecast when customers need product. And all of that leading to a significantly enhanced customer experience, where customers can deal with us electronically. They have a digital application that they can come and really interact with us differently than when you look at a very large percentage of the market today that is served with -- from moms and pops, where they just don't have that same capability. So I see '23 as a foundational year. It's a year where all of these pieces now are coming together nicely, and we absolutely expect to see now some nice trends going forward into '23 and beyond. And if I may, just coming back to cost and cost levers here. I mean, obviously, you guys have been talking about doing what you can, if you will, throughout the year as well as talking about preparation into '23 for some time. Can you talk about sort of what's reflected in '23 in terms of mitigating efforts and measures and the ability to continue to source that? Again, I know you're not talking about beyond '23 per se. But as I think about sort of the integration, descaling out of Europe, for instance, how much of that is a headwind? Is that reflected in those earnings sensitivities you provided on the strategic impacts here, but also just altogether on the cost side, too? Yes. So maybe a couple of comments on cost, and I'll talk a little more about energy marketing as well in Europe, Julien, to formulate the answer to your question here. So on cost, '22 was a year that we absolutely dug deep and made sure to control discretionary expenses. It was a year in which where open positions, we kept open for a period of time. And when we look towards '23, it's definitely a year where some of those open positions we're filling because we absolutely are focused on the customer experience and delivering our promise, while at the same time, our '23 guidance also includes our views of inflation. And there's no doubt that we have seen very specific inflations in specific areas. For example, driver populations, I think it's very well known across North America that getting drivers and retaining drivers, a part of that strategy must be ensuring that you're competitively paying that population, and that's certainly all built into our fiscal '23 guidance. If I move the conversation a little bit to energy marketing, you saw that last year, it was a pretty significant hit. But this year, we expect that hit to be cut basically in half which we see a $0.10 uplift from the prior year. And that's dependent on our concluding the sale in France, and it looks like that's something we expect to be done in the first quarter. And then we're going to continue to wind down the business in the Netherlands and in Belgium. So clearly, our portfolio, our volume of energy marketing is going to continue to diminish because as we talked about prior, we have not been resigning contracts. We are letting these contracts come to their natural conclusion, while also engaging with customers to ensure that the risk profile of continuing to serve them is balanced. Now, we are really looking at what volume are they going to take. If they take excess volumes, we need an ability to charge for that excess volume, et cetera, as we go forward. And those are efforts that we've been very focused on. So when you look at our guidance range of fiscal '23, it's factoring in these elements that I just talked about. Maybe just to start with a quick one. I was curious if you could talk about the expected cash proceeds side to the sales in UK and French Energy Marketing businesses. Yes. We won't be sharing the details on that until we close the books with the first quarter. I will say that we were very much motivated to -- as we have shared to either get out of these businesses or move towards wind down. And so, it is not we're moving these businesses out at a cost that is going to be fairly neutral to us. What you are going to see is dramatic write-downs of our derivatives positions. And just as a reminder, when you see those large figures on the write-downs of those derivative positions, those are derivatives that we established that do cover out of -- cover the contracts we have for that business. And so, it's fairly -- it's a fair offset to what we're seeing as hurts on the contracts that exist in that business. So, we will be showing those figures as we close the first quarter of the year, and we'll provide the actual final results on that sale. Got it. Understood. And then if we look at Slide 20 in the outlined international energy marketing volumes, have you hedged your exposure there? And could there be more volumetric exposure into the full requirement contracts that you have remaining? Yes. Let me kick off the answer for this question, Marc. What we're seeing -- so again, we -- as we've described previously, we're like over 90% hedged, right? So we have these fixed price contracts hedged at over 90%, and the remaining portfolio is a very similar story. We do have very solid hedged positions for those customers that are going to be hanging with us in the Netherlands and Belgium. That being said, I think where there's a bit of an unknown here is what will the volume consumption actually look like. We see in Europe today that the European governments are encouraging customers to reduce consumption. I expect that to be the case. I expect that the customer portfolio, the customers will, in fact, be very sensitive to the amount of product they take. That being said, I can't be certain, right? There are no specific rules in Europe that are really mandating customers to take less product, but there's a strong encouragement to do so. Now just to give you some insight on our customers we serve, we primarily serve small, medium enterprises. So we're serving customers like schools and other establishments that are these medium-type enterprises with whom we are having conversations. We are, of course, having conversations with them to really understand what their consumption profile could look like, understand more from them, are they expected to take less volume. And if they are expecting to take more volume, then we're engaging with them on ensuring we have a commercial discussion that recognizes that there could be additional costs. And where possible, we would be passing on that cost to the customers. And then maybe lastly, as it relates to the 8% EPS CAGR target at AmeriGas through 2026, could you maybe peel back the onion a bit around the embedded assumptions related to volume versus margin recovery? And does that bake in any M&A? And what would be the capital costs expected to incur your or require to get to that 8% EPS CAGR target? Yes. So, a few things that I'd like to highlight. It's a combination of many of the things you've described, right? We are expecting organic growth. So, we are expecting and we will succeed at ensuring that the customer churn continues to diminish during the period. We are always focused on effective margin management. Now again, that's when I say effective margin management, that's being very surgical in how do we manage margins when we see cost increases, which include inflation and, of course, product costs that we pass through to the customer bases and in addition to that, some acquisitions. What we've talked about is our excitement around reengaging into the acquisition space. We've invested now a couple of years of redesigning how AmeriGas operates with a much more centralized model, where we're now able to route trucks across the country centrally. We're able to do service -- apply service to our customer base across the country from a centralized center. We're able to handle customer calls from a centralized center as well. And when we think of the acquisition model, post synergies are going to be tremendous for us. We're going to be able to bring in these small, medium-sized propane distribution companies into our new operating model with what we expect to be very attractive synergies and based on the fact that we made these very significant investments to improve the customer experience, but also operate way more efficiently overall. So, we're excited about the combination of all the three areas that I described where we're going to continue to see improvements in customer churn, organic growth while at the same time, blending in some acquisitions. As we continue to blow this -- to build on this, of course, during our quarterly earnings, we're going to be able to talk more specifically around the capital that we are deploying to the acquisitions. [Operator Instructions] And I'm showing no further questions. I would now like to turn the conference over to Roger Perreault, President and CEO, for closing remarks. Well, thank you to all for listening into our call today and for the excellent questions. We look forward to following up in investor meetings in the coming weeks and, of course, at our next earnings call.
EarningCall_1928	Yeah. All right. Thank you, everyone, for joining us. I am Sami Badri with Credit Suisse Equity Research. We have Kip Compton, today, CTO and SVP of Strategy and Operations and specifically the Enterprise Networking and Cloud business for Cisco. Thank you very much for joining us. Yeah. So one thing I want to open up a very broad statement here, a broad question is, there are several technological industry tailwinds that are currently ongoing today from 5G, WiFi 6, you name it, there seems to be a big tailwind embedded in the technology sector across all the various sub-segments. Could we talk about which of these drivers are most relevant to Cisco? Sure. So before I begin, I want to say that, I am going to make forward-looking statements and they are subject to the risks and our latest filings. So with that out of the way, there are a lot of tailwinds. We are seeing networking right now is -- maybe itâs cliche, but maybe more important to a lot of our enterprise customers than even it has been in the past. The three that I would highlight perhaps are: IoT, hybrid work, and the web -- the growth in the web scalers that we are seeing. So on the IoT side, you think of industrial IoT and some of the things, but we are actually seeing a growth in Smart Buildings and sensors and all kinds of things in the enterprise Power over Ethernet. Lighting, for instance, is driving a lot of growth and certainly a catalyst for our campus business. On hybrid work, at the beginning of pandemic, a lot of people made very quick technology calls to make it so all their employees could work from home. Now theyâre taking much more strategic approach and they are looking at their return to office and hybrid work and realizing pretty much every meeting is a video meeting now, even when most people are in the office, there are still people who are remote. And thatâs driving a really significant change in the amount of traffic and traffic patterns in the enterprise and we think thatâs going to continue to be a catalyst for some time. And then on the web scalers, itâs just driven by the continued incredible growth in that segment, and we are seeing new builds of AI and ML networks that are even more sort of network intensive and thatâs contributing to our growth there. Got it. And then when you think about Ciscoâs R&D investments, where would you say is kind of the biggest concentration? I will probably divide that into two buckets, the way I think about it. I mean, thereâs core technology. So I mean, huge investments in optical, our Silicon One ASIC strategy, our security technologies and core networking software that powers the Internet. Those are the core technologies where we made huge long-term investments and we are going to continue to do that to differentiate and lead the market. The other category Iâd say is we are increasingly investing to deliver experiences. And I think the success that we have seen with Meraki is maybe the primitive example of this. But all of our customers are looking for simpler ways to consume technology. Simplicity is winning. So we are increasingly investing in cloud management platforms that deliver simplicity and you will see us increasingly bring AI and ML into those platforms to make it even easier for people to run their networks. Got it. Got it. One thing I wanted to hit or kind of discuss with you is the market share of Cisco across various product segments. Where is Cisco most resilient from a market share perspective? And over the next kind of three years to five years, how would you expect market positioning to actually evolve? Yeah. This is -- I mean, itâs on everyoneâs mind, certainly including ours, and itâs a super tricky environment right now. I -- one of the conversations this morning, itâs a great environment for networking for the reasons I mentioned earlier. If you are trying to track market share, itâs a terrible environment, and of course, itâs because of the supply chain. And market share is counted on revenue, revenue requires us to ship. Shipping is dependent on supply chain. And just to give you an idea of the diversity and lead times that we are seeing and why this complicates how we calculate and others track our market share, we have some products that are as short as three-week lead time right now. We have other products that are 40 weeks, 50-plus weeks still. And thereâs not a lot of rhyme or reason to that. Itâs based on various component availability and our competitors have a similar landscape. So Iâd just say itâs super difficult to track and understand market share right now. We did some internal analysis and we actually shared on our recent earnings call a few things on our view of market share. We felt like we are holding our own in-campus switching, SP routing, wireless and optical as examples, and growing share in blade servers, telepresence and voice. So thatâs what we are seeing in terms of the landscape. We think as the supply chain situation continues to resolve itself that the market share accounting will become a little bit more transparent and things will normalize itself. In terms of whatâs resilient, I mean, I come from the engineering product development side of the house. So my view of resiliency is where we have differentiation and thereâs a few examples. I mean, in SP routing, a lot of it is driven by the incredible growth of our Cisco 8000 platform, fastest-growing platform in the history of the company and thatâs powered by and differentiated by our second one ASIC strategy. You see us in optical, just bringing incredible technology from Acacia and other areas. And also being able to take that best-in-class technology and integrate it vertically into a networking stack, which just drives greater efficiency and simplicity for our customers. And then wireless and campus switching, Meraki is a major factor there. The simplicity and the experience that we are able to deliver with that model is winning in the marketplace and is helping to make our wireless and campus switching market shares more resilient. Got it. Got it. For my next question, I was hoping we could kind of talk about the record performance you discussed on the last quarterly call and maybe you could talk about them by product SKU and you kind of alluded to some of them now. The main ones that you guys called out was the Catalyst 9000, the Series 8000, Meraki, ThousandEyes and Duo. Could we kind of dissect each of these product lines and just discuss what are the key growth drivers of each of these? Sure. No. And itâs great to have -- frankly, we have quite a few products in different parts of our portfolio doing so well. The Catalyst 9000 in wireless, I will kind of lump together, because some of the drivers there are the same and I mentioned it earlier, the return to office and the fact that every meeting is a video meeting is causing some pretty massive campus refreshes. That, coupled with the sort of traditional and ongoing more rapid refresh of wireless driven by new wireless standards. We have seen a lot of refreshes driven by WiFi 6. Recently, we see 6E on the horizon thatâs driving similar refreshes. And by the way, not a new phenomenon, but one of the things that we see with these WiFi 6 and 6E refreshes is that it tends to drive a switch upgrades as well, because they deliver -- those wireless standards deliver more than 1 gigabit of performance. So it triggers our customers to invest in switches that are multi-gigabit or M-gig capable. On the Cisco 8000, itâs driven by the web scaler growth. And as I mentioned earlier, in addition to the normal incredible growth that we see out of the web scalers, we are seeing these AI and machine learning network deployments emerging, which are bringing a greater level of network intensity and more opportunity for us. On Meraki, itâs the simplicity of the Meraki dashboard along with the full stack management capability. So a customer is able to go in and manage their switches, their wireless, their routing, their cameras, their sensors, for instance, all in one unified place and thatâs something thatâs very, very powerful. ThousandEyes is another area where we saw incredible growth. This is a really fantastic asset. This is actually the first M&A transaction that we closed virtually. It was at the beginning of the pandemic. It was the first deal we had done without in-person meetings. I think the timing worked out really well. ThousandEyes gives customers end-to-end visibility over their own networks, but also public networks, as well as the cloud. So they can understand the application performance that customers or employees are getting and this actually become super critical when you have people working from home, because they are calling the IT department and trying to figure out whatâs going on and all of a sudden, itâs not enough for the IT department just to be able to see their own network. So thatâs being driven by hybrid work and hybrid cloud in a big way. And I think last one you mentioned was Duo. Thatâs Zero -- driven by Zero Trust for the same hybrid work environment, where increasingly people are not in the office, obviously, the security perimeter type model breaks down and you need people to be able to work efficiently and securely from anywhere that drives Zero Trust architecture and Duo is a leader there. So those are some of the drivers. And then if you were to think about maybe the one technology or the one solution that seems to be, by far, the leading reason why customers are spending money, upgrading and doing what they are doing mainly to modernize or maybe even upgrade their networks. What would be that technology? Well, I mean, I would say, first of all, the network seems to be more important even than it was in the past. Maybe itâs because of remote work, maybe the -- just the acceleration of some trends that were already in place because of the pandemic. So we are seeing people really seeing their network -- their investment in their network is critical to their success. And even as they move very close to the cloud, you actually need a great network if you are going to get a great cloud experience. So I think itâs -- again, itâs probably a combination of the things I have talked about. The hybrid work, including the return to office and what that means is key. Hybrid cloud drives investment in networks. IoT is a factor of 5G on the service provider side and also some interest in private 5G on the enterprise side are all catalysts. Got it. Got it. I want to shift gears a little bit and talk about Ciscoâs business model transition from predominantly transactional or perpetual to more subscription and software. Could we kind of talk about how this transition is going and I know you guys released the Catalyst 9000 with a subscription offering. And I guess the investor base is expecting this to kind of go into other product groups at some point. Could we kind of go through that path and how the transition is actually going? Sure. So I mean, we feel like we are on track. I think last quarter we said 43% of our revenue is recurring and that -- I think thatâs aligned with the rough time line we talked about at Investor Day, I think, it was last year. A lot of people question like do -- are we just growing our recurring software because of the hardware attach? And for sure, thatâs growing. And we wonât hesitate, frankly, to attach recurring software value to our large scale hardware businesses, because that brings a lot of value to our customers. It brings an acceleration of the scale of recurring software for us as well. We are also, though, seeing success in what I will call hardware independent recurring revenue, software businesses, SaaS businesses. In fact, we already talked about a couple of them, Duo and ThousandEyes. Our Cloud Calling business is doing extremely well as a Cisco Contact Center. So we are able -- I believe we are able to drive a balanced strategy where we drive recurring software revenue attached to hardware like the play that we are still running with the Cisco 9000, as well as businesses that are SaaS properties that are hardware independent. Got it. Got it. I wanted to kind of shift gears and talk about some of the redesign efforts that you guys have been kind of going through. And I think one of the main product lines is the Nexus 9000 and you have really seen it. So how long does it normally take for product redesigns to take place? And has this kind of impacted or cost Cisco market share at least in the most recent quarters? Itâs a great question. Itâs -- thereâs not a set - I mean, as you probably appreciate, thereâs not a set answer for how long a redesign takes. What I would say is it really depends most of all on how -- when we are redesigning, usually, thereâs a product and we have one component that has a very long lead time that, and of course, we canât ship the product unless you have all of the components. And so we will redesign in an effort to remove that component from the product, so we can ship it more quickly. The length of time it takes us to accomplish a redesign is determined by a bunch of things. But how intertwined the particular component is with the rest of the product and how similar or different the replacement or alternative component is, is what drives kind of the differences in terms of how long it takes us to accomplish that. We are almost always talking about months. So I have not seen redesigns get done in a few weeks. I have not seen redesigns take an extended period of time either. We have done quite a few redesigns. It is, as you alluded to, sometimes a little bit disruptive to our innovation engine. So if we have product development teams who are focused on innovating and bringing new value to our customers, we have to ask them to pivot and do a redesign program that can impact our roadmap. But itâs -- it became extremely clear to us that, perhaps, the feature our customers need it most was to be able to actually get the product. And so I think it was the right call. Thatâs actually given us some good results, without getting into specifics. We did have one product where we executed a redesign and we started shipping it and we were able to immediately drop the lead time for our customers from 40 weeks to 12 weeks on that particular product. So it can have a really significant impact and we are continuing to use targeted redesign efforts on our longest lead time of products where we can make a big difference. And then maybe just for an idea, I guess, because Data Center switching is going through redesign, that may potentially put into one of the more longer lead time categories, right, just because itâs currently an ongoing process? Yeah. We do -- I mean, we do think that -- we -- in particular, from a market share perspective, we do degree -- do believe that, to some degree, the longer lead times that we have right now in that product are impacting how market share is counted. I mean, I donât want to get into exactly which product you will be designing at any particular moment in time. But those longer lead time products are exactly the candidates that we would be targeting. Got it. I wanted to kind of go back to a couple of references that were made on the fiscal 1Q 2013 call and it has a lot to do with energy efficiency. And I think I counted it multiple times. I think I counted three times, right? And I guess like the big question when people talk about Cisco and the outlook on potentially like what happens in an economic downturn, what seems to be a comment made from at least the Cisco team is energy efficiency is a much bigger deal than we ever reallyâ¦ â¦ thought and that is kind of like the driver for why spend should be maintained. But maybe we can kind of get your take, like, how front and centerâs energy efficiency coming up across your entire customer base versus maybe a select few that are sensitive? Sure. I mean, itâs -- I think thereâs really two things coming together here. One is the long-term sustainability targets that almost all of our customers have and they are trying to get to net zero and that is always -- that has put a focus on energy efficiency. Obviously, the more energy the product uses in general the more carbon it contributes. The other thing thatâs really come into the picture in the last year or so is just the rise in energy prices around the world, but especially in Europe. Thatâs brought a renewed focus to energy efficiency from our customers. So itâs part of their sustainability goals, but itâs also now a direct economic situation. And I think we -- I think on our conference call, one of the things you are referring to, as Chuck mentioned a few technologies that he felt could help. Because we see this energy efficiency thing as perhaps a double-edged sword. Some people may delay projects because of the cost of the energy that they are paying on other things or that the project itself would incur. On the other hand, we are also seeing it as something that causes people to look at new technologies that could help them with their energy efficiency. And I think we mentioned Power over Ethernet, Silicon One and IoT. As Chuck mentioned, there are those three technologies that Cisco could help our customers with their energy efficiency needs. And briefly, Silicon One, itâs pretty obvious, itâs a much more efficient, especially on a watt per gigabit type basis solution. On the IoT side, itâs about deploying sensors and making buildings smarter so that you can save energy and even make better use of that space. On the Power over Ethernet side, itâs about just a more efficient energy transmission. So we have a lot of customers looking at using Power over Ethernet for their lighting in their office buildings, for instance, and they can actually save power, because the transition of the energy is -- of the electricity is more efficient and also because the Power over Ethernet infrastructure gives the much finer grain visibility and control over where that power is going. So he mentioned those three technologies as things that our customers are looking at from Cisco to help them. Iâd also note that we have seen greater interest in sort of sustainability solutions and those include like sustainable Data Center solutions and Smart Buildings in particular. And if you are interested in this, we recently renovated our One Penn Plaza office in New York City and redid it with the latest Smart Building technologies. Thereâs a number of videos and other materials online if you want to check out what we are talking about here. Iâd also note, in addition to these technologies, we are seeing some customers, particularly in Europe, starting to look at their equipment and considering an early refresh, because they will have equipment in place, perhaps, itâs not fully depreciated, but they see their energy bill, their electricity bill and they see that newer equipment could be significantly more efficient. And in some cases, we see customers putting together business cases to move forward with an early refresh, because they would rather get to that lower energy cost than finish depreciating a less efficient piece of equipment. Got it. One quick follow-up on something you said earlier is, if you were to look in history, right, the last time customers really were very sensitively focused on energy efficiency for the equipment, right? Has there ever really been as important as this time today or has there always kind of been a top criteria for customers and their solution set deployments? I mean itâs always been a criteria. I mean, I would say, qualitatively, to me, itâs coming up more right now. I think the confluence -- I think what I havenât seen before is the confluence or the intersection of the energy costs and the sustainability targets that companies have. And I think those two things are coming together in a different way right now than I have seen in the past. Got it. Got it. I wanted to touch on specific demand drivers in customer verticals, right? If we look at from public safety or the Public Sector to Commercial, to Enterprise, how would you kind of characterize drivers specifically to those verticals? Sure. So Enterprise, itâs a lot of things I have mentioned, hybrid cloud, 5G, 400G and beyond, IoT and hybrid work are all top of mind with our Enterprise customers and driving interest and demand. We think we are really well positioned there with solutions. On the service provider side, we are seeing solid demand, frankly, led by the web scalers, again, and thatâs something that we see continuing. On Public Sector, in the U.S., we saw a little bit of a pause with the election, but we are expecting to see things pick up, and perhaps, a tailwind from the investments in the Inflation Reduction Act. Got you. Got you. I wanted to go back to a question I actually overlooked on my list, but it has to do with software attached to hardware. When you think about Cisco over the next couple of few years, is software growth becoming more independent or more dependent on hardware shipments and hardware growth? Oh! I donât know how to quantify that. I mean, like, I said earlier, we are focused on growing recurring revenue software. And we will have a balanced strategy where it makes sense and thereâs value to the customer to attach that to our hardware base, like, we have done with the Catalyst 9000, or frankly, like, is inherent in the Meraki business model. We are absolutely pursuing that. And we are seeing some high-quality results there. Meraki, for instance, if a customer doesnât renew their Meraki subscription, the hardware that they have bought becomes unusable. So that tends to drive a very, very high quality renewal rate on that business. So we are very pleased with the results there. But then we are driving the growth and I think I mentioned Duo, ThousandEyes, Cloud Calling and Contact Center, as examples. We are building and buying and growing hardware independent SaaS businesses as well. So I donât know, Iâd have to go look at our models and see if we had numbers. But we are less focused on like a percentage here or there and more, like, well, okay, recurring software, how do we grow that? How do we find opportunities to bring that kind of ongoing value to our customers and get that predictability for Cisco. Got it. Got it. I wanted to kind of close out the final question with what keeps you up at night as a CTO just because the world is obviously changing very fast and there are multiple technologies and probably multiple opportunities for certain technologies to either be displaced or to be adopted. So how would youâ¦ But in terms of whatâs top of mind. Lately, what I have been pondering is, given all of the change, it feels like a much more dynamic world. I mean the panic certainly herald in a new level of uncertainty, but now, obviously, geopolitically and in other ways, it feels like a much more dynamic environment than we have had in the past and I think thatâs here to stay. So thinking a lot about how we strike the balance as we are responding to things that come up now, like, the supply chain things that we talked about, how do we strike a balance there in responding to those things in ways that give us more resiliency and flexibility going forward, because I think, we are in a different period with a lot of change and we have a very large and complex business, so itâs important for us to think about that. Got it. Got it. Well, I appreciate your time. We went through the question list and thank you very much for joining us today.
EarningCall_1929	So good afternoon, everyone. Thanks, and - welcome, and thanks for joining us here at Credit Suisse' 26th Annual Technology Conference. I'm Moshe Orenbuch, joined by Tim Chiodo, and we're very, very pleased to have with us SoFi this afternoon. I'm going to start off with a few questions on the financial services or the Neobank segment. So the first one that we want to talk a little bit about is user activity. So you report the accounts and the members more on a cumulative basis rather than an active user basis, which it helps with the quarter-over-quarter growth at times, but it makes it somewhat more challenging to think about modeling ARPU, if you will. But maybe you could just provide some context into the underlying engagement of the user base that would help us and help investors with that overall user number. Yes, sure. And thanks for having me, Tim and Moshe. I really appreciate it. So what I would say in terms of overall, we certainly have high engagement numbers through our financial services business as well as through our member products and relay products. But my view is that user activity on a day-to-day basis or daily activity is not the right metric to really look at, given the lifetime value of our members. What we've learned is that we are here to create a one-stop shop and create lifetime value with our members. And if you look at the LTV cohorts of each of our members, we've learned that not - our members don't generate value for us just on day one of becoming a member or in the first product that they take out, but also on the second, third and fourth product. And if you look at those curves, we've seen an increasing amount of monetization of those members over time. So we think that the true way to value our business is by looking at our member base. And by looking at user activity at any single point in time is not really aligned with our overall jobs to be done of creating that one-stop shop and lifetime value with a member. Okay. Thank you, Chris. Appreciate those points around the engagement. Somewhat related to that, which is a really important high-engaged type of customer within your user base is the direct deposit customer. So you talked about in Q3 earnings, we thought some pretty impressive stats around roughly $5 billion in total deposits. 85% of that coming from direct deposit members and 50% of that was newly funded accounts. So maybe you could just talk a little bit about direct deposit attach. How are you doing it? It seems like you're having a lot of success with it. How are you driving that? Yes. So we've had great success. As you mentioned, we reached over $5 billion of deposits with over 85% of those deposits coming from direct deposit members. So we're really excited about that as it provides a low-cost source of funding for our business. In terms of what's driving that growth, we've really focused on creating a product that caters to folks who do direct deposit with us. And we've tried to embed direct deposit throughout our entire product ecosystem in everything that we do. And have created products that work better when they're used together, especially when someone does direct deposit with us. The best example of that is through SoFi Plus, which we just rolled out and is basically an amalgamation of all of the member benefits that are available to our customers, but it also provides our members with 2x rewards as well as 3% cash back on their credit card if they use direct deposit. So that certainly helped drive some of the growth. What has also driven the growth is our top-tier APY, both on checking and savings. Right now, we have a 2.5% APY on our checking business. I don't know another bank out there who offers anything over 1% and the 3.25% that we just announced yesterday on savings is also in the top tier. So that's a key and critical driver to continuing to drive growth there. And what I would say is we're not even at the peak or the ceiling of what we can offer in terms of APY. And the reason for that is because our alternative cost or sources of funding, whether that's through warehouse or other means, is 200 to 300 basis points higher than what we're offering our consumers and members, and we have significant room to grow. Right, in terms of the alternative or the mix shift towards this, even if at a higher APY is still cheaper than the alternative. Also, Chris, I think you made some good points around the interwovenness, if you will, of direct deposit across the multiple products, whether it be lending products or to your point, the high APY on the savings or the checking account. Let's move on to CAC. And this is kind of related to this. So part of it just a general question in terms of the cost of acquiring customers in terms of other competitors, maybe bidding in certain similar channels for customers, if that's changed at all over the last 12 months. But the follow-up and more detailed question is, are you shifting some of that money towards enhancing engagement of existing customers relative to just trying to bring new ones in? Yes. So what I would say is we're focused on both, both in terms of new user and member acquisition, but also engagement and having people convert with other products or whether that's direct deposit taking out a second, third, fourth product. So our overall strategy and mix shift in terms of allocation of marketing dollars hasn't changed. We've made a tremendous amount of progress in terms of marketing efficiencies over the course of the last few years. And that's primarily driven by significant growth in brand awareness, growth in our overall cross buy rates and growth in our financial services products. When we think about what goes into how we acquire a member or how much we're willing to spend on a member, it's not just looking at the expense and putting it in the product P&L and seeing what the unit economics are, we're looking at the lifetime value of that member and what can be achieved over the course of that member's lifestyle - lifetime. And what we've learned is, over the course of the last several quarters, we've seen meaningful growth in the LTV of our financial services members, particularly in our SoFi Checking and Savings business where we focused on direct deposit and bringing those customers on board. What that's allowed us to do is provide us with more flexibility in terms of CAC dollars - spending more in CAC to drive overall membership in financial services, and that has had downstream impacts on our lending business. If you look at our overall CAC and lending from people as a result of all the cross-buy we're seeing, that's down 8% to 9% both year-over-year and sequentially, and that's a result of this focus on brand awareness and financial services. Well said, Chris, thank you so much on the CAC and also the sort of implied LTV to CAC commentary there. I think investors appreciate that. Before we move on to the Lending segment, and I'll turn to my colleague, Moshe. We want to just ask one more, clarify when you put something out the other night related to this, but I just think given it's so topical, let's just hit this for the investor community in this form. Maybe just talk about some of the recent regulatory attention to crypto and some of the headlines there. And maybe the, I would call it, small exposure that your business has there? Yes. What I would say on that front is that we take our regulatory and compliance obligations extremely seriously, both at the bank level but also at the bank-holding level and particularly as it relates to digital assets. What I would say is that we believe we're in full compliance of the mandate of our bank and all applicable laws. And to your point, the overall exposure that we have to cryptocurrencies is insignificant. If you look at our 10-Q filing, the amount of revenue that we generated in our brokerage business was $3.85 million. So less than 1%, and crypto is only a subset of that $3.85 million. In addition to that, we have about $130 million of our members' crypto assets on our balance sheet that are held at other custodians. But we're doing that to facilitate their trading and there's no exposure to us. So overall, very minor exposure from a crypto perspective, but we are working extremely closely with regulators and have a very constructive dialogue as it relates to all of these matters. And then the last thing I would say is we don't have any exposure to FTX or - and we don't partner with them. Perfect. It is worth taking a minute to clarify that for people that might be listening in on the webcast, it's de minimis, less than - well less than 1% of revenue, no lingering exposures and really - which is the reason why you put the filing out the other night. All right. Last one for me on the neobanking segment. When we think about an example of a neobank that has a full product suite, SoFi is a great one, right? Maybe one of the most full product suites out there of any neobank in the U.S. But there's still probably some more products that you could add over time. Could you just talk about maybe what you don't have? Yes. I think we have a lot of the table stake items in the financial services space that we like to have. We recently rolled out margins earlier this year. We'll come out with options on the invest side. And then there are a number of other features and services that we'll be able to offer through financial - through our financial services ecosystem. One of the things that comes up often with our customers and others on a - almost on a day-to-day basis is SMB banking and lending and whether we're going to get into that. It's certainly something that we will explore. It's not something that we're going to do right now. But everything that we're doing right now with the consumer and everything that we're doing on the technology front, we want to be able to do not only with consumers, but also with businesses who also have similar types of needs. So over time, you'll see us making investments in that space. There's a huge opportunity on the consumer front right now. So it's not something we're focused on. And we are also a brand-new bank and need to continue to prove to the regulators that we're living up to what we put in our application and in our existing businesses. But over time, we expect to be able to enter into that space as well. Excellent. We agree the SMB digital banking opportunity is an important one. But to your point, though, for now focused on U.S., but it's something that's more of a potential call option down the road? Okay. Great. With that, I think we can shift to the Lending segment, and I want to pass to my colleague, Moshe Orenbuch. Great. Thanks, Tim. So Chris, the personal loan segment has been in the area that's been consistently the highest - recently the highest level of originations and has been taking market share within its industry. Just talk a little bit about what has given you the ability to gain that market share and take price in that segment. Yes. So what I would say on the personal loans front, we've had really good success. Our overall market share in our credit profile, the number we're trying to attract was about - was north of 6% this past quarter, and that's up from 4.5% just a year ago. And what's even better is that we've been able to grow originations and outpace the market while maintaining really strong credit trends. What I would say is what's driving some of these things, it comes down to the fundamentals, product, pricing, placement and promotion, the 4 Ps. On the product front, we truly believe that we have a differentiated product that goes anywhere from how quickly someone can get a loan. Right now, someone can apply and get funded within two days, which is a really tough hurdle and bar to meet. That's down from eight days just a few years ago. So we've made significant progress there. We offer sizable loans. Our average balance right now is - origination balance is about $30,000. We offer flexibility in terms of terms and structure. And then we also provide additional benefits to our members who are willing to set up auto pay or do direct deposit, which further reinforces that Better Together concept that I was talking about earlier. So certainly, from a product perspective, that's helping drive it. On the pricing point, we've come a long way since 2018 when we first joined - we only had the ability to price 50% of our personal loans at one price and 50% at another price. We're now able to price across dozens of sells across multiple grids and be able to dynamically move pricing on a day-to-day, week-to-week basis. So that certainly also helped in attracting the right type of member and continuing to grow that origination base. And then finally, the last thing I would say is we're continuing to hone our overall credit models, which has been a huge investment area for us over the course of the last several years. And it continues to improve with all of the proprietary data that we're getting from our members. We seek to underwrite to free cash flow versus FICO score and the more data that we have about someone's income and spend behavior, the better we're able to serve them. So I think those three factors combined is what's really helping drive that growth. Turning to the student loan area that was the basically the business on which SoFi was originally founded and was your largest origination category up until the issue with respect to the student loan moratorium, now that's been extended. So how do you think about that product in the next several quarters? And given where interest rates are now, how do you think about that product even once that moratorium is over? Yes. So what I would say is rewinding back to 2019 when the business was fully operational, we were originating $2.4 billion per quarter, so almost $9.5 billion on an annual basis. Obviously, the rate environment was a bit different at the time, but Fed funds was still north of 1.5%. The last several quarters, we've been operating in the $400 million-ish origination volume level, so less than 25% of where we were. What we were anticipating is that there was going to be definitive expiry of the CARES Act in January of 2023. And what we had contemplated in our guide was that we would see an acceleration in demand in the back part of the quarter, similar to what we saw last year at this time. And that revenue that would be generated from an uptick in demand, which came at a higher incremental margin than the contribution margins that we're operating at right now. So what I would say is it's certainly going to have a near-term impact on the business. We did expect several weeks of outsized demand. But what I would say is there's still a third left in the quarter and we're in a very, very fluid market environment. And we'll do everything we can to make up lost ground just like we have. Looking forward to 2023, right now, what's contemplated is that this could go until end of June, at which point, there's another 60 days before repayments actually even start. So it would have an impact. But again, given the diversification of our business model and our ability to allocate capital effectively and execute, we feel like we'll have another strong year of growth as well as profit improvement in the same way that we've done in the last 2.5 years. Thanks for that. The home loan business, it's been difficult, both at an industry level and for SoFi. Could you just talk a little bit about, number one, you remain committed to that business. What is it that you kind of need to do to get to the point where you want to be? And how that could evolve over the course of the next year or so? Yes. One of the reasons that we're in the home loans business in general is because taking out a home loan or purchasing a home is one of the most important financial decisions someone will make in their financial lives. So we need to be there for our members in those situations and every day and between. So we will figure out how to operate in this business while delivering great value to our members and also to shareholders. What I would say is we are squarely in a purchase market relative to where we were a few years ago, where we were in a refinancing market. In a purchase market, one of the things that allows people to succeed is you have to have phenomenal back-end operations, and you need to be able to fund a loan in 30 days or less, no if, ands or buts. And that's a big shift from where we were in the refinancing business where you could fund within 90 days. So right now, we're partnering with folks on the back end from an operations perspective, and they're not living up to what we need them to do in terms of the overall customer experience. So we're looking for ways to own the entire end-to-end process in the same way that we do with our student loan business and personal loans. We've made really good progress over the course of the last several months in improving the experience and the operations and are really optimistic about the forward outlook. But there's a long ways to go before this business becomes a meaningful contributor to the overall P&L. But we're excited about where we're at, and we're going to continue to rebuild. We talked a little bit about the ability to continue to take price on the personal loan business. And certainly, that's enabled you to continue your hedging at a comparable cost, yet it still is a source of confusion concern to investors. As we've been through a continued volatile interest rate environment, how have you been able to maintain that program? And the effective yield or gain on sale that you've been able to. Yes, the two reasons that we've been able to maintain the gain on sale margins that we've had over the course of the last several quarters is, one, our hedging program and then second, being able to pass price through or keep pace with the forward benchmark rates in our weighted average coupon. So on the hedging front, what we're trying to do from the most simplistic way is, as soon as we originate a loan that is susceptible to rate volatility, we're trying to lock in the execution that we would achieve at the time of originating that loan. As soon as we sell the loan or it's in a structure where rates do not impact it, we would lift the hedge, and that's purely what we're doing. So in a rising rate environment, you'll see hedge gains that offset fair market value true downs. In a lower rate environment, you'll see hedge losses and upside in fair market value. So it's purely a hedge to lock in the execution. What's also helped is that we've been successful in raising our weighted average coupon at a fairly healthy clip relative to where the forward benchmark rates are. Over the last two quarters, we've raised our balance sheet weighted average coupon by 60 basis points. So that's not just new originations, but that's the entire balance sheet. So new originations is increasing even more and much more aligned with Fed funds. Got you. Last thing, we've gotten a lot of questions about the $1 billion of loans you repurchased. Can you just talk a little bit about, obviously, having the bank gives you the ability to do that and actually add to profits, but can you talk about the appetite from your partners? And how to think about that $1 billion in the context of that? Yes. So as you mentioned, having the bank provides us with much more flexibility. Right now, we're going out and generating deposits and we need to earn a return on those deposits to be able to cover the cost. So there's a few ways you can do that. You can go out and originate loans and pay a marketing expense and start generating NIM and taking on much more from a credit or a loss profile perspective. Another way is going out and purchasing loans. In this specific instance, we had the opportunity to repurchase over $1 billion of loans that we originally underwrote and that we currently service, which we viewed as a great asset. These are members that we know that we underwrote, we understand the loss profile and they were seasoned loans, which means that the overall loss profile of those loans was much less than what they would be on a new origination. So this came down to purely returns and generating the highest returns for our cash and that's what we've done - that's what we did. And this is something that we will continue to do given the opportunity set. We're looking to maximize ROE across the board over the long term, and that can mean originating new loans, but it could also be purchasing and holding them on the balance sheet. We're going to shift the conversation a little bit to Galileo or the financial technology platform. And then hopefully, we're going to have some time at the end for a quick discussion on profitability. So Chris, I want to touch on two things that you and I have talked about in the past, but I think they're important to discuss here in this forum as well, but Galileo customer concentration, it comes up a lot. So that most recent number, I believe, was just north of 60%, just shy of two-third or so, right, 64%. And it's these five larger customers there. Maybe you could just talk about since that disclosure is a little bit dated at this point. Has that number come down? And the follow-up is just around the contract length with those customers and confidence behind retaining them. Yes. So in terms of the overall concentration, that was a number dated back to our 2021 10-K. We will update it for this upcoming K if there is meaningful exposure. But what I would say is the overall concentration has come down, and that's a function of bringing on new customers onto the platform. We've been really successful in continuing to gain share on the consumer front but also more recently in the B2B space. So overall concentration has come down and will continue to come down as we onboard new customers. Perfect. In the interest of time, I want to move to another one that I think is pretty exciting, which is TAM expansion for Galileo. So clearly, when you look at the logos of digital banks, neobanks that are working with Galileo, it's most of them, right? It's a lot of logos. But beyond that, I believe that you've recently signed some new types of customers. And maybe you could just elaborate around that, what I'm getting at is platforms, right? Platforms and marketplaces, which are another means of accessing TAMs of card issuance. Yes. So what I would say on the Galileo front, we couldn't be more pleased with where we are from a technology, scalability, robustness and ability to innovate in that business. We truly believe that our technology and ability to innovate is second to none, and we're doing really well relative to competition, particularly legacy processors, but also some of the folks who tell themselves as modern digital processors. So right now, we're starting to steal - continue to steal share in the consumer space. We're starting to steal real share in the B2B space, and we expect to be able to continue to do so over the course of the next several quarters and years. And one of the things that's certainly helping is the acquisition of Technisys, where we now have a complete end-to-end solution all the way down to the core. Right now, we're in discussions with large financial institutions and other consumer businesses and platforms that we never were in before, and that's a function of having this complete end-to-end solution. And it's our view that - it's not a question of whether our technology is superior or we're able to deliver this technology or service at the lowest cost, it's more of a question of when it happens, not if. So we feel like we're extremely well positioned to win some of these mandates with larger financial institutions who are operating with legacy providers in a very siloed way, but it's much more of a question of when, not if. In addition to that, we're also talking to a lot of the consumer platform players who are partnering with multiple technology providers that are very fragmented. And the technology that we've built both at Galileo and Technisys as well as all the products that we've built at SoFi create a really unique opportunity for a complete package for these businesses. So overall, we feel great about the progress that we've made. We think we're set up for success, and we're on all the right conversations right now. Okay. In the interest of time, I think we need to move to profitability. Thank you, Chris. But on the platform piece, I just want to clarify for the audience. When you talk about some of those platforms, one, you have signed some to be clear? And when you talk about a platform, you mean, for example, maybe a retail or restaurant point-of-sale type system that has access to underlying large number of merchants. Got it. We'll wrap it up to talk a little bit about profitability. Can you just talk a little bit about the time frame for the stock-based comp? How long does it last? And when can we see it fall off? And how that relates to SoFi kind of getting to be GAAP profitable. Yes. Absolutely. So let me start at a higher level. Right now, we have - we operate in three segments. Lending business, we're operating at margins on a consistent basis. Our tech platform business, right now, we're operating at a 30% margin - contribution margin. We expect that business longer term to operate north of 40%. Our Financial Services segment, we are losing money today. But if you look at our variable profit ex marketing, we've been profitable over the course of the last several quarters, and we expect to be able to cover that marketing cost and exit 2022 variable profit positive. The reason that that's important is because at that point, it's about scaling those members that have positive variable profit in order to cover our fixed costs, which we expect to be able to do by the end of 2023. So by the end of 2023, we expect to have three segments that are contribution positive, . Below that line, you have the stock-based compensation, which is about $75 million to $80 million per quarter. A one-third of that is related to performance share units, which were issued as part of the IPO. And those performance share unit expenses will roll off in Q1 of 2024. And the residual portion of that is about 12% of revenue today, and we expect to get that down to single digits over the course of the next several years. And then finally, the other line items are fixed overhead, which we'll get real leverage from over the course of the next several quarters, and depreciation and amortization, which is predominantly amortization of intangibles of our tech platform acquisitions. So overall, we're making really good progress. It's a multistage process, but we're making great strides in that area. Great. And unfortunately, with that, we are out of time. We have many more questions we'd love to ask. And Chris, I wanted to thank you for joining us, and thank everybody who participated in this year's conference.
EarningCall_1930	Hello, and welcome everyone to the Ooma Third Quarter Fiscal Year 2003 Financial Results Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Thank you, Savannah. Good day, everyone, and welcome to the third quarter fiscal year 2023 earnings call of Ooma Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. On the call with me today are Ooma's CEO, Eric Stang; and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its third quarter fiscal year 2023 earnings press release. This release is also available on the company's website, ooma.com. This call is being webcast live and is accessible from a link on the Events and Presentations page of the Investor Relations section of our website. This link will be active for replay of this call for at least one year. A telephonic replay will also be available for a week starting this evening about 08:00 PM Eastern Time. Dialing information for it is included in today's press release. During today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events of future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward looking statements, except as required by law. Please note that, other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non GAAP basis. The non GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non GAAP financial measures and a reconciliation of the non GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures is included in our earnings press release, which is available on our website. On this call, we will give guidance for fourth quarter and full year fiscal 2023 on a non GAAP basis. Also in addition to our press release and 8-K filing, the Overview page and Events and Presentations page in the Investors section of our website, as well as the results page or the financial info section of our website include links to information about costs and expenses not included in our non GAAP values and key metrics of our core subscription businesses. These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non GAAP reconciliation. That also provides resolution of GAAP expenses that are excluded from non GAAP metrics. Thank you, Matt. Hi, everyone. Welcome to Ooma's Q3 Fiscal Year 2023 Earnings Call. Thank you for joining us. It's my pleasure to talk with you today about our excellent results for the Q3 quarter just ended and the many growth initiatives we have underway for Q4 and next year. I'm delighted to report for Q3 FY '23 that Ooma outperformed on both the top line and bottom line. Q3 revenue of $56.7 million was up $4 million sequentially and up $7.5 million year over year through a combination of growth across all parts of our business and the acquisition of OnSIP, which we announced last quarter. Similarly, non GAAP net income of $3.5 million was up over previous periods, in line with our plan announced last quarter to trim spending modestly, bolster cash flow from operations and position ourselves better to take advantage of additional inorganic growth opportunities in the future should they come along. All in, Q3 was an excellent quarter. Turning now to Ooma Office, which, of course, is our solution for serving small to medium sized businesses. We announced during Q3 the addition of five new features to our top service tier plan, the Pro Plus tier. These added features bring even more sophisticated capabilities too small to medium businesses in an intuitive and easy to use way and include enhancements to improve simple call center activities and integration with Microsoft Dynamics 365. These new features represent one step in an ongoing effort we have underway over the next several quarters to add new features to the Pro Plus service tier, allowing us to serve even larger sized businesses with Ooma Office and continue to raise our revenue per user. I'm happy to report that during Q3, 50% of our new office users adopted a premium service tier, either Pro or Pro Plus. And then about 10% of the users who did select a premium tier chose our highest tier Pro Plus. We believe our strategy to provide even more advanced features for small to medium businesses in an easy and intuitive way is working and we are excited about our plans for Q4 and next year. Regarding Ooma Enterprise, which, of course, is our offering for serving larger sized businesses that need extensive and customized solutions, we continue to make good progress in our targeted verticals. One such vertical is hospitality, where we added more than 40 new properties in the quarter, up from about 25 the quarter before and about 15 the quarter before that. To further support growth, we are developing relationships with larger hotel groups as part of our strategy to continue to expand in this vertical. We believe our strategy with Ooma Enterprise to target customers who need flexible solutions is finding traction in the market. Now in regard to international expansion with our largest customer, we continued to execute well in Q3. I'm pleased to report we now serve more than 50,000 users with this customer. We have achieved this one quarter ahead of the plan we set at start of this year. Our outlook for growth in Q4 remains robust, but lower than in Q3 given the holiday period in Q4. Looking out to next year, we believe at this time that Q1 will line up to be the highest growth quarter so far with this customer and that we will continue significant growth in users throughout next year. We are thrilled to enable a unique solution for this customer and are excited about planning for rollout to new regions next year beyond North America and Europe. We discussed at length on our last conference call that our acquisition of OnSIP affords us an additional opportunity for profitable growth. As a reminder, OnSIP operates its own internally developed UCaaS platform that is used today by approximately 5,000 customers, comprising approximately 50,000 users. The short term goals we laid out last quarter for OnSIP were to maintain low churn, integrate the team, drive cost synergies at the gross margin line and make the acquisition accretive in this Q4. I'm pleased to report that we are ahead on each of these goals and that OnSIP turned EBITDA accretive in Q3 one quarter early. We're very appreciative of the hard work that both the Ooma team and the OnSIP team have put into making this acquisition a success. As you know, in addition to our strategic efforts to grow Ooma Office and Ooma Enterprise, integrate OnSIP and expand internationally were heavily engaged in capturing the large opportunity to replace the sun setting of copper lines with our new solution AirDial. We continue to make great progress with AirDial in Q3. As was the case in Q2, AirDial orders outpaced installations as customers require time to test AirDial and to plan equipment installation across multiple sites. Our largest AirDial order in Q3 was for 300 lines to an organization with a large number of locations. As anticipated, AirDial was also opening up new agent relationships and we were able to add more agents in Q3 than in previous quarters. One particularly exciting development is T-Mobile for Business began reselling AirDial in Q3. Based on the progress we've made over the last three months, we're excited about the potential of this partnership and anticipate that T-Mobile will become a significant reseller of AirDial. One particular benefit of our T-Mobile partnership is that T-Mobile opens up access for AirDial to government entities that procure through special purchasing vehicles. This can be essential in selling to state, local and educational entities. Including T-Mobile, we now have six strategic partners signed up are already reselling AirDial. Looking forward, we are in active discussions with several other potential resale partners, some of whom are national in scope. Finally, regarding AirDial, it was exciting in Q3 to win several awards. In August, we announced that AirDial won best endpoint product for 2022 and the prestigious UC Awards from the publication UC today. And in November, we announced that TMC named Ooma AirDial as a 2022 TMC Labs Internet Telephony Innovation award winner. There is growing awareness of the sun setting of copper lines and we are committed to building recognition of AirDial, which we believe is the best solution in the market today for serving elevator gate, pool and door phones, fire and burglar alarm panels and other devices that require an analog line connection. I'm also excited to report that Ooma Business was named a UCaaS leader in Frost and Sullivan's October Frost Radar Report. The report states that through innovation, organic growth and strategic acquisitions, Ooma has quickly earned a top spot in the North American hosted IP telephony and unified communications market. And the report goes on to say that Ooma's dedication to removing the complexity of purchasing and using business phone service makes the company particularly well positioned to capitalize on the rise in hybrid work. I'm very happy for the entire Ooma team to see Frost and Sullivan recognize our efforts. Switching now to the residential front, we continue to drive modest growth with subscription and service revenues up 2% year over year, in line with our residential strategy. Our sales made in conjunction with T-Mobile Home Internet were approximately the same as in Q2. And both we and T-Mobile continue to look for ways to increase the visibility of the Ooma offering for T-Mobile customers. Overall for Q4, we remain excited about our many growth initiatives. Unlike the actions taken by some of our competitors, we are currently not cutting back on key investments and we're currently not planning any personnel layoffs. As we've previously said, in these times, we do believe that customers are sometimes taking longer to make a decision and are sometimes being more careful in what they buy, but we also feel we have leading solutions for the marketplace and there is significant demand for improved communication, especially at the price points we can offer. We're cautious about our outlook. Most of all for the timing of AirDial installations and revenue, given that AirDial is a new product and market segment for us, but overall for our business, we continue to see significant opportunity and to execute our strategy to drive growth and profitability. I will now turn the call over to Shig, our CFO, to discuss our results and outlook in more detail and then return with some closing remarks. Shig? Thank you, Eric. And good afternoon, everyone. I'm going to review our third quarter financial results and then provide our outlook for the fourth quarter and full year fiscal 2023. We delivered another strong quarter with a total revenue of $56.7 million, exceeding our guidance range of $56 million to $56.5 million. On a year over year basis, total revenue grew 15% in the third quarter, driven by the strength of Ooma Business, which included a full quarter contribution from OnSIP for the first time. In the third quarter, business subscription and services revenue accounted for 55% of total subscription and services revenue, as compared to 49% in the prior year quarter. Q3 product and other revenue came in at $4.9 million, as compared to $4.5 million in the prior year quarter with accessories sales contributing to growth. On the profitability front, the third quarter non GAAP net income was $3.5 million, above our guidance range of $2.7 million to $3.2 million and was the highest in the company's history. The team did an excellent job in balancing executing -- execution of our growth initiatives and managing expenses during the quarter. Now some details on our Q3 revenue. Ooma Business Subscription and Services revenue grew 30% year over year in Q3, driven by user growth and the full quarter contribution from OnSIP, which performed well with solid customer retention. Excluding the effect of OnSIP revenue contribution, Ooma Business Subscription and Services revenue grew 16% year over year. On the residential side, subscription and services revenue grew 2% year over year. For the third quarter, total subscription and services revenue was $51.7 million or 91% of total revenue compared to 91% in the prior year quarter. Now some details on our key customer metrics. We ended our third quarter with 1,202,000 core users, up from 1,181,000 core users at the end of the second quarter. As Eric mentioned earlier, we saw another quarter of robust user growth from our largest customer as they continue to deploy our solution. At the end of the third quarter, we had 4,17,000 or 35% of our total core users, an increase of 23,000 from Q2. Our blended average monthly subscription and services revenue per core user or ARPU increased 9% year over year to [$14,000.38] (ph), up from [$13,000.24] (ph) in the prior quarter, driven by an increase in mix of business users, including higher ARPU Office Pro and Pro Plus users, as well as inclusion of OnSIP users into this metric for the first time this quarter. During the third quarter, we continue to see a healthy Office Pro and Pro Plus take rate with 50% of new office users opting for those IoT services, which was up from 48% in the prior year quarter. Overall, 25% of our business users have now subscribed to our Pro or Pro Plus tier. Our annual exit recurring revenue, which included OnSIP in Q3, grew to $207.4 million and was up 19% year over year. Our net dollar subscription retention rate for the quarter improved to 96% as compared to 94% in the second quarter. Now some details on our gross margin. Our subscription and services gross margin for the third quarter was 73%, which was consistent with 73% in the prior year. As expected, subscription and services gross margin dipped slightly from the second quarter as we had a full quarter impact of OnSIP gross margin, which is running lower relative to Ooma subscription gross margin of 74% when OnSIP is excluded. Good news is that, OnSIP gross margins is improving as expected through our integration effort to leverage Ooma's infrastructure and we continue to believe it can reach 70% plus range within the next quarter or two. Product and other gross margin for the third quarter was negative 35% as compared to negative 46% for the same period last year. The third quarter product gross margin was favorably impacted by sales of accessories that drove our product revenue higher in the quarter. On an overall basis, total gross margin for Q3 was 64% as compared to 62% in the prior quarter. A higher total gross margin in Q3 this year was primarily due to the improvement in product gross margin. And now some detail on operating expenses. Total operating expenses for the third quarter were $32.8 million, up $5.5 million or 20% from the same period of last year. Excluding the four quarter impact of OnSIP, the total operating expenses increased $3.8 million or 14% from the same period last year. Sales and marketing expenses for the third quarter were $16.9 million or 30% of total revenue, up 17% year over year, driven by higher marketing and channel development activity for Ooma Business, but sequentially lower on a percentage of revenue basis, in line with our increasing focus on profitability and cash flow we discussed on our last earnings call. Research and development expenses were $11 million or 19% of total revenue, up 31% on a year over year basis from $8.4 million, driven by investments in new features for both Ooma Office and Ooma Enterprise, as well as new products such as AirDial. A portion of the year over year increase in R&D expense was also a four quarter -- due to a four quarter impact of OnSIP team members who joined us at the end of Q2. G&A expenses were $4.9 million or 9% on total revenue for the third quarter compared to $4.5 million for the prior year quarter. The year over year increase in G&A expenses was primarily due to an increase in personnel costs and the four quarter impact of OnSIP. Non GAAP net income for the third quarter was $3.5 million or a diluted earnings per share of $0.14 as compared to $0.13 in the prior year quarter. In addition to stock based compensation and intangible amortization expenses, non GAAP net income for the third quarter excludes approximately $0.6 million of acquisition related costs, as well as $1.4 million of facility consolidation costs incurred in connection with the OnSIP transaction. Adjusted EBITDA for the quarter $4.5 million, a record for the company or 8% of total revenue as compared to $4 million for the prior year quarter. We ended the quarter with total cash investments of $24.5 million. Cash generated from operations for the third quarter was strong at $2.5 million compared to $1.9 million in the same period last year. On the headcount front, we ended the quarter with 1,082 employees and contractors. Now I'll provide guidance for the fourth quarter and full year 2023. Our guidance is on a non GAAP basis and has been adjusted for expenses, such as stock based compensation, amortization of intangibles and other acquisition related costs. We expect total revenue for the fourth quarter of fiscal 2023 to be in the range of $56.3 million to $56.6 million, which includes $3.5 million to $3.8 million of product revenue. Product revenue for the fourth quarter is expected to be lower compared to the two previous quarters as we do not expect certain accessory sales we saw in those quarters to recur. We expect fourth quarter net income to be in the range of $3.5 million to $3.8 million. Non GAAP diluted EPS is expected to be between $0.14 to $0.15. We have assumed $25.7 million with average diluted shares outstanding for the fourth quarter. For full year fiscal 2023 we expect total revenue to be in the range of $216 million to $216.3 million, which is within our previously issued guidance range of $215.5 million to $218.5 million. The adjustments to the high end of our guidance range primarily reflects our current expectation for the timing of our AirDial revenue ramp, which is slower than we originally anticipated in the near term for the reasons Eric said earlier. Despite the pace of revenue ramp in the near term, we remain very excited about our growth prospects for AirDial as its customer demand and engagement as well as channel development activity remained very strong. In terms of revenue mix for the year, we expect 92% of total revenue to come from subscription and services revenue and the remaining 8% from products and other revenue. We expect non GAAP net income for fiscal 2023 to be in the range of $13 million to $13.3 million. Based on the midpoint of the updated non GAAP net income guidance range, we estimate our adjusted EBITDA for the year to be approximately $17.1 million or 8% of revenue for fiscal 2023, which is an increase from our prior guidance of $15.6 million or 7% of revenue. The updated profitability guidance reflects our continued focus on cash generation and making progress towards our long term profitability model. We expect non GAAP diluted EPS for fiscal 2023 to be in the range of $0.51 to $0.53. We have assumed approximately $25.3 weighted average diluted shares outstanding for fiscal 2023. In summary, we are pleased with our solid execution in Q3 with a record quarterly revenue and non GAAP profitability, along with strong cash generation. We're excited about growth opportunities in front of us and remain focused on executing to our long term strategy to achieve profitable growth. Thanks, Shig. As I said at the outset, we believe Q3 was an excellent quarter for Ooma. We now have over 1.2 million core users and our Q3 annual exit recurring revenue of $207 million is up 19% year over year. We're proud of this progress and feel our strategy is working. As we look ahead, we believe our investments in feature enhancements for Ooma Office, new verticals and sales channel expansion for Ooma Enterprise, international expansion and AirDial will build Ooma into a larger and more profitable company. Thank you, everyone. We'll now take your questions. Hey, there. Thank you for taking the questions. Maybe just one on the updated full year guide. You obviously mentioned AirDial on the revenue side, a little bit of narrowing towards the lower end of the guide. Just double click on kind of the breadth of what you're seeing in the macro. What's impacting AirDial that you're continuing to see kind of what you saw last quarter in terms of lengthening of some sales cycles and things like that. It would be great to kind of double-click on what's included in that Q4 guidance. Sure. Let me start there, and we'll see if Shig wants to add. We've only really been selling AirDial for two quarters now, and we're very excited about how it's developing. We have learned that just getting orders and wins doesn't lead to revenue until we can get these things installed and working and customers do have to test them and get comfortable with them and then plan installation. And so, our revenue ramp is not consistent with our sales or opportunity ramp. I can tell you that the opportunity that we're going after, what's in Salesforce.com, for instance, deals that we are -- that we can see grew markedly in Q3 versus Q2. We believe that went up something like 40% in Q3 from where it was in Q2. And we're excited about the size of that opportunity and what we're trying to do going forward. But it is going to take some time for AirDial to drive ramp in the revenue, and we're being a little more cautious about that. We're just being a little cautious about Q4 in general. With the Thanksgiving and the Christmas holidays, it's not quite as -- there are some things that can get in the way of particularly growing our business sales in the quarter, particularly since a lot of our business is done through inside sales, selling to smaller businesses that can be very busy this time of year. So we're just mindful of that a little bit. And then I think in my opening remarks, I did talk a little bit about how we see the market generally. We're still seeing the opportunity for significant growth and believe that with our solutions, we can power it through any minor market weakness that we see. Shig pointed out that we have about $1 million less of product revenue in Q4. And AirDial particularly affects that number, because if you can -- the boxes sell for hundreds of dollars each. And the more you can install and the faster you can install the more you can drive that. We were not able to install all the opportunity we had in Q3. We're still building up our capabilities to help our customers do that. That's also part of what's going on here. But no, we're excited about our outlook and see if Shig wants to add anything to what I said. No, Eric, I think you summed up pretty well. And that -- despite just a near-term pace of the installation revenue ramp, as I said in the script that we're seeing the increase in customer engagement. And I think you saw that in our press release on T-Mobile relationship on AirDial. We're very excited about it. So I think it's more a timing issue near term as customer see our product, which is a great product. And so, we're still excited about it despite the Q4 guide. That's very helpful color. Thank you. And then maybe just one follow-up on the OnSIP integration here. I guess, first, could you just clarify the revenue contribution from OnSIP in the quarter? And then maybe just give a double click on the -- what you're seeing in terms of progress integration, talent retention and kind of the expectation for potential additional synergies going forward? Yes. I think if you sort of follow the -- what I said on the organic versus inorganic growth, I think you back into probably about $3 million per quarter kind of run rate on the OnSIP. And as we acquired OnSIP last quarter, we had a pretty conservative assumptions on the churn. I think the team did very well post acquisition retaining customers, and we're pleased to see that. So I think the $3 million a quarter run rate is what we see. And from a P&L contribution standpoint overall, like I said, they're making a great gross margin contribution, making improvements. I see them getting closer to Ooma margin in the next few quarters. Yes, so -- and made one quarter early on our EBITDA contribution. And so, that's what I would like to say. I'm not sure Eric, if you want to add anything from the sales and marketing standpoint. But -- Just one thing. We knew when we acquired OnSIP, we were getting a great team. The folks running OnSIP really know their stuff, and they become really valuable members of Ooma just in the short time they've been with the company. And we're not seeing any turnover issues. In fact, we're seeing employees excited to be part of Ooma. And together, we're going to grow the company. And so, I think it's going extremely well. Okay. Thank you. Congrats on the quarter there. The retention rate improved sequentially? Is that because of the acquisition? Or is that organic or both? It's a little bit of both, but certainly, I think I explained this last time, Mike, and I'll explain it again, but our retention rate is dependent upon year-over-year growth in ARPU and offset by the churn. And churn was very stable this quarter. I would not see any material change to the trend that we saw in the first half of this year. And we saw a better year over increase in ARPU growth, I think I said 9% year-over-year. Good tackle that, obviously, was the OnSIP coming in to the equation for the first time this quarter. And so, I think we said last time without being too specific, that OnSIP's average pricing, seat pricing is a little bit below Ooma's average business pricing, but certainly above the overall blended ARPU of 13 -- high 13s to 14. So that was having a good effect on the metric. And so maybe that was the biggest piece, yes. Yes. Okay. That's a good clarification on ARPU there. On AirDial, how many units have you manufacture kind of year-to-date, let's say? And then I know you want to expand your installation capabilities, but what is the extent of the installation capabilities say? Like how many can you sort of effectively install if you want to? Yes. So we've -- yes, we've built the first 10,000 units that we said we were going to build at the start of the Q1 or Q2. And most of those we have here, some we don't have an inventory yet. That's not holding us back. What's -- the bigger challenge is getting customers to roll out. I announced, for instance, our largest AirDial sale in Q3 was a customer who needs 300 lines. But I don't think any of them are installed yet. And that's going to be a real process we plan with the customer. And the customer has to decide how they want to do it. They might have their own people to do it. They might want to use our third-party installers. They might want a combination of the two. It's usually starts, frankly, with a site survey to figure out where the lines even coming into the location are located and what you're going to need to do to make the swap. So it's just a process. Now customers are very motivated because the FCC has removed its constraints on the pricing of analog copper lines to businesses. Prices have gone up markedly. We've even seen them over $1,000 a month, believe it or not. And so, customers are starting to become really aware that they're paying too much for these, and they do want to make the change, and it's economic to make the change. But spooling up the resources and the effort to do it, it just takes time. So I think it's a building wave for us. But we're not intending to disclose exact numbers of what we do each quarter for just competitive reasons, but the numbers do show up in our overall user growth metrics. I guess just last question. How much of the customer process ties to -- ability to install versus their discovering -- well, we need a different feature and then it leads to more -- almost an R&D effort. Is it more kind of purely installation? Or is there some additional future work that pops up here and there? For most applications, it's purely an insulation. We -- where that can vary a little bit is with certain older pieces of equipment, particularly older alarm panels, which are supposed to work to a certain standard, but you find have their own vagaries. And when we get a situation like that, we do have to do some diagnosing. But fortunately, the way our product works, it's easy for us to customize it, to download new firmware in the box. We're managing all these units remotely. And once we've done that alarm panel, we're set for any other one we run into going forward. So -- but there has been some of that, certainly. There have been some -- we're only two quarters really into this new product, and we are learning the wide variety of equipment that's out there. And -- but that's -- that's not the driving issue. We have had some customers who want to install our unit outside, and that has been an issue for us. We're not -- we did not design the unit for outdoor installation, but that's rare as well. Yeah. Thanks for taking my question. I wanted to dial in a little bit more on the international opportunity and the key customer expansion. You've already kind of doubled the seats, right? You're at 50,000, I think, now and expect some good additions in the fourth quarter as well. Could you kind of talk about what the opportunity is for next year with that customer, could they add another 25,000 plus seats? And then -- more broadly, you previously talked about expanding internationally beyond that key customer. Is that still in the works or opportunity? Thanks Sure. Happy to double-click on that. Yes, this customer has a lot of scope for growth with us. And it's just like we were talking about for AirDial a minute ago, just the process of conversion and switching things over onto our platform, which is what they want to do worldwide over time, it does take effort. But I can tell you that as we sit here today, there's a desire on the customer's part to move faster. And we are laying plans to go faster next year than we went this year. And that means moving to multiple regions beyond Europe. We defied the world up into a number of regions based on how we would serve it. But yes, there's a lot of desire for us to add -- if plans come together, and we'll talk about more of this on our next conference call when we give guidance for next year. But the plans as we see them today, we will be looking at more user growth next year than we've achieved this year. And this year has been a strong year. So we're pretty excited about that. And I will say that with all that effort with that customer, I don't know if it will be part of our plan next year to try to sell to users beyond this customer in these regions. That takes a level of investment -- additional level of investment and particularly sales and marketing efforts that we'll have to balance with what we're already doing here in North America and what we're doing with this customer and what we're now doing with AirDial. But -- so that may not be part of our outlook next year. What I would like to see part of our outlook next year, but obviously, we'll have to come together before we can talk about it is, I would like to see us implementing AirDial outside of the United States. I think there are many countries that have the same challenges as we see here with the sun setting of copper lines. And I do think AirDial could be a great product in several other countries. But again, that's down the road for us at this point in time. So I hope that it's a little speculative of what I just told you, and I have to be careful about that. But the one answer I can give is, I do expect as of now that our large customer will add more users next year than they have this year. Thanks for the detail on that. And then I just want to touch a little bit -- looking at the fourth quarter guide, you should be north of 8% EBITDA margin, it looks like around 8% for the full year. I know there's been an increasing focus on profitability. It looks like cash flow and things have been moving upwards and to the right. As you complete some of these investments that you've made over this past year or so, do you expect that you'd be able to achieve some incremental EBITDA margin expansion next year given that's kind of what is a bigger focus for most of the investor base nowadays. Yes. Josh, obviously, we are not ready to guide for next year. But I think the -- directionally speaking, we want to start to show some level of additional operating leverage. And so, I think we're happy with where we think we're going to land about 8% for the year this year. And we certainly want to make next few years, the progress towards our long-term model, EBITDA margin. So I'll just leave it at that and look forward to chatting with you about guidance next time we talk. And then last question for me. I guess like it's only been a couple of quarters since you launched AirDial, right? But you do have these new partnerships now. I think T-Mobile represents a pretty sizable opportunity, how long until you get a little bit better visibility into this? Do you think by the time you're reporting fiscal 4Q earnings that you have that pretty dialed in? I'm just -- or are you likely -- it's still too early and you've been taking a pretty conservative stance on this product offering. I'm just thinking about how long it will take to have a better handle for what this demand could translate to and how long it may take to actually get these units in sale to install? Yes. That's a good question. I said one thing in opening remarks, which I'll highlight again here. We are talking with other potential partners, strategic partners who would resell AirDial. If some of those partners come to fruition, I think that would be a nice boost for us as well. I think we'll have a lot better visibility the next time we talk because we'll be talking kind of end of February, early March. And we'll have the momentum that comes with starting off the New Year already underway. So yes, I'm thinking that, that timing should allow us to be more definite for you. Great. Thank you so much for taking my question. I guess first on OnSIP, can you talk about any plans that you may have here in the works now that you've had the asset for a few months here and actually increasing the average pricing per seat for OnSIP user or if there's plans to maybe lift some of those folks on to a [indiscernible] or something like that? So it's our longer-term plan to bring the OnSIP users over on to the office platform. But there's no urgency to that really. What matters more is that we do it well and don't cause any issues or challenges for customers. So we're just moving slowly looking at what we need to do with the office platform to tick all the boxes for an OnSIP customer. And there is -- there are some things that office already does better than the OnSIP platform. There are some things that the OnSIP platform has that are part of Office's road map that we have not yet implemented. But we were going to do these things anyway as a business. So we've been trying to pull in some of that development effort. So our view right now is that, it will be an ongoing process with us -- for us with OnSIP over 12 months or longer. As long as an OnSIP customer is happy with the features they've got on OnSIP, we don't really need to do much for them. When a customer wants to enable more features that maybe are in Office that aren't yet in OnSIP, that's when we would want to move people over, particularly because we don't want to put development effort into the OnSIP platform. But right now, customers are very happy. They've got a good relationship with OnSIP. OnSIP is very good at customer support. And we're going to treat the -- it's not that long a list of customers. It's 5,000 total, but there's an 80-20 in -- on this a little bit in terms of the largest ones. And we're going to approach those kind of one by one and see how to handle them. So -- it's a long way of saying we think we'll be operating the OnSIP platform for the foreseeable future as we go through this process in a careful way. Got it. Okay. Great. Thank you for that. And then just last question for me. So you added around $20 million in ARR sequentially and of which is about $12 million coming from OnSIP. So $8 million organic and that's a pretty good add just looking at the historical ARR adds. Can you just talk about what's driving that incremental organic improvement? Is it all the international expansion with the large customer? Or any other things you want to call out? So yes, I mean it's really the rest of the piece is really what you're pointing out. International customers, user adds. It's been pretty healthy the last two quarters, as you heard. And we continue to add office users. And as you also heard, again, half of the new customers that take office users are taking Premier tier services. So all these are contributing to the other pieces you're pointing out. I mean I think you know we have several growth vectors as a company. And we're fortunate to have that. And I think we're seeing results in each of them, and that's how we want to accelerate growth as we go forward. Good afternoon. I was just curious on the hospitality side where you are showing nice sequential momentum. What are the prospects for landing a real elephant or even a [indiscernible] mammoth deal, if you would? I mean, it feels like that's a great vertical for you and you're relatively nascent on the penetration at this point to say, at least. Thanks. Yes. So -- the way we see that vertical operating is that, even though you can have relationships at a, call it, corporate level with a large provider of hospitality, you still often end up having to sell at the individual property level. It might be that some of these properties that are independently owned. It might just be that every property has a different situation and needs to work under its situation. Now we are -- obviously, our drive there is for Ooma Enterprise, but we are also seeing AirDial in these locations that are significant as well. So we get a nice combination of opportunity in this vertical now. I'm not sure what you call Wolle Mammoth, but we do have hotels, for instance, that are hundreds of rooms that are now running on Ooma and then we have smaller ones as well. We have ones in very major cities. We have ones in out of the way locations. And you can see by how I talked in my script about how we've increased the number of wins, so to speak, each quarter through this year that it's a focus for us to keep doing that. We'll be -- yes, let me just say, there are something like 80,000 hotel properties across North America. And then there's other kinds of managed living quarters that you can also look at for these kinds of solutions. So it's a pretty big vertical. And I think that we're starting to get recognized by -- at a more corporate level by some of the larger players in the space. And that's a good step forward for us. And I think that will help with getting us known across the opportunities. And that's our biggest challenge. Customers knowing what we can do for them. Thank you. Thanks, everyone, for joining us today. We were excited to have a strong top line and a strong bottom line in Q3. I think we're trying to be cautious for Q4, but we're great to -- we're happy to have taken up the bottom line outlook for Q4. And we'll look forward to a strong Q4 and then giving you next year's guidance the next time we talk. Thanks for joining us today. Thank you.
EarningCall_1931	Hello, everyone, and thank you for joining 111's Conference Call today. On the call today from the company are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of 111's Major Subsidiary; Mr. Harvey Wang, COO; and Ms. Monica Mu, Investor Relations Director. As a reminder, today's conference call is being broadcast live via webcast. The company's earnings press release was distributed earlier today, together with the earnings presentation, are available on the website at edge.media-server.com/mmc/p/kpnswevm. Before the conference call get started, let me remind you all that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 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. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year-over-year basis. Good morning, and good evening. Thank you for joining our Q3 2022 earnings call. What we'll be discussing here is also provided in the slides posted earlier today on the company's website. I encourage you to download the presentation, along with the earnings report at ir.111.com.cn. In today's call, I will add some color to some of the latest regulatory development in the health care industry and the latest development in COVID policies and how the company rose to the challenges and opportunities. I'll also cover our strategies for building growth momentum, improving operational efficiency and strengthening supply chain capabilities. Then Mr. Luke Chen will walk you through our financial results. COVID zero restriction policies in China continue to create tremendous challenges to our business in Q3. More and more cities are experiencing the rising numbers of infected people and consequently, the number of cities that had lockdown increased significantly. The supply chain in general was severely disrupted and the transportation and other logistics were tightly regulated in epidemic hit areas. Our biggest challenge was to deliver the goods to our customers and the replenished stock in time. I'm proud to report that our team truly stood out in dealing with those unprecedented challenges, they literally have to move mountains to fulfill badly needed medicine for our customers and patients. Our online and offline digital platform proved to be highly effective in dealing with the pandemic. We spared no efforts in meeting patients' demand in epidemic hit cities for medical consultation and drugs. We have provided free online consultations for customers in over 370 cities and provided over 3,000 medicinal products covering more than 400 diseases in the last few months. Since the beginning of the COVID-19 pandemic, our online hospital 1 Clinic has been offering free online medical consultation services. Recently, we also provided government approved a dedicated delivery fleet for medical products for some provinces hit by the pandemic. Even with the approval, the fleet had to overcome cross-provincial logistic challenges due to different control policies to deliver drugs to patients staying in mobile field hospitals, quarantine hotels and other facilities. The last few weeks saw the number of infected people in quite a few provinces is rising sharply and a lockdown followed. A few of our fulfillment centers are under lockdown right now, which is very disruptive to our business. We believe that COVID-19 will continue to create challenges to us in the near future, but I have very strong faith in our team and believe we will be able to serve customers with our utmost effort as we have done in the last few quarters. Please allow me to take a moment to brief you the latest regulatory developments. As you know, China just finished its 20th National Congress of the communist party in October. One of the very important themes is its focus on construction of a healthy China, which includes enhancing managements of major chronic diseases and boosting preliminary disease control capabilities and improving treatment and health management. Opening remarks from the 20th National Party Congress provided us a broad direction on where China's health care industry may be heading over the next few years. The following initiatives will create great regulatory tailwinds for the industry. One, encouraging innovation. The government is supportive of domestic innovation with the intention to bring in newer and better therapies to China and the world. The initiative will provide a better environment to allow China to act as a global innovation hub in the space of innovation drugs. This will mean that there will be more opportunities for 111 to launch and commercialize new drugs with its integrated digital platform. Two, strengthening infrastructure for preventative, chronic and infectious diseases. Importance of early diagnosis, early treatment and early rehabilitation was stressed from the remarks. The government pledged an increase in funding for routine health screening, chronic disease management, infectious disease control and mental disease treatment. We anticipate the digital technologies can play a key role in the areas of disease prevention, chronic disease management and the containment of infectious diseases. Three, revitalizing TCM or Traditional Chinese Medicine. In recent years, the government has set TCM as a strategic priority and has issued plenty of supportive policies, including relatively less price cut compared to other types of drugs in the government run VBP, where many drugs had to drop prices sharply, not to mention encouraging modernization and practicing of TCM. Significant efforts have also been made to promote the standardization of Rx TCM granules, which should improve safety and efficacy as market penetration increases. The policy is already having an effect in the market as we have seen a gradual pickup in our sales of TCM. Four, focusing more on the youth and elderly care. With the birth rate falling for the 5th year in a row in 2021, the government implemented policies to boost the birth rate such as the third child policy, tax deductions, longer maternity leave, enhanced the medical insurance, housing subsidies and additional financial support for the third child. I'm happy to report that some of our private label products are specifically targeting infants and children. As we broaden our portfolio, we should have a range of products for use and elderly. In addition, the State Council announced 20 prevention and control measures to further optimize the COVID-19 response, under which China will roll out and implement precise, reasonable and efficient epidemic control measures for public needs. Although it's early days, and there have been various implementation approaches in different provinces and cities and even obvious deviation from the announced control measures are taking place, we see this as a very positive move. In fact, yesterday, we saw media coating [ph] senior officials that with the decreasing toxicity of the Omicron variant, the increasing vaccination rate and the accumulating experience of outbreak control and prevention, China's pandemic containment faces new stage and mission. This potentially indicates an adjustment of the current COVID measures. One of the major capital cities, Guangzhou was saying yesterday that the city has adjusted the designation of risk levels and pandemic containment measures to a varying extent in all its 11 districts. We very much welcome the new development in the fight against COVID-19 and look forward to the time when the pandemic is behind China where business can operate as usual. Despite the economic downturn and material adverse impact on the offline retail sector in general in the third quarter, we managed moderate growth in revenue and a solid growth in gross margin. Our net revenue for third quarter increased by 0.1% year-over-year to RMB 3.3 billion, while our gross segment profit increased by 22% year-over-year. Our efforts to improve our margin profile continued to deliver positive results during the quarter. Our overall gross segment margin as a percentage of net revenues improved to 6% from 5% in the same quarter of last year. Given the circumstances, this hard-burnt margin growth is quite an accomplishment. This achievement came from optimized product assortment and the smart pricing, as well as improved team efficiency and technical capabilities. Our B2B business remains the key contributor of our revenue growth, which reached RMB 3.25 billion. Gross profit of our B2B segment rose to RMB 180 million, an increase of 27% year-over-year. B2B segment margin improved to 5.5% from 4.4% in the same quarter of last year. We also improved the B2C segment margin to 22.4% from 19.7% in the same quarter last year. We will continue reducing procurement costs as well as optimizing our product assortment and structure. We were able to leverage our digital capabilities to deliver more value-added services to our partners. The market continues to show strong demand for our diverse service offerings. Our value-added services include marketplace vendor services, digital marketing, supply chain management, online medical consultation, e-prescription services, patient education, drug commercialization tools, et cetera. Even during the pandemic, our service revenue reached RMB 32.57 million, representing a growth of 34% over the same quarter of last year. As our business continues to expand and as we position ourselves as an effective commercialization partner, we will continue to offer value-added services to pharmacies and pharmaceutical companies. In addition, we continued to enhance our operational efficiency. And as a result, total operating expenses as a percentage of net revenues decreased to 8.4% in this quarter from 10.2% in the same quarter last year. Sales and marketing expenses were down to 3.2% from 3.9%. General and administrative expenses were down to 1.4% from 1.6% and technology expenses were down to 0.9% from 1.7% in the same quarter last year. We expect this momentum to continue as we scale while we continue to focus on delivering superior services to our customers. Although the current macroeconomic environment has resulted in challenges to our business, we're still committed to executing our strategy to continue to grow our revenue and gross margin. I'm pleased to report that our non-GAAP loss from operations was narrowed to 1.5% of net revenues as compared to 4.1% in the same quarter last year. We're getting closer and closer to profitability. We're also pleased to see that our operating cash flow and overall cash flow were in the black for the quarter, which is a major milestone of our business. As of Q2 2022, 111's [ph] virtual pharmacy network reached approximately 413,000 pharmacies, covering more than 70% of the total number of pharmacies in China. As of September, our cold-chain service has deployed in over 270 cities, over 80% of which can complete orders within 48 hours. This capability has provided convenience for rural consumers in particular. In order to continuously improve gross profit, we have carried out a platinum product program. At present more than 400 pharmaceutical companies and over 1,000 SKUs have become part of this program. The revenue of B2B high-margin products in this quarter has increased by 15% [ph] year-on-year and contributed 0.9% increase to the overall B2B gross profit. I'm pleased to update the progress we have made on our private label initiative. As our network of pharmacies continues to grow and it's time we should introduce some private label products. Not only will this help our pharmacy customers to improve their gross margin, but this helps with our own margin as well. We partnered with some pharmaceutical manufacturers to build a suite of products, which include medicines, health supplements, medical devices, et cetera. So far, we have already developed three brands, which are [indiscernible] and over 90 SKUs launched or already in production schedule, targeting specific market segments. Although this part of the business is still at its infant stage and no conclusions can be drawn yet, we believe these proprietary products will significantly increase our gross profit and enhance downstream customer stickiness. As we deepen our relationship with upstream pharmaceutical companies, we were able to help them to improve their digital marketing efficiency and drug commercialization efforts. Now let me provide a couple of examples. Since the recent launch in China by [indiscernible] of its innovative drug, [indiscernible] which successfully completed clinical trials in China and abroad and is China's only approved targeted oral drug for atomic [ph] Atopic dermatitis for teenagers. We actively participated in the launch of the medicine, leveraging our patient management platform, we now offer a full life cycle closed-loop services for the drug, covering online plus offline consultation and post-diagnosis consultation and refuel service, which effectively help patients control disease progression. In addition, we'll help patients improve medication compliance and effectively reduce profile [ph] rates. We also provided full-time caring medical professionals to respond to patients' questions online in a timely manner. Within the span of one month, we have served patients in 16 provinces. Also in November, Hua Medicine rolled out dorzagliatin [ph] a first-in-class glucokinase activator in China, providing type 2 diabetes patients with a new treatment option. With a strategic partner in its national rollout of the drug, leveraging our advantages in the smart supply chain capabilities and digital platform, we were able to assist our medicine in its launch of the drug across all channels. We have also enhanced the accessibility of the new drug through reservation registration by medical professionals and a full life cycle patient management, thus providing more patients with convenience to access new therapeutic treatments. The launch was so successful that inventory was depleted so fast that Hua Medicine is scrambling to increase its capacity of manufacturing to cope with the supply shortage. Looking ahead, we will continue to pursue the enormous market opportunities from the digital transformation of the health care market in China, which given the country's mass population provides us with opportunity to connect millions of people in lower-tier cities via our direct B2C platform and our broad network of pharmacies. In order to bridge the gap in consumer access, we will focus on strengthening every facet of our S2B2C model and advancing our strategic plan to expedite business expansion. On the infrastructure side, we'll keep improving the AI and data processing capability of our technology, asking [ph] its power to handle higher volumes with greater predictive ability. Our technology platform today can access point of sales data of over 10,000 pharmacies for those SKUs we are commercializing. We believe this network of pharmacies and the number of SKUs will commercialize will grow at a fast pace in the near future. With this, we will be able to provide retail pharmacies greater control and cost efficiency to drive their store sales growth and at the same time, further deepen the share of wallet among our existing retail pharmacy customers. The platform's enhanced capability will also allow us to virtually deploy more digital modules and features which will connect more upstream suppliers and result in better sales and the margins for our pharmacy customers. On the supply side, the services we provide to pharmaceutical companies in support of their commercialization efforts help deepen our relationships with them allowing us to source an even wider selection of medications and health-related products for our pharmacy customers and a benefit in consumers. This commercialization services also represents a major growth opportunity for us. Globally and in China, medical innovations have been happening at an unprecedented rate. As more and more new medications and devices come on to the market, competition becomes increasingly intense. 111's support during our product launch can improve our company's market position and increase the likelihood of a successful launch. Ultimately, our integrated online and offline platform is a win-win for all. As we help to transform the health care system for the better, we believe that there are significant opportunities for us in the age of industrial Internet to expedite the digital transformation of health care system in China. We will work relentlessly to strengthen this model and pursue growth opportunities post COVID-19. Operationally, our priorities will be delivering revenue and margin growth, strengthening supply network and reduced procurement costs, continuing to improve operational efficiency, optimizing fulfillment cost and broadening our service offerings. We have come a long way since our IPO in 2018. From a new kid in the block 4 years ago, we have now established ourselves as one of the major players in the digital health care service industry. As we continue to expand the coverage of pharmacies and broadening our drug supplier's network, plus our advanced digital capabilities with supply chain infrastructure, we're uniquely positioned to create value for all our partners in the value chain. 111 was certified by the Chinese Ministry of Science and Technology as a National High-tech enterprise again. We were also recently awarded the prize of National E-commerce Demonstration Enterprise by the China Ministry of Commerce. Our remote consultation and chronic disease prescription refill service platform has also been selected as a case study in digital solutions for economic [ph] control and production resumption by the Shanghai Pudong New Area, Science and Technology Commission. We're very proud that our efforts have earned us such distinction and are committed to continuous innovation and implementation. Moreover, we have received critical claim from local governments, hospital specialists and patients for our online hospital services and a continued support for Tibetans living in Gansu City Sichuan province for hydatid disease control. All the ESG efforts carry our core values, and we will firmly fulfill our social responsibilities as we have done in the past. We wish to thank all the investors who have supported us all along. Thank you, Junling. Good morning or evening, everyone. Moving to the financials. My prepared remarks were focus on a few key business and financial highlights. You can refer to the details of the third quarter 2022 results from Slide 11 to 14 in Section 2 of our presentation. Again, our comparisons are year-over-year and our numbers are in RMB unless otherwise stated. Let's start with the third quarter results. Third quarter has been very challenging for our business due to negative impact from COVID lockdowns in many cities and province. We have tried our very best to work with local governments, as well as logistic companies to fulfill our customer patient orders as these medicines are badly needed. Total net revenues for the quarter grew 0.1% to RMB 3.35 billion, and the total gross profit for the quarter grew at 22% to RMB 202 million and the gross margin improved from 5% to 6%. B2B segment was the major contributor for total gross profit and margin improvement. B2B segment revenue grew at 0.8% to RMB 3.25 billion, while gross segment profit for B2B increased by 27%, with gross segment margin up from 4.4% to 5.5%. This was attributable to our optimization of selection portfolio and competitive pricing. We had also focused on our sales on higher margin products and launched private label products with much better margin. Our B2C segment revenue decreased 20% to RMB 100 million, with gross segment margin improved from 19.7% to 22.4%. Total operating expenses for the quarter were down 17% to RMB 283 million. As a percentage of net revenue, total operating expenses for the quarter were down to 8.4% from 10.2%, which reflected continuous improvement in our operational efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was around 3%, comparable to the same quarter last year. Sales and marketing expenses were RMB 108 million, representing a decrease of 18% year-over-year. As a percentage of net revenues, sales and marketing expenses for the quarter was 3.2%, down from 3.9% in the same quarter of last year. We believe this trend will continue as we further build up our scale and improve our sales team efficiency. General administrative expenses were RMB 46 million, representing a decrease of 13% year-over-year. As a percentage of net revenues, G&A expenses accounted for 1.4% down from 1.6% in the same quarter of last year, which was attributable to our continuous optimization of our supporting functions. Technology expenses accounted for 0.9% of net revenue, down from 1.7% in the same quarter of last year. We completed major tech development programs, and we believe that current spending reflect appropriate amount of our investment in technology. As a result, non-GAAP loss from operations narrowed to RMB 48.7 million compared to RMB 135.9 million in the same quarter of last year. As a percentage of net revenues, non-GAAP loss from operations decreased to 1.5% in the quarter from 4.1% in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was RMB 64.9 million compared to RMB 213 million in the same quarter of last year. As a percentage of net revenues, non-GAAP net loss attributable to ordinary shareholders decreased to 1.9% in the quarter from 6.4% in the same quarter of last year. As you can see, we are improving our financial performance quarter-by-quarter, and we are getting very closer to profitability. We are also very pleased to report that we have achieved positive operating cash flow and overall cash flow for the quarter. Please refer to Slide 15 to 19 of the appendix section for selected financial statements. And a quick note on our cash position as of September 30, 2022, we had cash and cash equivalents, restricted cash and short-term investment of RMB 866 million. Hi. This is Kathy from CICC. Thank you for taking my question and congratulations on your progress. I have two questions in total. The first one is that, looking forward, I'm wondering what will be the company's operational focus? And the second one is that as on the gross margin of the B2B business continuously increased and very appreciative if you can share with us the key factors [indiscernible] sustainability? Sorry, I was on mute. I apologize, Kathy. So thank you for your question. I'll answer the first question. So looking ahead, if we look at our operational - priorities, I would say the following. So we're going to focus on the top line and client growth. So we're going to [Technical Difficulty] the supply network, we're going to reduce procurement cost and we will focus on improving operational efficiency and in terms of sales and marketing, the logistics, the G&A, et cetera. And we also want to grow the services. And the last point I want to make is that we're going to continue to really invest in innovation. There's a lot we can do with the asset that we have built so far, and we're going to continue to exploit our technology capabilities to deliver value for both the upstream and downstream customers. Thank you. Yeah, this is Harvey. I would take your second question regarding the B2B margin. And yes, you are right. Our B2B gross profit increased 27% year-over-year. And this improvement came from our continuous effort to reduce our procurement costs, as Junling just mentioned and through either our direct sourcing from pharmaceutical companies, et cetera, and also our efforts to optimize our product assortment and our cost structure. Regarding your question of this sustainability, when - as we can expect the overall economy and environment gets better. We will further tighten our partnership with pharmaceutical companies, and we will get more room to promote our digital marketing capability. So I believe the B2B profit, the gross profit improvement trend will continue. Thank you, Kathy. Hi. Thanks, management for taking my question. Congratulations on your solid results, especially your positive operating cash flow this quarter. This brings me to my first question about cost control. Can management share more details on what's been done to contain costs? And can these measures or this trend sustain going forward when macro environment turns better and we may need to increase investment to gain more growth? And for my second question, I want to ask about on your outlook for next year. Is China gradually easing COVID control measures, how would it impact our business? Thank you. Yes, Lauren. I will take your first question regarding the cost control. And yeah, it is very encouraging to see that as a result of our continuous efforts, we are seeing - we enhance our operational efficiency, and our total operating expenses have decreased to 8.4% from 10.2% of Q3 last year. And this is actually from every single element we are doing our best. Our sales in marketing expenses decreased from 3.9% to 3.2%. And our technology expenses and also our G&A decreased from 1.7% and 1.6% to 0.9% and 1.4%, respectively. When the overall environment is getting better, definitely, there will be even better news for us. When the overall economy and environment are getting better, we definitely expect this momentum to continue. As at that time, the demand of our customers will be released and increased with our volume growth, we will definitely see scale. Thank you. Yeah, Lauren, let me just answer your second question about it. And we're all anticipating that the COVID zero policies will be behind us, we relaxed. And we saw some encouraging developments recently. But that's still unknown because different provinces have different implementation approaches. And as we speak, some of our warehouses are still under lock down. And we cannot ship goods out, we cannot replenish inventory. So there is also the latest development starting from today that a lot of those drugs were not allowed to sell online anymore, especially those Rx drugs. And also every customer has to register its real name, and there is going to be a verification process. Fortunately, for us, that we're more focused on the B2B, and that's the majority of our business. So the impact to us is a lot smaller than the rest of the other guys in the industry. So we all hope that this is the first step to a post-COVID restriction kind of containment measure. And of course, if we look at a broad picture, we are in a multi trillion-dollar market to quote some numbers in 2021 last year, the market is JPY 8 trillion [ph] And it is widely anticipated that by 2030, this market is going to hit JPY 16 trillion. That is more than $2 trillion. And there's â you know, I said a few things early on in my speech that there is a lot of tailwinds for us as well. And I think the biggest tailwind is really the transformation of digital - digitization in the industry. And we are already playing a major role and will continue to play any more important role in the future. And in terms of expectation, I'm going to expect very good quality growth for the company, both the top line. In the past few years, we focused more on the revenue growth. And obviously, we needed that, we needed that scale. We needed the customer to know us to experience the services we deliver to them. But in the future, I would like to see in addition to the top line growth, we also want to see better margin growth and also the improvement in the bottom line. I hope that answers your question, Lauren. Good evening, management. This is Zoe from Citi. I have one question here. So what - may I ask what's the update of your potential privatization? Junling, maybe let me answer Zoe's question on this one. The process is still ongoing. And as we disclosed, we - the company has formed a special committee to work on the proposal and the special committee has recruited the legal and financial advisers. Also the company will make public [indiscernible] information regarding the privatization as by special committee. So now it's within the hands of the special committee and we will disclose when we advise by them according to SEC rules. That's the latest. Hello. Congratulations on your performance this quarter. I'm gratified to see that the operating cash flow and overall cash flow were in the black for the quarter, which I believe is a major milestone for your company. How do you plan to continue this trend going forward? Yeah. We are pleased to see the positive operating cash flow and overall cash flow for the quarter. Now it mainly attributed to our efforts to continuously reduce the operation loss, as well as we improve - continue to improve our working capital efficiency. Our average accounts payable is about like 40, 45 days and our inventory average turnover is like 25 days. So that gives us a good operating cash flow. Now we have pretty strong confidence when we continue to leverage our scale, to build up scale and improve our margin and getting closer to operating profitability. So the overall cash flow will be continued to be positive. So - and we're quite confident on that. If you don't mind, if you - may I ask a second question. How will your company achieve double-digit revenue and gross profit growth, especially in light of the COVID situation and possibly third quarter economic uncertainties? Yeah. Maybe let me try to answer that question. First of all, you mentioned about this overall environment. It is the COVID-19, the COVID zero policy does cause a lot of disruption to our business. Our fulfillment centers cannot operate as usual, and we couldn't really replenish inventory. And some of the fulfillment centers were lock down, and we were not able to deliver orders out. And there are many orders get stuck in transit because we don't know which city was lock down - some of the cities actually are the logistical hubs. And I think under such circumstances, it really proves the quality of our team, and it's extraordinary. And first of all, we established emergency response committee, and this committee reports to the management of the logistic problems and all the necessary measures that need to be taken. And if there are decisions that need to be made in the daily meeting with the management, for instance, some of the majority of the workers stay in dormitory near the warehouse and some of the dormitories get lock down. And then under such situation, we need to quickly figure out how we can do our best to keep the operation going. So in the end, we made a decision that all our office people went to the warehouse to help with the - sorting to help with packaging and really try to deliver the orders out. And also, our GR team is excellent. They managed to work with various governments to get a special delivery fleet permit. And we'll have to work with different provincial governments to make sure that the goods can really cross provinces. Under the extraordinary circumstances, we still delivered 22% margin growth. This is also related to our strategy, like what we did was we optimized our assortment. We optimized our pricing and we reduced the procurement cost, and we also used our technology to really provide a whole selection, a whole rich selection of products at a very competitive pricing. And the pandemic is still pretty serious right now. And we still anticipate a lot of the negative impact is going to be assumed. But we have every confidence that we will overcome all those challenges and will continue to deliver growth in the future. Thank you, Gerald. Thank you for your answer and I really look forward to your report next quarter with great anticipation. So good luck going forward. Thank you for the chance to raise questions. First of all, congratulations to you all for the 17th continuous growth quarterly. I have two questions regarding the technology R&D progress and also the private label products. First, I would like to know, is there any progress in technology R&D in the past season and what future advances will there be? And second, it's about private label products, I know it's a good way to raise the margin. And what will there be for the next quarter and the coming year? Thanks, Felix. Let me take the first question regarding our technology. We are continuously making very decent [ph] resource investment in technology and in innovation. As you know that we set our mission as applying digital technology to seamlessly connect patients with medical services. So you can see that everything is through digital technology. And Junling [ph] also mentioned that we build various systems to - for example, build a smart sourcing system to manage our assortment. We build the [indiscernible] system to improve the efficiency of our field teams and also build very effective supply chain management systems based on organization models and algorithms. All those help us to speed up our inventory turns, improve our supply chain efficiency and use our segment [ph] cost. As you can see that results are - is through our margin improvement. And this has also been simplified by the various recognitions, some nationally, some locally. Junling [ph] mentioned that we are certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise. Also, we were awarded the price of national e-commerce demonstration enterprise by China Ministry of Commerce. So these are national recognitions, which are very significant, also have some recognitions or distinctions by the local government, Shanghai government and Pudong government. We feel very proud of all the recognitions and the efforts we are putting in. Regarding your second question of OEM. Yes, this - actually, this is really excited. Today, we have launched about 9 SKUs of our private label products. And all of these 9 SKUs have been well affected by our customers, especially those small and media trends or individual B2B stores. So actually, in China, in those big trend stores [ph] the private label products have contributed about 10% to 20% of the GMV and about 30% to 40% of their margin. Well, our B2B customers, those individual stores, those small chains, they are not able to have their own brand as their volume is there. There are also many, many opportunities for this market that when we launch our offers, our private label to help them compete with those big ones in the market. And they are already about 100 private label SKUs in our pipeline, some are in production, et cetera. So we expect to see a fast increasing volume in this project in the coming quarters. Felix, I hope I answered your questions. Good afternoon. This is Tom Craig from [indiscernible] And congratulations on your performance in the third quarter. I have three questions. The first one is, well services did the company provide to patients in COVID hit regions? And second one is, what are the reasons behind contracting non-GAAP net loss from operation as a percentage of net revenue. Can this be sustained? And third one is, what is the status of the company's cash reserves? Thank you. Hi, Tom, let me answer your first question. It's hard. It's very hard to provide services for the COVID impacted regions. We have made tremendous efforts in counting all those difficulties. As we speak now, 5 of our 7 fulfillment centers are under severe impact loss balance or other impact right now. So our offices, our headquarter office here lockdown for almost 80 days. So it was hard. And even every single day, we have 1,000 orders blocked somewhere on route to customers, everything single day. So what we did, since the first day of pandemic, we won [ph] an emergency response center and we have daily calls to result from the slide. And we launched a free consultation, online consultation for all the patients in those pandemic impact regions. As Junling mentioned that we cover customers for more than 370 cities and more than 400 different types of diseases. And also, we work with the governments to get special licenses. For example, we get our - for some local government to give us dedicated [indiscernible] for medical products or some provinces. And we also built a very robust and dedicated transition networks to deal with the daily disruptions caused by the COVID pandemic. The network consists of the house both partner with our type of vendors, our marketplace vendors. And everything we have multiple options to - so that if one link is broken due to some reasons and we can immediately transfer to the second. So through all those ways, we're able to [indiscernible] as we hope so - hope to, but we got a large volume - large percentage of our business through the pandemic. And Tom, regarding second question about the net loss. Yes, we are seeing the contracting of our net loss from operations as a percentage of our net revenue. And this is, of course, both parts, what is the improvement of our gross profit. As I just mentioned, about 27% improvement on our gross profit year-over-year, and this is one hand. On the other hand, and also, we will reduce our operating expenses, which is 8.4% from 10.2% of the same quarter last year. So the improvement came from the procurement source upgrade and our product assortment, the optimization of our product assortment and also we launched various tools, for example, our new PRS or smart pricing tools. So all of this has contributed to the reduction of expenditure. So moving forward, of course, we will - we definitely will sustain the trend. We will continue our efforts on both sides. And also, we expect to see a further improvement in the near future quarters on our net loss and our profitability. Thank you. Yeah. On the cash position, we have closed at our earnings release that as of September end, we have total cash, including restricted cash and short-term investments amounting to RMB 860 million. As we just shared with you that we have reported a positive operating and overall cash flow for the quarter, and we believe the trend will continue. So we have strong confidence that this position, cash position is sufficient to support our future operations as well as our growth. Tom, I hope we answered all your questions. Thank you. There are no further questions at this time. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting 111 in Shanghai, China, please let the company know. Thank you for joining us today. The call has concluded.
EarningCall_1932	Hello, everyone. Welcome to Fusion Fuel Greens Third Quarter 2022 Investor Update. My name is Benjamin Schwarz. I'm Head of Investor Relations at Fusion Fuel. I would first like to remind everyone this call may contain forward-looking statements, including but not limited to, the company's expectations or predictions of financial and business performance which are based on numerous assumptions about sales, margins, competitive factors, industry performance and other factors which cannot be predicted. Forward-looking statements are inherently subject to risks, uncertainties and assumptions and they are not guarantees of performance. I encourage you to read the disclaimer slide in the investor presentation for a discussion of the risks that may affect our business or may cause our assumptions to prove incorrect. The company's under no obligation and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. So thank you again for joining us today. I'll just quickly run through our agenda for the next hour. So we'll kick things off with an overview of Fusion Fuelâs value proposition. Then the management team will share, actually, what -- yes we'll share third quarter highlights financial results, latest on our commercial strategy, pipeline, market expansion plans, and finally, a very exciting technology update, we will then revisit our 2022 milestones before ending the presentation portion of the webcast with a -- with some brief closing remarks from Fusion Fuel's Chairman. We'll then open up the floor for facilitate Q&A. I'd like to remind everyone as in our previous quarterly calls, questions can be entered in the chat box in the webcast platform at any point in the next 57 minutes. Alternatively, you can also submit your questions to the Investor Relations mailbox, which is ir@fusion-fuel.eu. So let's begin with an overview of Fusion Fuel. What makes us unique, how we are creating value? Fusion Fuel is in the business of developing and delivering cost effective cleaning hydrogen solutions to accelerate the global energy transition. At its core, Fusion Fuel is an industrial technology company. We have developed and commercialized a proprietary miniaturized PEM electrolyzer that unlocks cost competitive green hydrogen through unprecedented functionality, flexibility, and scalability. The modularity of our electrolyzer technology lends itself to a decentralized approach, and we've leaned into that as a source of unique differentiation. Where much of the market has gone down the path of ever larger scale of electrolyzers to drive down their levelized cost, we've gone in the other direction, small scale, mass produced. In doing so, we've been able to eliminate some of the cost and complexity of hydrogen production and distribution and deliver bespoke co-located solutions that few others can. So while others are talking about developing green hydrogen projects, we are doing it. Our unique approach and differentiated tech have enabled us to build a robust commercial pipeline of tech sale and development projects. We are producing green hydrogen today at our demonstration facility in Portugal with many more highly actionable projects in various stages of the development cycle, including what will be Spain's first solar to green hydrogen refueling station which we're developing for Exolum in Madrid. So with that primer, I'll now pass it over to Frederico Figueira de Chaves, Fusion Fuelâs CFO and Co-Head for an update on the third quarter and subsequent events. Thanks, Ben. Appreciate that. And thank you everyone for joining once again. As mentioned last time, we have received approval of EUR10 million grant from component 14 of Portugal's resilience and recovery plan for a project in Sines, and also commenced work on our Exolum tech sale project in Madrid during the third quarter. More recently, we have announced two tech sale contracts, totaling EUR7 million in Portugal and in Spain. In addition to the opening of the -- to opening the Italian market with the Duferco Energia agreement. We continue to make progress on securing grants for the projects we're involved in. Now we'll dive into this little further later on. Two significant notes from earlier today and last weeks are important for us. We've now disclosed our first project in the U.S. This is a project that has been in the works for several months now and with the passage of the Inflation Reduction Act, it's become one of the keys strategic pillar for the company. Zach will dive deeper into this major milestone in a little while. Last week, we also introduced the HEVO-Chain. This is the first centralized and electrolyzer for the company and is the first that we know in the market that is based on a series of miniaturized units working together in a strength. We're extremely excited by this product. It not only opens new markets to us, but we believe it will also be a true disruptor for the PEM electrolyzer market in the coming years. During the third quarter, we booked an operating loss of EUR5.5 million driven by EUR4.6 million of operating expenses. Increase in expenses from the second to the third quarter was largely driven by an increase in headcount for entailing with the go-live of Benavente, and then the related tax provisions required in the portal for the holiday subsidies paid to employees. In addition, we incurred EUR600,000 of one-off bookings related to Evora and Exolum expenses. and various larger activities related to marketing costs as well as various consulting and specialist engineering validation works, the results of which we've disclosed in previous quarters. Going forward, we're adjusting our administration expenses guidance for around EUR4 million to EUR4.5 million a quarter for the fourth quarter and also for the most of 2023. Our pretax profit loss for the quarter was again significantly impacted by the non-cash item of the fair value movement of the outstanding warrants. This had a EUR3.8 million positive impact, bringing on pretax loss for the quarter of EUR1.6 million. One item, I would like to highlight is that we expect to book revenues and also part of the P&L impact of the Exolum project during the third -- the fourth quarter of this year. So that's something to look for in the next quarterly update. We've added this slide, so for additional transparency for our shareholders and analysts, we've added a slide covering some elements of our balance sheet into this -- to the financial section of our results and we'll continue to provide this information going forward. As you can see, we have a total of EUR61 million of total assets and around EUR15.6 million of liabilities. Our property, plant and equipment is mainly composed of our Evora plants of HEVO-Sul Sines project and our Benavente facility. Regarding Benavente, several months ago, we initiated a process to do a sale leaseback for the property. We can now inform you that this is a transaction that we expect to close in December, which will also generate substantial cash proceeds for the company. Important to note, we currently hold EUR12 million of inventory and around EUR3 million of advanced payment to suppliers. This is a result of measures taken late last year and at the beginning of 2022 to secure our supply chain. We've recently seen several cases where competitors were unable to deliver due to supply issues and we have had the opportunity to step into projects in that phase. Over the coming months, we will be working to transition this inventory into revenues and have a positive impact on our cash balance. Our receivables also included EUR3.7 million, a growth of -- we're awaiting payments on. In the third quarter, we continued to hold substantial VAT receivable balance of EUR6.5 million. However, I'll highlight that we have submitted reimbursement requests for part of this balance. These requests have been approved and those inflows will be reflected in the fourth quarter. During Q3, we continued to pay for some materials order, not only for inventory, and for our Evora and Exolum projects as well as investments into our international property and our EUR4.6 million of operational expenses. Our liquidity position is something that we as a team have been actively managing with the various tools that are available to us, including as mentioned, the reimbursement of all our VAT and the grounds receivables, the sale leaseback of Benavente and as our projects progressed through additional revenues. We are a company in an aggressive growth trajectory and the recent announcements and projects may require certain capital in the future. As we've noted before, we'll continue to consider all possible options for the company to ensure that we continue to execute along our growth plan. Our outstanding shares and warrants balance is relatively unchanged of 13.4 million shares spent. As announced at our last earnings release, during Q3, we did tap into the ATM facility and sold around 300,000 shares on an average price of $7.35. During the fourth quarter, we also used ATM facility to sold an 400,000 shares at an average price of $4. Year-to-date, we have raised around EUR3.7 million through the ATM facility at an average price of $6.3 per share. With the sale leaseback of Benavente, the receivables mentioned in the previous slide and the other capital options being supported by the firm, in addition to normalizing of our product activity and revenues over time, we expect to have less use of the ATM facility going forward. As highlighted previously, we have a strong track record of securing grounds for our project portfolio. We've applied for nearly EUR80 million of grants excluding our IPCEI submission. As of our last update, we had -- during the last update we had EUR19 million of grants approved and EUR3.5 million of grants for investments already requested. As of today, we can show that we have secured another EUR30 million of grants for another one of our projects. We expect to be able to disclose information regarding this award in the coming days. So for now, I'll not go into the details of the project that it relates to, but please be on the lookout for the press release relating to that hopefully still this week. As announced last week, we are technology providers for four projects in Spain, who were preselected for grants. We expect to get in the final results of those submissions early in 2023. This grant portfolio and the related projects are very significant asset for the company and established with very strong bases for our order book for the coming years. Now to dive a little deeper into those, I will pass to Zach to share more information with you regarding our commercial activities. Thank you, Frederico and nice to see everyone and everyone that's in the U.S., I hope that you had a great Thanksgiving weekend. For me, can you go to the next page, please? A key focus going to next year for Fusion Fuel to turn the dreams of the hydrogen market into a reality. The market is being created, which requires projects to be permitted, and attracting customers with providing attractive economics and confidence in our offering. We're targeting over 40 million gross revenue next year. We plan to achieve this target through technology to third party -- technology sales to third-party customers and sell most of our existing Fusion Fuel own projects to financial investors. We've been focusing derisking our pipeline in 2023 and beyond by concentrating on a few key characteristics. First, does a project have the land secured? Secondly, does it have grants? Third, completing permitting, and finally, does it have a customer. These four characteristics as simple as it may seem allow us to rank opportunities that will have a high likelihood of reaching final investment decision and lets us prioritize our resources appropriately. Virtually our entire pipeline has grants and land secured for 2023. This allows for our pipeline to commence permitting and have a higher probability of reaching FID due to the fact that we can subsidize our projects via grants to make them more attractive to third-party customers. We received or started permitting on over 50% of our 2023 pipeline and the balance is planning to start. Permitting takes approximately six to nine months to receive the necessary permits to reach FID. Our team is focused on initiating permitting on the balance of our 2023 pipeline by the end of Q1 2023. Next yearâs pipeline is broken down by approximately one-third being already established third-party customer sales and the balance of them are a Fusion Fuel owned projects, which all located in the Iberian Peninsula that we plan to sell to third parties. Having our 2023 pipeline being focused on Portugal and Spain allows for a higher chance of success due to our company has most of our employees locate on the Iberian peninsula. As we're focused on 2023, we're also looking ahead into expanding our reach into other core markets. We're excited to announce that we are expanding into North America and the Italian markets. Both markets have strong incentives, especially the Inflation Reduction Act in the United States. We've secured early stage opportunities in California and Southern Italy a total over 75 megawatts of capacity for 2024 and 2025 production. These projects combined with the balance of our portfolio in Portugal -- is over a 138 megawatts of HEVO-Solar and HEVO-Chain units for 2024 and 2024. HEVO-Chain is a product that Frederico will go into next, but it's a new product that we have developed and will be in production in 2024. HEVO-Chain is our own centralized PEM electrolyzer that Fred will discuss shortly. To take advantage of the Inflation Reduction Act in the U.S., our team is actively evaluating if we can supply units for USA projects from Benavente or do we need to build an additional production capacity in USA? This could be a step change in our production capacity due to the early successes that we've had so far and the massive increase in the total adjustable market sides via entering the United States and Canadian markets. We believe our product offering along with our approach will be attracted to third-party customers and financial investors to expand into these exciting markets. In summary, we have a strong plan to utilize our 2023 production capacity focusing on a region that we know very well, the Iberian Peninsula. And already, we've established anchor projects in two core exciting and strategic markets to ensure the growth in the future for the company. 2023's technology sales, as I just noted are focused on Iberian Peninsula. We have over 18 megawatts of capacity of projects that totaled 743 units with an estimated potential revenue of over 45 million to Fusion Fuel that have 15 million grants attached to those projects. We are concluding the construction, as Frederico just noted, of our first technology sale in Madrid with Exolum, have built a team to be able to execute our projects in this region working closely with our third-party external partners. These capabilities allow us to either do a tech sale or a turnkey project that includes engineering, procurement of the balance of plant equipment, construction of the facility as well as the operations. This allows us to not only make returns on the tech sale, but also in the overall project and potentially recurring revenue from operations if we operate the facility. Our tech sales in Portugal or with the same company by KEME. Both projects have secured grants have the land and the first KEME project is already under environmental permitting. Anticipate (ph) KEME one reaching FID in the first half of 2023 and as Frederico noted, we already have inventory available to execute this project. The Spanish portfolio has been preselected for the PERTE program and finalizing their respective grants. These projects are going through a final evaluation to receive formal award of the grants which is noted as a waiting grants in the table. We're focused on supporting these respective projects and receiving their grant so they can initiate permitting in the first quarter of next year. Some of the projects do not require off take because the company is the end use customer or already has secured a customer. I cannot emphasize enough that, that helps derisk these projects knowing that they already have a customer in hand. [indiscernible] is the most advanced project, most advanced Spanish project, and is finalizing permitting with anticipation of reaching FID in the first half of 2023. And again, we have inventory available for this project already to execute it. Also, we have a backlog of projects for 2024 which include additional technology sales in Spain that have applied for other grant programs and the deferral project in Italy and other projects were currently in negotiations on throughout North America and Europe. Our development projects continue to progress. We have two key themes as we touched on the last investor call. First, is that we are building a mobility backbone, not only in Portugal, but not only in Iberian Peninsula. Second is decarbonizing industrial applications to sell to customers throughout Iberia with our initial focus on the Sines region of Portugal. We secured grants and land for all the projects we plan to reach FID in 2023, which includes two mobility projects and three industrial focused projects. Our focus is to build out our footprint in the Sines region through three phases to reach a total capacity of 85 megawatts. Our first phase has already received its environmental permits and is finalizing feasibility phase to reach FID in the first half of 2023. And again, we have the inventory available to do these projects. Our second phase has initiated environmental permitting and is planned to reach FID in the second half of 2023. We continue to do pre-feasibility work on the balance of our portfolio to be in position to commence permitting in the coming months and reach FIDs in the second half of 2023. As noted on our last call, Portugal is the blueprint for the rest of the markets that we're currently focused on. This blueprint is already being utilized to build a pipeline of over a 175 megawatts of development projects in California, Portugal, and Spain for â24 and â25. I cannot emphasize enough the -- how the expansion into North America is truly a game changer for Fusion Fuel. North America has significant momentum due to the IRA and infrastructure build that create hundreds of billions of dollars in subsidies for hydrogen and other renewables including tech manufacturing. Most of you partly already know this, but I will emphasize anyways. These subsidies include a $3 per kilogram production tax credit. It can last up to 10 years, a 30% to possibly 40% investment tax credit on the capital cost of the solar components of the project, billions in subsidies for clean tech manufacturing and development of hydrogen hubs to further advance the growth of key areas of hydrogen production and demand in the United States. We also have significant state level subsidies such as the low carbon fuel standard credit in California focused on the mobility industry. Lastly, Canada has also recently announced a 40% investment tax credit for the upfront capital cost of hydrogen production, which makes Canada a very attractive market for Fusion Fuels HEVO-Chain product that plan to roll out in 2024. This legislation combined with our expanded technology offering creating strategic shift in our focus to accelerate our plans to grow in North America for 2023. Securing our first project in North America and Southern California was strategic due to our technology offering and maximizing incentives to have the highest likelihood of reaching a successful FID. Our first project is in partnership with Electus Energy, a developer of hydrogen projects with operations in California. We're excited to work with Electus which brings commercial relationships and boots on the ground in California. Our first project is planned to be 75 megawatts of capacity of green hydrogen production located on 320 acres in Bakersfield, California off of Interstate five. Bakersfield is a strategic first location due to its existing heavy industry located to nearby distribution facilities that connect to areas such as Los Angeles. We've commenced prefeasibility work with Black & Veatch as a lead contractor, and we'll update as we make progress on this exciting development project. Our target is to have an FID on this project in 2024 and have commercial operations in 2025. We're actively building out our team in North America to be able to execute this opportunity as well as identifying secure additional opportunities in 2023. We believe the announcement of HEVO-Chain expands the market opportunity significantly for us in the U.S. and Canada, specifically in markets such as Northeast and Pacific Northwest of the United States, and British Columbia and Ontario provinces in Canada. These markets have existing or planned hydrogen incentives that make them attractive markets to apply the HEVO-Chain technology. The size of Bakersfield project alone justifies building a new manufacturing facility in particular for the HEVO component. As this project matures to reach a final investment decision, along with other projects in our pipeline, we'll need manufacturing capacity in the U.S. to be able to obtain the benefits from the IRA, the majority of the equipment that you produce has to be made in the USA. We're in the early stages of identifying our needs and starting to look for possible locations to put a manufacturing facility or two, in North America. This growth would be an increase of our existing business plan for Benavente. We're excited about the challenge to grow in such an important market as United States and Canada. We are also excited to have expanded the Italian markets. We think that the Italian market is a natural expansion of our core and strategic markets in Europe due to its excellent solar irradiance, existing natural gas infrastructure and ambition to add hydrogen production in the coming years. Italy also has an existing natural gas grid from Northern Africa to Southern Italy and is seeking to by 2030 have a significant increase in its hydrogen used for heavy industries and long distance truck transport. This is ideal for Fusion's mobility and industrial decarbonization strategies we are already employing in the Iberian Peninsula. Our partnership with Duferco Energia is exciting because Dufercoâs core business is energy trading, steel manufacturing and shipping businesses. The joint agreement has been established between Duferco and Fusion Fuel with the following goals to develop a footprint in Italy and the MENA region for technology sales and project development. Fusion fuel will utilize Dufercoâs existing operations and will be the boots on the ground for expansion to Italy and possibly Algeria and Tunisia. The interesting aspect of Algeria and Tunisia is that there's an existing pipeline that connects Northern Africa to the Italian markets and the other interesting part is the Duferco have significant operations in both those regions. The perfect way to start any partnership is a focus on a project and execute it. We're doing this through the development of a pilot plant in Dufercoâs Giammoro site and Sicily, we plan to install 50 HEVO-Solar units or the green high field be used to feed a multi carbonate fuel cell system that -- that's a technology that Duferco wants to test. The project is planned to be installed during 2024 and allow us to showcase the HEVO-Solar potential in the strategic country and in a very hard to abate market sector to potentially replicate other markets. Following our successful strategy in Iberia, Fusion Fuel will now use the same blueprint as I noted earlier in mobility and the industrial segments. Our target is to have up to four mobility hydrogen fueling stations in Southern Italy by the end of 2024. Separately, we've seen Northern Italy in areas such as Bologna, Brescia, Verona, and Rodina, as key areas similar to Sines to focus on decarbonizing the steel, glass, ceramic and refinery industries with examples. These are ideal locations for our new HEVO-Chain technology that can scale with our customers, decentralized or co-located and more efficient than our peers. We'll work with Duferco to use this technology at the Brescia steel mill as one of the initial targets in this region. Great. Thanks, Zach. So innovation hub hasn't stopped at Fusion Fuel and obviously, Zach and the team and all the whole commercial areas, keeping us well on our toes with all these opportunities. So I'm happy to be able to share with you some of the great things that team has been working on today. So for those of you who have followed our story for some time, you know that this all began with our first generation of our miniaturized and the electrolyzer the HEVO. This 2020 model [indiscernible] pressure and required 664 HEVOs per HEVOs all the unit. We then consolidated three HEVOs into one in 2021, and this is the model that's been installed in Evora. This year, we further consolidated our HEVOs so that we only require 144 for HEVO-Solar. This version while still taking advantage of the cost benefits of the miniaturized system, can work with four bars pressure and has an increased hydrogen output and a 50% cost reduction from the 2021 version. We're already in testing of the 2023 version of the HEVO. This not only sees further consolidation, but still maintaining overall similar size, but it is able to work with two membranes per unit, emitting us to improve the performance further and also reduce unit cost by another 20%. This 2023 unit is not only highly competitive, it's also a game changer for Fusion Fuels. We've recently step -- taken the step into the -- into a new market for us, the centralized PEM market. Using this 2023 HEVO, we've connected several units on an integrated string of miniaturized and electrolyzers. With this, we've created a modular system that is easy to install and operate and can work inside with limited available space. It's able to work with any energy source thereby broadening our addressable market substantially and no longer limiting us to markets with high solar radiation. This system takes advantage of the attractive cost benefits of using a miniaturized system, which we've covered before. This allows us to bring to make even small systems cost effective rather than what could be seen in the market today, where electrolyzers need to be very large to be cost efficient. We are bringing affordable hydrogen solutions even for small scale uses. As it is modular, it's also easily scalable, making us competitive already with our first generation for many different types of projects. All this together gives us the HEVO-Chain, a truly revolutionary product in the hydrogen markets. Now, I will show you a short video on the technology. Our HEVO-Chain solution is able to work with any energy source, making green hydrogen from any renewable energy. This is a start New Worldâs Fusion Fuel and a very exciting one of that. It is a solution that can be containerized. It's usable for small to large scale use cases. It's all based on our HEVO miniaturized PEM solution, all working in tandem on a string. The system is easy to install highly modular and highly efficient. By using our HEVO, we can make the most of our cost efficient design to bring a highly competitive product to the market. We believe this will truly disrupt a loss of the existing small -- especially smaller mid-sized projects in the market today. What you're seeing here is the real life version of the HEVO-Chain unit that's in all app. We're running tests to be able to bring this to markets in 2024. We need to thoroughly test the system and then industrialize it for production. This solution will truly revolutionize the centralized electrolyzer market. The HEVO-Chain hydrogen unit, which I have with me here today, you might be able to see it right now next to me to get a sense for the science is made of 16 HEVOs, all integrated and linked, but operating independently. The system is designed to be modular and scalable, and we can include them in a rack to be able to service larger projects. It boasts one of the highest efficiency rates for PEM systems today. Again, this is all based on what we learned in the creation of the HEVO-Solar. This new addition to our product portfolio puts us in a strong position to be competitive for a wide range of projects. Focusing the HEVO-Solar on projects with large scale grants, land availability and very high solar radiation. and the HEVO-Chain on markets with loan constraints in requiring a range of energy sources. In 2022, we developed the first HEVO-Chain hydrogen unit, Ken, right next to me here, allowing us to now begin planning projects using this technology. The first version uses the existing water and power systems from the HEVO-Solar and the HEVO-Night technologies. In 2023, subject for hydrogen unit to further testing and also focus on making the water and power systems suitable for inclusion in the right container solutions. In 2024, we expect to start industrial production of the HEVO-Chain and commercial operations, offering both rack and containerized solutions. In order to do this, we will start planning projects and kicking off the required licensing and permitting processes for these projects already in 2023. Iâd like to briefly update you also on our production status and our Benavente facility, where we continue to ramp up production of the HEVOâs each month. We currently own EUR12 million of inventory, as I mentioned previously, together with another EUR3 million of prepaid orders to suppliers. This puts us in a very strong position to be able to deliver product to our projects, as Zach mentioned earlier, and in several cases, you can step in with competitors have not been able to deliver. This significantly derisks our 2023 production and also project portfolio. In the first half of 2023, we expect to install and sell activities on both our solar concentration and module production lines in Benavente to complement the existing HEVO production line. And we want to have Benavente with a 100 megawatt annual production capacity by year end. In 2024, we expect to install and operate our HEVO-Chain production line and gradually increase of production capacity, so that by the end of 2025, we reached 500 megawatts of annual production capacity and going into 2026. As always, we'll close up bringing our main milestones, but to note, we continue to make strong progress across all fronts of our major milestones for the year, all while significantly ramping up our team and ensuring the company operates smoothly as one unit. Whereas we would have liked to have seen faster developments in licensing and permitting processes for some of our projects and some of our markets. We've been positively surprised that the large movements governments around the world are making in the hydrogen market, building up significant momentum for the industry. For us, the IRA in the U.S. in particular marks a strong game changer in the hydro market and we could not be more thrilled about the timing of our entry into this region with the Bakersfield project. The introduction of the HEVO-Chain is also another product that is likely to have profound positive impacts on the company both in terms of the markets -- markets available to us, as well as solving solutions that are in the past we simply had to pass up on. We're ramping up to first 2022 in a very strong position for the upcoming year. Thanks, Frederico. This investor presentation has been chalked full of important developments of Fusion Fuel. Therefore, I'm sure we're going to have lots of questions, so I'll not take up much of your time. Quarter-after-quarter in my remarks, I've emphasized that what has been my formula for success as an investor, finding companies with a strong management team, a differentiable and superior technology, and serving a growing market. As I read Wall Street Research discussing Europe's impending economic winter of discontent, the uncertain timing of any relaxation of China's COVID zero policy, and the likelihood that the Federal Reserve will need to bring on a recession in order to break the back of inflation in the U.S. I'm greatly comforted knowing that Fusion Fuel operates in a market that is and for the foreseeable future will be the beneficiary of huge tailwinds. The financial incentives for green hydrogen, which will exist for years to come in both Europe and North America, give me the confidence to say that despite the highly uncertain global macroeconomic environment, which most businesses are facing, the market opportunity for Fusion Fuel has never been brighter. Great. Thanks so much. A lot of questions came through, so appreciate your engagement. We'll begin with a couple of questions from Chris Tong at Webber Research (ph). So with respect to the breakdown of revenue between the HEVO-Solar and HEVO-Chain looking out into the latter half of the decade. Can you provide any guidance as to which product would likely be Fusion Fuels main source of revenue by 2025 or by 2030? Sure. Absolutely. So from our side of seeing that in the short one, HEVO-Solar will be taking the bulk of that, given that that's the production facility available. In the future as we ramp up, most likely, HEVO-Chain will likely overtake HEVO-Solar. The target addressable market is much larger for the HEVO-Chain opportunity. Again, it's not limited by solar radiation nor by land requirements. We believe both offerings are incredibly competitive in their markets and in their niches. It's just that the available market for the HEVO-Chain is just that much larger. So from our side, we're currently obviously playing still on the advantages of the HEVO with a miniaturized electrolyzer will continue to look at solutions that could operate with that as its base. It's no accident. The one is called HEVO-Solar, the other one is called HEVO-Chain. HEVO is the base of both. We don't foresee it in the short-term any product that is not HEVO centric, although, there may be variations of solutions that could combine the HEVO. But primarily, we see the HEVO-Solar and HEVO-Chain as well, two major projects at least for the midterm. Switching gears to commercial for the H2 Pioneros Program in Spain, that was announced the other week, is it all or nothing for the four projects for which Fusion Fuel is involved as a technology supplier or can one project be selected while the other three are not? It's the latter. So every project stands on its own. If the one project moved forward and received the grant, the other three did not, we would still move forward with the one project as a third-party technology sale. Thanks, Zach. There's a subsequent question about breaking up a number of HEVO-Solar for each project. I suspect we will disclose that information. So we've engaged Black & Veatch to do the initial conceptual study and prefeasibility work. We are going to evaluate both options. Do we do HEVO-Solar projects, or do we do a centralized or centralized HEVO-Chain with traditional solar or combination thereof. So we'll update you on the progress of that as we get closer. Thanks. There was a question about milestones in order to take FID on that project, but I suspect that you answered that â at Black & Veatch is kind of answers that as well. Maybe I'll just touch on that for a second. I mean, we're -- so the -- as we've noted in previous calls, we put in concept, pre-FEED, FEED, and then FID final investment decision. So we're in the concept stage of this project in the coming months. We hope to make a decision to move into prefeasibility, which we would start -- we'd initiate permitting on the project. But we are and hopefully, we can make an update on that in our next quarterly call. Thanks, Zach. Can you touch on the JV with Electus Energy? Is it a 50-50 JV head? And then additionally, with respect to funding that project, given the hefty price tag, how we plan on funding the expected capital investment would it come from cash or other? We are planning to have a 50-50 joint venture on the project. We have a current arrangement on funding the -- on funding the development cost of the project. And as we -- and we are already in active discussions with our own financial investors to kind of come in and partner with us on that projects. So the plan is as we get closer into reaching FID, we'll lock down and secure our financing for our position, which as I noted earlier, we'd sell the technology -- we'd sell our units to look like a third-party technology sale with equity upside. And then Electus has arranged their own financing for their position. Then I just want to just emphasize how attractive the economics of we expect this Bakersfield project to be and so we think that the ability to get this financed will not be particularly challenging. The IRA and the California low carbon fuel standards really make this a very, very attractive project. Thanks. Last question here from Webber (ph) Research. Touching on the partnership with Duferco, is the agreement final for the 50 HEVO-Solar pilot project in Sicily? Or is that not yet a committed order? Good. I got me. We're working on jointly with them to develop a -- do the engineering work to submit for an upcoming grant program in Italy. The plan is that once after we submitted the grant, we will have entered into a third-party technology sale agreement with them. Right now, it's under a memorandum of understanding or letter of intent. But we plan to convert that into a binding agreement in the coming months. Great. Thanks. A couple of questions here from Erwan Kerouredan from Royal Bank of Canada. With respect to the broader pipeline and timing of revenue recognition, should we be using commercial operation date as guidance for the revenue recognition timeline or will we be recognizing revenue prior to that date? That's a great question. We should -- we'll put on the -- we put the presentation after the call on the -- on our website. We'll update that to show final investment decision date instead of COD. I think final investment. So our plan going forward is that we aren't going to carry all the working capital for all the projects. We are going to be getting installment payments as projects make FID. We want to keep our working capital inventory close to net zero. So we'll update that to show the FID date, which can be where you actually recognize the revenue. We're not going to hold the working capital for the projects until they reach commercial operations. So we'll update that. Just to note also on the accounting procedure and how we operate also with Exolum. When it's a tech sales, we'll start recognizing the revenue as we deliver the units. So by the date that's there on the COD, we should have recognized pretty much all of the revenues or if not the vast majority of the revenues. But as I pointed out, the revenue recognition probably starts at FID onwards. Thanks, Frederico. One more for Zach here. Was the IRA in the U.S. a major driver for the partnership with Electus and the project in Bakersfield or had commercial discussions started prior to the announcement of that legislation? We started talking with Electus back in the spring of the -- of 2022. So it was before the IRA passed. But, obviously, when IRA passed that solidified and crystallized, a $3 production tax credit. Our system right now is roughly HEVO-Solar component. HEVO-Solar is roughly 50% solar. So we also qualify for a solar investment tax credit upfront. And then as Jeffrey noted, the low carbon fuel standard credits range anywhere between $3 to $5 a kilogram. So just the economics when you add it in that production the tax credit, which is still attractive, that accelerated discussions with Electus to having acre projects, we can start to really development business in North America. Thanks, Zach. Sticking with you here a couple of questions from Torkjel Jordbakke from Fearnley Securities. Can you provide a breakdown of the EUR40 million revenue estimate for 2023? So because we have not secured the -- we're finalizing arrangements on the financial investors for the Fusion Fuel owned projects. We took a 90% close rates of our third-party tech sales. But the -- so the I would use the third-party sales pipeline as kind of the reference page as -- and the next quarterly update hopefully can talk more about financial investor participation on our own projects, and then we can update that projection and give more granularity. Thanks, Zach. A question here for Frederico. Just a quick one. How much has been invested in the Benavente facility thus far? I believe is rough be 13 million, but I'll let Frederico chime in on that. It's around -- that we actually have in here, 10.1 million so far. It's actually in -- on first footer of Slide 9 for anyone who wants to refer to it. We do expect to probably invest another 15 million or so million in -- during 2023 into that facility. That 10.1 million also includes also of the real estate investments, as I mentioned, we will be doing the sale leaseback, which we expect to close in December, surpass with that 10.1 million will be converted to cash proceeds for the company during Q4 is our expectation. Thanks, Frederico. Sticking with you and pivoting to capital strategy, capital planning. What's that the most likely or optimal path and timeline to raising capital? So first, the ideal way would also be to -- well, the two best choices we'd have is obviously converting bunch of our receivables into cash inflows. Those items that we're working on both with the VAT, the grants, as well as the, obviously, tech sales to Benavente and to Exolum. The other is, and as I've mentioned before, we have a substantial amount in inventory that we'd like to convince into cash and cash proceeds. That will significantly help our capital position. However, as it looks forward, we have the sale leaseback as options and what we'd like to see is, as the market recognizes the position we're in, that we're able to potentially raise capital through whatever means available to us, which we'll consider whether it's debt, equity, or so on to be short of fund our growth plans of 2023 and onwards. Okay. I just want to jump in for a moment. We're very focused on cost of capital. And so as an example, the Benavente sale leaseback would be at effectively a very attractive equivalent of cost of debt. I apologize about the feedback. Additionally, when Zach mentions the potential financial investors for our fusion developed projects, we will look at -- we understand that our cost of capital right now is higher than that of -- well higher than that of traditional infrastructure investors. And so that would be a very attractive source of financing for our Fusion projects. At some point in time, once we have developed a little bit of a track record, we expect that that project financing, debt based project financing for those Fusion projects becomes a reality. So I want our shareholders just to understand that we are very focused on trying to identify the best way to fund the growth of the company for the benefit of Fusion shareholders. But we think there are multiple levers for us to be pulling and we imagine that, we'll be using some from column A, some from column B, and some from column C. Great. Thanks. Sticking with Frederico, if you could just quickly -- quick data point here, current production capacity for the company for this year and I guess expectations for â23? So for 2023, we expect our production, I wouldn't say possibly available production to us for the full year would be closer to somewhere between the 40 to 50 megawatts of production. Now, we will not -- we will only produce what the projects can take. We'll avoid producing just for a stop. We have a significant amount of inventory right now. So we do realize that for example, right now, we are producing it less than we could produce if everything was licensed and pounded. So we are holding back some of the production capacity. So the production capacity for next year, Benavente lines go fully live would only be in theory between sort of 40 to 50 megawatts. But how much of that we produce will depend on the products going forward. As Zach mentioned before, we have a very healthy project pipeline and a lot of inventory to service those. So we hope to be in a good position to be able to deliver on that. But there is just one highlight, it's also important for our capital, right, ;like to what Jeffrey said on cost of capital. Inventory is expensive for us, so we want to produce what is needed. Thanks. A couple of questions on grants came in with respect to the 30 million estimate under -- listed under other grant applications. Is that referring to component five? So I will answer that, mysteriously. I'll just say that unfortunately we cannot disclose what that is related to, as I noted in the slides, that is secured until the respective entities allow us to actually disclose the further details of what project it relates to. We will then communicate that to the public. We expect to be able to do that this week. That is our target to still do that within this week. Thanks. And then sticking on that topic, the potential size of the IPCEI grant that was excluded from the table. I know it's something that we've been -- we've not commented on in some time, but it's still hanging on the background if you have any clarity on that. So the IPCEI grant, the total IPCEI project was over 0.5 billion with the grants. I would not mistaken, it was put in this sort of 150 million range, I believe so, it's restored. We can significantly distort all of the numbers. We're in third tier of the IPCEI submissions. So we should be -- it's the next one to be communicated. Unfortunately, we don't define that timeline and given that uncertainty and given the potential volatility and impact of that one single line item, we removed it from the list. That doesn't mean we're not pursuing it. I just want to clear, this is very much a project where we still pursue and we still work on. It's just something that we don't want to create expectations with such a single line item that will be such a binary outcome. Frederico, I just want to clarify, when you say third tier, what you really -- what you mean are, there are different tranches depending on what the funding is for? So with the few minutes that we have remaining, I just want to pivot over to a couple of commercial questions for Zach. Based on the advantages of our HEVO-Solar technology in high DNI regions, are we seeing any increased demand or interest in our technology from the MENA region and are actively pursuing potential opportunities in those countries? That's a very good question. We've not put that on the last two presentations, not because that we're not actively pursuing them or they're not still opportunities in the MENA region. But until we secure kind of necessary components that I noted, in the presentation around land subsidies if they exist, initiating permitting, those kind things we didn't want to disclose it because the number, the size that they can skew everything else we're working on. But they have to -- with all the caveats aside, still working on Morocco. So the cup opportunities we're looking at in Egypt. And as I noted, the FERCO has -- they have some potential opportunities with existing partners in Tunisia and in Algeria. There's a question here about those pipelines, a trans Mediterranean pipeline from Tunisia to Italy. Are those pipelines natural gas? Are they hydrogen? Do you have any understanding of what percentage of hydrogen those pipelines can transport. Natural gas, and my understanding is we're looking at, under 5% to be blended as hydrogen. Capacity will be TBD, but because it's we've been focused more on the Italian aspect of it, but there's significant land available in those countries and those are more -- those are similar to the Morocco opportunities that as they kind of advance, we get land. We know more about the projects and we can have more definition, we'll share it. So our estimated revenue will be likely under 2 million. We will be booking the Exolum revenue. The Exolum projects is a EUR2 million project. We'll be booking a portion of that. To note, as we go on into 2023, what we want to do is with many of our projects, which currently are born as HPAs, we want to pass them to a financial investor. Iâd be financial partner. And as Zach I've mentioned before in his section, so we can recognize all of those as revenues. So we expect in the future to be able to book revenues for both the slides that sanctioned on tech sales and development projects. But for Q4, the only revenues will be -- likely booking will be related to the partial component of Exolum. Perfect. Thank you, Frederico. Well, that will do it for our third quarter webcast. Thanks to everyone who joined for your engagement. If you have any additional questions or if we did not get around to answering your questions, please feel free to reach out to me and the IR team at ir@fusion-fuel.eu. So we look forward to seeing you all again in our next update.
EarningCall_1933	Ladies and gentlemen, thank you for standing by, and welcome to the Splunk Inc. Third Quarter 2023 Financial Results Conference Call. I would now like to turn the call over to Ken Tinsley, Corporate Treasurer and Vice President of Investor Relations. Please go ahead. Great. Thank you, Mandeep, and good afternoon. With me on the call today is Gary Steele. After market closed today, we issued our earnings press release, which is also posted on our Investor Relations website, along with supplemental material. This conference call is being webcast live, and following the call, an audio replay will be available on our website. On today's call, we will be making forward-looking statements, including financial guidance and expectations, including our long-term growth and profitability and expense reduction efforts, forecasts of our fourth quarter and full year fiscal 2023 and our future expectations of revenues, total ARR, cloud ARR, operating margin and free cash flow as well as trends in our markets and our business, our strategies, our expectations regarding our business, acquisitions products, technology, customers and demand. These statements are subject to risks and uncertainties and based on our assumptions as to the macroeconomic environment and reflect our best judgment based on factors currently known to us. Actual events or results may differ materially. Please refer to documents we file with the SEC, including our Form 10-K and 10-Qs as well as the Form 8-K filed with today's press release. These documents contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. These forward-looking statements are being made as of today, and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during the call may not contain current or accurate information. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website. The format for today's call will be a little different with the CFO position open and the search underway, Gary will provide our prepared remarks, including an overview of results, highlights in the quarter and the outlook for the remainder of the year. We'll then move to a brief question-and-answer session. Just a reminder that most of our financial and operating metrics are provided in the supplemental slides, which are available on our IR website. And unless otherwise noted, financial comparisons made on this call are on a year-over-year basis. Thanks, Ken. Good afternoon, everyone, and thank you for joining today's call. I'm pleased to report that we delivered solid third quarter results, demonstrating progress in our disciplined approach to deliver long-term durable growth and profitability. We grew total revenues by 40% year-over-year to $930 million, and cloud revenues, 54% to $374 million. Our top line outperformance was driven by strong term license demand from existing customers, underscoring the value our customers continue to gain from Splunk's mission-critical security and observability solutions powered by our one-of-a-kind data platform. That said, as noted last quarter, we continue to see caution from customers on the timing of their cloud migrations and expansions setting ongoing macro concerns. In addition to our top line results, we made good progress on our expense controls, which I'll detail in a moment. Our revenue outperformance and expense reductions were key contributors to delivering a nearly $350 million improvement in free cash flow on a trailing 12 month over a trailing 12-month basis. I'd like to thank the entire Splunk team for their commitment and execution throughout the quarter. Q3 results illustrate 1 of the core reasons I joined Splunk in the first place. Splunk is the leader within a massive and growing market opportunity. And in the current macro environment, we believe the prioritization of IT budgets is benefiting platforms like ours. Splunk helps the world's largest and most innovative organizations be more resilient, so they can adapt to, respond to and recover from threats, disruption and attacks faster and more efficiently. Within today's economic environment, the evolving cybersecurity landscape and the ongoing demand for digital transformation, Splunk provides unparalleled capabilities at scale and the partnership that organizations need to keep their system secure, reliable and performing. Our differentiated technology is deeply appreciated by our customers who are continuing to invest in the Splunk solutions they need to drive faster insights and actions across security, IT and DevOps. Only Splunk delivers a highly scalable and extensible platform organizations required to gain end-to-end visibility of all their data across on-prem, hybrid and multi-cloud environments. Consider our leadership in security. In October, Gartner named Splunk a leader for the ninth consecutive year in its Sim Magic Quadrant. We are again among the identified companies in terms of ability to execute and completeness of vision. And that's just 1 measure of our success. We hear time again from CISOs that the breadth and depth of Splunk security solutions are critical for security teams and underpin their security operation centers. Turning to IT operations and DevOps. Our portfolio of enterprise grade observability solutions provides customers with full fidelity monitoring and visibility across our IT infrastructures, applications and customer-facing digital experiences. Splunk has been recognized for leading the market in AI Ops and in cloud observability by GigaOm, Research in Action and Constellation Research. Splunk was recently rated first in IDC's market share ratings for the IT operations analytics software market. We were also the market share leader by revenue in Gartner's 2021 market share report for all software markets worldwide in the health and performance analysis of software market subsegment. Today, our comprehensive product portfolio delivers incredible value to our customers across our core markets. As we look ahead, we are continuing to innovate. Early next year, we plan to roll out an enhanced unified security console, further helping organizations modernize their stock with a unified security operations experience to detect, investigate and respond to threats from 1 common work service. We're also planning to enhance Splunk Observability Cloud with new features to help customers identify long-tail issues before they grow into they grow and impact multiple users and with new tools to collaborate more effectively to resolve those issues faster with deep insights into Kubernetes and cloud-based networks. Our security and observability offerings will also be bolstered by continued innovation in our underlying platform. To that end, we're focused on increasing access to a wider range of data sources and providing greater control over the redaction filtering and routing of data in motion with edge processor and ingest action technology. In addition, enhanced federated search capabilities will enable customers to access data stored in third-party data lakes, all from 1 Splunk search bar. Our performance in Q3 underscores the value customers place in Splunk as well as the focus of our team, particularly given the uncertain macro environment. As we shared on last quarter's call, we continue to see a slower pace of cloud migrations and expansions as customers remain cautious with their budgets and reprioritize their investments. This caution was evident in our cloud DBNRR, which remained strong, but ticked down slightly in Q3 to 127% as we expected. We remain committed to partnering with our customers to support moving their workloads to cloud on their time line. While as the cost and resource intensive undertaking, most of our customers continue to acknowledge long-term value and transitioning to the cloud. In the meantime, given the flexibility of our hybrid deployment model, many are continuing to support their complex architectures on-prem. So while we did not see any meaningful change in the pace of cloud expansions and migrations in Q3, customer engagement remains [indiscernible] and overall demand for Splunk was good. RPO bookings were $1.1 billion in the quarter, up 37% year-over-year. Total ARR was $3.47 billion, up 23% and Cloud ARR was up 46% to $1.62 billion. Let's turn to our customers. Splunk partners with some of the world's largest and most innovative organizations, including more than 90 of the Fortune 100. I meet with customers every week, and I'm hearing over and over about their passion for Splunk and the mission-critical role we play in driving their overall business resilience. During the quarter, we are pleased to earn 6 distinct Best Of awards from TrustRadius, the results of which were determined entirely by customer reviews. We had many compelling customer wins during the quarter that demonstrate the breadth of our offering as well as our expertise. I'd like to share a few examples with you today. One of the world's top investment banking and securities firms renewed its on-prem Splunk platform agreement and signed a new 3-year agreement with both Splunk Cloud and Splunk Observability Cloud to drive innovation and continuously improve credit card operations. This customer processes billions of dollars in credit card transactions annually and requires fast-paced, resilient operational efficiencies. They turned to Splunk because alternatives would have been too risky and require years to implement with 5 or 6 IT staff. Our cloud-based approach and observability technology will help ensure this team can be up and running in a matter of days with just 2 or 3 of their staff. Department of the U.S. federal government signed a 3-year multimillion dollar agreement to expand their use of Splunk Enterprise Security with additional professional service business Splunk Education. This department supports our nation's defenses, and we've collaborated with them for more than 5 years to help ensure they have access to data-driven insights to combat threats, avoid disruptions and mitigate risk across multiple locations. Splunk is deeply committed to supporting our nation's government agencies, and I'm looking forward to connecting with many of our public sector customers and partners at Splunk Annual Gov Summit event on December 14 in Washington, DC. We also signed a multiyear, multimillion dollar renewal and expansion agreement with a major telecommunications company in Japan. With data volume growing at an exponential rate, this telco leader was struggling with the cost effectiveness of its existing on-prem data analytics model used in SIM, IT operations, analytics and DevOps. We've continued to earn the customers' trust not only because of our unfailing support over the years, but also through the flexible pragmatic cloud upgrade strategy we develop. We bundled Splunk Cloud and Splunk Observability into the solution to ensure a smooth and stable transition to the cloud. We also advised the customer to switch from an ingest-based to a workload-based license, enabling them to manage their environment without limiting the amount of data they send into Splunk. Finally, this quarter, we expanded our footprint with a top Fortune 100 retailer. We worked as a trusted adviser with this company for several years. And last year, we took them from on-prem to the cloud with a 3-year multimillion dollar deployment of Splunk Cloud. Fast forward this quarter when we displaced 1 of our SIM competitors with cloud-based Splunk Enterprise Security. Ultimately, the competitor lack that requires scale and couldn't keep pace in today's rapidly evolving security landscape. Only Splunk could provide the capabilities and partnership they need to keep their digital systems resilient. As we move forward in this uncertain economic environment, we are focused on managing the business with a balanced approach to growth and profitability. The combination of our business transformation plus the operational efficiencies that we're continuing to unlock is leading to good results. On the gross margin side, we've made excellent progress managing direct costs over the past several years. During the quarter, we continued to deliver steady cloud gross margin expansion driven by ongoing optimization actions, working with our cloud service provider partners as well as engineering and cloud delivery improvements that allow us to better align infrastructure requirements to our customers' needs. As a result, I am pleased to share that cloud gross margin surpassed 72% in Q3, our highest ever, up 8 percentage points over Q3 last year and hitting the 70% milestone that we've previously targeted and sooner than expected. Our sharply higher cloud gross margin drove a stronger total gross margin of 82% in Q3 and of 5 points over last year. Turning to our operating expense reduction efforts. We're also making good progress in the 4 areas we've identified on last quarter's call. Contingent labor, travel and expenses, hiring and real estate. We began taking actions to reduce our total labor cost by utilizing contingent labor for only the most business-critical projects. Over time, we think there is substantial cost savings here. For T&E, we continue to limit spend on customer-facing travel and support only, and our customers and our employees have adjusted to an ongoing culture of expense reduction and efficiency. Our measured and deliberate approach to hiring has allowed us to drive efficiencies across our entire business while still expanding overall sales capacity. For example, we recently realigned the parts of our sales teams that are focused on security and observability product areas in favor of single seller model. This chain aligns the change aligns directly to feedback from our customers who are increasingly asking for solutions across our unified security and observability platform and to deliver outcomes across security, IT and DevOps use cases. As a result, we're continuing to hire more quota carriers while ensuring sellers have access to the right technical and industry expertise. We've also begun to focus more of our engineering hiring outside of the U.S., affording us greater access to diverse cost-efficient talent. Finally, we continue to evaluate our global facilities footprint to identify opportunities to reduce or consolidate office base where possible. For example, in San Francisco, we recently consolidated operations from 2 buildings into 1 and will not renew the lease on 1 side. This action will result in more than $15 million of cost savings. It typically takes time to realize cost efficiencies from real estate changes, but we expect to pursue several additional opportunities over the near term, which could result in meaningful savings as early as next year. Beyond these 4 areas of focus, there are many other opportunities to streamline operations and increase profitability. This 1 example is a more expansive approach on transacting in multiple currencies globally. Historically, we've denominated all customer contracts in U.S. dollars and have relied on partners to absorb foreign exchange risk in exchange for a discount. As we continue to enhance our international execution capabilities by denominating contracts in local currencies, we can assume the FX risk, hedge it ourselves and capture higher gross value of the underlying contracts. Overall, through our discipline and prioritization, we're making significant progress on cost initiatives, which contributed to a $30 million sequential decrease in total OpEx in the quarter and a year-over-year decrease of 2%. We are pleased with our progress on expense control and remain confident we can continue to drive operating leverage from high-impact cost efficiencies going forward. We are simultaneously investing in differentiated technology and leadership that are driving long-term growth opportunities. Since joining as CEO in April, I've been laser-focused on accelerating innovation from our product organization. In Q3, we welcomed Tom Casey, our new SVP and GM of platform as well as Jason Lee, our new [indiscernible]. Both Tom and Jason are highly regarded in the industry and known for their ability to execute while staying very close to customer needs and feedback. We're already feeling the difference of having these leaders on board, engaging with customers and leaning in with our organizations and our product road map. On the M&A side, earlier this month, Splunk acquired Twin Wave, a cybersecurity startup with unique technology that automatically follows and analyzes complex a cat change that would otherwise require cumbersome manual workflows for security analysts. Twin Wave Founder and CEO, Mike Corn is now serving as SVP and GM of Splunk Securities Team. Bringing in this key talent and technology is further bolstering our world-class technical teams, and I'm excited about what we'll deliver together in FY '24. In September, we welcomed a new partner leader, Gretchen O'hara as VP of Worldwide Channels and Alliances. Gretchen brings decades of experience leading channel ecosystems, building alliances and developing strong teams. Within weeks of joining, Gretchen and her team signed a 5-year extension to our strategic collaboration agreement with Amazon Web Services. And just this week, AWS named Splunk the 2022 ISV Partner of the Year for North America. We also welcomed the new Chief People Officer, Cheryl Givens. Cheryl has a proven track record of successfully developing and leading people-centric strategies at public companies and technology startups. I've worked with Cheryl for a long time, and I'm confident she brings not only the expertise we need to scale as a global business with a hybrid and geographically distributed workforce, but also that she is a great fit within Splunk unique culture. And while on the topic of executive hiring, we are making good progress on our CFO search. As you'd expect, for a company with our profile and opportunity, interest in the role has been high, and we've had a great slate of high-caliber candidates. We are taking the time needed to choose the right CFO to help Sears plans through our next chapter. Looking forward towards the end of the year, we're confident in our execution plan and are reaffirming our full year total ARR target of $3.65 billion. We remain cautious on the pace of cloud migrations and expansions given the challenging macro environment. So we're moving to a range for Cloud ARR of between $1.775 billion and $1.8 billion versus our prior point estimate of $1.8 billion, primarily due to continued uncertainty of cloud mix. For Q4, we expect total revenues of between $1.055 billion and $1.085 billion with a non-GAAP operating margin of between 23% and 26%, reflecting expense reduction efforts and continued profitability improvement. For the full year, we're increasing our outlook for total revenues to between $3.45 billion and $3.485 billion, reflecting our Q3 outperformance. We're also upping our total op margin expectation from 8% to between 12% and 13%. We expect higher free cash flow of $420 million from expense savings in the back half of this year. As I wrap up, I want to reiterate my appreciation to our global Splunk team and for their discipline and execution during Q3. Since I joined in April, I've been constantly impressed not only by the caliber of our talent, but also the deep customer post mindset across our business. I also want to thank the tens of thousands of global customers who trust us with their complex mission-critical workloads. We will continue to deepen our relationships to support customer security and observability needs across on-prem, cloud and hybrid architectures. Finally, as I mentioned, the demand environment is strong, and we are reaffirming our total ARR target for the full year. As our guiding principle, we're committed to maintaining a disciplined approach to optimizing costs and improving efficiency and profitability while continuing to invest in future growth opportunities that we expect will drive long-term value. Gary, like could you speak to the dynamic in terms of cloud versus the old -- not the old, but the people staying on-premise and doing it themselves. How do you see that dynamic play out, especially in this environment as well, where you kind of might kind of buttoned down the hatches and just kind of continue to do what you do versus kind of doing new projects and moving to the cloud? And how are you standing as a company towards that? Is that kind of something you want to push a little bit more? Are you happy with where customers are -- can you speak to that, please? Yes, you bet. So as we indicated last quarter, we did see because of macro conditions, we saw some cloud migrations and expansions move out. and it was very consistent through Q4 where we saw the same behavior on buying. We did not see, however, we didn't see any less loyalty to renewal. Our renewal rate stayed incredibly high. And so I think what's happening is customers definitely see the value of cloud. They know they're going there, but they will pace their migration. And they will pace their migration when they are ready to make that move. And I think we've done a good job of clarifying with our customers as well that we are very supportive of a hybrid model where customers embrace on-prem in addition to cloud. And we think that's a strategic differentiator for the company as well. So while cloud migrations have slowed down. We don't necessarily see that as a big negative in our business. Gary and team, 1 of the key investor issues with Splunk has been despite the great growth, will it make cash flows. And finally, I think you delivered unbelievable cash flow, so congratulations on that. And my question is not going to be about cash flow only, but I just wanted to understand, Gary, what is the -- what are the chances that the growth in cash flows is a more sustainable thing? And what were the things I think you did a great job outlining the operating margin levers and free cash flow levers. I think some of us are positive [indiscernible] price how quickly this came to fruition. Can you maybe help us understand how philosophically this gearing towards free cash flow is more of a longer-term thing. And 1 of the levers that we could expect from the company as you give us more cash flows in the future. And then second, more of a technology or product-related question. If the economic environment does clarify, do you think the cloud business can get back to better growth rate? And that we'll have less -- the markets [indiscernible] Great. Kash, I'll answer your second question first. So the second question, if the economic environment improves, do we think cloud migrations accelerate, we do believe that. Because I think these are projects that customers absolutely want to do. I think there's tremendous demand, but they're being thoughtful on their timing based on macro conditions. So should macro conditions change, I think we will see cloud migrations accelerate. Going to your first question on cash flow, there's 2 things going on here. One, I think there's sometimes some confusion with our model. One of the very powerful, very cool aspects of our model is cash flow mirrors ARR cash flow mirrors ARR simply because whether you're a term license customer or whether you're a cloud subscription customer, you're paying us annually. So there's lots of vendors in the industry that bill upfront for multiple years. We stopped doing that several years ago. So again, I want to reiterate that 1 of the strengths in our model is the fact that cash flow mirrors what happens with ARR. And so that provides long-term durability on cash flow, which personally I am super excited about. And I think it can deliver incredible value to investors over the coming years as we've now gotten out of this transition from the upfront billing to the annual billing. And then coupled with that, as we've talked about, we've had some very focused expense initiatives as we've outlined in the prepared remarks, in 4 categories. We've been at this -- I've now been with the company about 7 months, and we've made tremendous progress, and I'm really proud of what the team has accomplished, but we have a lot more that we can do. There's more efficiency that can be gained. And I think at the end of the day, we'll be we will be better able to serve customers with that efficiency. So I think it's very much aligned to what customers want to see as well. So I'm super encouraged about the opportunity with cash flow. And I think at the end of the day, the power of this business model will be proven out with our free cash flow results. Gary, could you talk -- you mentioned some of the challenges from a macro perspective. A little bit more color on how the quarter played out. Was the demand environment fairly stable? Or did things get little bit more challenging towards the end of the quarter? And then secondarily, how is the U.S. Fed business for you all this quarter? Yes. So first on macro conditions, we first started seeing a macro change in July. And so what we did see over the course of the quarter was pretty consistent behavior. So we didn't see more intense macro issues as we got to the close of the quarter. It was very consistent throughout. And I think because we had started in July, it felt very consistent to us through that entire period. And it was really focused again around cloud migrations, which typically are big projects. or associated cloud expansion. That's really where we felt it. Now I'll reiterate, as I said before, we saw great consistency to on renewals. We saw no issue getting customers to renew it was really much more around cloud where the macro conditions play a role. And then to your question on the public sector business, we were very pleased with the results that our public sector team delivered. We had very good execution in the quarter. Really proud of what the team put up for us. We still think there's a tremendous opportunity there. We have new leadership in our public sector team that's really helping us drive execution. So super excited about that as well. Gary, margins were really strong, right? So I'm just curious, though, is when we think about that sort of conflict sometimes between growth and margins. Is that something that we should think a little bit more about if margins continue to be strong? In other words, is a focus on margins in any way inhibiting growth? Or is there just simply room for efficiency gains here while still investing for ample growth? Yes. I do not think at all that we're inhibiting our ability to grow with the cost initiatives that we put in place. And I actually believe what we're doing is creating a more efficient business that can scale more effectively that can better deliver for customers. So I do not believe anything that we're doing is inhibiting our ability for the business to grow. I wanted to double-click on the efforts to drive efficiencies in sales and marketing. It sounds like single seller approach is the direction you're heading. Could you just explain a little bit kind of where you're coming from, why this might be productivity enhancement in the sales and marketing area? Yes. No, great question. So historically, what we had were distinct sellers for security and observability working in conjunction with core sales reps. And it actually wasn't great from a customer experience because you'd have multiple reps needing to interact with customers. And so the single seller model supported by the right level of expertise and knowledge is a more efficient way to handle the customers' use cases and help drive the opportunities. And so it's just much, much simpler. It's more -- it's simpler for Splunkers and it's actually simpler for customers. And it ultimately results in nice cost efficiency as well. So it has multiple benefits to it. Congrats on the strong execution in the quarter. Gary, we're clearly in an environment where customers are wanting to do more with less. And with some of the changes that you're enacting as we think about the go-to-market and having this single sales point of contact. I'm just thinking in what ways can Splunk ensure that you're the platform of choice for customers to consolidate requirements? And is that part of what's inspiring the changes that you're making in the field as well? No, thatâs exactly right because 1 of the things that we do see to your exact point is we see customers wanting to find ways to consolidate suppliers, they want to find ways to simplify their environment because it ultimately will be more cost efficient to run. And so we see that even today, and I would even go back to 1 of the examples that we provided in our prepared remarks, where existing customer took out competitive solution that had been using someone elseâs SIM solution and moved to Splunk SIM solution. I do think that this creates an environment with this revised selling model to capture more of that consolidation. Gray, thanks for getting me on here. I'll ask a multipart question, it's pretty short. So the first part is, can you give us a little color on the big revenue beat this quarter? Was it -- to what extent was deal duration factor here? And then secondly, you are doing an awful lot as 1 person here, and the shift seems to be stabilizing how are you spending your time? How have you been spending your time? And how do you expect that to change over the next 12 months? What things are you focused on? Thanks, Steve. So to answer the first part of the question on the beat, the beat came in 2 forms. So 1 was we obviously saw less cloud mix -- and that was -- that came in at 56%. And so that was slightly down from our expectations. And so you had more term that obviously drives revenue up. And then the contract term was slightly up as well. So the combination of those 2 things then provided for that broader revenue beat. And then going to the second part of your question, where am I spending time. Obviously, I'm spending time on driving these cost efficiencies. That's a priority because I think at the end of the day, all of you will want to value the company on the amazing free cash flow that we will deliver. And so clearly, focused on that side of things. But I continue to spend a lot of time with customers and being in market with our sales team to really understand how people are thinking about buying and making sure that I'm understanding the role that Splunk is playing in their future plans. So that's another critical element. And then obviously, the third big area for me is to continue to recruit a world-class team, and I'm super encouraged by what we're seeing on the CFO front and look forward to announcing someone soon. I did want to circle up very quickly on the cloud migrations and those expansions that we're talking about. And I just wanted to see I know that we're talking about the single seller model and you guys supporting customers in this hybrid environment. But is there anything that Splunk can do or is doing to get in front of customers and help them with these migration plans kind of to support those cloud ARR metrics that you guys are moving towards? Yes. Really good question. So we continue to encourage customers to move to cloud. That's clearly a focus of our sellers. And while we were -- our mix wasn't exactly what we expected going into the quarter. We're still pleased with the results. There's still really good cloud momentum. And I think the place where we're seeing opportunity is where we can provide some level of incentive around professional services and things like that, that help incent customers to move more quickly. Those are things we continue to explore with our sales team. And one other, if I could. Great to see the cloud gross margins come in, I guess, north of that 70% that we should be looking at. It was a big milestone, frankly. That was a big milestone for us. I'm really proud of the team and the work that was done to get there ahead of time, frankly. So I guess my question is -- and I just wanted to stress test this, but was there anything onetime there? And then the follow-up is, is this 70% thought of as being more of a milestone, there's more room to push that higher over time? Yes. No, great question. This is not a one time thing. This is durable, and we can go farther. What you will see, though, it will take more work to move those numbers. So you'll see smaller incremental moves, but you'll continue to see gross margin move up. And as you would expect, we've taken down the low-hanging fruit, and that's what's really driven us at this point and not that it wasn't a lot of work, but we've gotten those through the low-hanging fruit. And now getting that incremental improvement in gross margin, we'll just take more effort. And so you'll see it continue to improve, but you'll see the smaller increments. I want to thank everyone for your time today and joining us. Our approach to balancing durable growth and profitability is delivering, as you can see in our cash flow and our momentum is there as theyâre as strong as we close the year and set up for a strong next year. Iâm especially appreciative of all Splunkers for their ongoing commitment and execution and for their close partnership with our customers around the world, particularly through this uncertain economic time. Thank you, again, and have a great day.
EarningCall_1934	Great. Good afternoon, everyone. Thanks for joining us at the UBS Global TMT Conference. My name is David Vogt. Iâm the enterprise hardware and networking analyst here. Excuse me, and thanks again for joining in-person. This is the first TMT Conference that we had in person since COVID. And so, with me today, we're excited to have John McCool, Arista's Chief Platform Officer. And in the room somewhere is Liz Stine from Investor Relations. Do we need to read a disclaimer? I think we're good. We're all good. Perfect. So, this is the first one I have not to do today. So, letâs -- so why don't we just jump off. I know I think many of you in this room have probably met John or heard John present in a different forum, but I do know from emails that I've gotten over the last couple of weeks, there are definitely people who arenât familiar with sort of your role and your purview. So, maybe I think it would help if you could spend a quick minute or two kind of discussing what falls under your sort of title, your role and your purview, just so we can level set the conversation? Sure. So, Chief Platform Officer at Arista, I have responsibility for our new product hardware development, as well as our manufacturing and supply chain, and the latter half has kept me quite busy this year. So, in many of the meetings that we've had today and yesterday and even over the last week or two, supply chain is slowly taking a backseat to more of the normal cyclicality and macro drivers of the business. But given sort of the success that you've had over the last 18 to 24 months, given your position with hyperscalers and enterprise, what you're seeing by vertical and product? I know a lot of your products are effectively it can be used in multiple different iterations and different customer verticals. Yes. So, I think over the course of COVID, the supply chain situation has evolved from factories closing, we canât get workers into the right locations because of mobility control orders to really a focus around semiconductors, and the semiconductor mismatch between supply and demand related to capacity, where it's particularly acute is in power semiconductors. So, these tend to be on older processor nodes, which really lacks some investment even coming into COVID. And then, the demand for these products is very broad based, itâs not just networking or even IT, there is consumer, et cetera. That's really been in the last half of the year, in 2022, the key constraint that go into power supplies. And in fact, they can be used across multiple of our products. So, not necessarily segmented by cloud or enterprise, they're very generic devices used across the boards. Right. How does that get resolved? These are older nodes. There's no incentive for anyone to make any investments in this current technology. I would imagine the same dynamics that have caused -- besides COVID, that have caused a lot of these shortages will persist as we come out of this economic cycle. So, as a company, how do you plan for this? I know you've been in the broker markets buying product at elevated prices. And you've done some reconfiguration, I think, of some of your products. But over the intermediate term, how do you navigate this potential -- I don't want to say, persistent challenge, but it's definitely going to be something that I think will probably crop up from time to time that maybe a slight disruption? Yes. I think there's been many areas of supply chain during COVID which showed us that there's an opportunity for more focus and attention on multi-sourcing or regional areas. We've gotten very clear about where things are sourced from, from our suppliers, and making bets around that. We have extended purchase commitments largely to deal with these kinds of situations as well. And I think that we're working very closely with these suppliers in the way that we haven't in the past. Should we read anything into the fact that purchase commitments have come down a bit in the most recent quarter? Does that suggest that maybe supply has gotten a little bit better? You've been managing it a little bit more effectively? I think as we went into 2022, we saw the challenges ahead and really -- we're very focused on placing those bets and now we're starting to see some of them played out. I wouldn't read anything deliberately into that. Okay, perfect. And to your point, just maybe just a final point right now, if I look -- I think you said publicly and you've written about this, thereâs like 6,000 parts -- or 6,000 vendors that you work with. When you look at what's happening in other parts of maybe the tech industry with some lockdowns and potential civil unrest, have you been thinking about maybe ways to further diversify your exposure in parts of world that may have potential trouble in the future? There's discussions about obviously new fabs being built in the U.S. I don't know it's not kind of core to what you do right now. But have you kind of thought about maybe diversifying sort of your exposure geographically over the long term, obviously? Yes, I think in terms of direct fulfillment, effectively, what we buy and make, we're very cognizant of where our factories are and what products are getting built in the various factories. As you go multiple levels down the supply chain, it gets more challenging. In fact, you start to see -- you may have two suppliers, but they're all relying on some resin or chemical that's coming from the same location. But we're drilling down much further than we ever have in the past. Got it. Okay. And so along those lines, maybe just turning to the big picture. Thereâs been a ton of discussion end market demand durability by vertical. Maybe just starting with your sort of bread and butter over the years, the titans, hyperscalers, there's a lot of discussion that maybe workload growth is slowing to some degree, capital intensity kind of grows more or less in line, I guess, with workload migration is kind of the way we're thinking about it. I know you have reasonably good visibility over the next three, four quarters. How do you think about your relationship, though, from a visibility perspective post COVID? I guess the question is, so you've been working, I know, very intimately with your customers. You're sharing road maps, sharing designs. Does that change? Going forward, does it revert back? I think there's two pieces. We've always had very good insight into technology direction, technology wins, and co-design even before COVID, so directionally, where things were going. And I think that continues when this supply chain situation starts to resolve or lead times come in. With the extension of lead times, though, procurement and deployment decisions had to beâ¦ Extended, right? Does that go back to normal? I guess one thing I'd go back to the semiconductor side, what people will say, it's easing. Lead times on semiconductors, the worst case, the most difficult one used to be 24 weeks. Today, the worst case one is 70 weeks. I don't think we see that snapping back to those 24 weeks for a long time. And especially in the cloud segment, they're much more cognizant of the semiconductor lead times and planful around that. So, I think we'll see some easing, but I'm not sure that brings snap back to that pre-COVID period. So, I mean, obviously, it sounds like it's a reasonable assumption to assume that even if lead times come in from 70 weeks to 52 weeks or somewhere a little bit tighter, the co-development work plus the lead time should give you reasonable visibility in hyperscalers... I would say that there's a level of intimacy that's required to participate in the cloud business that needs an engineering level of engagement and I think that will persist. Got it. Okay. And then maybe on the enterprise side, itâs a little bit of a different market, right, different go-to sales motion. It's a new -- not newer, but it's not the original market that Arista sort of renowned for. What do those conversations look like today from an enterprise perspective? Are the conversations changing in terms of where the decisions are being made? Weâve heard from a lot of companies that we've done calls with that it's basically a C-suite decision at this point. Has it reached that point in terms of your conversations with your customers? Or is it still on a project-base-by-project-base basis? Yes. We're very involved in the project-base-by-project-base decisions. We've had a strong historical presence in the data center. Five years ago, organically, we did routing, so we could data center to data center, built the campus use case, network visibility. So, we've, in the last five years, expanded the number of use cases that we can go into an enterprise and truly present ourselves as an alternate end-to-end from the incumbent. So, when we go in, we're very much into a new account. Decisions had been made around the project. They're looking for another supplier. It's less about refresh activity, which could be put-off essentially because you're not going to refresh this year, we kind of hold the budget. Right. Got it. So, against that backdrop, does that mean from a -- I know market share doesnât mean a lot to a lot of people, but from a company perspective, some of the larger competitors in your space talk about how they are fighting back to keep share in some of the verticals. And you've taken a lot of share in some key verticals. But given that you're more of a rip and replace story in, let's say, enterprise, does that mean in a sort of a challenging economic climate where project-base-by-project-base has been decided that you theoretically should be able to continue to take market share? That's our objective. We think weâre a share gainer. We've given the sales teams more opportunities to go after projects. Three, four years ago, they would wait for the data center refresh. And if that wasn't up for refresh, we would talk to another account. Now, we'll have a campus opportunity, network visibility story, maybe even [NAI] (ph) component that we can bring into the picture, a wake in the security pieces. So, there's many more touch points in an enterprise that we can play against. I mean, where are you seeing more of these touch points being successful? Campus had been successful fairly recently. Enterprise data center has been very successful. The core pain point that we touch is âMy network is hard to operate. It's difficult. I can't upgrade. If thereâs a security hole, it's difficult for me to patch. It's just difficult to deploy.â That's where our team is focused, and that may present itself a campus opportunity or a data center opportunity, and we're fairly agnostic about that. Just looking for a way to continue to either grow wallet share within the company we're in, or bringing in a new customer. That was one of my next questions. You mentioned wallet share. Is there a way to look at sort of your relationships with your customers from an attach point perspective? So, for example, this company historically was an enterprise data center customer. Now it's a campus and enterprise data center customer. Do you think about your business that way? And does that decrease or increase the stickiness and decrease some of the cost of maintaining and -- or maintenance of that account and drive better profitability? Absolutely. I know our sales team look at opportunities in wallet share within the accounts and big bets that theyâve placed. I don't think we can correlate with the stickiness. We're just trying to gain share either by grabbing another customer or increasing the wallet share. Some of the large customers still have significant footprints of switches and routers that are an opportunity for us as we move forward. Got it. And then maybe just finally on enterprise. It certainly sounded as if maybe at your Analyst Day, there was a little bit of hesitation in terms of maybe demand for campus on the enterprise side. Is that a reflection of maybe a lot of the initial wins were legacy sort of touch points for Arista customers that knew the product well, knew what you bring to the table and now maybe the next leg of growth is a little bit -- I donât want to say tougher, but maybe it's a little bit slower in terms of onboarding effort? Actually, we felt like we were pretty par on target with the demand. It was the ability of the supply chain to really drive that from a revenue perspective. Interest is -- Iâm not sure about backlog, but interest in general and I think opportunity we see are pretty strong. Got it. Okay. Sticking to campus. Over the last couple of years, I know it's a small market for you, but some of the bigger competitors have been aggressively raising price. Has that been an umbrella that you can price under? Or are you using that as a leverage point in addition to your technological position to gain share orâ¦? Yes, I think we get questions about either pricing or supply as a leverage point. I mean, we're very focused on the operational simplicity as the key win and the sticky win in the long term. So, not so much from a cost of ownership, right, operational complexity, reducing cost of service calls, automation, that -- all those components. So, conversely, if pricing kind of softens as we go through '23 and, let's say, calendar '24, itâs less of an issue for you, because you're not sell or competing directly on price? Got it. Okay. And so, when you think about the 800-pound gorilla in the room in campus, for data that I've seen, eight, ten quarters really haven't seen much in the way of growth in that market. Now there's some debate on growth because of backlog drawdown and other sort of metrics, but absent the backlog drawdown, it seems that their position is relatively stable and losing share as the market grows. Are you -- how do you think about their competitive position vis-a-vis you in terms of -- you're small now, but as you get bigger, is there a risk that this competitor becomes a little bit more aggressive, right? We've seen it in the past where companies have gotten a couple of points of market share in campus or three points of market share, and maybe Cisco has been a little bit more aggressive on pricing with those customers to retain and/or win back. How do you think about that over the long term? I know you're selling on solutions, butâ¦ I think we've seen that in short term. I think, we're up against an incumbent thatâs extremely competitive and very focused on maintaining their share. Weâve seen that in the data center piece and enterprise. Weâve seen that in the cloud, where they, at one point, had dominant share. So, I think we're used to that dynamic. I don't think we will see or expect any changes from their very competitive position that we've seen in the past. And you mentioned cloud. Have you seen them aggressive on enterprise data center recently? It looks like they're losing share. At least from the data that we've checked, it looks theyâve had a relatively difficult quarter. You guys had an incredibly strong quarter. Just would love to kind of get your perspective. Again, I think it's more solution-based and people looking at sort of the end-to-end value of having cloud fusion and being able to automate those environments and not having a separate network for campus and a separate network from routing and a separate network for data center that requires three different operating systems. That's been the selling point. Got it. Great. And then, sticking with enterprise data center, obviously, it's been incredibly strong. We have this conversation with investors all the time in terms of what's the long-term investment cycle for this market? For example, I'll use UBS as an example. One-third of our assets are on-prem, one-third is our own data center, and one-thirds in the cloud. That's migrating slightly more towards probably public cloud, full disclosure, itâs Azure. We've been public about that. In your experience and from your view, how do you see the enterprise data center market evolving vis-a-vis, let's say, public cloud? Is this a market that can grow reasonably faster than GDP? Or can it go faster if public cloud becomes significantly more expensive, we're hearing a lot of pushback that public cloud is maybe not the right solution for everyone anymore, itâs too expensive. I'd just love to get your kind of perspective. No. I think that that's an interesting point. I do think people are measuring now the expense of the public cloud, but there's still an advantage of ease of use and deployment, and then thinking about how they balance it. We also talk to customers who think about strategic workload that needs to run on-prem. And my guess is, your one-third might fit into that category, which -- this can never go because this has to be on site for data domain versus whatever you have. So, it's tough to say how that changed, but I think we're at a point where people are thinking in terms of -- they've already rationalized their portfolio. Mail went to the cloud, right? So, I think we're at that point where people are thinking about the balance of their investments going forward. And do you think the big delineating factors going forward is cost? I think the cost -- because the reason why I ask is most companies that we talk to, understand the value of a cloud. But what they didn't understand maybe five, ten years ago was this lock-in effect and how costs continue to escalate, and now the bigger part of your cost of goods sold effectively, right, if you're running a P&L. And so, when we have these conversations with some Fortune 500 companies is that I don't want to move more to Azure. I don't want to move more to AWS, because I have a P&L to hit. So, does that maybe lend some credibility that maybe enterprise data center or some of these as-a-service offerings or maybe some of the hardware companies offer, because itâs maybe priced a little bit more aggressively, offset the growth? It's hard to say just from a cost of deployment, you also have geographical diversity. You have the ease of moving and migrating workload. So, if you zoom back, I think it's less clear about those cost benefit trade-offs. And it's tough to say. Right. Okay. Just I'm trying to figure out what we always debate is the long-term investment cycle for public versus enterprise? I know you're well positioned on both sides of the ledger, but we hear from a lot of investors who are very public cloud centric, like this is... And we've tried to -- if we look at kind of the solutions, especially as we go forward, focus on solutioning in the enterprise for hybrid environment, multi-cloud, on-prem, multiple off-prem clouds and trying to make that operational model simple to do all of that. I guess maybe just turning to agnostic. And I know financials are not your focus, Iâm not going to ask your models or anything of that nature. But when we look at this -- when we look at sort of the different verticals, typically, the hyperscalers are a little bit more -- itâs a little bit more aggressive on price or gross margin given the nature of the relationship, enterprise is a little bit better. But when you think about different growth rates going forward, to your point, you're agnostic about technology platforms, but are you agnostic long term, where you want your -- what your business to look like? Is there -- maybe not financial is not the right way to look at it. Is there a risk being overly dependent upon titans, because they tend to be more cyclical than enterprise? They go faster at a point, but then there's a digestion period. I think you have to look at service provider, cloud enterprise as they are separate markets, and they have their own care-abouts, their own solutions and architectures that you need to fulfill. I think that on the cloud side, there's been just phenomenal growth over multiple years. We do think there's an element of cyclicality potentially that we've never seen a cycle. We've seen some flatness in 2019 and 2020, but they do tend to follow the technology roles. So, we would -- but not being in cloud would be incredibly hard as an infrastructure provider today, a networking provider, because you get huge scale, they're really driving the architectures effectively. I think that when Arista started, the premise was, everyone is going to build like clouds. And now we're seeing enterprise customers building leaf and spine architectures, driving a level of automation that you wouldn't have even thought possible five to seven years ago. So, they're clearly the thought leaders today around networking. Since you just mentioned leaf and spine and digestion period, how are you thinking about -- in your planning in terms of your road map from a technology perspective, how do you think about the risk of digestion, right? It's a cyclical business you just mentioned. Do we -- does Arista continue its investment road map through the cycle? So, if you think, let's say, '23, '24, '25, '26 -- well, I guess you have a five-year plan out there, through '25, does it change on -- let's say, there's a shortfall in demand next year, does it change how you think about where you're investing, what your research dollar priorities are going forward? Yes. I think if you're here in the infrastructure business and networking, the dynamics follow Moore's Law. Things get better, faster for similar costs. And we made a bet on merchant silicon because we saw the economies of scale being in the silicon business, they being able to go faster. And weâve seen that model to be pretty efficient in delivery of platform. So, we expect the continuation of that going toward. Next-generation platforms are continuing. It's just part of the way you do business in this market. Got it. And since you mentioned merchant silicon, obviously, that's been a competitive advantage, I think, this year, having a very tight relationship with Broadcom. What are you seeing in terms of new entrants in silicon? And is it something that would interest you? I mean, youâre merchant silicon company effectively, right? Thatâs all you use. We stepped back from that. We're even happier with that decision. And I think we were at the company inception, itâs just incredibly expensive to build silicon, and many of the basic building blocks are used in other markets besides networking, the substrate design, the packaging, SerDes, all the technologies that go into it. And just a rough and tough number, people talk about out of the data center, the networking component being 10% to 15%. So, storage and compute and all the consumer electronics really driving these investments in silicon that benefit networking. It's tough to go the other way around. Thereâs just not enough volume. So -- I mean, so does that -- do you think it gives you a competitive advantage vis-a-vis maybe I know one of your big competitors went down different route, right? They went down their own silicon route to some degree. Does that give you sort of, in your view, a cost advantage going forward, flexibility or [indiscernible] market? I think flexibility and consistency in your road map, it definitely has supported us. And our competitor, in some ways, there's a different positioning of that silicon, but it's always been focused on captive silicon internally even back since its inception. Got it. Back at the Analyst Day, I think there was some discussion about expanding your addressable markets. And one of them was the AI Spine. Can you -- that was a little bit new for us back then when we listened to you guys talk about it. Can you kind of talk about what that market entails, and how you think you can capture share in that particular new addressable market? Yes, I was thinking more about that. I know we would talk about that. And it's been a long time since something that wasn't a computer has connected to the network, right? We had servers connecting to desktops and then we had laptops. Probably the phones were the first thing that was not a computer that got connected to the network and drove a new market, right? So, in some ways, we're now connecting dedicated AI devices to the network. Those clusters are built out as a separate system. So, it almost reminds us of high-performance computing, where you had a cluster that was dedicated to computing something, it then connected to the broader network. So, it's new TAM. It's new opportunity. It's probably not very well-sized by the analysts. But we see it happening in the cloud networks today that we're invested in. And we believe also this is back to where the clouds are important, that will start to take place in other segments like the enterprise. So, how -- I know it's early days, but what would that architecture look like? Obviously, this is new for us. So, how would you be positioned from a technology perspective? One thing we see that's been important in that market is the intelligence seems to scale with the size of devices connected to the network. So, having very large fabrics that are single tier that can connect a lot of devices is important. The second thing is theyâre very expensive devices with memory. So, any stalling, you're not utilizing your asset. So, keeping the AI device fed is a very important metric. And typically, people didn't believe you could do that with Ethernet. So, between our DMA and congestion control and some of the other things that weâve put into our products, we believe that we can make Ethernet work very effectively at 400-gig. And it also drives just higher speeds into those devices themselves. I mean, have you seen any sort of use cases right now or trials that give you encouragement that there's a real commercial opportunity in the intermediate term? With the AI cluster piece that we talked about, we talked about a number of use cases, probably the most near-term realizable. And would it have sort of a similar -- I know I'm not getting into specific numbers, but when you think about everything that Arista has done, it's all at similar kind of profitability profile. Is that how you would think about these types of businesses, where... Got it. Okay. And then obviously, sizing, you said it's impossible, itâs early days, analysts canât gauge this. Is it a market that you think has a handful of winners, three, four or five players that are extracting the economic rents from this market kind of like where we're today in some markets where if I look at hyperscaler type of data centers, it's only a handful of players that really compete at scale? Or is this going to be -- you're going to see a ton of smaller players that can maybe proliferate this market, because it's diverse enough, right, thatâs going to be, I think? That's a really good question. I think there'll be some overlay in systems and data centers today that people have large data centers, including enterprise at some point. Will there be specialty AI providers? I don't know. But it will be an interesting market, absolutely. Yes, the reason why I ask is if you find these inflection points in these markets, where -- maybe it's a winner take most in some cases that it's a hyper-growth market with a fairly big TAM. You have a new entrant that comes out of effectively less field or an existing player that has a much smaller presence that you maybe didn't quite fully comprehend the scale and scope of what they bring to the table and changes the step function or the dynamic of their business, and that's what we are trying to figure out. Helpful. Can we -- and this may be a little bit different. SD-WAN. For years, it sounded as if you were, to be blunt, less interested in the SD-WAN market. I think maybe if that's a fair characterization, you might disagree. You talked a lot about it at the Analyst Day. What's changed? What's changed in the company's perspective? How are you thinking about the opportunity, whether it's a go-to-market or technology perspective? Just kind of expand on that? So, maybe I'll just step back and talk about the application a little bit. And of all things in the network, I think this area has gotten the most names over time. So, how will I connect my enterprise to something at the edge. It could be -- I'm running a bunch of supermarkets, I have to connect all the stores together, or I'm an insurance company, I have a number of branches, et cetera, et cetera, et cetera. And back in the '90s, it was about integrated services. They had to have voice, video, security, all in one box, and that was the technology de jure, right? Then we went into WAN optimization, because we needed a ton of bandwidth and T1 was slow and you had to do something cool, right? And then came SD-WAN where a lot of features and functionality about running over multiple networks and getting rid of T1 and doing that kind of thing, right? Saving some costs. So, we would have been the 15th player in SD-WAN. We also built up some core technologies that connecting the edge is important to have, like just our routing stack in the enterprise and POE devices and edge devices are already part of the portfolio. So, now can we do something cool that would differentiate us. And I think the teams got some really good ideas about a solution that would offer some different technologies and applications to solve that edge connection that we're really excited to deploy. So, it's a combination of having the technology as a basis that we feel fundamentally very good about already and seeing some inflection point in the market that we can take advantage of. When you have a conversation with a customer, a potential customer, what solution or what pain point then does this solution directly address that's maybe not being addressed currently in the marketplace? Yes. So, I mean, consistent with Arista, it's always been in the enterprise network, building on those networks in a more consistent fashion with EOS, a single operating [indiscernible] and the management stack runs across the whole thing. I don't think you'd see any surprises from us in this area. It will be consistent with everything else we've done. If you're running the campus, you'll be able to run this, not a different operating system, very consistent. Understood. And then, we talked about, over time, campus was a new opportunity. This new SD-WAN approach could be a new opportunity. AI Spine could be new opportunity. What else out there are you looking at today from a road map perspective that you think we don't have the core capabilities or competency today, but if I think out three, five, ten years, the market is moving in this direction, and given our position, we can be there, and we need to be there? Yes. I think the one thing that we've talked about is we're excited about what we've done in the management stack with CloudVision. We announced CloudVision as a service. And then we've announced the Data Lake. So, this is an extension of our management architecture, and being able to take all the information that are streamed from all the devices and have a large data repository that we can federate with other folks either trying to consume that data or add information into that database. So, that's a technology area that something that we're very focused on as a team. And with our Awake acquisition, being able to make good security decisions around the information that's going through the networks, not endpoint security, but what's flowing through the pipes, is it right, is it wrong, and making some sense of that is very interesting to us and we see that directionally... So, does that mean that you need to pursue incremental security asset purchases, acquisitions? How does Awake -- so, Awake has a dedicated sort of -- it's solves a dedicated problem, right? It's not a complete security solution per se, doesn't have endpoint, right? But from a security perspective, where are you today in terms of what you need to get to the point where you want to be at? I would say -- just given the TAM that we laid out at the Analyst Day is very sizable, right? So, how do we get more of that? And what functionality and strength need to differentiate and bring that above? So, Awake wasn't really about being a security player. It was about getting the most insight from my network that we're in a unique position to be able to extract that, right? So, I don't think we think we have to go into other tangential market segments or different buying centers. We really focused on that network buying center, but differentiating the product and extending it, I mean, like, we've done with these other use cases. Five to ten years, maybe there'll be other use cases that we see where the network can be adapted to connect. I don't think if you had asked this five years ago, we would have dreamed up the AI use case. Kind of knew what was out there, maybe that would happen. I think people were talking about it, but at the scale that is starting to take placesâ¦ It adds to your capability. Can you kind of walk through how you think about adding a new technology capability? You just talked about all these different use cases. Iâm assuming thatâs a big driver of when you look at an asset or you look at a technology that drives the decision primarily and obviously, there's some economic financial consideration. Is there anything that maybe would create sort of a deviation from that, if there was a larger asset? I mean everything to date in the last several years has been... Yes, absolutely. It's just difficult to find something that would be complementary, not dilutive, they would fit the model, right? And there hasnât really been such a thing. I don't think we would be necessarily against it, but itâs difficult, andâ¦ Can I ask maybe in a different way? If I think back in 2020, 2021, it seems like there was a plethora of small deals done across the industry. Not just you, but Cisco and Juniper. People were fairly aggressive. And it seems, at least from the data that we track, moderated to some degree. Is that a reflection of the economic climate? Maybe private companies have unrealistic expectations in terms of what they want? Or is it a question of that maybe there's just not the right technology assets that make sense for your use case or maybe a competitorâs use case? It seems like the M&A market has been much more subdued... It's tough for me to say outside Arista. I mean, we've been very focused on the assets we've acquired. How would it fit? How will we use them? Cultural fit is important. And if you also think about our value proposition around EOS and the software stack has to be consistent with that, so areas that werenât necessarily switching and routing. We've been able to go out of the box a little bit with Awake that has a different operating system, but it is not really connected to the network. But what we did with wireless, Big Switch. We already had visibility into the network, but being able to make that more usable and consumable was an important thing to add it on to the solution. They had kind of two aspects to it. They had one that was more of a fabric-based kind of software-defined networking, but they had pivoted to more of a network visibility solution. And we've built that into our operating system to extend that to kind from switch to [indiscernible] yes, it's a full solution for network visibility. Right. So, basically, to get the full complement of solutions and get the full functionality and the best use case, it boosts customers to use Arista softwareâ¦ It makes it easier, yeah, hence, competitive advantage. And then, maybe one final point along those points. We've heard from a variety of consumers that, that sort of solution has helped maybe swing the pendulum back away from White Box to an Arista branded vendor in the data center. If there any truth to that? Are you seeing that sort of customer decision? I think, again, you kind of parse this by cloud and enterprise. On the enterprise side, there really isn't a viable third-party operating system that makes it consumable. On the hyperscalers side, I think, a component of this also in the supply chain and being aggressively invest has helped in this environment on the OEM side. So, it sounds like you don't think, let's say, like Meta without getting -- well, I donât want you to talk about specific customers, but that your solution is not a reason why maybe it's been a little bit better than, say, like Facebook's own operating system vis-a-vis with White Box. I would say the situation on the cloud side is pretty static. I think people who have chosen to use White Box and vertically integrated still remains under 100%, some are mixed. I donât think that changes too much. But there's still an opportunity for you to take share in some of these hyperscalers, that would be predominantly White Box over the years? Thanks everyone for joining. Liz, thank you for joining. And if anyone has any questions, please reach out, and we're happy to help.
EarningCall_1935	Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Third Quarter 2022 Results Conference Call. All participants are at present in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Amir Adar, Head of Investor Relations and Corporate Projects. Mr. Adar, please begin. Thank you. And thank you to all our listeners for joining us on this conference call to discuss Partner Communications third quarter results for the year 2022. With me on the call today is Avi Gabbay, Partner's CEO; and Sigal Tzadok, our Acting CFO. Avi will provide an update on Partner's business development. He will then hand over to Sigal, who will provide a detailed discussion of our quarterly financial and operational results. And finally, we'll move on to the Q&A. Before we begin, I would like to draw your attention to the fact that all statements in this conference call may be forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 as amended; Section 21E of the U.S. Securities Exchange Act of 1934 as amended, and the Safe Harbor Provision of the U.S. Private Securities Litigation Reform Act of 1995. Regarding such forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in Partner's press release dated November 23, 2022, as well as Partner's filings with the U.S. Securities and Exchange Commission on Forms 20-F, F-1 and 6-K as well as the F-3 self-registration statement, all of which are readily available. Please note that the information in this conference call related to the projection or other forward-looking statements is subject to the previous Safe Harbor Statement as of the date of this call. For your information, this call is also being broadcast over the Internet and can be accessed through our website. If you have any further questions following the call, please feel free to contact me at 972-54-781-5051. I will now turn the call over to Partner's CEO, Avi Gabbay. Avi? Thank you Amir. Good morning everyone and welcome to our earnings conference call. Q3 ended with solid results of KPI [ph] improvements translated into robust financial execution. In the last call I spoke about the importance of bringing value to our customers. In my experience, simplicity plays an important role to achieve this goal. Focusing on simplicity in our day to day activities is a key ingredient in making Partner more productive, more agile, and more accessible to its existing and potential customers. For example, in the past few months we have optimized our follow-up packages by bringing more value to our customers, adjusting tariffs in older discovery plants, and reducing the overall number of packages. By doing that we helped our customers to find quickly and clearly the best offer while at the same time improving productivity and satisfaction of our own sales and customer service teams. Another example is the termination of sales which tied cellular packages benefits to equipment purchases. These sorts of deals didn't match the value to the requirements of the customers and didn't follow the rule that one plus one needs to be at least two. I hope this gives you some color on the changes that we are implementing to better maximize long-term revenue from customers while increasing customer satisfaction. As for 5G rollouts, deployment is continuing its best at space. We continue with the expedited 5G infrastructure deployment and expect to achieve over 40% population coverage by the end of the year. Still, it is important to note that 4G continues to play an important role and our premium 4G value packages are getting attraction. In fiber optics we're expanding our value chain as we become a dominant fiber optic infrastructure player as our fiber optic network has reached 929,000 households, homes connected as of today. Regarding challenges, as I said in the previous call, equipment sales is one of the areas in which more focus is needed in order to build new capabilities that will match our brand strength, the geographical reach, and vast customer base. On a company level, a new diversified and experienced management team has been formalized which will take the company to new records. I would like to thank Partnerâs employees for their contribution to the results and will now turn the call over to Sigal Tzadok for a detailed review of our financial results for the quarter. Thank you, Avi. The growth in revenues this quarter was the result of a stronger seasonality impact in the cellular segment and the continued growth in fiber optics subscribers. Along with the increase in revenues, we continue to control the level of OPEX despite onetime expenses of 17 million Shekels related to the collective employment agreement. From July 2022, adjusted EBITDA increased by 10% from 250 million Shekels in the third quarter of last year to 276 million Shekels this quarter. Regarding the cellular subscriber base, as we noted last quarter, the number of Ministry of Education package, subscribers decreased by 66,000 during the third quarter. Excluding the impact of this subscribers, the cellular subscriber base increased by 13,000 in the third quarter and the sale of churn rate totaled 6.8% compared to 6.6% in the previous quarter in the third quarter last year. Cellular output increased for the second consecutive quarter to total 51 Shekels compared to 48 Shekels in the third quarter of last year. Turning to the fixed line segment, the number of homes connected to our fiber optic infrastructure increased by 63,000 in the third quarter and the number of fiber optic subscribers increased by 18,000 compared to an increase of 17,000 in the previous quarter. The penetration rate of fiber optic subscribers from potential customers in connecting buildings remains unchanged at 13%. I will now briefly review funding and investing. Adjusted free cash flow for the quarter totaled 38 million Shekels, CAPEX payments in the third quarter totaled 205 million Shekels including a payment of 31 million Shekels for the 5G license fee for the tender that was held two years ago. Net debt was 667 million Shekels at the end of the quarter compared to 662 million Shekels at the end of the third quarter last. Finally, the company's net debt to adjusted EBITDA ratio stood at 0.6 at the end of the third quarter compared to ratio of 0.8 at the end of the third quarter last year. I will now be happy to open the call for questions. Moderator, please start the Q&A. Hi, good evening everyone. A quick question from me on the fixed line side, can you tell us what the split of new ads in the of customers connected to fiber lines are on your network versus wholesale? Okay. And the 900,000 homes passed, I know you guys have set a goal that's a little bit higher than that this year. Has anything changed, are you ahead of schedule on that or are you on schedule or are you thinking about passing more homes now given the success you've seen so far? Okay, so the end of this year we should or should say going into next year we should expect to see a significant decrease in CAPEX, is that correct? We didn't summarize yet the budget for 2023 because we are in the process of it and we have to decide on the how many home we are going to pass this year and some other investments. So I cannot elaborate on our budget till 2023. So does that mean you think there's a possibility that you would continue rolling out fiber and homes passed at the same rate that you're rolling them out now or would you expect for there to be a lower rate in 2023 of that? Definitely there's going to be a low rate in 2023. Still, there are other issues that we want to -- we are -- letâs say discussing the possibilities of investing in other issues that we need, it's not only fiber, it's not the only investment that we do. Okay, and then the last question is given the increase and continued higher levels of free cash flow, I know we talked last quarter about potential dividends, can you tell us where you are on that and as far as where Partner is or where the Board is as far as considering a dividend? Okay, first of all, we believe that at the end all the stakeholders should enjoy the company including the shareholders. And shareholders the way to -- let's say to enjoy the company by dividends and we intend to summarize the budget to 2023. And then to almost at the same time to make the plan for five years to see the business plan of the company five years ahead. And then we'll make the decision about the dividends whether yes or no and the amount. As you probably understand, I mean it's probably yes, the issue -- the only issue is what is the amount and what is the schedule. And would that be like it was in the past, do you believe you might have answered this question yet, a quarterly dividend, do you think it would be a semiannual or just an annual dividend? [Operator Instructions]. There are no further questions at this time. Before I ask Mr. Gabbay to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S., please call 1-888-254-7270. In Israel please call 03-925-5921 and internationally, please call 9723-925-5921. The recording is also available on the company's website www.partner.co.il. Mr. Gabbay, would you like to make your concluding statement. Yeah, thank you. Well, Partner continues to report growth and stability in the financial results together with continued investment in fiber optics in 5G deployments. Correspondently in these days, we have concluded the formalization of the company's management team while staying focused on the further service improvements to our customers. I want to thank you again for joining us today and we look forward to speaking to you next quarter. Have a good day. Thank you. This concludes the Partner Communications third quarter 2022 Results conference call. Thank you for your participation. You may go ahead and disconnect.
EarningCall_1936	All right, we'll get started here. 30 seconds, all right, this is always a highlight of the conference for me to have Phillips 66 here. And you got keynote at a couple of years ago at the conference. And gosh, a lot happened and refined and I don't think any of it pre-COVID, or the midst of COVID would have thought that refining margins would have ended up being where they are today. So we want to talk with the leadership team about how they're seeing the go forward, especially on the back of what I thought was a very effective Analyst Day. We have Mark Lashier, President and CEO, Kevin Mitchell, the CFO and Jeff Dietert, Vice President and he knows everything macro. So Mr. Lashier, maybe you talk about the response from investors on the back of the Analyst Day. What do you think was the most important message and from an investment community perspective how we can track your progress and hold the company accountable? Absolutely. First, Neil, thanks for having us here. It's great to be here. Happy New Year. We did enjoy our Investor Day was I think we had good strong message that we wanted to deliver. And really at a high level, the takeaway is we want to be very focused and very disciplined, and we're going to be disciplined around returning value to our shareholders in the near term and the long term. And near term, we committed to returning $10 billion to $12 billion cash returns to shareholders from July of this year through the end of 2024. And that's a combination of course of dividends and share repurchases. Where we are today with a dividend, you can think about a little less than half of that number will come as dividends and the balance as a share repurchases and we have high degree of confidence that with our outlook on margins, and a conservative view that we'll be able to deliver against that. And then you go beyond that, then we had, we talked a lot about our business transformation efforts that are underway, fixing some things in our refining business, reducing our costs and positioning us to compete in any environment. Refining, we're looking at cutting, reducing our cost by about $0.75 a barrel and also enhancing our ability to capture market what the market gives us by about five percentage points, enhance the availability of our assets create more flexibility. On the bigger picture, our cost restructuring. We're targeting a $1 billion in cash reductions by the end of â24. And we're -- we've targeted about half of that this year, about half that next year, we're outperforming so we've got good momentum going into next year on those metrics. And when you look at that billion-dollar number, about $800 million is actual cash cost reductions, and then about $200 million in sustaining capital. And beyond that, beyond the end of â24, we'll continue to accrue those sustainable recurring reductions through some modest capital investments. So you'll see some upside to that number beyond â24. We also talked about our wellhead to market strategy around midstream, particularly NGL midstream and key part of that is a DCP acquisition, that acquisition will add about a billion dollars a year in EBITDA and of course there'll be synergies associated with that as well. That we'll talk about once that transaction is complete. And other things we've got going on, whether it's in petrochemicals, the cost initiatives, all those things add up to about an incremental $3 billion in EBITDA that we will grow from our current base over the next couple of years. We're going to cap our capital investments to $2 billion to be very disciplined about a billion dollarsâ worth of growth, about a billion dollars in sustaining. I said we were going to reduce, we've been historically at about a billion dollars, we're going to reduce $200 million of sustaining capital but when you fold DCP in, their sustaining capital expect about a billion dollars and so that's really it, we're going to do things to improve our refining performance to have a very focused and deliberate growth in specific areas. Nothing getting out over our skis. We talked a little bit about what we're doing in renewables, mostly renewable fuels, the renewable diesel, sustainable aviation fuel, those kinds of things. But as far as tracking that we're -- we intend to deliver metrics and talk about metrics at the very least at earnings calls on a quarterly basis, so you can be able to track what we're doing and how we're recapturing that. We don't count anything until the CFO says we can count. And so we'll see scorecards, that sort of thing coming out around the cost reduction and enhancements that we're driving so. We are pretty excited about it. So we're moving heavily into execution, last year was a lot about putting all this together and planning. And now it's all about execution and delivery. It was great. That's a good foundation for our conversation. Let's start on refining. And this question for all of you. But maybe I'll pick on Jeff first. So just your perspective on where we are in the refining cycle? The perspective on cracks when you actually set out the Analyst Day, which when you can do math implies $13 of long term EPS, you set it at a pretty conservative crack spread. Does that reflect some conservatism in the way you're thinking about the market? Or and just where are we -- what's the potential that we're above midcycle? Yes, so I think one thing that was big that really happened since the pandemic is we've taken about 4.7 million barrels a day of refining capacity out of the market. And so that rationalization has tightened up the market. Last summer, we saw demand back close to 2019 levels, and saw margins, frankly, I didn't think we'd see and hadn't seen historically. And so that is tight in the market, diesel in particular is very tight. Today, diesel inventories are 15%. below the five-year average, gasoline inventories are 7% below the five-year average. So the market is still tight. We've seen a little bit of softness in demand, recently, gasoline and diesel down relative to 2019 levels. But still a tight market. When we think about mid cycle, we use the 2012 to 2019 period. And when average rent adjusted crack during that period of time, was $12 a barrel. And today we're over $20 a barrel in January, which December in January are usually your weakest months of the year, weak demand period versus a summer driving season. We do have an above average maintenance period, the industry as a whole does for the spring. So maintenance is going to be heavy. For Phillips 66, we have had our heavy maintenance period in 2022 last year, so we'll have something closer to normal turnaround year this year. But things look to continue to be tight as we are maximizing diesel yield year-round. And so as we approach the summer driving season, gasoline, we expect gasoline and diesel to be tight again this summer now. China's an interesting wildcard because it can move two ways. And Mark, you've spent a lot of time looking at China in your experience running chemicals businesses, what are your thoughts around reopening and what that could mean for global demand, but also the offset potentially, of higher product exports? Yes, I think that's a great question. We pay a lot of attention to that both from refining, refined product perspective, as well as petrochemical. I think from a petrochemicals perspective, it really could be a catalyst that pulls us away from what we kind of see as the bottom of the trough right now. And it's those markets, it doesn't take a lot to catalyze a movement towards restocking and see margins expanding. Refined products between COVID and China and the sanctions on Russia and crude oil from Russia going to China and India and very soon, maybe refined products. And if you're Chinese producer, do you run Russian crude through your refinery to produce refined products? Or do you import refined products and the Chinese are very good at making buy versus make decision. So it's going to be an interesting dynamic to see how that all plays out. But I think that's -- that is the biggest wildcard I think that we're looking at in â23 is how that equilibrium gets reestablished. But to be clear, even though you use $12 at midcycle in the way that you set your long-term guide, you believe we're going to sustain above midcycle? I believe we will. I think there's a number of things driving that dynamic. I think the cost structure in the US is competitive globally. I think that Europe while it's not having the blowout cost and energy that it was, itâs still going to be under pressure. It's going to put pressure on which crudes Europeans can process and so I think that does create a structural advantage, at least in the near term, and they may reset out in the future. But we're bullish for now. Well, that's natural gas prices in the US about $4 a MMBtu. In Europe, it's about $24 a MMBtu. For us, that's about a $6 a barrel cash operating cost advantage in today's market. That's real money, and higher European gas prices, even though it has come off cyclical peaks. Still will differ a European refiner from running a hydrocracker, but also from processing heavy crude, and I think that is showing up less than locational differentials in Western Canada. But in terms of quality differentials, and you guys have the largest western Canadian crude buying capability of any refiner in America, so you talk about how you've been able to take advantage of that here more recently? Well, certainly, we've got refineries positioned to take advantage that both from the pipeline connectivity as well as the kits that they have on the ground, and so it has been beneficial to our refineries. I think, Jeff, do you want to comment further. Yes, I think we're experiencing really wide differentials today, $27, $28 a barrel discount to WTI. We do expect that to soften next year, the SPR, a lot of the crude pulls out of the SPR in 2022 was medium sour crude, but still expect strength there, the forward curves about $23 a barrel for 2023. So that's still a nice advantage for us. Yes, okay, let's talk about the operational improvement journey. And the self-help, because that's really important. So you spent some time we saw each other over the summer, and you talked about, you're doing some diagnosis to try to figure out the root cause of why uptime hasn't been as good as you wanted it to be? And what do you think as you look back and diagnose the initial issues, what they work? And what is the structural fix, to ensure that you're operating at first quartile going forward? Yes, I think that it's a number of things as the head of our Refining Division, Rich Harbison talked about on Investor Day, that we have taken our eye off the ball a little bit with respect to refining and refining, it was kind of a beat-up industry for a couple of years. And we were focused on growing midstream, we were focused on developing other opportunities, there refining was facing existential questions, frankly, across the globe, that's changed. And that we've got the opportunity to correct those things and to come back and actually make some fairly minor investments to enhance our ability to operate. I think we've come through a very heavy turnaround season, post COVID, the kits are running well, they're running incredibly well. Even through the winter storm, they showed great resilience, I think that we've turned a corner there from a bit on our ability to operate, but we're going to continue to focus on enhancing that availability. Now if the market is there, we want to be able to run and we think the market is going to be there for at least a couple of years. And to be able to capture those margins that are out there and in the same time, reduce our cost and enhance our ability to process crude if the WCS, this contract, we want to be able to shift to lighter crudes that are available in North America. So we want to focus our ability on key assets to be able to compete for the very long term. So we're talking decades now instead of years, and we're in it for the long haul in refining and we've got to make the right moves to make sure those assets are ready to fight and whatever the market environment is. It strikes me one of the practical implementations of this is shifting from really a hub and spoke type of a model where each of the businesses ran as independent refiners to one where it's a lot more centralized. Is that a fair assessment? That's a fair assessment. That's a very accurate assessment. Frankly, we want to simplify the business. We want to standardize the way we run our refinery business. We want to optimize across the platforms, technologies that we've put in place will enable that. And we really think it's the way to position ourselves competitively, and it's being embraced by the organization today. And that's where are we in terms of bringing that business into the fold and because you now have a controlling interest in the entity. We are making progress, we're already taking action, we are essentially operating the business now. We've identified we're driving synergies. Now Kevin is actually the Chairman of the DCP Board. So maybe I'll let him address the question. Neil, I mean, you're right, we're limited on what we can say. And I think the one thing you could be sure of is when we have something to tell you, you'll be the first to hear, we will be public on that. And just from my perspective, in terms of what that means timeline, once we have an agreement, and this whole process is in negotiation with the special committee of the DCP board, they have a fiduciary responsibility to the LP investors. And so they have to go through their process, obviously, our motivation is to be able to conduct this transaction at the lowest cost, lowest price, we can, but they're motivated the other side of that. So we're working through that process. And when we have something to say, we'll certainly be in a position to do that. But just to kind of think about timeline, once we reach agreement, there's about a probably four-month period before we close because it's still an acquisition of a public entity. And so there's a defined process around that. And it takes a little bit of time. So realistically, if you assume we get something done in the not-too-distant future, it's still going to be a second quarter closing. But to Mark's earlier point, we already control the entity, we're already executing on integration plans. In fact, we're, the integration planning is done, we're executing on integration. And you saw some of the changes that were announced at the end of the year. And so we're marching quickly down that road. And the only downside is, at this point in time, any synergies we only capture the 43% benefit net to us, once the rollout is complete, then it's 87% to us, so we're continuing to progress down that path. What does DCP provide to Phillips 66? And how is the weakness of the NGL market change the, your thinking around the investment, or has it not at all? We've got a long-term view on the strength of the NGL markets and the resource base in the Permian and DJ, where we can access is going to be around for a very long time. And it fits well and integrates well into our view of petrochemical markets. So they're going to drive demand long term for NGL products as well as gas and gas is becoming more important, natural gas is becoming more and more important. So we, -- DCP acquisition and the roll up of the public units is key to our strategy to have a wellhead to market strategy. So we can be a one stop provider for producers in the Permian, for instance. And they know that they can have their molecules, their NGL molecules or gas molecules can be taken to market without going through multiple parties where they got to have somebody that does a GMP, somebody does a transportation, somebody does a fractionation, we've got the whole value chain now. We see that as where we want to be to derive future growth. Neil, if I could add just on macro perspective, NGL and petrochemical feedstocks have grown at a pace faster than overall GDP, as opposed to crude demand, which grows at a fraction of GDP. So the growth there has been sustained for quite a while and we expect that to continue. NGL production in the US has outperformed crude and natural gas for many years. And in 2022 NGLS grew 8% to 9%. Crude was up 4% and natural gas was up 3%. So it continues to grow at a faster pace than the other products. And I would just add further, you look through the pandemic, DCP held up extremely well during the pandemic period, which was a little bit of a surprise to us to be honest, but it really did, which speaks to the resilience of those molecules. The other factor is their businesses about 70% 75% fee based, so it's not 100% commodity exposure, there is some residual commodity exposure there. And honestly, for us in our portfolio, we're okay with that. Because as you know, we have significant commodity exposure anyway. And as you talked to ratings agencies, they're okay with you taking on a little bit more leverage because of the higher fee base contribution. So that's actually a great pivot over to chemicals. And Mark, I'll turn this one over to you. We went from euphoria to depression in this market a matter of a couple of months. I thought refining was volatile. What the heck happened? And how do we get out of it. I guess the cure for high prices is high prices. But what you're seeing is really when, chemical demand was strong, polyethylene demand was strong across COVID for a number of reasons. That included weather disruptions and just strong demand. Demand continues to be strong with there's been quite a few capacity additions in North America. And those are kind of running their course now over the next year, demand continues to increase globally, though, there could be an impact of recessionary influences and what happens in China. But the fact is, we're kind of running our course on the near-term demand or the supply additions, and you're seeing the demand continue to increase. So we believe margins have pretty well bottomed out. And if you look at the data, they've flatlined, and they're starting to show some life again. And should just typic season low typically is towards the end of the year. And so we see things starting to improve probably maybe the second half of this year and continue to 2024. So you really do a good job of putting this in terms of cents per margin the integrated basins. And so I think your midcycle over the years has been about $0.30. Yes. And I think when we look at CPChemâs US Gulf Coast II, potentially RLPP, those coming on in â26, â27. That turns out to look like a pretty fortuitous time to bring assets on because there's not a lot, you look at everyone pulled back hard through COVID, looking at capital investments, and yes, if you wake up tomorrow and say, Gee, I want to build a petrochemical complex, it's about a 10-year horizon. And so I think that the things that you would see come on in â26, and â27 have to be pretty well baked at this point in time. And there's not much going on, so yes. Interesting because as we talked to the majors, and we'll hear from Aramco and others over the course of this conference, I think a number of them are looking at the demand profile, exactly what just said, gasoline looks tough. It looks pretty good in chemicals. And so there's a tendency to move towards building out a desire to build out in areas where growth is more significant. But your point is, it's different to do the work on and analysis around project versus getting FID? Correct. It's a long process to develop these, and there's a handful of companies that have the wherewithal to do it. So there's been a fair amount of discipline over the years. So at your mid-cycle margin, how should we think about the returns on your recent Gulf Coast FID? And why are you excited about that project? Yes. The Gulf Coast FID is going to be mid-teens, and we've always upside to those kinds of projects. There's always debottleneck opportunities. And so I think you -- and that's consistent with what CPChem has done over the last 20 years that we won't. We take a very conservative front view. The capital looks good. It came -- we worked hard to get it to where it is. The construction is going to happen at a good window. There's not a lot of other competing construction projects. We've got line of sight on labor. So we're comfortable with that. And inflationary pressures, I think, have been taken into account in that number, and we see those starting to ease by the time we really hit the heavy construction. So we're feeling pretty good about it. If I can just add a little bit on the returns. So those -- that mid-teen is a project-level return, and that project is being financed at a sort of 50-50 level. So one, in terms of the effective returns to CPChem and to us is greater than that because of the benefit of the leverage but that also plays out in terms of the capital funding commitments to it. So you've got a 51%, 49% joint venture and then 50% financing. And so when you do the math and you then figure that's a spend profile over about a 4-year period. The capital commitments to CPChem really are very manageable. And in fact, less than -- quite a bit less than the original Gulf Coast project, which did not have financing and was 100% CPChem level. Yes. CPChem will also be the marketer for the offtake. And so there'll be an uplift for them -- there as well. And they're also -- because it is located and will tap into existing CPChem infrastructure that they'll see additional return benefit there. It will be incremental above what the project was [inaudible]. Okay. That is helpful. So then the question is the composition of the business. It's really been balanced across these four different pillars. If you look at some of parts equal weighted marketing, chemicals, refining, and midstream. Is there a conscious effort and decision here to say, all right, refining because we're worried about this on a long-dated basis. We're going to start investing a little bit more in chemicals and so one was going to make up for the other? Yes. I think that it really is all about what you believe about growth and how you can position yourself to take advantage of growth and secure those returns that our investors expect, and that will drive it. And so we see the growth in NGL. We see the growth in chemicals. We see modest opportunities. And I like what John said about bullets versus cannons in renewables because that's exactly what our strategy has been. We've put our toe in the water of several places, renewable diesel is a lot closer to home. We've got assets that are very amenable to that. So that's been a bigger step for us, but the other renewables or longer term, we're not -- we're continuing to press down that path, but we're going to be cautious on some of the more long-term, more exotic opportunities. And so you're going to see that balance. Some of those things may show up in refining like Rodeo or if we do anything in sustainable aviation fuel, but you're going to see chemicals, obviously, attracting more capital, NGL attracting more capital, marketing has been low capital, high return and we continue to look. We've got a very specific strategy, targeted strategy there that we like that's been successful across COVID, across a number of different market conditions. And so we're going to continue to make modest investments there as well. Yes. Let's talk about marketing. That has been a consistent surprise relative to our model, and you did raise your mid-cycle view of that business. What's going on to drive higher cents per gallon effectively? Yes. The higher cents per gallon because we're getting more exposure in targeted markets to retail margin, and we're focused on markets where is a retail margin to capture. And we've partnered with entities that know more about running the convenience store part of it than we do. And we bring strength to complement that. And so you've got an evolution going on in the marketing where we used to supply gasoline, diesel to literally moms and pops that were out there running these stores. And they've grown to these moms -- 50, 60 or 100 stations, but maybe the third generation is not interested in it. So we know the business really well. We know the assets. We know the environment really well. And so we're partnering with those that know how to run convenience stores, but we can then participate in the region. And we do it in a very -- in that. We've got -- we know what we're looking for in specific markets to take advantage of that. So we're seeing gasoline demand down about 5% relative to 2019 levels and diesel down about 4% recently. So we've seen demand softened a little bit relative to last summer, we were approaching 2019 levels. And as you've done the analysis and you kind of tried to ascertain why we're trending lower than pre-COVID levels. This might be an economy being bigger than where we were back then. Is it the remnants of COVID? Is it work from home dynamics? Is it the consumer wallet being impacted by inflationary forces? How do you think about that? Yes. There's some of all of that. I think we've seen it hit on the East Coast and the West Coast more significantly than the central part of the country. We've not seen commuters go back to that 33% that was pre-pandemic component of overall U.S. gasoline demand. There's been more in the press about Gavin Newsom, trying to take ICE vehicles out by 2035, the concern over inventories on the East Coast, it's been in the news a lot more. And we know that when it's in the news, it tends to impact consumer behavior, where it's been not as much in the news in the Central Corridor and the Gulf Coast. So it hadn't had as big an impact. So I think all those are variables. Yes. And I think that you still -- the airlines were perhaps hit hardest during COVID, their demand destruction and the industry was able to ratchet back and make jet fuel go away in different ways. But I think the rapid recovery in travel, I think the airline industry has struggled to keep up with that. And I think it's still limiting the growth in jet demand is just the capacity of the airline industry to keep planes moving to keep everybody happy. It looked like it's getting better and then maybe 2 steps forward, 1 step back. Jet's actually the tightest market today. Jet cracks are the highest in diesel and gasoline is lagging. Now that's been interesting to see the difference between the distillate complex and the gasoline complex. Gasoline is basically at the 5-year this time of year, diesel in jet trading very strong. You have this heavy refining kit. Are you running max diesel right now? And how do you think about that spread between these two products, especially in an environment where European gas is still elevated, but it's not $12 a barrel elevated to $6 a barrel elevated. Yes. so diesel, we max diesel all year last year. I think the industry did as well. There was incentive to -- which historically, we max gasoline yield in the summer months. But even -- so we ran hard through the summer. There was a heavy turnaround season in late September, October. And then the industry ran hard November and December. We looked up early December, the industry was running 95% utilization. Typically, in December, we're running 88%, 89% utilization. And so gasoline inventories recovered somewhat but they're still 7% below the 5-year average, and we see heavy maintenance this spring and go -- likely to go in with pretty tight inventory situation into the summer driving season. Again, even -- so we're expecting to max diesel throughout the year. Okay. That makes a ton of sense. So let's spend some time on low carbon and we'll finish off on the fun stuff that how we think about your mid-cycle cash flow because I think that's going to be really important for investors to think about how to value your businesses. What is the low-carbon strategy? And help us -- I think it was at this conference, Jeff, right, three years ago that you guys announced that you were starting to develop -- two years ago, you're starting to develop a low-carbon -- that low carbon platform. What is -- what's your EBITDA expectation from that business and target? And how should we think about your strategy there? Yes. We've talked about a $2 billion EBITDA by the end of the decade. I think that we're not going to move heaven and earth to realize that. We really are focused on how do we get the kinds of returns that we expect that our shareholders expect from emerging energy opportunities, from energy transition opportunities. And that landscape is evolving. And so really, from a lower carbon perspective, it starts with our existing hydrocarbon business. How do we lower the hydrocarbon -- the carbon footprint of our hydrocarbon business. So we've got goals in mind there. We've published our Scope 1, Scope 2, Scope 3 emission targets there. But then our next nearest neighbor to that is our aspirations around renewable fuels and primarily the first move is renewable diesel, taking used cooking oil, vegetable oils, animal fats, converting those to renewable diesel. We've got an asset in California that's being converted today, our Rodeo facility. It's got hydrotreating capacity that's perfect. It's almost as if it was just put there for this purpose. We can put new catalysts in there, put a front end on that to clean up all these different cats and dogs that we'll bring in to process there. It's in a great market, great logistics location. We've got access to feedstocks. And there's a unit running today, unit 250 is proving the concept. So we've got great comfort there. It's going to be a high-return project. The next nearest neighbor to that is sustainable aviation fuel. There's strong market demand for sustainable aviation fuel, every airline has made net zero commitments and really the only opportunity for them out there today would be sustainable aviation fuel, and there's not enough go around. And so there's a market pull, there's government support. So that's starting to look interesting as well. I think the key there is to not compete for the same feedstocks that renewable diesel consumes into sustainable aviation fuel. We do produce a small amount of sustainable aviation fuel, co-processed in Rodeo. We do produce a small amount in our Humber facility in the U.K., but longer term, I think it's going to be on purpose production of sustainable aviation fuel. Then you start looking at things like hydrogen and carbon capture. I personally believe that carbon capture is going to be very important because it's going to be hard to get away from the high energy density of liquid hydrocarbons for a very long period of time. And the only way to mitigate that carbon that the Scope 3 emission is carbon capture. So we believe that carbon capture is going to be important. We're not doing fundamental research in carbon capture, but we believe that the technologies are out there that are going to become very important and necessary hydrogen. We know a lot about hydrogen. We know a lot about the cost of hydrogen, how hydrogen is produced. And I think hydrogen is over the horizon a bit from a cost perspective, moving to an entire hydrogen economy I think it's going to require nuclear fusion or something like that long before that happens. But we are shooting bullets in that direction. No cannon balls yet, but we're tracking that. We've got technologies that we're looking at around hydrogen. And we've got our battery opportunities. We could believe both EV batteries, lithium-ion batteries for EVs as well as storage batteries to facilitate the use of wind and solar power are important. We aren't investing in wind. We're not investing in solar, but we certainly are looking at helping others invest in wind and solar around our facilities, so we can again lower our carbon footprint of what we do today. Yes. I'm not even -- I'm not sure if I'm even allowed to ask you about needle coke given all the sensitivities and how much of the market, you're involved in. But just talk about the contribution from that business. It does seem to us that pricing has firmed up a little bit there. Yes, pricing has firmed up, and I think that you look at the scarcity of materials to meet the world's aspiration around lithium-ion batteries, one of those that are challenged, most is graphite, synthetic graphite, and our needle coke goes into synthetic graphite production, it's a very good precursor to synthetic graphite. So we're -- that's why we are looking at that value chain to find out where is -- where can we capture the most value, is it at the needle coke is that synthetic graphite, is it somewhere further down the battery value chain. But again, we're walking before we run. We've made our investment in NOVONIX. We're learning a lot about that business today. There's going to be ecosystems built up around lithium-ion batteries in North America and in the UK or in Europe, and we're well positioned from Lake Charles and from Humber in the U.K. to supply those ecosystems or participate in them if it looks like the right thing for us to do. Yes. From a demand perspective, we're optimistic as well. Obviously, electric vehicle market is growing, and we serve that. But also the steel manufacturing, electric arc furnace has a smaller carbon footprint than traditional steel manufacturing, and we are seeing the addition of new electric arc furnaces into the market. So both aspects of demand look positive. Great. We only have a couple more minutes. I want to make sure people get food before -- for lunch as well. But I thought Kevin, I'll finish with you on just the numbers, right? You always do a good job of helping bridge from mid-cycle cash flow to thinking about how you're going to use the cash. So walk us through the numbers. Yes. So what we laid out at Investor Day, mid-cycle cash flow on a 2022 basis of $7 billion. Obviously, 2022 actual cash generation significantly stronger than that. But on a mid-cycle basis, $7 billion, growing to $10 billion by 2025. So that's $3 billion increment. And it comes from a combination of the midstream growth that is driven primarily by the acquisition and integration of DCP. There are some other components to the midstream growth but that's a large piece of the $3 billion in cash flow growth. We also see Rodeo renewed coming online in 2024 and that's another approximately $700 million of EBITDA, which is going to translate into about the same from a cash standpoint. And then the third major element to that is the business transformation efforts. And so the business transformation, by that point in time, it's a $1 billion run rate, of which there's a couple of hundred million of sustaining capital, $800 million on the cost side of it. And so when you put all that together, you're at this approximate $3 billion growth in cash generation. But I think what's really important when you measure that against our commitment to returning cash to shareholders, we actually can deliver on that commitment based on the 2022 mid-cycle. So that $7 billion, the dividend is just under $2 billion, and we're committed to competitive, secure and growing. So you can continue to expect to see an increase in the dividend on an annual basis. And effectively, that will get funded -- that increase will be offset by the impact of share repurchases. So $2 billion on the dividend, the capital program at a $2 billion level, approximately $1 billion of sustaining and $1 billion of growth. You saw the capital budget that we laid out for this year, very consistent with what we said on that. And so that's $4 billion that's consumed. That leaves $3 billion for share repurchases, any incremental work you want to do around the balance sheet. But it gives us a lot of flexibility, especially when you consider that we're actually in an above mid-cycle environment. We were significantly above mid-cycle last year. We will go into 2023 with a strong cash position. And yes, we got the DCP buy-in to fund. But the DCP buy-in also funds a sizable component of that cash generation growth. And so that will start accruing to us pretty soon once we're able to get that transaction completed and announced. And just one other comment from a balance sheet standpoint. We did -- you may have noticed in December, we paid off $0.5 billion of debt at the Phillips 66 level. That was debt that was maturing anyway early this year. At the DCP level, we also redeemed $500 million of preferred equity. That became callable in December. At that point, it also went from a fixed coupon structure to a variable rate structure, which would put it at about a 10% cost of funding. So that was a very straightforward financial transaction. It also goes to continue to help clean up the balance sheet. So I think we can do all of that and stay within our stated objectives of a 25% to 30% net debt to capital level, which we feel very comfortable given that will include the -- and we already have consolidated the DCP debt and the funding associated with that. And Neil, just to put that in perspective, $10 billion to $12 billion for a company with a $45 billion to $50 billion -- returning 20% to 24% to shareholders over 2.5 years, 10 quarters. Yes. That's great. Well, thank you. The story is very, very clear post the Investor Day, well done. I wish you guys a wonderful '23, and thank you for coming to Miami.
EarningCall_1937	Thank you for standing by and welcome to the Autodesk Q3 Fiscal â23 Earnings Conference Call. [Operator Instructions] As a reminder, todayâs conference call is being recorded. I would now turn the conference over to your host Mr. Simon Mays-Smith, Vice President, Investor Relations. Please go ahead. Thanks, operator and good afternoon. Thank you for joining our conference call to discuss the third quarter results of our fiscal â23. On the line with me are Andrew Anagnost, our CEO; and Debbie Clifford, our CFO. Todayâs conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. You can find the earnings press release, slide presentation and transcript of todayâs opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, acquisitions, products and product capabilities and strategies. These statements reflect our best judgment based on currently known factors. Actual events or results could differ materially. Please refer to our SEC filings including our most recent Form 10-Q and the Form 8-K filed with todayâs press release for important risk factors and other factors that may cause our actual results to differ from those in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numerical growth changes as we discuss our financial performance. Unless otherwise noted, each such reference represents a year-on-year comparison. All non-GAAP numbers referenced in todayâs call are reconciled in our press release or XL Financials and other supplemental materials available on our Investor Relations website. Thank you, Simon and welcome everyone to the call. We again reported record third quarter revenue, non-GAAP operating margin and free cash flow. Encouragingly, the business is performing as weâd expect given secular growth tailwinds and macroeconomic, geopolitical policy and COVID-19-related headwinds. Subscription renewal rates remain resilient. Our competitive performance remains strong. Outside of Russia and China, new business growth slightly decelerated in the quarter, most notably in Europe, but overall growth remains good. And we see less demand for multiyear upfront and more demand for annual contracts than we expected. We are hopeful this is a positive signal for our transition next year to annual billings for multiyear contracts. Overall, our leading indicators are consistent with these trends. Channel partners remain optimistic, but with hints of caution. Usage rates continue to grow modestly in the U.S. and APAC, excluding China, but are flat in Europe, excluding Russia. And bid activity on BuildingConnected remains robust as the industry continues to work through its backlog. We are reinforcing the secular tailwinds to our business by accelerating the convergence of workflows within and between the industries we serve, creating broader and deeper partnerships with existing customers and bringing new customers into our ecosystem. Our strategy is underpinned by disciplined and focused investments through the economic cycle, which enables Autodesk to remain well invested to realize the significant benefits of its strategy while mitigating the risk of having to make expensive catch-up investments later. In September, we hosted more than 10,000 customers and partners at Autodesk University. There was incredible energy, excitement and optimism for being together in person for the first time in 3 years. There was also palpable momentum behind the digital transformation of the industries we serve. At AU, we announced Fusion, Forma and Flow, our three industry clouds, which will connect data, teams and workflows in the cloud on our trusted platform. By increasing our engineering velocity, moving data from files to the cloud and expanding our third-party ecosystem, they will enable Autodesk to further increase customer value by delivering even greater efficiency and sustainability. I will now turn the call over to Debbie to take you through our third quarter financial performance and guidance for the fourth quarter and full fiscal year. Iâll then come back to provide an update on our strategic growth initiatives. Thanks, Andrew. In a more challenging macroeconomic environment, Autodesk performed in line with our expectations in the third quarter, excluding the impact of in-quarter currency movements on revenue. Resilient subscription renewal rates, healthy new business growth and a strong competitive performance were partly offset by geopolitical, macroeconomic, policy and COVID-19-related headwinds, foreign exchange movements and less demand for multiyear upfront and more demand for annual contracts than we expected. Total revenue grew 14% and 15% at constant exchange rates. By product, AutoCAD and AutoCAD LT revenue grew 10%. AEC and manufacturing revenue both grew 13% and M&E revenue grew 24%, partly driven by upfront revenue growth. By region, revenue grew 17% in the Americas, 10% in EMEA and 14% in APAC. At constant exchange rates, EMEA and APAC grew 12% and 18%, respectively. By channel, direct revenue increased 14%, representing 35% of total revenue, while indirect revenue grew 13%. Our product subscription renewal rates remain strong, and our net revenue retention rate was comfortably within our 100% to 110% target range. Billings increased 16% to $1.4 billion, reflecting continued solid underlying demand, partly offset by foreign exchange movements and a shift in mix from multiyear upfront to annual contracts versus expectations. Total deferred revenue grew 13% to $3.8 billion. Total RPO of $4.7 billion and current RPO of $3.1 billion grew 11% and 9%, respectively. At constant exchange rates, RPO and current RPO grew approximately 15% and 13%, respectively. Turning to the P&L, non-GAAP gross margin remained broadly level at 93%, while non-GAAP operating margin increased by 4 percentage points to approximately 36%, reflecting strong revenue growth and ongoing cost discipline. GAAP operating margin increased by 3 percentage points to approximately 20%. We delivered robust third quarter free cash flow of $460 million, up 79% year-over-year reflecting strong revenue growth, margin improvement and a larger multiyear upfront billing cohort. Turning to capital allocation, we continue to actively manage capital within our framework. As Andrew said, our organic and inorganic investments will remain disciplined and focused through the economic cycle. We will continue to offset dilution from our stock-based compensation program and to accelerate repurchases opportunistically when it makes sense to do so. Year-to-date, we purchased 4.4 million shares for $873 million at an average price of approximately $200 per share, which compared to last year contributed to a reduction in our diluted weighted average shares outstanding by approximately 5 million to 217 million shares. We also announced today that the Board has authorized a further $5 billion for share repurchases. And in December, we plan to retire a $350 million bond when it comes due. Recall that we effectively refinanced this bond last October at historically low rates when we issued our first sustainability bond. And related to that new sustainability bond, we published our first sustainability bond impact report about a month ago, which updates our progress. You can find the report on our Investor Relations website. Now let me finish with guidance. Andrew gave you a readout on the business and our markets at the beginning of the call. Our renewal business continues to be a highlight, reflecting the ongoing importance of our software in helping our customers achieve their goals. New business growth continues to be relatively stronger in North America with growth in EMEA and APAC outside of Russia and China, slightly decelerating, but overall growth remains good. And weâve seen less demand for multiyear upfront and more demand for annual contracts than we expected. As we look ahead and as weâve done in the past, our Q4 and fiscal â23 guidance assumes that market conditions remain consistent with what we saw as we exited Q3. The strengthening of the U.S. dollar during the quarter generated slight incremental FX headwinds, reducing full year billings and revenue by approximately $10 million and $5 million, respectively, for the remainder of fiscal â23. Bringing these factors together, the overall headline is that our fiscal â23 revenue, margin and earnings per share guidance remained close to the previous midpoint at constant exchange rates and comfortably within our previous guidance ranges. Our lower fiscal â23 billings and free cash flow guidance primarily reflects less demand for multiyear upfront and more demand for annual contracts than we expected. Weâre narrowing the fiscal â23 revenue range to be between $4.99 billion and $5.005 billion. We continue to expect non-GAAP operating margin to be approximately 36%. And we expect free cash flow to be between $1.9 billion and $1.98 billion. The slide deck and updated Excel financials on our website have more details on modeling assumptions for the full year of fiscal â23. The challenges our customers face continue to evolve that reinforce the need for digital transformation, which gives us confidence in our long-term growth potential. We continue to target double-digit revenue growth, non-GAAP operating margins in the 38% to 40% range and double-digit free cash flow growth on a compound annual basis. These metrics are intended to provide a floor to our long-term revenue growth ambitions and a ceiling to our spend growth expectations. Thank you, Debbie. Our strategy is to transform the industries we serve with end-to-end cloud-based solutions that drive efficiency and sustainability for our customers. Fusion, Forma and Flow connect data, teams and workflows in the cloud on our trusted platform, making Autodesk rapidly scalable and extensible into adjacent verticals from architectural and engineering to construction and operations, from product engineering to product data management and product manufacturing. Our platform is also scalable and extensible between verticals with industrialized construction and into new workflows like XR. By accelerating the convergence of workflows within and between the industries we serve, we are also creating broader and deeper partnerships with existing customers and bringing new customers into our ecosystem. In AEC, our customers continue to digitally transform their workflows to win new business and become more efficient and sustainable. For example, to support the city of Changwon smart city ambitions, the Changwon Architectural Design Institute, which operates across architecture, municipal engineering and city planning is standardizing on AEC collections and developing features to Revit APIs, which automate modeling, drawings and specification inspection. These will leverage the design instituteâs expertise in BIM and enable faster and higher quality design, reduce error and waste during construction and build the digital twins for post-construction operation and maintenance. In a challenging market environment, the design institute has been able to win new business and capture new market through digital transformation. In construction, we are seeking to eliminate waste at the source rather than simply automating the process around it. By seamlessly connecting construction data and workflows both upstream with preconstruction and design and downstream to hand over, operations and maintenance bases to our digital twin, we are enabling a more connected and sustainable way of building. For example, after a leading mechanical contractor in the United States purchased a competitorâs construction management product a few years ago, communication and workflows between the design and field teams were disconnected, resulting in data fragmentation, less insight, more complicated reporting and ultimately low adoption of the process. To resolve these issues, it chose to consolidate all of its design to build workload on the integrated Autodesk platform, turning to Autodesk Build to streamline handoffs between detailing, the fab shop and the field. Our momentum in construction continues to grow. Across construction, we added almost 1,000 new logos with Autodesk Buildâs monthly active users growing more than 60% quarter-over-quarter and becoming Autodeskâs largest construction products. In infrastructure, we see greater appetite from owners to accelerate their digital transformation to connect workflows from designed to make on the Autodesk platform. For example, to transform the speed, efficiency and sustainability of its network, one of the leading electricity network operators in Europe is accelerating its transformation from 2D to BIM and digital twins. In the third quarter, it signed its first EBA with Autodesk, adding Revit and Docs to enable it to upgrade the capacity of its substations and incorporate renewable power generation rapidly and safely. To accelerate maintenance workflows and reduce costs, the customer is in-sourcing the production of maintenance parts and using Fusion 360 as a platform for 3D printing. Turning to manufacturing, we have sustained good momentum in our manufacturing portfolio this quarter as we connected more workflows from design through to the shop floor, developed more on-ramps to our manufacturing platform and delivered new powerful tools and functionality to Fusion 360 extension. We continue to drive efficiency and sustainability for our customers and provide further resilience and competitiveness in uncertain times. For example, De Nora is an Italian multinational company specializing in electrochemistry and is a leader in sustainable technologies in the industrial green hydrogen production chain. It has been a longtime user of AutoCAD and Revit. Over the last few years, it accelerated its cloud strategy by replacing a competitorâs on-premise PLM solution with an integrated Vault and Fusion 360-managed solutions and improve the security of its data, enables seamless collaboration between product design and manufacturing and more easily onboard and integrate acquisitions. In Q3, it took another step in its digital transformation by firstly transitioning to named users and adding premium for better usage reporting, insights and single sign on security and secondly, by adding Flex to optimize consumption for its occasional users. Heineken is on a mission to become the best connected brewer as part of its evergreen strategy and is undergoing a digital transformation to ensure is prepared for the unforeseen challenges in an ever-changing world. To help, Autodesk has been supporting Heinekenâs 3D printing initiative with an expanded adoption of Fusion 360 across a number of breweries. By designing and manufacturing their own equipment parts in-house, Heineken has been able to see a reduction in the replacement times of a number of parts from over 6 weeks to just 4 hours, significantly reducing downtime and lessening the carbon impact of shipping new parts when necessary. Scanship AS, a Vow Group company is a great example of how our customers are using our Fusion platform to generate sustainable outcomes efficiently and transparently for customers. It has developed technology that processes waste and purified wastewater providing valuable, sustainable and circular resources and clean energy to a wide range of customers. By consolidating on Fusion 360 managed with Upchain, Scanship AS will be able to connect data and workflows in the cloud to manage processes and collaborate more easily and efficiently, while also gaining greater transparency on its supply chain to deliver decarbonized products to its customers. Fusion 360âs commercial subscribers grew steadily, ending the quarter with 211,000 subscribers, with demand for extensions continuing to grow at an exceptional pace. Outside of commercial use, a rapidly growing ecosystem of students and hobbyists learning next-generation technology and workflows will take those skills with them into the workforce. We would like to congratulate students from over 57 countries who recently competed in the finals of the WorldSkills competition, aptly referred to as the Olympics for vocational skills. Students used the latest workflows and technologies from Fusion 360 and Autodesk Construction Cloud to compete in vocational disciplines such as mechanical engineering, additive manufacturing and digital construction. Sit Shun Le from Singapore, who won the gold medal for additive manufacturing, used Fusion 360 to find the optimum structure and then minimize the amount of materials used through additive manufacturing. All participants were able to hone their skills using next-generation technology. I am inspired by their ingenuity and optimistic about the innovation they will bring to the workforce of the future. And finally, we continue to work with customers to provide access to the most current and secure software through our license compliance initiatives. For example, we worked collaboratively with a large multinational manufacturing company seeking to adhere to the same software standards and ensure access to the latest and safest software for all its employees across the globe. We helped customers conduct a self-audit that identifies gaps in its operations in China and then crafted and optimized a bespoked subscription plan. As a result, we agreed to an approximately 5 million contracts in Q3, our largest ever license compliance agreement. During the quarter, we closed eight deals of $500,000 and four deals over $1 million. To close, subscription renewal rates and net revenue retention continue to compound. New business growth remains good, and our competitive performance remains strong. The business is performing as weâd expect given secular growth tailwinds and macroeconomic, geopolitical, policy and COVID-19 headwind. Our capital allocation will remain disciplined and focused through the cycle with organic investment and acquisitions accelerating our growth potential and competitive intensity and share buyback offsetting dilution. The breadth and depth of the market opportunity ahead of us is substantial, and our platform investments will expand that opportunity and realization of it. Okay. Great. Hey, Andrew. Hey, Debbie. Thanks for taking my questions here. Debbie, maybe we will start to start with you. I donât want to put you on the spot here. But I guess just given the evolving macro and some of the other factors that we spoke about, is there anything that you want us to know high level on kind of how youâre thinking about fiscal â24 as we maybe fine-tune our models looking out? Hi, Saket. Hope you are doing great. So we will give formal guidance for fiscal â24 in February when we report on next quarterâs results. But here are some things to think about. First, on revenue. At this point, we expect some exogenous headwinds out of the gate. We will have about a 5-point-or-so incremental FX headwind. Thatâs because of the continued strengthening of the U.S. dollar and then another point of incremental headwind from exiting Russia. Thatâs going to make it tough for us to grow revenue beyond double digits. On margin, the revenue headwind creates margin growth headwinds, which likely means limited progress on reported margins in fiscal â24. Put another way, margins will look better at constant exchange rates. And then on free cash flow, FactSet consensus right now is a range of $1.2 billion to $1.7 billion. There is a couple of important things to consider. The first is the rate at which our customers transition to annual billings. And the second is the overall macroeconomic environment. We continue to be focused on executing on that transition as fast as possible because while the change is good for us, and itâs good for our customers, from a financial standpoint, we really want the noise behind us. So remember, the faster that we move the multiyear based annual billings, the greater the free cash flow headwind we will see in fiscal â24. On macro, we will, as usual, give our fiscal â24 guidance based on the macro conditions that we see as we exit fiscal â23. Got it. Got it. That makes a lot of sense. Andrew, maybe for my follow-up for you, a lot of helpful commentary just on retention rates and sort of the pace of new business, I was wondering if you could just go one level deeper. And maybe we could just talk about how demand fared through the quarter? Most of the business, as I think we all know, is pretty high velocity. But Iâm curious if you saw changing trends in pipeline or close rates or duration preferences towards the end of the quarter versus earlier? Any commentary there would be helpful. Yes. Saket, good to hear from you. Alright. Look, Q3 was very much like Q2 and that the quarter was fairly consistent, right? What was different between Q3 and Q2 was the slowing down in Europe taking Russia out. And that was definitely something that was different about the quarters. But that was consistent across the entire quarter. There was no acceleration or change of that as you proceeded across the quarter. Europe was weak throughout the quarter. As were â some of the preferences with regards to multiyear billings, there was no kind of trend of more and more reluctance as you headed further and further down the quarter. So itâs a fairly consistent quarter with regards to all of those things and fairly consistent performance of the business across the quarter. So nothing that fundamentally changed in the quarter. Look, one of the things â another thing that was different about Q3 over Q2 is that we had some currency fluctuations towards the end. And that really is probably the only thing that was different, and those currency fluctuations were responsible for the majority of the small revenue miss. Thank you. Good evening. Andrew, for you, first, to follow-up on some comments you made regarding your strategy at AU and then allow a follow-up for Debbie. So at AU, you made some comments with regard to the various clouds that youâve introduced, and you made an important distinction between the AEC cloud and the manufacturing cloud, namely that manufacturing cloud is more mature. Itâs been out in the market perhaps longer. So what is your expectation for the maturity or development of the AEC cloud to get it to where you think it needs to be so itâll be comparably mature or capable, the way the manufacturing cloud is, the way you described it at AU? And then for Debbie as a follow-up since the door was open to an FY â24 discussion, apart from everything else youâre doing programmatically, could you talk about some of the things that youâre going to be doing with regard to channel compensation in terms of margin structure, comping on annual versus multiyear and all those various things that youâre planning to implement and if those are going to have any effect on your margins and your cash flow? Alright, Jay. So Iâll start with regards to the Forma evolution. Itâs going to be kind of similar to what happened with Fusion, all right? And Iâll kind of tell it this way. When we started Fusion, we actually anchored Fusion on two things. We started Fusion upfront in the design process. You probably donât remember the early days of Fusions, Fusion was actually a conceptual design application. It was highly focused on consumer products design and upfront design processes. And we started to bolting onto it the downstream processes close to the [indiscernible] manufacturing, and we started building cloud-based connections between those two and basically filling off the middle between those two bookends of manufacturing and conceptual design. Think of the evolution of Forma is very similar to that, right? The cloud â the Forma cloud is going to start off focusing on the upfront conceptual phases of design, helping architects, planners, developers, all types of people that have to deal with early conceptual decisions about utilization, space utilization, aligning and distributing various aspects of development or an individual building and helping them make some better decisions far upfront in the design. But itâs also going to work to integrate downstream to what weâre doing in Construction Cloud. So Construction Cloud will start getting very close to some of the early bits of what Forma does. And over time, whatâs going to happen is Forma and Construction Cloud, Construction Cloud representing the downstream example of manufacturing, all the bits in between are going to be filled out on the same platform, similar to the evolution that we walked through with Fusion. And that will basically bring the entire process to the cloud over time, but continuously adding value to what our customers are doing today throughout the entire development and evolution of that cloud. And Jay, to your second question, channel compensation, the details, they are still in the works. But ultimately, how we think about engaging with our channel partners, engaging with our customers, how we think about the compensation programs, everything is about delivering value to our customers, driving adoption, driving customer satisfaction. So, examples of some of the things that youâve seen us do historically are things like moving more front-end incentives to back-end incentives that mandate some kind of adoption metrics, things like that, again, all in service of trying to deliver value. And in terms of the impact on margins, well, we havenât guided to margins next year, we havenât guided specifically to anything next year other than some of the breadcrumbs that I just left you guys. But I would say that as weâve said before, weâre committed to achieving our margin target in that 38% to 40% range in the fiscal â23 to â26 window. Thank you. [Operator Instructions] Our next question comes from the line of Phil Winslow of Credit Suisse. Your line is open. Hi, thanks for taking my question. I should have one earlier. But Andrew, a question for you, then a follow-up for Debbie. One of the questions I think is about the cyclicality of the AEC industry. And as you mentioned, the industry entered this year with a backlog from 2020 and frankly, even 2019. But as you pointed out, the macroeconomic environment has obviously deteriorated. So my question is what are you seeing and hearing from this vertical, especially about sort of the go-forward pipeline, as you think about the software that Autodesk sells in the various spaces here, the design, plan, build and maintain? And then Iâll just wait to ask the question to Debbie. Thanks. Yes. So first off, one thing continues to pressure the industry more than the demand, and it is the labor shortages and the capacity to execute. Construction companies still have a backlog of business. They are still struggling to execute through the business that they have. Iâm sure you saw that some of the leading indicators of architectural buildings have gone or entered into a shrinking territory, which means that architects are going to see some decline in some of their buildings moving forward, but they also still have a backlog of business. So weâre still seeing customers saying, look, you know what, I have a pretty big pipeline of business that I havenât executed on a queue of projects, and I still have capacity problems of getting through it. They are labor-related, they are material related, they are execution related. So we still have an overhang of backlog thatâs going to continue into next year for a lot of our customers, and thatâs what weâre hearing from our customers. Thatâs not to say they are not seeing pressure, and thatâs not to say that they are not seeing some pressure in various segments. But they are still seeing a pretty good book of business for the next 12 to 18 months. Now as things continue, theyâll start to see kind of downward pressure in some of that backlog. But right now, they are all much more concerned about their ability to execute than they are about the book of business that they are accumulating. Awesome. Thanks for that color. And then Debbie, just a follow-up on billings, at the beginning of the year, you talked about long-term deferred revenue, I think, being in the high 20s as a percentage of toll as you exit this year. I wonder if you could give us an update on that. And then in terms of next fiscal year, as you move towards 1-year billings, help us maybe quantify sort of the drawdown of long-term deferred revenue and the impact of that? Because obviously, you flagged the sell-side range right now of $1.2 billion to $1.7 billion, but obviously, thatâs pretty broad. So maybe some color on the impact of long-term deferred next year would be helpful, too. Thanks. Yes. So overall, our messaging in these two areas hasnât changed. So we were talking about long-term deferred as a percent of total deferred in that 20s range, and itâs going to continue to be there. The impact of our guidance adjustment for billings, a little over $100 million on a $5 billion number is not significant. And so weâre not anticipating that they will have a major impact on the metrics that you described. As we think about next year, I donât have anything additional to share on how to think about the decline or what have you, other than to reiterate what I said before, and that is to think about the FactSet consensus thatâs out there right now, that range of $1.2 billion to $1.7 billion. And then to reiterate that itâs really our goal to move as fast as possible because we really like to get this financial noise behind us. Hey, guys. Thanks for taking the questions. First, for Andrew, and then a follow-up for Debbie. So just given the macro, are you seeing any trends of customers either â not necessarily upgrading to collections that otherwise or doing so earlier in the year? Or conversely, any trade downs from collections to point solutions or even LT? And then I have a follow-up. Yes. Okay. Great. Adam. No, actually, there is no change in those demand preferences with regards to collections and what people are buying. The mix of state essentially is same, the renewal rate of the states pretty steady. If anything, what weâre seeing is softness in the low end of our business, which is what you would expect in a climate like this. LT growth has lowed, LT renewal rates have seen some pressure. Thatâs where weâre seeing things. The collections percentages, the collections renewal rates, these have remained steady throughout the year and throughout the quarter. Awesome. And maybe just for Debbie. So â and I donât know if this is a harder question to answer, but if the multiyear mix came in line with your original expectations, how we think about the billings guide or even the billings results in the year, right? If it was the original mix that going into the quarter. Thanks again. If I understand your question correctly, if the proportion of our business that had been multiyear was in line with our expectations then we would have hit our original guide. And the fact that weâre seeing some in that cohort choose to move to annual billings or annual contracts, thatâs making it so that weâre reducing the billings and free cash flow guide. But maybe â did I understand your question correctly? Thanks. So Iâm just â maybe Iâm an idiot, but just like reading between the lines, the faster you guys move in the transition, all else equal, the lower the free cash flow next year will be, correct? Or are there other things moving around? The faster the transition, well, first, I want to continue to characterize that the impact of the numbers is relatively small, and it would have a minor follow-on implications to next year. But ultimately, what was built into our guidance was an expectation of a certain proportion of the business that was going to be multiyear upfront. A small portion of those customers have elected to be annual. So rather than it being a negative impact to next year, it would be a very slight positive impact to next year because we would have annual billings next year that werenât in the form of a multiyear upfront transaction this year. But I want to continue to reiterate that the impact is relatively small. The impact to our billings guidance this year is relatively small. And if you think about the scale of the free cash flow number next year, I want to go back to that range that I was talking about that FactSet consensus range of $1.2 billion to $1.7 billion. And our goal really is to move the totality of the multiyear base to annual billings as fast as possible. And the faster we go, the greater that headwind is going to be to free cash flow next year. Yes, I was â yes, exactly. I was asking about â24. Basically, youâre kind of telling us $1.2 billion to $1.7 billion and then youâre reiterating that youâre going to try and move as fast as possible. So it was just much more of a â24 question, which you just, I think, answered. Yes. Okay. Thatâs super helpful. And any color on kind of the I guess, the drop-through on bookings â or sorry, billings when I look at free cash flow itâs like 85% to free cash flow, Thatâs, I guess â just it drops through with your gross margin. I would assume you donât really manage that on a quarterly basis. So it makes some sense. I am I looking at that the right way? Or is there something on the cost line that moves around and mitigates that decline in billings? No. I think you are thinking about it in a directionally accurate way. The billings reduction then has a follow-on implication to the free cash flow reduction. There is nothing else going on there. Thank you. [Operator Instructions] Our next question comes from the line of Michael Funk of Bank of America. Your line is open. Yes. Thank you for the questions. So you mentioned a few times trying to incentivize the shift from multiyear to annual. So first, what are you doing to incentivize that? I guess second, what drove the different customer behavior this quarter than expected with the shift? And I guess third part, same question, is how quickly do you believe that you can transition your base over to annual as we think about trying to model out the free cash flow impact? Okay. So letâs â taking detailed note. So in terms of the incentives, the incentives for both our channel partners â well, for our channel partners are still in place. So thatâs part of the programmatic details that we are working through right now as we engage with our partners and we execute on the transition. Remember, a substantial majority of that transition is going to be next year in our fiscal â24, and thatâs why those details are still in flight. On the customer side, what they have historically had a discount of anywhere from 10% to 5% to have a multiyear contract thatâs invoiced and collected upfront and that discount goes away. So the incentive is not there necessarily in the future for those customers to be trying to pay for upfront. And we think based on the feedback that we have been getting from our customers that they want to have multiyear contracts with annual billings. Itâs good for them in managing their cash flow just like itâs good for us. It removes the volatility that we see and as you can see from our guidance this quarter, the volatility that we see with those multiyear upfront contracts. In terms of what drove the behavior that we saw this past quarter, well, the end of the multiyear discount is coming at the start of next year. And so we were anticipating more demand for multiyear upfront contracts. And in the end, we are seeing slightly less demand than we expected. In the current macroeconomic environment, thatâs not surprising. The trade-off of the discount versus the cash upfront, itâs not as enticing for some customers right now. We have assumed that the behavior that we saw with respect to the multi-years in Q3 persists through Q4. And thatâs whatâs built into our guidance. Itâs consistent with our overall guidance philosophy. And we really think that it reinforces our strategy to move to annual billings. We are hopeful that itâs a positive sign for the transition next year. And then finally, in terms of what we can do in order to drive the pace, well, a lot of thatâs going to come down to our internal capabilities being available. I have mentioned before, that we are investing in systems to set us up to manage all these contracts at scale, and we are on pace. With those system changes, ultimately, itâs going to come down to whatâs on our price list and how we work through these programmatic details with our partners. And these are all decisions that are very much under discussion right now, and that you will hear more from us over the next couple of months. Thank you. One moment please. Our next question comes from the line of Gal Munda of Wolfe Research. Your line is open. Thanks for taking my questions. The first one is just around Fusion 360 and what you guys are seeing there. I know that when we visited Autodesk University with us, really, really good feedback. At the same time, the macro environment in manufacturing is kind of going a little bit slow. Is there anything particularly that makes you potentially see any sort of slowdown in that, or do you think your Fusion 360 throughout the cycle is going to perform better than what you have seen in the past in your manufacturing portfolio? Thank you. Yes. So, first off, Gal, manufacturing grew 13%, 14% on constant currency, thatâs still best-in-class for our space. So, we continue to believe that we are taking share in that respect. Look, you canât have a slowdown in Europe, where we are very strong, without seeing some slowdown in new Innovyze [ph] acquisition with regards to Fusion. However, we still continue to acquire more new users than any of our competitors in the space. So, even in the face of some headwinds where we see some slowing, we are outpacing our competitors, which is kind of the important metric here in terms of the appetite and desire for Fusion. It continues to be the disruptive player, the disruptive price point, the disruptive capabilities. And our customers continue to embrace the solution even in the environment of headwinds. So, we are not concerned because customers really need the efficiency of an end-to-end connected solution, and they really want what they get at the kind of price points that we deliver with Fusion. So, we continue to be the preferred solution. I continue that â I expect that to continue, and I expect our relative performance to remain strong. Thatâs perfect. Thank you. And then just as a follow-up, thinking about the opportunity. I know when COVID happened and we talked about the non-compliant user opportunity, you kind of posed a little bit everything, and you said we are going to come back when the environment, especially macro, is a little bit stronger. You have done that over the last year. If I am thinking about heading into another macro weakness, how much of an opportunity is coming from the non-compliant users, or how much more lenient you might be maybe for a year or 2 years until that plays out? Thank you. Yes. I think we have got a good rhythm in our compliance business right now. I mean I think COVID was a very unique situation where there was a sudden and precipitous impact on our customers. I think we are heading into kind of a different environment in many respect. Of course, manufacturers are seeing increased costs in terms of energy and material costs and things associated with that. So, the pressures are real. But I think the rate and pace that we are on right now with regards to license compliance makes sense. Like I have always said, this isnât something that we are going to slam the accelerator on and try to move faster. But right now, I donât see us actually changing our pace or slowing down in any kind of way. I think we are at a nice clip right now, and I think that we will be able to maintain it through any kind of bumpiness that we might see as we head into the winter. Thank you. One moment please. Our next question comes from the line of Matt Hedberg of RBC. Your line is open. Great. Thanks for taking my question guys. Debbie, I wanted to come back to the cash flow breadcrumbs that you gave. Sort of â you keep talking about the range of $1.2 billion to $1.7 billion and wanting to progress as fast as possible. I mean does that effectively imply that, that low end of FactSet consensus is at play? Just sort of curious on why phrase it as a range like that? Thanks Matt. So, we are not guiding on the call today. We are trying to provide some insight into how to think about it. And that range is in the realm of possibility, and there are a couple of factors that we want to continue to emphasize that are going to impact that. And that is the rate at which our customers transition to annual billings and the overall macroeconomic environment. But as I have said, we will provide specifics on the next earnings call. Got it. Thanks. And then maybe just one on the expense side, I appreciate the currency headwinds next year and sort of the reiteration of kind of the long-term margin framework. Are there things that you guys are doing right now from a spend perspective, whether itâs hiring or just sort of like general cost consciousness as we get into more economic uncertainty? Thanks. So, first, I want to say that we have been focused on ensuring that we donât spend ahead of top line growth. We have delivered considerable operating margin expansion over the last couple of years. We have exhibited a spend discipline that we now benefit from as the market conditions continue to evolve. If we focus on the near-term, we have delivered on our margin goals for the year-to-date. We are on track to do so through the end of the year. You can see that from no change in our operating margin guidance. Our hiring plans at the beginning of the year reflected really what is a solid balance between proactive investment and the discipline required to achieve our margin targets. As we look ahead to next year, we are in the planning process right now, but we are focused on ensuring that we continue this pattern of disciplined spend. We are looking to ensure that we can invest in the right areas to drive the strategy. So, things like purposeful and strategic rather than broad-based investing in areas like our industry clouds and shared services, but all against a backdrop of delivering a healthy margin. And I also want to say that we want to ensure that we are not too short-term in our thinking. We have a strong balance sheet. We want to make sure that we strike that right balance as we navigate these macro waters. We want to capitalize on the downturn to continue to invest, but all while keeping that watchful eye on operating margin. And as we said before, we are committed to achieving a margin target in the 38% to 40% range in that fiscal â23 to â26 window. Thanks for taking my question. Andrew, so at AU, you obviously announced the product announcements on Forma and Flow. I am curious how, if you could talk a little bit about the plans to accelerate the engineering velocity, specifically, is this is going to require more hiring, or is it just kind of re-prioritization of your engineers? And then just kind of comparing it to the timeline that you saw Fusion play out in that monetization cycle, just help us understand how you are expecting kind of the product to roll out and the monetization trend over time? Thanks. Yes. So, first off, one of the things we did to just start Forma, as you might recall at the beginning of the pandemic, we acquired a Norwegian company called Spacemaker. And we have continued to invest in that team, and we will continue to expand that team either by repurposing existing resources to work with that team or by adding additional resources to that team to make sure that we are on track. But one of the foundational investments that supports all of the things we are trying to do with our investment in data. And thatâs an ongoing investment in trying to break up Revit files and make them more accessible in the cloud as granular data. Forma and â by nature is built net native on the cloud and it has granular data at its core. So, thatâs one of the kind of core vectors that we will be doing. But we will be incrementally investing to ensure that we are heading on the right path with this solution. But we have done some of that already. And we have kind of absorbed some of those investments today. Now, I think the question about timeline is a really good one because these kind of transformations â what we are doing with Forma is different, right. What we are doing with Revit to improve its performance and improve its capabilities based on what our customers are asking us to do is making their current tools better. But what Forma is doing, especially with its connection â its native connections to downstream process is different. It takes time for different to penetrate the industry, just like different took time with Fusion. It was â we have been working on Fusion for over a decade, alright, roughly speaking a decade. So, you can expect that itâs going to take 5 years for Forma to mature and even longer for it to totally replace what our customers are doing. However, our goal is to incrementally add value to the process as time goes on, just like we did with Fusion. Fusion, we added incremental value with the connection to downstream manufacturing. In Forma, we are going to add incremental value with regards to the data platforms and the connection to the downstream construction processes. So, thatâs all connected, but it is going to take time similar to what we saw with Fusion. Thatâs helpful. And Debbie, maybe a question for you. So, just on current RPO, it looked like that did pick up a bit quarter-over-quarter if you back out the currency. Can you just help us understand I guess first, do you kind of view that as the best leading indicator given the headwinds in billings? And just remind us how you are thinking about the puts and takes on that just as you do â renew these large EBA customers in the coming quarters. Just anything we should be mindful of there? Thank you. Yes. Sure. So yes, I mean current RPO is a very important metric in monitoring our business performance. And you are right, particularly when you normalize for the currency impacts that growth was in a healthy zone. So, I want to just continue to stress that FX has been really volatile, and thatâs going to continue to impact the growth rate. So, definitely look at the constant currency growth rates over time. Also, the timing and volume of our EBAs impacts the growth rate period-to-period. And so sometimes what you see is that when we have large cohorts of our EBAs coming up for renewal, it tends to be back-end loaded in our fiscal years and most often in our Q4, we start to see growth impacts as the year progresses, in many cases, deceleration Q1 to Q3 that would tick back up as those cohorts for EBAs come back up for renewal. So, growth rate should tick back up over time, given consistent historical â given patterns consistent with our historical patterns. But again, remember the constant currency has just been a zinger thatâs going to impact growth rates for quite a while here. So â but it is an important metric for us, and we monitor it closely. Hi. Thanks for taking me in. Just two quick ones. So, when we look at the fourth quarter guidance, it looks like you will exit the year at 8% growth at the midpoint, pretty big decel from third quarter. I guess what is the FX headwind built into here? And are there any other factors that we should think about for Q4? Yes. So, Jason, the biggest impact is currency. We have seen a growing currency headwind during the year, and thatâs gradually showing up in the growth rates as the year progresses. Itâs about a 3-point headwind in Q4. It was a 1-point headwind in Q3 and was neutral in the tailwind at the beginning of the year. So, you can see that itâs gradually having a significant impact on our growth rate. Thatâs the biggest driver of the implied growth rate that you are talking about. Also, to a lesser extent â but Andrew did mention that we saw a modest deceleration in our new business, particularly in Europe during Q3, that does have a slight follow-on impact to revenue in Q4. Okay. Great. Thank you. And then the last multiyear appetite, it sounds like, to some extent, some of this is macro related. I guess where do you see that dynamic most prevalent? Was it with your larger customers, your smaller customers, international versus domestic? Just trying to understand kind of the puts and takes. Thanks. Yes. It tends to be larger deal sizes, not surprisingly. I think that when our customers start to exhibit cash conservation behavior, that behavior does tend to be more prevalent with some of the larger deal sizes. And remember, they are still signing multiyear contracts, they are just signing multiyear contracts and asking for annual billings, which for those larger deals, we are willing to accommodate while we continue to invest in the back-office infrastructure to be able to handle the totality of the multiyear base with annual billings at scale. Thank you. [Operator Instructions] Our next question comes from the line of Keith Weiss of Morgan Stanley. Your line is open. Hi, thank you so much. The comments on the stable renewal rates, and Iâd just like to dig into the expansion motion and itâs not like never tension stayed within the historical range, but curious if you are seeing any changes on just the expansion behavior with the shift in macro and should we expect a similar range into 2024? Is there any risk that we could fall outside of those ranges just given the broader macro headwinds? Thank you. So with regards to retention rates, look, retention rates continue to be strong and maintain steadiness. I think we are going to continue to see that steadiness into next year. The one area where we expect to see softness with macro headwinds is at the low end of our market. So the low end of the market is low ASPs, but high volume. So, the retention rates can move around on a volume basis when there is headwinds like this. But generally speaking, broadly across our business, we see retention rates holding up. Our products are mission-critical to what our customers do. They need them. But at the low end of our business, we will probably see some headwinds there, but they wonât be material to the larger business. I would just add that our net revenue retention rate was comfortably within the target range of 100% to 110% and in the short-term, our expectation is that it will stay in that range. Great. And then just following up on kind of the comments about the strong balance sheet and willing to invest, wanted to see if you are seeing any change in behavior in the competitive landscape, especially from some companies that may not have as strong a balance sheet? So any changes you are seeing in the behavior overall? Thank you. So with regards to â I just want to give a clarification on that question. With regards to the competitive environment in what way in terms of how that â how does it â just give me a clarification on your question a little bit there. I didnât quite understand. Yes, sure. So you guys have a strong balance sheet kind of willing to invest in the current environment, just even though there maybe some macro headwinds. But you likely have some peers out there that may not be as well funded or has strong balance sheets. So curious if you are just seeing any sort of changes in behavior across the competitive landscape? Yes, okay. Okay, good. I just wanted to make sure that I was in it. So look, we are in better shape than some of our competitors that are not profitable. In certain situations, people are going to be chasing, I think long-term things that kind of boost revenue or pull revenue forward. They will be doing customer unfriendly things to try to pull things forward. We are not in that position right now, especially in certain types of sectors. We are maintaining customer-friendly practices. We are focusing on the long-term. Weâre investing in the long-term. And that will actually provide competitive advantage as we move out of the slowdown. And itâs always great to be in a position to invest during a slowdown and to not have to pull short-term levers to try to achieve profitability, maintain profitability or get in the way of things. We will probably have more dry powder for inorganic activity than some of our competitors as we head through this. So yes, strong balance sheet actually helps us invest ahead of the curve while we go through these things. So I am pretty confident that we are ahead of the game in a lot of places. Thank you. That is all the time that we do have for question. So Iâd like to turn the call back over to Simon Mays-Smith for any closing remarks. Thanks everyone for joining us. I hope the call was useful. For those of you that celebrated happy Thanksgiving and happy holidays and weâll look forward to catching up with you again at conferences and in the New Year at our fourth quarter earnings. Thanks very much. Thank you. Ladies and gentlemen, this does conclude todayâs conference. Thank you all for participating. You may now disconnect. Have a great day.
EarningCall_1938	So, welcome back. I am Joe Moore. Very happy to have with us today the management team from ON Semiconductor, including Hassane El-Khoury, CEO; and Thad Trent, CFO. And I'm really excited to have you guys here. You'll really touch a lot of the key debates that we are dealing with right now across semis. So, thanks for coming. Maybe we could start off with just a general commentary on the environment. You guys have talked about strength in autos, maybe pockets of weakness elsewhere. How durable do you see those trends looking forward? Yes. Look, as a general comment on the market, as you mentioned, the automotive strength is coming from a very sustainable mega trend, which is electrification of vehicles that we see as sustainable through, call it, the next decade as more and more OEMs introduce their electrification platforms. If you think about the announcements made anywhere between 2025, 2030 is where more and more of these vehicles will come in, and thatâs the underlying strength that we see in our automotive business with power. And of course, parallel to that, you have the autonomous driving, which is, for us, the cameras in the vehicles. As that more and more gets into penetration on all vehicle platforms, we see that strength continuing again over a multiyear period. On the industrial side, itâs a -- I'll call it a mixed bag. The industrial side, thatâs closer to the consumer or more tied to consumer demand like power tools, for example, we see that softening, we saw it softening, and we took actions to get ahead of it. But the underlying strength in industrial or factory automation, renewable energy, they are also tied with the automotive mega trend. We see strength remaining there and growth through this year and next. And then, the consumer and compute, I think we see what a lot of our peers that are more exposed to those markets where we see softness and that softness seems to be maintained. Great. And maybe if you could talk a little bit to the general business strategy? You have talked about -- a couple of years youâve been here, you have talked about exiting revenue streams that have less enduring value. I think you talked $277 million of business that you have reduced in total, $39 million last quarter. Can you talk about the criteria for whatâs a sustainable business, what businesses are you trying to get out of, and how much more business is there left to reduce? Yes. Look, two years ago, when I joined onsemi, I referred to -- we need to do a portfolio optimization. And what that meant is, looking at all our products. We have over 20,000 SKUs in the company with a very broad manufacturing footprint. And the portfolio rationalization was purely based on value and value creation. Just like we look at value creation from the company side, we look at value creation for our customers. So, the criteria really is, do we see differentiated value enough that we can extract that value in the market for our products? And if the answer is not, we are not going to continue with that product. So, thatâs really at a high level, the criteria, in order to maintain two things that are sustainable for our financials is the growth in our business and the margin expansion of that business. Both of those happen when you have great products that create value and differentiated products that you have a competitive advantage against a lot of your peers. Those are the high-level criteria that we parsed our portfolio. And what we have done -- deployed that strategy in August of '21, part of our Analyst Day, we put under that umbrella, at the time, about $700 million or $800 million of business that meet that criteria of -- well, we are not adding value and we decided to exit. To-date, you mentioned $277 million. Average gross margin of 25%. So that proves the point of why we are exiting, and thatâs in a good pricing environment. So, we have exited that. There is about $400 million to $450 million, call it, left. We expect that to -- exit that through next year as our customers have other options or other companies that are taken that business from us. That will actually be expansion of our margin from where we are today, which is part of our strategic intent. And can you talk about the remaining part of the business? You have talked about a relatively tight gross margin range over time despite a lot of moving pieces. So, you really view that as kind of an enduring margin level thatâs not cyclical on the remaining portion. Thatâs right. I mean, we've given our model of 48% to 50%. Over the past few quarters, we've actually achieved that model. Obviously, we have a few headwinds that are measurable coming up. Most of it are strategic decisions that we have decided to enter. One of them is a silicon carbide, which is our big growth. We have put a lot of CapEx. Thatâs about 100 basis point to 200 basis point headwind. And as that business scale, which we expect it to get to scale end of '23 into '24, that headwind is going to go away. And then, we have some foundry business part of our fab acquisition that we have done, that will also work its way out over the next couple of years. As those headwinds go up, we are expecting, just like we have in the last few quarters, to maintain that 48% to 50% margin. Great. And I just want to get into some of those newer drivers in a sec. I think the interesting element of this is you guys really have executed to this plan. I think itâs clearer now when you have taken utilization down, you focused on reducing inventory at distribution and you remain -- even though parts of your business have some softness, you remain committed to kind of taking out these other businesses. Anything that changes that progress? I think you have mentioned some of -- itâs just harder to get out of some of these businesses than you thought it was? So, the answer is no. We stay the course. And if you look at the performance of the company, even in the last few quarters, we are kind of -- some of these markets started seeing signs of weakness. We've kept performing and really outperforming the market, because we believe in our strategy, and more importantly, we are executing to that strategy. We saw the weakness coming. We took utilization down. We started reducing our fab utilization back in the second quarter before kind of we got to where we are today, which really gave us an advantage, have been able to see that coming and taking proactive action. People ask, "You took utilization down in the fab. Did you see the backlog cancellation and push out?" The answer was no. What we saw is new backlog layering on, that was call it the second derivative of backlog. But that was enough for us to take action. Because, what we donât want is get into a softer aspect of our -- in some of our business and end up with inventory, whether on the balance sheet or in the channel. And what you have seen us do in the last two quarters is actually reducing both of these inventory, which sets us up very, very nicely for moving forward as a sustainable financial outlook for the company. Yes. I appreciate that. Thank you. Maybe if you talk a little bit about the longer-term supply agreements, and I feel like we are learning that every company has a slightly different philosophy about this, as we move into this elevated lead time environment. How do you view it? How long do the commitments go out? How much do you hold people to those commitments in different types of economic environments? Sure. Look, so the LTSA, as broad as it is today, our long-term supply agreements are new, call it, to a first order. But for us, both Thad and I, in our prior lives, we implemented and executed very, very well for -- on LTSA with the same framework that we are in -- executing to at onsemi. It worked very well. So that learning, we carried over to onsemi in order to have that same infrastructure. So, what does it mean, and what do those commitments look like? They are essentially take-or-pay agreements, where the customer commits to taking products, except volume and pricing. So, both of those are contractually -- call it, contractual obligation for volume and price. And what we will do is we will invest in order to support those volumes at these pricing. So, thatâs at the high-level structure. They extend anywhere, on average, itâs four to five years, to some extent, seven or eight years depending on the automotive and the new products that we are putting in. And on average, they have almost 200 parts in them. We identify it by part number. So, itâs not this high level of are you going to pull this much revenue and this much margin, itâs a part number level list, volume and pricing. Now the following question is, well, how enforceable are they, which is really the question that comes up now given some of the outlook in these markets. Let me just say it, at a high level, they are legally binding agreements. So, we will start with that. Now what happens when a customer says, "Hey, we have a -- we see softness coming in, in six month or nine month, and we are not going to be able to pull." Well, benefit number one is I did get the call, where before, backlog will disappear 30 days before you ship, you are stuck with inventory, then what? The LTSA, if they do one thing, they will guarantee a phone call. The bad phone is going to ring, way in advance, where the customer is going to be proactive and so will we. So, what does that mean? It means we can manage inventory. I can move capacity somewhere else. So, itâs not dead inventory that ends up being reserved or scrapped. And the customer gets -- we get a much longer signal of demand -- of end demand than you do just by looking at the backlog, which is almost backwards looking signal. Now what -- and we will negotiate, because, look, itâs not our benefit either nor is it the customers to shove inventory. You just push the problem down the road. So, we want to manage inventory. We want to be proactive in managing inventory. What is non-negotiable is the pricing. So, we can discuss demand. We can discuss demand signal. But what is non-negotiable and itâs extremely enforceable is the pricing conversation that we are not going to have. So thatâs how we look at LTSA and the engagement we have with our end customers. And, Joe, I would add that we have got a lot of cases where customers are co-investing with us. So, they are actually putting capital upfront. So, it tends to make that relationship very much like a long-term partnership, which is what our industry hasnât had in the past and very sticky. So, in a downturn, we expect to pick-up market share well through that, right. So, I think itâs an engagement that is totally different than what weâve seen. Itâs much deeper and itâs at a C level. Yes, thatâs a great explanation. Thank you. Can you talk generally about the automotive market in this context of LTSAs? I have never seen anything like the last two years where the entire auto industry is bottlenecked by semiconductors, and in fact, a lot of industries. Can you talk to how that changes behavior going forward? Do you see customers trying to put safety stock into place? Are they -- is that at the OEM level, Tier 1 level? Whatâs your customer behavior looking forward? So, I would say itâs not a one size fits all. It depends on the customer strategy. But Iâll tell you the most proactive customers, both specifically at the OEM level, have engaged in the LTSA, because thatâs -- from an engagement level both us and them, that is a sustainable model for us to move forward. We will invest CapEx. We will get ahead of it. They have to pull it, kind of like we had the conversation on the LTSAs. That engagement is a much higher level, meaning we have LTSAs directly with the OEM, although they may not directly purchase, they will do their directed purchase from a Tier 1 based on the LTSAs that they have committed with us. I would say thatâs the model that the OEMs -- when an OEM can't build a $100,000 car because of $1 semiconductor part, it kind of makes you think something has to change. And thatâs what changed, and the LTSAs have provided that. And we have seen in the last few quarters, even the number of escalations for LTSA customers have kind of died out because we committed, and the customer doesnât have to call unless itâs a strategic conversation now, not escalation calls. There are others where they are hoping to go back to the good old days. I donât know what those days are after two years of being in this, where they look at it as potentially, call it, a business continuity plan. So, not inventory for the sake of inventory, but staging inventory between us and the end customer in order to absorb any supply chain disruptions. That is a much longer-term model, because I will tell you today, thereâs no inventory in -- between us and the OEM. Everything we ship is going into an end car and end module and end system that goes into the consumer -- in the consumer hands. There are talks weâve had with customers about how do we plan a business continuity as far as inventory staging, but thatâs a conversation for, call it, beyond â23, because even in â23 for automotive, we have no intent nor do we have the capacity to put buffer because weâre still struggling to meet end demand. Okay. Can you talk a little bit to some of the end markets, maybe starting with ADAS? I feel like EV has kind of jumped ahead of ADAS in the innovation pipeline. We were hoping for cars with no steering wheels by now, and weâre still looking at kind of single camera forward-facing ADAS. When you talk about the opportunities for image sensors, youâre starting to see proliferation, more cameras per car, and where is that trend going? Yes. Look, ADAS, if I look back -- and Iâve been on automotive my whole career. If I look back, call it, even five years ago, everybody is talking about Level 4, Level 5. Well, here we are. There is a new term, itâs called Level 2+, which is Level 2 and everything else. So, whatever that is, itâs driving content. And if you look at those five years, the last five years, the number of cameras per car has doubled, and we expect that to double in the next five years as more and more vehicles put some level of autonomy, like I said, Level 2+. We donât have to get to full autonomy, but the content is driving that adoption. What does that mean? We have vehicles today, not full autonomous vehicle, but call it Level 2+ vehicles that have nine cameras in them. So, itâs not just the forward looking. We have seen that content proliferation. And for us, that content not only focuses on image sensing, but our power and mixed signal analog content that goes as a cross-selling or a BOM coverage for -- within our camera. So, you get a PMIC and the camera. So, the content for us expands as far as dollars from just the unit content that you see. Now, more importantly also, within that time frame, outside of ADAS, you have the content now in-cabin, passenger monitoring or driver monitoring, where thatâs driving a different adoption where the way you figure out if a driver is tired or not is how fast they blink. Any one of us who drives too late or too long, you start like trying to keep your eyes forced open because the faster you blink, the more tired. Well, that requires technology you canât miss a blink of an eye. Thatâs putting us, again, as a competitive advantage back to the conversation about value where we bring value with our technology, and that camera is getting adoption. So, itâs not just the ADAS outside the vehicle or the perimeter, but itâs also within the vehicle for safety as it relates to the driver. Thatâs whatâs driving our image sensing business. So, we donât need to get to Level 4 and Level 5. The content is getting created today. And we have about an 80% market share in ADAS today, and thatâs going to drive that proliferation as more and more penetration happens in ADAS for your day-to-day vehicles. Thatâs good stuff, thanks. So, maybe moving to EVs. Silicon carbide, very topical. You guys, a couple of quarters ago, sort of started talking about $1 billion number next year, which puts you among the market leaders. Itâs kind of surprising how quickly you kind of got to that point. Can you talk to the progress there? What are the challenges that you have ramping that business? And how much visibility you have to that $1 billion target? Sure. So, let me start with the visibility and then Iâll give you kind of how we got there. From the visibility, we have very clear visibility. You heard me talked about the LTSAs. All of our silicon carbide, â23 and beyond, is under LTSA. So, our strategy as a go-to-market strategy, weâre not going to put silicon carbide capacity unless itâs under LTSA. That protects our return of capital, which is very solidly tied to volume and pricing. So, we maintain our financial model and the return on that capital. So thatâs one. So, itâs all under LTSA. Overall, over the next three years, we talked about a $4 billion of committed revenue, committed revenue under the structure of the take-or-pay with our LTSA. So, from a visibility, clear visibility. Now, obviously, what we have to do to get there is ramp, and ramp like hell, because, like you said, we went from a few years ago to where we are headed, which is a market leadership. That doesnât happen just by cruising into the growth. So, what does that mean? If I take big high-level components, we have the substrate. So, weâve acquired a company called GTAT that provides access to that substrate, and weâve been scaling that, since the acquisition, maybe about 13, 14 months ago. Exiting this year will be 5x the capability, capacity-wise, of that company. So, weâve invested heavily in that capital in order to get the growth to fuel our future intent and LTSAs. Weâve also, since last year, doubled our fab capacity to get to the silicon carbide out, and we will double that again next year. Now, the conversation -- then the following question is, well, how do you double fab capacity when equipment is lead times and so on? What you have to look for onsemi, this is not new for us. Weâve been doing power semiconductors for two decades. So, we have fabs at scale that do power with silicon today. So, moving from silicon to silicon carbide is what we call brownfield expansion, which is much faster and more predictable and lower risk. I donât have to get a fab up and running from zero to high ramp, and have to deal with yields and all of these things that you do with a hard ramp. We have the fab. It is producing. It is producing at scale or just moving silicon carbide into it. So, these are the execution components that we have to do. So, the beauty of it, itâs all execution. The market is there. The revenue is there. We have visibility. We have commitments. Now, weâre executing towards that. And with the GTAT acquisition, I guess that seems like itâs pretty important to get that up and running. We sort of know what your wafer supply agreement is with Wolfspeed. To get to $1 billion number, you need a lot more than that. How do you -- I know you went to an event in New Hampshire, which was great, where you kind of gave us an overview of what youâre doing on the substrate capacity. But how do you get customers comfortable with that? How do you -- I think of this being something that requires multiple years of qualification. So, youâre ramping GTAT very quickly. They need to qualify it fairly quickly. How do you get to that number that quickly? The great thing about GTAT is weâve been -- we worked with GTAT a few years before we acquired the company. So, a lot of our sampling, a lot of design win and design-in that weâve had was also based on GTAT substrates. So, for us, itâs not a gap or itâs not a gate to get there. Itâs always been in our baseline. But now we have the capability and supply assurance, and more importantly, the vertical integration that requires. But ultimately, what does the customer -- how does the customer get comfort? Just like you mentioned you visited GTAT at the event, we have customer visiting the facility and doing what they do, which is they audit, they review the data, they review the ramp, they review the capability, and thatâs how they get comfortable. When a customer comes and signs billions of dollars of long-term supply agreement, they are doing diligence. They have done the diligence locally at New Hampshire and Hudson, where we have that operation, and they have become very comfortable. So thatâs the credibility that our vertical integration has brought to the industry and to our customers in order to -- for them to sign up with the long-term supply agreements. Great. And so -- and I have one last question on this, and then Iâll see if thereâre questions from the audience. You talked about the start-up expense of 100 basis points to 200 basis points short-term of bringing up the silicon carbide capacity. Can you talk to the longer-term margin ramifications of this business? Does this fall into the 48% to 50% range at some point? And what has to happen for it to get there? What type of scale and how much internal substrate you have to have to get to that point? I can take that, yes. So, look, at scale, the silicon carbide margins are at or above the corporate average. So, as you said, in â23, we expect 100 basis points to 200 basis points headwind as we ramp, because we donât exclude all the start-up costs out of our non-GAAP numbers. We think by the time we exit â23, we will be back to parity and then itâs off to the races after that. So, itâs favorable margin. Weâre obviously pricing it that way at scale. Itâs just a matter of getting through this ramp pace. And is that -- whether -- is that true whether you use other peopleâs wafers or your own, or you need internal wafers to get to the above corporate? Hi. From your angle, can you see changes in the EV leadership market, like changes in leadership in the EV market? Time will tell. I donât -- when people ask about our LTSAs for EVs and so on, I always make sure itâs -- I mentioned itâs geographically distributed and OEM distributed even within the OEM multiple models distributed. Weâre not here to bet on the right horse. Weâre here to make sure our technology is available to anybody whoâs got those aspirations. So thatâs the reason we go abroad and we go wide in order -- because even within an OEM, letâs not talk between OEMs. Within OEM, sometimes a vehicle will sell more than they expect versus the other. So, you want to be able to have a very distributed model in order to sustain your growth and the margins. So that will be my expectation. But there is a lot of interesting things happening at the OEM level, not just the traditional, but you have a lot of disruptors that are pure EV players that are coming in. So, the next few years will definitely be interesting to see. Yes, but thatâs the thing. Obviously, China is a big EV market, but weâve talked about our engagement with NEO. But again, when you talk about it from an LTSA perspective, that $4 billion, itâs beyond just that one account in China. And thatâs important for us to be able to get full access to our technology to the customers that see the value in adoption. Thank you very much for the presentation. And you may have already covered this because I missed the first five minutes. Apologies, if you already have. So, on the EV and ADAS, there is a phenomenal demand growth. We all know that. But could you explain about how your competitive landscape looks like, and where your sort of value differentiation is? Sure. So, from a value differentiation between the two technologies, not to get too much in EV, but from an imaging perspective or the sensing perspective that goes into ADAS. Obviously, the differentiation is weâre the market leader today. We have 80% share, as I mentioned, for ADAS, specifically, 60% in automotive. Now why is that? Because unless you design the imager for automotive, youâre not going to be able to solve the automotive use case. What does that mean? Anybody who tries to take a picture with their phone and the sun is in your face, you see dark. And what do you do? You tell the person letâs switch, different background in order to get the exposure. Well, you canât do that when youâre driving a car. If youâre in a tunnel, the sun is in your face that could be a truck parked out there. And if the camera is blinded, itâs not really ADAS, or you donât want it to be ADAS. Thatâs called technically high dynamic range. Bright is bright and dark is dark. Our cameras are able to do that with, obviously, no shading, no nothing, just normal same camera, same technology. Thatâs important. Thatâs why we win. Most signs today, speed signs are LED. If you take again a picture of an LED sign with your phone, it will look distorted, because the LED flicker -- exposure breaks that picture. LED flicker mitigation designed into our products allows us to do that for autonomous driving, where a clear sign, no matter what they export. Those are technology enablement that our products do that allow us to service the use cases for automotive that are tailor-made for automotive. On the silicon carbide side, itâs all about efficiency. We talked about GTAT, thatâs more on supply assurance. We win for two reasons, efficiency, driven by technology. What that means? Technology and efficiency on the device, so the silicon carbide die with a package. When you do power semiconductor, package is as important as the device itself. So, a lot of people failed to mention that or failed to invest in that. Silicon carbide is a high-power wide-bandgap device. What that means? If you canât get the power off the chip, the chip is not going to give you the efficiency, youâre not going to get the range, youâre not going to save on battery. When we couple our device and our package, our end customers, the system designers, the OEM are able to get more range with the same battery volume or get the same range by removing battery volume. Thatâs cost and weight, which are key to a higher range. So, all of these are a competitive advantage that we combine both device and packaging in order to capture majority of that market we talked about.
EarningCall_1939	And welcome to Samsara's Third Quarter Fiscal 2023 Earnings Call. I'm Mike Chang, Samsara's Vice President of Corporate Development and Investor Relations. Joining me today are Samsara Co-Founder and Chief Executive Officer, Sanjit Biswas; and our Chief Financial Officer, Dominic Phillips. In addition to our prepared remarks on this call, additional information can be found in our shareholder letter, press release, investor presentation and SEC filings on our Investor Relations website at investors.samsara.com. The matters we'll discuss today include forward-looking statements. Actual results may differ materially from those contained in the forward-looking statements and are subject to risks and uncertainties described more fully in our SEC filings. Any forward-looking statements that we make on this call are based on assumptions as of today, December 1, 2022 and we undertake no obligation to update these statements as a result of new information or future events, unless required by law. During today's call, some of our discussions will include our third quarter fiscal 2023 financial results. We would like to point out that the company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues and revenue growth. Reconciliations of GAAP to non-GAAP financial measures are provided in the press release and the investor presentation. We'll make opening remarks, dive into highlights for Q2 and then open up the call for Q&A. Thanks, Mike and thank you everyone for joining us today. We delivered another quarter of substantial growth at scale with ending ARR of $724 million, growing 47% year-over-year. We saw record quarter-over-quarter growth in our $100,000 plus customers by adding over 120 net new large customers. We now have over 1,100 large customers, including many Fortune 1,000 companies across a wide range of physical operations industries. We also continued to improve our operating leverage. In the last year, we've improved our non-GAAP operating margins from negative 26% to negative 10%, and our adjusted free cash flow margins from negative 38% to negative 9%. During the quarter, Samsara's Chief Product Officer Jeff Hausman, and I met in person with over 30 customers across North America and Europe. Iâm always inspired by the strength and resilience of our customer base. Our customers are the critical infrastructure that power the global economy. And their industries makeup over 40% of the worldâs GDP. The span diverse industries that include food distributors, chemical companies, energy utilities, freight carriers, and municipalities. Many of them have been around for over half a century so they are no strangers to the challenging economic cycles. Our customers are essential. They keep the world running and are incredibly resilient. In this macroeconomic uncertainty, our customers are focused on achieving their business goals. They're looking for new ways to maximize every dollar invested into their businesses. Right now, they're focused on asset efficiency, worker availability, and maintaining safe and compliant operations. As a system of record for physical operations, Samsara delivers value across each of these areas by digitizing their day-to-day tasks and workflows. Clear and direct ROI continues to be a priority for physical operations customers. They love investing in technology when it's a clear win. Let's take a look at a few notable case studies from existing Samsara customers in waste services, critical infrastructure, and transportation, who've been able to quantify their ROI since adopting our platform. The results they've shared with us are pretty incredible. A waste transportation and container rental company in Texas adopted Samsara to improve driver safety and safeguard their drivers from false accusations. With SamSara's Video-based Safety driver coaching, they decrease speeding by 58% in one-year. They also helped exonerate drivers from more than 50% of accidents. This application alone equated to an estimated savings of $500,000 in annual insurance premiums, representing a five-month payback period for their entire multi-product investment. They've also turned their safety culture into retention multiplier. In this instance, their driver turnover rate dropped to 26%, which is three times lower than the industry average of 80% to 90%. Retaining skilled workers is a massive cost reduction lever and is especially important given today's labor shortage. Inflationary pressures remain top of mind for our customers. Samsara's platform is a deflationary technology with a proven ability to help customers control costs. Let's take a look at another example. A leading infrastructure provider serving more than 40 states who subscribes to multiple Samsara products, Vehicle Telematics, Video-based Safety, and Equipment Monitoring. They saved an estimated $11 million by using Samsaraâs Equipment Monitoring to optimize asset usage across their multiple subsidiaries, representing a five-month payback period for their entire multiproduct Samsara investment. With real time operational data, they've identified inefficiencies in their equipment usage and sold their underutilized equipment, freeing up cash flow to invest in other areas. Optimizing asset utilization is a particularly relevant topic for physical operations customers who now face record wait times for new vehicles and equipment. Let's turn to how Samsara customers can drive ROI by improving and measuring their sustainability efforts. More and more of our customers are focused on carbon reporting and sustainability. Samsaraâs connected operations cloud helps to measure and reduce fuel and energy usage, electrify their fleets, and monitor carbon emissions. Here, we're looking at a less than truckload carrier based in Illinois with subscriptions to multiple Samsara products that include Telematics, Video-based Safety, insights. They were drawn to Samsara because we can provide a complete platform to help them reduce their fuel usage, improve safety, and cut back on paperwork and inefficient processes. Since deploying our telematics across their entire fleet, they've reported an improvement in fuel efficiency and a 50% decrease in idling, which is significant source of fuel waste. This one feature alone translated to approximately 150,000 gallons of fuel saved and over $500,000 in cost savings per year representing an 8-month payback period for their entire investment in Samsara products. These case studies represent a snap out of how Samsara customers are getting clear and fast ROI to our platform. As a system of record for our customers daily physical operations, the amounts of insights and cost savings our platform can generate is tremendous. Trillions of data points now flow through our platform every year, providing companies with rich insights that can help them control costs, improve safety, and reduce emissions. What makes our data unique is not the sheer volume alone, it's the breadth and depth of the data. We are able to pull data from all aspects of the company's physical operations from vehicles, to equipment, to buildings. All of this business critical data exists in an open platform and can be seamlessly integrated with a robust ecosystem of partners, including OEMs, IT systems, insurance providers, and vertical specific applications. This quarter, we reached an important milestone. We added our 200th partner integration to our platform. This makes Samsara the largest open ecosystem for physical operations. Similar to leading cloud platforms that exist to deliver actual insights for IT workers, Samsara allows physical operations leaders to have a single source of truth as our system of record for physical operations. As the scale of our data compounds, we're able to refine our analytics models to deliver even richer insights and innovation for our customers. This quarter, we launched our Proactive Driver Coaching solution. It's powered by our data asset and our advanced AI capabilities. With it, customers can take a preventative approach to driver safety. Technology solutions like this help build safe habits on the road, empower drivers to own their coaching experience, and act as a differentiator for companies as they look to attract and retain talent. But we're not only focused on building products, we're also focused on building our company for the long-term. Digitally transforming the world of physical operations isn't going to happen overnight. To be a multi-decade partner for our customers, we must become a self-sustaining company. This was our 10th consecutive quarter of delivering year-over-year improvements to our non-GAAP operating loss in both dollars and margins. Over that same period, we've scaled ARR over 3x from $222 million to $724 million. We're committed to operating efficiently on our path to profitability. Like our customers, we're focused on investing the highest ROI areas of our business. We also continue to invest in our people. Samsara has become a destination of choice for top tier talent. This quarter, we welcomed Steve Pickle as Samsaraâs first Chief People Officer. Steve joins us from Salesforce, where he oversaw Global People Strategy and Operations, and helped double Salesforceâs headcount. Steve's experience leading and growing large scale transformative teams and cultures will be instrumental as we grow and develop our talent pool. We benefit from a flexible workplace model at Samsara and have offices in North America, Europe, and Asia. By expanding our operations, we leverage the efficiency of a global talent pool. This allows us to bolster customer support and accelerate region specific go to market strategies. It's been an exciting quarter of efficient growth across our product offerings, partnerships, executive leadership, and global footprint. We are proud to serve a diverse and resilient range of essential industries. Samsara's customers keep our world running and we are here to help keep them running. Safely, efficiently, and sustainably by streamlining their operations, reducing their cost tax and providing clear and direct ROI. I'd like to end with a thank you to all Samsarians, as well as our customers, partners, and investors for your continued support. While there's much to be proud of today, I know the best is yet to come. Thank you, Sanjit. As a reminder, please refer to our shareholder letter, press release, and investor presentation at investors.samsara.com for additional information on our Q3 results and financial guidance. Q3 was highlighted by strong top line growth and continued operating efficiency improvements. Our durable and increasingly efficient growth demonstrates the large and growing opportunity for digital transformation across the world of physical operations. While global economic uncertainty persists, we exceeded our expectations for key top line and profitability metrics by providing quick time to value and meaningful ROI savings for our customers. Q3 ending ARR was 721 million, growing 47% year-over-year and Q3 revenue was 170 million growing 49% year-over-year. Several factors drove our strong top line performance in Q3. First, we continue to focus on serving large physical operations customers. In Q3, we eclipsed 1,000 large customers and now have 1,113 customers with more than a 100,000 of ARR, a record quarterly increase of 124 and a record annual increase of 398, representing 56% year-over-year growth. Next, Samsara is increasingly utilized as the system of record for physical operations and multi-product transactions continue to significantly contribute to our top line growth. In Q3, 6 of our 10 largest transactions included subscriptions to two or more products. More broadly, more than 70% of core customers and more than 90% of large customers subscribed to two or more applications and more than 50% of large customers subscribed to 3 or more applications. We're also seeing multi-product strength at scale. At the end of Q3, our two connected fleet applications Video-based Safety and Vehicle Telematics each represented more than 300 million of ARR. Additionally, our emerging products contributed more than 14% of net new ACV in Q3, including our third largest ever equipment monitoring transaction. And while just over 10% of ARR comes from non-fleet products today, customer adoption is much higher, almost half of multi-product core customers and two-thirds of multi-product large customers already subscribed to non-fleet products. This demonstrates our product breadth and opportunity for further expansion as customers bring additional assets onto the Samsara platform. Lastly, we continue to see strong expansions within our customer base, including upsells of existing products across a broader set of assets and cross-sells of additional products. As a result, 55% of Q3 net new ACV came from existing customers and our dollar-based net retention rate for core customers and large customers remained above our targets of 115% and 125%, respectively. Our largest Q3 customer expansion was a $1 million plus upsell to a Fortune 500 telecommunications provider. With no incumbent solution, the customer selected Samsara to help them reduce fuel costs and maintenance spending, improve safety through speeding reduction, and decrease carbon emissions from idling. As a result, we expect the customer will achieve a 3.6x return on investment. In addition to delivering top line growth, we continue to focus on driving operating efficiency improvements across our business as we scale. As a result, we saw year-over-year leverage across all major functions. Q3 gross margin was 74%, a year-over-year improvement of 2 percentage points, primarily from product and supply chain optimizations and larger scale. Q3 operating margin was negative 10%, an annual improvement of more than 60% or [16 percentage points] [ph] year-over-year, driven by leverage across all functions. And Q3 adjusted free cash flow margin was negative 9%, an annual improvement of more than 75% or 29 percentage points year-over-year, primarily from continued improvements in the global supply chain and working capital optimizations. In Q3, adjusted free cash flow margin converged with operating margin and we expect these metrics to be more closely aligned moving forward. We also achieved Rule of 40 in the quarter, a milestone that demonstrates our focus on efficient growth. While we're pleased with this accomplishment in Q3, our goal is to continue making improvements that allow us to achieve Rule of 40 consistently on a quarterly and annual basis. Okay. Now, turning to guidance. Based on our Q3 results and increased forecast clarity for the last fiscal quarter of the year, we're raising our revenue and profitability guidance both in dollars and margin. For FY 2023, we're raising our revenue guidance to be between 636 million and 638 million or between 48% and 49% year-over-year growth. We're improving our full-year operating margin guidance to approximately negative 14% and we're raising our EPS guidance to be between negative $0.16 and negative $0.17. Based on our updated full-year FY 2023 guidance, Q4 implied revenue is expected to be between 170 million and 172 million or between 35% and 37% year-over-year growth. Q4 operating margin is expected to be approximately negative 16%, and EPS is expected to be between negative $0.05 and $0.06. Looking to next year, based on our current outlook and after analyzing various scenarios, we believe current consensus estimates for high 20s percent FY 2024 revenue growth is appropriately de-risked. On our next earnings call, we will provide more detailed FY 2024 guidance based on our actual Q4 performance and our finalized operating plan. And finally, we also included some additional modeling notes for Q4 and full-year FY 2023 in our shareholder letter. To wrap up, while we're operating in uncertain macroeconomic environment, we are pleased with our performance year to date. We are digitizing the world of physical operations, and our cloud is becoming our customers' system of record. As a result, we remain committed to driving durable growth along with improved operating efficiencies on our path to profitability. Thank you, Dominic. We will now open the line, up for questions. When it's your turn, please limit your questions to one main question and one follow-up question. The first question today comes from Bob Wang at Morgan Stanley followed by Sterling Auty at MoffettNathanson. Hi. Thanks for taking my question. Congratulations on a strong quarter. Maybe if I can just focus a little bit on net new ARR. Last quarter, obviously, you had a much more difficult comp for net new ARR, can you talk about if there were any impacts to net new ARR this quarter, such as macro environment, elongated cycles or anything particular that that could be called out. I'm trying to have a better understanding of what could be the potential run rate of net new ARR going forward? Sure. Hey, Bob. It's Dominic. So, you know, I'd say a few things. On the Q2 earnings call, we mentioned that we were seeing some elongation of sales cycles that, you know, that the demand was still very strong, the pipeline was very strong, the conversion in one way were really strong, but we're seeing longer free trial periods, higher levels of approval and really analyzing ROI analysis with much more rigor. We continue to see a similar amount of sales cycles in similar kind of length in Q3. So, no real change in Q3 versus where we were in Q2. So, that's kind of the point I would make on macro. And the second is really, again, back to our overall sales capacity. And so, obviously, we've really been focused on hiring this year and building more sales capacity that is ramping that we think will provide more productivity as we get into FY 2024, but is still not as ramped. It generally takes about four quarters for sales reps to ramp. And so that obviously is also having an impact on our Q3 results. Okay. Thanks. That's very clear. Just for my follow-up on that point, actually. Is it fair to say that the elongated sales cycle is not that customers are cancelling their discussions with you, but rather just dragging out the conversation. And if so, is it fair to assume that in the first half next year or second half next year, that you will see a lot of these [delayed deals] [ph] to be completed thus resulting in somewhat of a higher than normal growth rate in your deals or in your net new ARR and such? No. Again, yeah, sort of the pipeline is strong and the conversion win rates remain at historic levels. So, we're not seeing the pipeline reduce. We're not seeing that pipeline not converting. All of that is still happening. It's just taking a little bit longer. And again, I would really categorize that Q3 looked very much like Q2. It did not get worse, but those deals are still closing. And they're not taking much longer to close. We're talking weeks, maybe months. And so, some of the deals that we saw that we thought could have landed in Q2 ultimately closed at the beginning of Q3. So, these aren't things that are pushing all the way into next year. Yes. Thanks. Hi, guys. So, just wondering when you look at the big customers that you landed in the quarter, what budgets are they funding these projects out of? And the reason why I ask is, wondering how that prioritization will, kind of carry through into next year given the tougher macro outlook that we that we say? Hey, Sterling. This is Sanjit. So, our customers are concentrated within the operations organization. It could be VP of Operations or COO. And that's typically the budget that it comes out of. This is the same budget, by the way, that also is related to their accident and insurance payouts, their operating efficiencies, and the capital equipment they're buying. So, for us, there's a direct correlation between adopting our platform and being able to save money and gain ROI in those areas. So, it's that same buyer, it's that same, kind of budget center. Excellent. And then just the follow-up would be geographically, do you think that there's going to be a different level of impact on demand in-light of the macro headwinds? We're not seeing that. You know, we have a focus in North America, Canada, U.S., Mexico, and then and then Western Europe. This was actually our best international quarter slightly. About 15% of our net new ACV came internationally and it was pretty well spread, you know, amongst those different geographies. And so, it's not a tremendously meaningful portion of our overall net new ACV, but it is a good chunk and it is growing quickly. And, you know, we're not seeing a lot of change on the international front. Perfect. So, I guess maybe just want a, just to better understand again the tone of the macro, Dom, it sounds like the macro, the sales cycle length has been roughly static from your comment previously from Q2 to Q3, but I guess how is it trending in November versus maybe end of October? Because you did have the largest amount of 100,000 customer adds in a quarter while others are calling out difficulty with closing larger deals. So, it's somewhat counterintuitive. And I'm just â if you could comment on, kind of what that trend line is, this is starting stabilize at a kind of net new level or are you assuming it to get worse? Yeah. Hey, Alex. So, again, I think that our business is holding up really well. We're really pleased with the Q3 results. When we look at our customer demand, the overall pipeline, the conversion rates, the win rates, all of those remain strong. Obviously, we're pleased with the Q3 results. We were able to increase our guidance for Q4 and for full-year FY 2023. And so, we're seeing good strength. We're not seeing it deteriorate. And I think a big reason that we're seeing good momentum is because as we outlined in some of the case studies, we have really fast ROI. Customers are getting paid back within months. And we're â they're using our solution to find real hard ROI savings. They're able to reduce their operational expenses. And then in this environment, you know that that often can get prioritized. Got it. And then for my second question, it will be a bit of a smart ask question, but given the fact that you called out consensus estimates, as a ruler for next year, kind of being in the right range from a risk or de-risk perspective, I guess, I want to question whether the consensus estimates around margins are also the right way to think about de-risking, and then particularly in the context of your comments about, you know the Rule of 40? Yeah. I would just say, look, we want to get through Q4. We want to see what are results are. We want to finalize our FY 2024 operating plan, and then we'll come back in three months, and we will give more detailed guidance across top line and margins, but I think you've seen our performance. We improved adjusted free cash flow margin by more than 75% over the last year. This is a really big focus for us. We're really proud of the fact that we got to Rule of 40 in Q3. We need to be able to make improvements to sustain that. But, you know, you can expect us to continue to make improvements on that as we go into FY 2024 as well. Yeah, great. Thanks for taking my questions everyone. Appreciate it. Just two, both related, so I'll ask them at the same time. First of all, if we look at the operating efficiencies that you're achieving, maybe you can just help us understand where exactly those are coming from? And specifically, are there any change to hiring plans that are driving those? And then as we look at the margin guidance for the fourth quarter, it implies operating margin worse than Q3, maybe you can just help us understand what's behind the guidance there for Q4? Thanks. Yes. Hey, Matt. So, it's Dominic. Again, so on â when we think about, kind of our operating margin improvement for the quarter, obviously, we had some outperformance in revenue, which definitely helped us, we had some savings around gross margin came in a little bit better than expected. And then within our operating expenses really across the board we're focused on just over operating efficiency improvements, but also some non-personnel related spend. So, can we get, you know, can we find software spend that we're not utilizing? Can we think about how, you know, our unused real estate? Can we think about being more thrifty around things like T&E and events? And so, those are all areas of focus and projects that we've built to drive some of the operating efficiency improvements that you've seen. In terms of the Q4 guide, I would really just focus investors on the full-year guide versus the kind of seasonality between Q3 and Q4. And so, overall operating margin for the year was negative 18% previously, now it's negative 14%. We are basically passing through the $14 million of [beat in] [ph] Q3 plus another $6 million for Q4. So, I would really focus investors on the full FY 2023 guidance versus the kind of Q3 versus Q4 seasonality. Hi guys. This is actually Peter Burkly for Kirk. Appreciate taking the questions here. So, just to start, you know, you guys are delivering pretty strong NRR rates. I'm just curious how you kind of characterize the balance between, you know, customers starting to go deeper with some of your more ancillary products versus, you know, just as these customers grow and they're adding new vehicles, you know, adding the safety and telematics solutions there? You know, I mean, I would assume a customer adds new vehicles. And if they're using you for safety, you know, that that's just automatic addition right there, you know, just kind of naturally, but just curious, you know kind of how much those ancillary products are driving that, if at all? This is Sanjit, by the way. So, it's really a mix. We see customers adding additional assets to the platform as they continue to expand their operations and additional applications. So, quite often will land with two or more applications, but in many cases, some of these customers, if they're larger, especially, they have a single project that they start with, might be telematics, or video-based safety or maybe even equipment monitoring. And then from there, once they get familiar with the platform, they see how much value in ROI it drives. They want to expand us, kind of across their entire operation. So, I would say it's a pretty healthy mix between those two cases of expanding the number of seats or assets on the platform, as well as expanding applications with us. And maybe I'll just add a little more. Just our overall go to market motion in a way that we kind of incentivize the sales reps is really just commission rate tied to overall net new ACV. So, whether that's a new logo or an expansion to an existing customer, you know, they're incentivized to go out and get as much net new ACV as possible. And we're seeing really good balance right now as we mentioned, 55% of our net new ACV in Q3 were tied to expansions to existing customers. And so, really good balance between, kind of net new ACV coming from new logos, as well as existing customers. Awesome. That's really helpful color. Maybe just a quick follow-up if I could. You know, international still represents a pretty nice area for potential expansion when taking, sort of a longer term view. Just curious, you know, if you're looking at Western Europe or elsewhere, what are the key barriers to adoption in those other regions versus what you're seeing domestically, if any? You know, is it just a matter of getting more reps on the ground over there or just curious about the dynamics there? So, the used cases are remarkably similar to what we have here in the U.S. and in North America. So, in Western Europe, the customers are still focused on safety, efficiency, and sustainability. There are some region specific features, some language changes that we have to make. There's some different regulatory compliance domains for our workflows. But I would say, you know, 80%, 85% of the product is very similar. And now we're beginning that invest of getting more quota-carrying capacity on the ground and also increasing our base of reference customers. So, I think with time, you'll see us grow into that TAM, but we're kind of taking it slow and we're also focusing on our efficiency as we grow. Great. Thanks guys and congrats on a solid quarter. It does feel like the broader supply chain conditions have eased a bit. It sounds like you guys are seeing that with your operations as well. Just curious as companies don't have to deal with the supply chain disruptions, seen over the last couple of years, and maybe as they're kind of recouping some better cash flow and market visibility, how is that impacting, kind of better customer conversations and willingness to do more digital transformation, kind of initiatives? So, the customer view on this is, supply chain has been an area of focus, mainly because they're trying to get better visibility, but in terms of the value that our platform offers, a lot of it is tied to labor. So, if you think about these industries, whether it's construction or oil and gas or field services, they're people intensive as much as they are asset intensive. And what we're able to do is, help them go find 10%, 15% operating efficiencies out in the field. We're able to help them save money on fuel, which is when they're operating those assets, and then also around things like carbon reporting. So, those are all unrelated to supply chain constraints. So, I would say there's multiple sources of value on our platform, while getting better asset utilization has been one of the many pillars or prongs in terms of the Samsara platform. It's not the only one. So, we still have a very broad-based appeal, and we're able to drive very fast time to ROIs we talked about earlier, across more than just visibility and supply chain. Great. And, Dom, maybe one for you. I mean, really great to see that the net revenue retention rate on 100K customers is stable over 125%, I mean anything â how do you feel about the durability of this number? Anything to be aware of, of tougher comps or given the macro, do you feel that this is a pretty good sustainable level from here going forward? We do. Yes, we feel confident in being over 115 for core customers and 125 plus for, you know, for our large customers. And again, we were just seeing a really good balance of net [indiscernible] fee coming from new logos, but also more than half of it again in Q3 coming from our existing customers. And you know, and we're seeing a lot of the large customers continue to come back. And once they've realized ROI on one used case or one product continue to add, you know, more products and used cases and find additional ways to save money. And so, more and more of our business is coming from 100,000 plus customers, 47% of our overall ARR is driven from that that customer cohort now, and you can see how that's increased over the last, you know, couple of years. Yes, thanks guys. This is obviously Matt Swanson on for Matt Hedberg. I was just wondering if you could kind of net, net the macro impact for us? We've talked a lot about ROI in the prepared remarks. Obviously, the results were showing a lot of durability, but I mean, would you describe parts of this macro as tailwind, I guess? And then how are you thinking about the macro in that Q4 guidance, but also in that early color for 2024? I would just say, again, we're really pleased with the results for Q3 and the momentum in the business right now that customer demand has remained strong. Again, our pipeline, our conversion and win rates have been really strong. And so, we're very pleased with the results and obviously we reflected that in Q4 as we raised our guidance for that quarter and for full-year. We do recognize that there's a lot of macro uncertainty, and so we want to make sure that we are given a little bit of color into next year, based on how we're thinking about things, as well as going through some different scenario analysis and we feel good with where the, kind of consensus FY 2024 revenue growth rates are right now in the high 20s percent that, you know, we forget about that, you know, based on what we're seeing right now. And if I can just add one or two things. While we are seeing customers very much focused on cost reductions and efficiency, in the world of operations, these are evergreen problems. They're always trying to find ways to be safer, reduce their costs of insurance. They're trying to find ways to be more efficient, whether that's in terms of how they serve their customers or how much they spend on fuel, and then same thing around sustainability. So, while there is a lot that's front of mind because of the current macro with our customers, I've just been spending a lot of time out in the field spend time with these customers. They're saying these are fundamental challenges in operations, and that's why they're digitizing. They're trying to move from pen and paper to a more modern platform to get better visibility into these kinds of problems. That's super helpful. And then it was great to see the success that you had upmarket for both the 100,000 customers, as well as the growing percentage of ARR. Is there any difference, I guess on kind of the other side of the market in terms of macro impact or anything else for the smaller deal sizes you [call out] [ph]? No. I think, again, the same problems that the large customers are grappling with, same with kind of our mid-market customers as well. They're looking for ways to reduce cost, lower fuel costs or insurance premiums or, you know, reduce accidents, increasingly meet their sustainability goals. You know, I'd point you to just the overall ARR mix coming from 100,000 plus customers continues to move up, but it's moving up, kind of like a percentage point every quarter, which means that the customers being below a 100,000 are also growing really, really quickly and driving a lot of our overall growth. We're just seeing a little bit more growth from the large customer segment. This concludes the question-and-answer portion. Thank you all for attending our Q3 fiscal year 2023 earnings call. If you have any follow-up questions, you can email us at ir@Samsara.com. Thanks again. Bye, everyone.
EarningCall_1940	Good morning, thank you. I am Tim Arcuri. I am the semi and semi equipment analyst here at UBS. Very happy to have Seagate with us. On this next slot, we have Gianluca Romano, who is the CFO of Seagate. So, we're going to talk about the company and I have a bunch of questions, so maybe you want to read a statement first and then we can go into the Q&A. Yes, thank you Tim. Thank you for inviting us today. Well, first of all, I'm here to remind everyone that I will be making forward-looking statements today, and you can learn more about the risks associated with those statements on our website. Great, awesome. Thank you for that. So, Gianluca, let's start by taking about -- and maybe you can sort of give us a, just your sense of where end demand is, and obviously we've -- there is some digestion going on for Nearline, thatâs pretty early, you were very, very clear -- you were clear about that last call. So, can you just talk about some of the dynamics in terms of demand for cloud and enterprise and some of the other end markets? Yes, we discussed a bit about earnings release and few meetings after the earnings release. There are different factors that are impacting demand in the short-term. The first one actually is not really the U.S. cloud inventory. I think the major factor for us is actually the slowdown of the economy in China, that is in terms of revenue, is where we get to the majority of the short-term impact. And of course, this is related to the lockdowns and the COVID situation, but, hopefully, it is starting to move in a better direction for the economy, but it's still now very negatively impacting our business in the short-term. The second part is still very important is actually the U.S. cloud inventory. And they have accumulated a little bit of inventory, a little bit every quarter, but for a fairly long period of time, starting the COVID situation, many companies were buying little bit more for their safety stock to avoid supply chain disruptions. And because COVID lasted basically three years, and actually still the scare is not over yet, companies have accumulated a lot of inventory. And right now, I think the fear of a major supply chain disruption, especially on the storage space, is not there anymore, and, therefore, no big companies want to reduce their inventory. We are actually doing the same things now. If you look at our own inventory, before COVID, we were at about $1.4 million. Right now, we are running at $1.6 million. So, even on our side, we have accumulated inventory to avoid supply chain disruptions. And now, as our customers are doing, we will also reduce our own inventory. The third factor that is way smaller than the other two, but is still material, is consumer. And on the consumer side, of course, the high level of inflation and the war in Ukraine are, of course, contributing to a lower level of demand in the short-term. We are still very, very confident in the long-term of this business. There are so many new applications that right now we're just starting, like artificial intelligence and machine learning and autonomous driving, Internet of Things, and smart cities, smart factories, all those new applications will generate an enormous quantity of data, and that data will have to be stored. And as you know, 90% of the data storage is actually in the cloud is actually happening on hard disk. So, very confident in the long-term, but of course, we need to manage this short-term down cycle. Of course, it's difficult to predict. I would say, in the coming quarter, we are trending as we discussed at our earning release. So, we don't -- so far, we don't have differences there in terms of revenue. As you know, there are possibly good signs from China in terms of how they managed COVID and lockdowns, so, hopefully, that will be a positive to us. It will take a little bit of time. Those are things that doesn't really change in one week, takes maybe a month, two months or three months, so a little bit of time. And then, through our very low level of production that we have today, we are also trying to help our customers to reduce their inventory and try to go back to more normalized business model in the next few months. Speaking of normalize, can you talk about gross margin? There's some atypical headwinds right now because of under absorption and things like that. So, can you sort of level set us in terms of gross margin? I think as I look at some of the Street numbers on gross margin, I feel like the -- what's being assumed is not sort of taking into account some of the headwinds that you have today and it seems to me like gross margin ought to recover to a level that's higher than what the current Street numbers would show. Yes, there is no reason why the gross margin should not go back to where it was before, once the revenue level becomes on the same level. I would say, actually through our restructuring and our reduction in force, we should have an even better cost structure at a certain point when revenue goes back into the $3 billion to $3.1 billion that we were basically a year ago, December quarter last year. So, I would say again, long-term, there are no reasons to be pessimistic. I think we will go back to where we were before, even better. Now, in the short-term, as you said, we have a lot of underutilization charges. So, we want to keep our production down until the inventory is clean. And of course, in the short-term, that is -- it is a big number, is probably going to be bigger than what we were estimating at the beginning of the quarter. But it's all part of our decision and our strategy. Right. Because if I look at December and I exclude the headwinds, you're sort of about a 26% gross margin ex those headwinds. So, if I run sort of a normal drop through on that, it seems like you don't have to get back to $3 billion to get to 30%. You could do 30% at something less than $3 billion, maybe even $2.6 billion, something like that. So, it seems like there is, given all the cost actions that you've taken, you should be able to get to about 30% at quite a lower revenue number. Yes. If you look our results a year ago, we were about $3 billion, but we were well above the 30%; we were basically 32%. So, again, I don't see why we should not be in the same situation or even a little bit better based on the new cost structure that we are going to take. Great. Can we talk about the product roadmap for a second? CMR versus SMR, I still sense some confusion among investors that assume that you don't have SMR and they don't fully seem to appreciate that a 22T CMR product can be used as a 26T SMR product. So -- and with some software changes on the customer side obviously. So, can you kind of talk about the product roadmap a little bit? Yes, there is a little bit of confusion. The technology, CMR technology, with basically a software change can be used as an SMR. So, with the same drive, when you go into the final test, you change the software, then you can have SMR drive. If you have a 22 terabyte CMR and the customer ask to have SMR version, you have to change the firmware. You have a 26 terabyte SMR. That has a different read and write, mainly the write is different. So, it cannot be used for all the applications, but if the customer for certain applications prefer to have SMR, because give more priority to capacity, then random write compared to [indiscernible] write, you can, and it's just the software. We sell about 20%, 25% of our exabyte in SMR version today. We didn't talk about SMR too much until now, because for us it was not a big deal. It is the same drive. You just change the software, and you have an SMR. I think what is not maybe well understood is HAMR. Maybe people don't fully appreciate that also HAMR can be used as pure HAMR or as an HAMR drive. If you change the software and you have an SMR drive based on the HAMR technology, the 30 terabyte HAMR would be mid-30 terabyte in SMR version. So, you need to compare SMR to SMR. You don't compare a base HAMR to a SMR. They are used for different applications. If you want an SMR version, now you are comparing a mid-30 terabyte SMR drive based on HAMR technology. And I think you said that the portion of exabytes that are on SMR is probably in the 20% range today, roughly? Great. Can you just talk about HAMR a little more and sort of the investments you've made there and how that's going to help your gross margin over the longer-term? Yes. As you know, we developed HAMR for more than 10 years. A lot of R&D was actually going to HAMR, but at the same time, we had to continue to develop CMR. So, we basically had two groups inside Seagate; one working on the CMR and CMR product, one working more on the HAMR technology. Of course, as you know, we have announced our 30 terabyte HAMR to be in the market beginning of summer, so in just few months from now. And this is also part of our restructuring. We don't need to have two groups over in the -- anymore. CMR is basically at the end of its life. We probably have another product coming out in few months, but then all the new products will be on HAMR. So, it's a very difficult and long technology to develop. We are very happy that we -- now we are at this point and we have product ready to come out. Again, a 30 terabyte HAMR beginning of the summer, if you want to use that HAMR into SMR version it will be a mid-30 terabyte. So, it is a big increase compared to that are in the market right now. But what is the real benefit of HAMR is basically the fact that HAMR will continue to grow capacity per drive based on aerial density. So, you increase the capacity of the disk. Today, a 20-terabyte drive has 10 disks and 20 heads. Now, if you go back in the past, the drive had one disk and two heads, and then two disks, three disks, up to 10 disks. This is how CMR was growing capacity, adding bill of material inside the box. HAMR is very different. HAMR will stay on 10 disks and 20 heads, start at 30 terabytes, the second product will be 36 terabytes, and then 40 terabytes, still on 10 disks and 20 heads. This is the major improvement of this technology. It doesn't need to have more bill of material inside the box, but by the way, it's physically limited at a certain point, just increase the capacity of each of the disks. Right. I mean the [HAMR] (ph) has pretty powerful ability to drive cost per terabyte down through aerial density alone without adding to the bill of materials is quite powerful. So, in that vein, can we talk about sort of longer-term gross margin and your ability to drive gross margin and the cost curve of HDD versus SSD? If you look at SSD today versus HDD, the cost delta today with NAND is 8x to 9x. But even if it were cut to 3x to 4x, yes that might be enough for customers to cut over to NAND. But HAMR seems like it's going to result in an improvement of the HDD cost curve versus NAND that is actually seeing some diminishing returns actually. Absolutely. No, I think NAND already went through the technology improvement when they moved from planar to vertical, and that was a major cost reduction in NAND. And then starting at 32 layers and then 64 and 96, the improvement in the cost is diminishing. HAMR is just starting now. So, we are at the beginning of this score in terms of cost reduction. Iâll also say there is a limited part of the market were really overlapped. On the legacy part, of course, there is an overlap. So, the low-capacity drive where the NAND can replace hard disk, assuming the cost is -- now it's fairly similar. But on the high-capacity drive, if you go into a data center today, you already have hard disk and NAND. They are both used in the data center for different parts of application. 90% of the data storage is on hard disk. It is cheap, and this what the hard disk is done for. And then, you have a lot of NAND, but the NAND done for that 10% of data storage that is used very frequently and is used to help for analytics and compute. So, it's not -- they're not used in the same way. They have not been used in the same way since the beginning, and it was 90% few years ago, itâs 90% now. If you talk to cloud customers, they will tell you that 90% of the data storage will continue to be stored on hard disk. Right. So, if you sort of take that and you project out to where the long-term margins can go, obviously, the customers have the power in the near-term just given the supply-demand dynamics. But given what's happening with HAMR, given what's happening with the cost curve, given the fact that all the client capacity basically has already been absorbed, you and WD are going to embark on a CapEx cycle. If customers want more exabytes, then there's going to have to be more CapEx put in the ground for that, once we absorb all these near-term issues. So, the industry, it reminds me a bit of DRAM five, six, seven years ago, and we can see what's happened to -- I mean, yes, obviously they're going through a difficult time now too, but the margins there have been going up over time. So, it seems to me that this is not a low 30% gross margin business over longer-term. There is no reason. Would you agree that this business can't be a high 30%-s, 40% gross margin over the longer-term? Yes, now a couple of years ago at our Analyst Day we gave a financial model where the gross margin was between 30% and 33%. But we said this is before HAMR. So, and next Analyst Day we have probably a different model. Of course, we need to rent a good quantity of HAMR to impact the P&L, but of course, we believe it is accretive to our gross margin. And as I said, it's not only the first product. Actually, the most important is when you scale even higher, 36, 40 terabytes with the same bill of material as we discussed before. I think that will be really the time where we should get a good boost to our profitability. Can we talk also part of the idea that you can push gross margin higher longer-term is the concept of LTAs. And I'm not a huge believer in LTAs that they really hold, whenever it's, bad times for them, they want LTAs, whenever it's good times for them, they don't want to adhere to the LTA. But can you kind of talk about just the evolution of the LTAs and how much teeth that they have? I think LTA is very good. It's good for us. It's good for customers, gives some stability. I would say, we had and we still have LTAs on about 50% of the cloud business. So, it's not 50% of our revenue, it's 50% of the cloud. I hope one day we will have LTAs on 50% or more of our [indiscernible] already. I think, this is good. It's helping us in how to manage our manufacturing, right now is still not big enough. And I would say customer, of course, now when they have too much inventory and they don't need the product, they're not maybe too happy to have an LTA in place if the volume is above what they need. But our experience is they still buy what is in LTAs. Of course, they just push the problem a little bit farther. So, when you arrive at the time that LTA expires and you need to renegotiate the LTA, that is when they tell you for certain period of time we need less, because if the agreement, they need to use the agreement. So, it's more a timing issue, but it's not that they don't respect LTAs. And actually, in the past, they were buying more than the LTAs. So, if it is an LTA with a certain volume, they buy the volume and they give you further for an upside. And then, when they don't need the upside, they go to the LTA, and when the LTA expire, they negotiate a new LTA, of course, considering their level of inventory where they are. So, assuming they are able to manage the inventory, and of course COVID is a very difficult situation because I think they were managing their inventory, they just wanted more, and now they don't want so much more anymore. So, they need to readjust that. But longer-term, LTA I think is good for us, it's good for customers, it's good for the industry, give a little bit of stabilization. And so, it's the first couple weeks of December, I'm sure you're engaging with customers on LTAs for next year. What's the tenor of those discussions? Obviously, it's sort of max pain or the pendulum has swung to pretty much the max in favor of your customers right now. Has that affected their appetite to engage in LTAs? And sort of how's the tenor of those discussions as you kind of head into next year? No, I would not say they changed their mind one of the reason why longer-term the LTA is good for them too. So, we still have LTAs. Of course, those LTAs for a period of time as a volume that includes the fact that they need to reduce their inventory. Right. So, they're -- so in terms of the duration of the LTAs, do you expect these to still be annual or like multiyear? I would say the majority is not annual. It's actually more on the six to nine months. We have couple of cases maybe a bit longer, but the majority are between six and nine months. And what portion -- is there a way to determine what portion of the LTAs -- if we rewind a year or even 18 months, what portion of the LTAs were lit up to? Or was it just that the volume got pushed out that's all? Actually, the customer that had the LTAs, they consumed the product until the end. They were not consuming more than the LTAs, but they were still getting the volume that was in the LTAs. And then as I said before, at the end of the LTA when we renegotiated the new LTA, their volumes, I think, went down because they have to use the inventory. That is a good question. Again, I would say we are not in a normal time. This COVID situation is difficult to manage for everyone. As I said, even for Seagate, we created more inventory, not because we were not planning in the right way, because we wanted more inventory. And I think now maybe our customer wanted more inventory for a while. And now we need to go to a period where we readjust and hopefully COVID will not create more disruption anywhere in the world, not only on the western part of the world, but everywhere in the world. And then, the planning doesn't need to include that extra inventory for no cause -- for safety stock. And I think that will be a new phase, but before we go into that new phase, we need to consume that additional inventory. Got it. Can we talk about your capital strategy? It was notable with the recent debt exchange and the successful covenant renegotiation. I got some questions as to the interest rate on some of the new debt. But can you sort of walk through the capital strategy? Yes, the capital strategy, longer-term, we don't think it will change. No, we are -- we have always been and we want to be very focused on shareholder return. And this includes a good level of dividend and a certain level of share buyback. We were active in the market until September quarter. And then, because of the downcycle, we said, "Okay, for maybe few quarters, we will go on polls in terms of share buyback," and we focused a little bit on our debt structure, because this fairly big reduction in the business, of course, we need to financially manage it. So, we, first of all, we renegotiated our covenants that were based on four times in terms of leverage and we did negotiate to five times. And we also reduced a little bit our debt through exchange notes that we have just concluded last Monday. So -- and we've also said probably we will reduce our debt even more in the next three to six months. It's just part of the financial management of the downcycle. Right. I think you replaced four tranches of 2029 and 2031s, all of which was at roughly 4% roughly, and you replaced it with 2032 debt at nearly 10%. So, can you speak about like changes in the debt service requirements? Yes, so first of all, we reduced the principle amount by about $200 million. So, by percentage it's on a lower debt. I think overall our interest rate moved from like 4.5% to 4.9% as a total company. Of course, we need to trade a little bit between the debt value and the interest, right, of course, in this period of time is much higher. This new debt will basically temporarily increase our interest by about $10 million a quarter. But as I said before, we are going to buyback more or redeem new notes and reduce our debt. I would say probably when we arrive at the end of this fiscal year, that is June, it will probably be similar level of interest. So, we'll still reduce our debt, so that the interest go back fairly close to where it was before. Right? So, there's a penalty in the near-term, but you're going to continue to work down the debt throughout the year? So, you reduce the debt, the interest rate is a bit higher, but the interest dollar that you pay more or less are fairly well aligned. Got it. And can you just maybe speak more broadly to capital return and how committed you are to the dividend and sort of how you think about the liquidity and the free cash flow profile on the capital return in the near-term and looking out? Yes. As I said before, we are very focused on shareholder return. So, this is something that is part of our strategy as a company. So, we want to continue to do that. Of course, we want to protect our dividends. We said we think we will have a positive free cash flow every quarter, even during this severe down cycle that I think is a good sign of our ability to create cash from this business even during a very difficult time in terms of revenue. We are reducing our inventory. That of course is also part of how we generate free cash flow in the current quarter and next quarter, probably more in the next quarter. So, again, it's something we need to manage in the downcycle. We don't think it'll be a long-term. We think it will be fairly short-term. The big customers that have already discussed about their CapEx for 2023 were fairly optimistic, for sure an improvement compared to 2022. These are fairly big CapEx. We don't think they can wait only the September and December quarter to spend that level of CapEx. So, we think, if it's not March, at least June would be already a fairly high level of CapEx and as you know, our disk is a percentage of that CapEx. And just in terms of the inventory, I mean obviously, you don't need more inventory yet, at this point. You reduced utilization in December, very low in October, November throughout this quarter. Do you expect utilization to come back much in Q1 or to work down the inventory you're going to probably keep running underutilized? Yes, as you said, mid-December is when you really talk to customers and see what is their forecast for the next three to six months. So, we need to see what is the level of the inventory at this point and see when they want us to run back production, because finally it's based on what they want to commit to us in terms of volume. But also very important, as I said before, is the situation in China, that is a big part of our volume. China is important for China Cloud, China Enterprise, OEM, China Video and Image applications, consumer, mission critical. All the segments are fairly big in that part of the world. So, when that part starts to improve, we need to ramp up. And of course, when our major cloud customers in the U.S. have consumed their extra inventory, this is when we need to ramp. So right now, as you said, our production level is very low and we want to keep it low until we have those good sign in terms of demand. This is, in the short-term, creating underutilization charges that are very expensive and impacting the P&L actually not fairly important. But you're -- you sound optimistic that China is going to come back maybe toward the end of Q1 into Q2. Well, of course we have a little bit all the same information. So, it looks like we have, there is now a support from the government to go back to a stronger economy. I think they probably want to have a stronger economy in 2023. 2022 is almost over. I don't think they want to influence the GDP of 2022 at this point. So probably they wait a little bit longer and then when we enter in 2023, hopefully those will relax some of the lockdown conditions and also support and stimulate the economy as I said after the meetings, the big political meetings they had in October. Can we actually talk about CapEx for a moment? You said that you'll be below the target range of 4% to 6% of revenue, but really you're being very careful to not cut CapEx related to HAMR. So, can you talk about that process and maybe hold our hand a little bit, when you have such a critical technology transition, people get a little worried when you start to cut CapEx, are you cutting the right CapEx, are you potentially damaging the roadmap, can you kind of talk about that? Yes, usually in this period of time, you don't need CapEx, because you are not producing more than the capacity you have in place, actually you produce much less. But because of HAMR, we still need to invest. We need to -- even if we spent CapEx that is fungible for HAMR, since at least 2020, it's already a couple of years that we are buying equipment that can be used for HAMR, but we need little bit more, so we are still buying those equipment. We said we will be below our normal range of 4% to 6%, it will be a little bit lower than the 4%, but we still need some investment, because we announced the product for early summer and we need to ramp. Got it. Also another question that I often get is, one of the large hyperscalers, not just one, but a general trend lately has been to extend the useful lifetime of servers and network equipment and things like that. Do you see signs of real extension of the useful life of the drives or is this more of just an accounting adjustment on your customers' part? I would say there is a business reason why they refresh their hard disk is more a capacity. So, if you keep -- if you think what was the high capacity five years ago, it's probably half of the capacity you have right now. So, it's not that the hard disk doesn't work after five years, it can work. Probably a big part of the volume still work, technically work, but for that physical slot, you can replace an hard disk with a new hard disk with double the capacity. So, the revenue that our customers generate from that physical slot can be doubled. That's why it's important for them to refresh, because in the same physical slot that is a limitation today, they want to have more revenue. And to have more revenue, they need to refresh and replace old hard disks with new hard disks. And this is why HAMR is so important, because you go into a phase where you refresh and you have old hard disk drive, what today we say mid capacity, knowing that maybe 12, 14 terabytes, and you can go to 30 terabytes or mid-30 if you use that in SMR. So, the benefit for the customers is enormous, not only because of the cost per terabyte, but because of the revenue they generate from that physical slot. Great. And I just, I'm going to ask you the question that I get asked a lot, around the Department of Commerce investigation and I know that you can't say too much about it, but is it -- does it change how you run the company at all? Or is it just a legal matter, that's all? It is a legal matter. It is not changing how we manage the company and our strategy. It's a legal litigation, so I cannot say much except that, we think we have a very solid position. Our internal legal team, our external legal team, they are very comfortable that we have a solid situation. We need to go through the discussion with BIS and hopefully solve this matter as soon as possible. Great. And then, can we talk about free cash flow? I think you've committed to generating free cash flow every quarter throughout 2023. Can you kind of talk about the trajectory of free cash flow? And maybe any other levers that -- I mean obviously you're pulling the inventory lever, you're pulling other levers, you're cutting CapEx. So, can you talk about that? Yes, probably the current quarter is where we generate the lower free cash flow, because the revenue is lower and because even if we are starting to reduce our inventory, we are still not paying our accountable for things we have purchased in the September quarter. So, there is a bit of time before you realize the decrease in inventory and increase in cash flow. So, probably this quarter will be the -- hopefully, will be the bottom in terms of free cash flow and then you will see an improvement starting in the March. Got it. And then, we haven't talked about the VIA market yet. Can you just -- can you talk about VIA? A very important market. So, video and image application, now smart cities, smart factories, extremely important. It will be known everywhere in the world. Today our major customers are actually in China, and this is one of the reasons why China is so important to us, but they manage projects everywhere in the world. So, it's not that is a Chinese application, it's everywhere in the world. But our achievement, our main major customers are in China. So, we think -- so that segment will improve and weâll go back to where it was before and even better. I think is a part of a -- it's one of those applications that will continue to grow in the mid-to-long term. Well, you never know about restriction. Even our restriction, of course -- we've been impacted as everyone else. In general, if you have a restriction at time, the demand is moving to someone that has no restriction, because itâs not that the project disappear, it's not that you stopped having video camera in New York, you will still have it. So, someone else will take care of that application and will become our new customer. So, the important is, all those applications are based on hard disks. So, whoever is the customer, wherever it is in the world, we can serve the customer. Today, big customers are in China, but if that will change for us it's not really a major problem. Great. And maybe just to wrap up, we're sort of running out of time. Can you -- so we talked about inventory, but can you talk about the risk of inventory obsolescence? Is there any -- I get some questions about the potential to have to take a write-down on inventory that doesn't seem on the cards, but can you kind of talk about that? Right now, we don't see that. Again, we are keeping our production very low, so that actually our inventory decline. I don't think we have part in our inventory that would become obsolete. I don't think.
EarningCall_1941	Good morning, and welcome to Warner Music Groupâs fourth quarter earnings call for the period and fiscal year ended September 30, 2022. At the request of Warner Music Group, todayâs call is being recorded for replay purposes, and if you object, you may disconnect at any time. Now, I would like to turn todayâs call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin. Good morning, everyone. Welcome to Warner Music Groupâs fiscal fourth quarter and full year earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q we filed this morning will be available on our website. On todayâs call, we have our CEO, Steve Cooper; and our CFO, Eric Levin, who will take you through our results, and then we will answer your questions. Before our prepared remarks, Iâd like to refer you to the second slide of the earnings snapshot to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides, and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency, unless otherwise noted. All forward-looking statements are made as of today and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that managementâs expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results to differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. Thanks, Kareem. Good morning, everyone, and thanks for joining us. As you may know, I'll be stepping down as CEO in January, so this is my last earnings call. I'll have more to say about our leadership transition later, but let's start by talking about what's happening today. It's no secret that we've been challenged on multiple fronts as we navigated the tumultuous macro environment. This includes financial volatility, rising interest rates, inflation, declines in online advertising spend, and currency headwinds. In addition, we've been navigating the complexities created by the pandemic and dealing with the impact of the war in Ukraine. Despite all these challenges, I'm pleased to say that we've had a very successful quarter. Our total revenue in Q4 was $1.5 billion, representing year-over-year growth of 16%. Adjusted EBITDA also increased 16% to $276 million, with a margin of 18.4% compared to 17.2% in the prior year quarter. These results were driven by growth across all revenue lines, as well as the benefit from settling certain copyright infringement cases, as we discussed on our last earnings call. Recorded music revenue was $1.24 billion, an increase of 13%. Streaming revenue grew 10.4% when adjusted for the one-time impact of the DSP renewal we've been discussing since Q1. I'd like to remind everyone that Q4 was the final quarter impacted by this renewal. Q4âs uptick in subscription streaming growth, and the benefit from emerging streaming platform deal renewals, more than offset the decline in ad-supported revenue. Artist services continued to recover in Q4, increasing by 33%, while licensing and physical were up by 38% and 6%, respectively. Publishing had another impressive quarter, with revenue of $254 million, reflecting exceptional growth of 32% plus. Digital and performance revenue stood out, growing 39% and 48%, respectively. As I look back on the last two and a half years since going public, it's clear that we haven't for a single day operated in a normal environment. So, it's gratifying to report that our businesses continued to shine during fiscal â22. For the full year, we delivered total revenue growth of 16% and adjusted OIBDA growth of 18%. Excluding one-time items, adjusted OIBDA grew 22%. We converted 65% of our adjusted OIBDA to operating cash flow for fiscal â22, well in excess of the expectation we discussed last quarter of 50% to 60%. As we look ahead, there's tremendous momentum in both the short and long-term. I've consistently told you that streaming revenue would continue to have significant runway, that we would have price increases and ongoing subscriber growth, and that emerging platforms would continue to expand. We're now seeing all these come to fruition. Most significantly, Apple and Deezer recently announced price increases. Making these announcements in the current economic environment, shows that music subscription services offer amazing value to consumers. Music remains undervalued, but we're optimistic that there will be other increases to come. We're also encouraged by reports of subscriber growth. Developed markets continue to grow in the double digits, while emerging markets are growing at higher percentages. With global smartphone penetration expected to increase meaningfully in the coming years, our conviction in streaming growth remains strong. Finally, the revenue growth curve of emerging streaming platforms continues to outpace more established formats. These new platforms are all heavily reliant on music. And as engagement continues to grow, we expect monetization to follow suit. In our recent deal with Meta, our annualized revenue from this category reached $370 million this quarter. We look forward to the continued evolution of our deals as these platforms harness the power of user-generated content, not just for music discovery, but for marketing and monetization. You've often heard me reference the four key pillars of our long-term strategy, music, globalization, innovation, and people. So, I'd like to talk about how these pillars have shaped our culture over the last decade and how they continue to drive our results. Let's start with the music. What distinguishes the Warner Music Group is our ability to identify and sign original artists at the beginning of their careers and develop them into the world's most recognizable superstars. We discovered many of our biggest names like Ed Sheeran, Cardi B, Dua Lipa, Bruno Mars, and Anita, when they were just starting out. Q4 exemplified the impact of our multi-pronged approach. We had great carryover success from our key artists like Ed, Dua, and Silk Sonic. Newly minted superstars, Jack Harlow and Zach Bryan, had multimillion selling albums released in Q3. And Lizzoâs phenomenal singles were a precursor for her chart-topping album, Special, released in Q4. We've also proved once again that music can come from anywhere and resonate everywhere. Not only do we develop Anglo blockbusters, but also superstars within their domestic regions. Local chart toppers, like Japan's Aimyon, and South Koreaâs Twice, and international superstars like Franceâs David Guetta, Argentinaâs Paulo Londra, and Nigeria's Burna Boy. In addition, given the growing consumption of catalog music, we placed even more emphasis on spotlighting our legendary artists. Recent highlights include great looks for Kate Bush, Fleetwood Mac, and Led Zeppelin. As we broadened and deepened our artist roster, and prioritized a global approach to domestic music, our revenue composition has evolved. A decade ago, our top five artists generated over 15% of our recorded music physical and digital revenue. In 2022, they generated just over 5%. Our momentum will continue with a strong release slate in Q1, including new music from Paramore, Aya Nakamura, Cardi B, Peter Fox, Roddy Ricch, Joel Corry, and more. I should also mention our outstanding showing in the Grammy nominations announced last week. Recorded music picked up more than 80 nods, which included half of the album of the year contenders. Our top nominees were Elektraâs Brandi Carlile with seven, and six each for Atlanticâs Lizzo, and 300âs Mary J. Blige. We also had three best new artist nominations for Anita, Omar Apollo, and Molly Tuttle. And Warner Chappell had a great showing, highlighted by nominations for The Dream and Amy Allen in the brand-new category of songwriter of the Year. Warner Chappell is also performing very well, delivering on its strategy of diversifying revenue streams, while providing wider opportunities for songwriters globally. Here are a few recent highlights. In the US, Daniel Caesar took home Song of the Year for Peaches at the 2022 BMI R&B and Hip Hop Awards. We signed pop sensation, Lauren Spencer-Smith, and breakout punk rock band, the Linda Lindas. We renewed our deal with eight-time Grammy Award winner, Chris Stapleton, and we entered into a license renewal with China-based social platform, Kuaishou, for our catalog across multiple Asia PAC countries. We constantly work to enhance the value of our songwritersâ catalogs. Our teams proactively find needle-moving placements to their music, which distinguishes us from passive right holders. One recent example of this is the placement of George Michael's Freedom, covered by Warner superstar Dua Lipa, in a Yves Saint Laurent campaign that launched in August. There's been a lot of debate over the value of major labels and publishers in a world where artisan songwriters have any number of distribution alternatives. While distribution has been democratized, talent never will be. Genuine talent is rare and difficult to find, but discovery is just the beginning. True long-term success requires significant resources, including financial investment, global infrastructure, creative expertise, and the skills to navigate the changing tech landscape. It's that combination, genuine talent backed by our considerable resources and skills, that builds careers for the long haul. Over and over again, artists and songwriters not only stay, but grow their relationships with us in this fiercely competitive market. That's when we know we're on the right track. 10 years ago, we were an Anglocentric company. Today, weâre a truly global music entertainment company, operating in over 70 countries. The key to our successful global expansion has been in identifying markets on the brink of ignition. We've customized for each new territory market and presence-building strategies. A couple of examples from the past decade are, the 2014 acquisition of Gold Typhoon in China, and the critical mass we've built in MENA, the world's fastest-growing market, through our investments in Qanawat, (indiscernible), and Rotana. We see Eastern Europe as a new and important growth area for music. Consumption in the region, which has a population of some 160 million people, grew 20% in 2021. Seizing on this opportunity, we've made moves to grow our presence. Examples include, our recently announced investments in Grupa Step, and BIG Idea in Poland, Mascom Records in Serbia, and the launch of OUT OF ORDER, a new label that will elevate artists in Eastern Europe and other emerging markets. The expansion of our global footprint has been further complemented by entering into partnerships with more than 200 streaming services around the world. In the music entertainment business, new technologies and business innovations they've driven, have often been met with fear rather than excitement. But today, we see tech as providing us with incredible opportunities to enhance the world of music. We've consistently been a first mover in investing across the digital landscape. Our early embracive streaming made us the first major to report it as our largest source of recorded music revenue back in 2016. Around that time, we also began our revenue diversification efforts. Since then, weâve partnered with nearly every major social platform, including Instagram, Facebook, Snap, Twitch, TikTok, and most recently, Pinterest. In many cases, we were the first major to do so. These deals are empowering our artists to scale their communities, encouraging fans to share user-generated content, and delivering significant incremental value. We were also the first major to aggressively pursue opportunities in the Metaverse. While our work in Web3 space has accelerated over the last 12 months, our efforts started back in 2019 when we invested in leading blockchain company, Dapper Labs. Our partnerships with Roblox, Fortnite, and Wave, have created innovative opportunities for virtual world-building, concerts, and other forums. This has allowed us to work with artists like Twenty One Pilots and Charli XCX, in pioneering new forms of fan engagement. Through our deal with Sandbox, we were the first major to plant a flag and build on virtual real estate. WMG Land, our current working title, is now Live in the Sandbox, and Atlanticâs Sueco, was the first artist to become part of the experience. I'm very proud of the progress weâve made over the past 10 years. We've moved way beyond thinking in terms of singles, albums, and videos. We help artists create all forms of rich, immersive interactions with their music in both the real and virtual worlds. As I look out on the next 10 years, I believe we're at the doorstep of a new golden age of music. As the ecosystem becomes more complex and exciting new business models emerge, our role as the connective tissue between artists and fans, will only become more prominent and more important. Finally, our people are the driving force that will always take our company to the next level. Last month, we announced that Julie Greenwald had been elevated to Chair and CEO of the newly created Atlantic Music Group. Julie's been with the company for 18 years, and it's industry mavericks like her that are the backbone of our success. We've enhanced our focus around important areas like ESG and diversity. Last year, we hired a head of ESG and established an executive oversight committee. On February 1 of â22, we released our first annual ESG report detailing our commitment to sustainability, equity, and social impact. Our second annual report will be published this coming January. In 2020, we hired a Global Head of Diversity, Equity, and Inclusion. We've since established global North Star commitments and launched our DE&I Institute. And we created the $100 million Warning Music Group Blavatnik Family Foundation Social Justice Fund, that invests in organizations and advances community initiatives around the globe. To date, the fund has already committed over $24 million in grants. On November 1, we published the Protect Black Art Open Letter in the New York Times and the Atlanta Journal Constitution. The letter urges legislators across the US to end the racially discriminatory practice of treating rap lyrics as criminal confession. Signatories included companies such as Universal, Sony Music, Spotify, and TikTok, organizations such as the ACLU, Color of Change, the Recording Academy, and the RIAA, and artists such as Alicia Keys, Coldplay, Drake, Megan the Stallion, and Post Malone, among many others. I'm pleased to see us creating new opportunities in our local communities using our resources to express our values and taking a stand on important issues. At the end of September, we announced that Robert Kyncl will become CEO during January â23, and then CEO on February 1. As an entrepreneurial leader, Robert has an impressive track record of championing change at companies like YouTube and Netflix. He's a pioneer of the creator economy, whose command of technology will enable us to unlock new opportunities for our company, our artists, and our songwriters. I have the utmost confidence that he'll build upon our strong foundation and bring us into a new era of how music lives in the world. Thank you, Steve, and good morning, everyone. Against a backdrop of currency fluctuations, the weak ad market, inflation, and war, our 2022 results truly highlight the resilience and diversified nature of our business. Despite the many macro challenges, we delivered double-digit growth for Q4 and the full year across a number of key metrics, including, total revenue on a constant currency basis, adjusted OIBDA, and operating cash flow, which, as Steve mentioned, exceeded our full year expectations. Let me provide some detail on our results in Q4. Total revenue grew 16%, reflecting growth across recorded music and music publishing. I want to note that our revenue includes the benefit from settling certain copyright infringement cases, as we discussed on our last earnings call. The $38 million impact is reflected in downloads and other digital revenue. Adjusted OIBDA increased 32.5%, with a margin of 17.7%, compared to 15.5% in the prior year quarter. These increases were primarily due to strong operating performance, as well as $29 million from the copyright settlement. Adjusted OIBDA and margin growth were impacted by foreign exchange rates, as well as two one-time items. These were the copyright settlement I just mentioned, and the impact of a DSP renewal we've been discussing since our earnings call since Q1. Excluding these items, constant currency adjusted OIBDA grew 33%, and margin would have increased 200 basis points. Adjusted EBITDA increased 16.5%, with margins increasing from 17.2% to 18.4%. You can find our adjusted EBITDA reconciliation in our earnings press release. Recorded music revenue grew 13.1%. Streaming revenue increased 5%, reflecting continued growth in subscription streaming, and a recent deal with Meta, partially offset by the market-related slowdown in ad-supported revenue, and the impact of the DSP renewal. Adjusting for the DSP renewal, which had a $38 million impact in the quarter, streaming revenue grew by 10.4%. This growth was highlighted by subscription streaming growth in the low teens, a sequential improvement from Q3. However, ad-supported streaming revenue, which does not include revenue from emerging streaming platforms, saw increasing pressure and declined by high single digits. Adjusting for the impacts of the DSP renewal and the copyright settlement, recorded music revenue grew by 14.2%. Artist services and expanded rights revenue increased by 33%, driven by merchandising and concert promotion. Physical revenue also increased, with growth of 6%, primarily driven by higher sales of final products and strong performance in Japan. Licensing revenue grew by 38% due to higher broadcast fees, synchronization, and other activity. Recorded music adjusted OIBDA increased by 20%, with margin improving from 17.2% in the prior quarter to 18.2%, primarily due to strong operating performance, as well as a $15 million impact from the copyright settlement. Excluding the one-time items detailed earlier, adjusted OIBDA grew 26% on a constant currency basis, and margin improvement would have been approximately 170 basis points. Music publishing continues to deliver impressive results, hosting 32% growth. Digital revenue grew 39%, reflecting solid momentum in streaming, which increased 37%. Digital revenue includes a $7 million benefit in downloads and other digital revenue from the copyright settlement. Excluding this benefit, digital revenue increased 33%. Performance revenue increased by 48%, as revenue from bars, restaurants, concerts, and live events, continued to grow. We saw particularly strong recovery in Brazil, UK, Germany, and the US. Sync and mechanical revenue both increased by over 8%. Music publishing adjusted OIBDA increased 33% to $60 million, with margin increasing modestly. Excluding the impact of the copyright settlement, adjusted OIBDA would have increased 31% on a constant currency basis, and margin would have increased 50 basis points. Moving to our full year results, total revenue grew 16%, driven by double-digit growth in both recorded music and music publishing. This translated to a healthy adjusted OIBDA growth of 18%, with a margin of 19.4%, up from 19.1% in the prior year. Excluding one-time items, the details of which can be found in our earnings press release, constant currency adjusted OIBDA increased 21.6%, and margin increased 70 basis points to 18.6%. Full year adjusted EBITDA increased 9.7%, with margin decreasing from 20.6% to 20.2%. Recorded music revenue increased by 13.6% or 15.2% when normalized for one-time items. Within recorded music, streaming revenue grew 9.5% or 13.5% on a normalized basis. Adjusted OIBDA increased by 12%, with margin declining by 30 basis points to 21.1%. Excluding the one-time items, adjusted OIBDA increased 17% on a constant currency basis, with margin increasing 30 basis points to 20.4%. Music publishing revenue increased by 30% or 27% when normalized for one-time items. Adjusted OIBDA increased by 35%, with margin increasing from 23.4% to 24.3%. Excluding the one-time items, adjusted OIBDA increased 32% on a constant currency basis, with margin increasing 100 basis points. In line with our expectations, Q4 CapEx increased to $38 million as compared to $35 million in the prior year quarter, mainly due to investments in IT infrastructure. I want to note that our financial transformation program has encountered a delay as a result of the disruption of COVID-19. In addition, the size and scale of this global system implementation, requires us to invest more time performing the rigorous system testing and data validation to ensure go live readiness. We expect the program to meaningfully roll out in 2024 and expand globally in the following couple of years. The program is still expected to deliver annualized run rate savings of $35 million to $40 million once fully implemented. However, the delay will result in a reduction in pro forma impact of cost savings that we account for in our adjusted EBITDA reconciliation in fiscal â22 and â23. We saw very strong operating and free cash flow growth and conversion in Q4. Operating cash flow increased 78% to $406 million, from $228 million in the prior year quarter. Free cash flow increases 91% to $368 million, from $193 million in the prior year quarter. For the full year, operating cash flow increased 16% to $742 million, and free cash flow increased 11% to $607 million. We delivered operating cash flow conversion, calculated as the ratio of operating cash flow to adjusted OIBDA of 65% for the full year. This was well above our expectation of 50% to 60% that we discussed last quarter. The over-delivery was largely driven by our strong operating performance in Q4, higher recruitments, and the timing of A&R investment and deal renewals. I want to emphasize that some of our Q4 over-delivery was the impact of timing. While we believe that our targets are reasonable, we view them as a multiyear period, and there will be lumpiness in working capital that will impact our operating cash flow to adjusted OIBDA conversion rates from quarter to quarter. As of September 30, we have a cash balance of $584 million, total debt of $3.7 billion, and net debt of $3.1 billion. Our weighted average cost of debt is 3.5%, and our nearest maturity date is in 2028. Fiscal â23 is already off to a very solid start, even as the challenging macro environment persists. While there is still softness in the online ad market, we believe it is a temporary dislocation, and that we will be well positioned to capitalize on the inevitable recovery. We are excited about the recent price increases announced by several of our digital partners, as well as the opportunity for more to come. The runway for streaming growth remains strong as global penetration continues to increase, and the next wave of emerging opportunities take shape. Music is no longer reliant on any one format or distribution channel. It is an essential part of every form of entertainment. The momentum in the music entertainment business is strong, and we continue to position ourselves for long-term success and growth. We're excited about the next chapter, and we look forward to having Robert on board to lead us into new frontiers. Finally, Steve. Steve, and I, have been doing these calls together for the past eight years. It's been a true joy to share the mic with him. On behalf of everyone at the company, I want to thank Steve for an amazing decade of growth and success. He's led this company brilliantly through an era of incredible change, both in our industry and the world at large. Steve, thank you so much. Thank you. Good morning. A couple of questions. Maybe just to start with, Steve, stepping back, you've been there and watched the industry go from declining to growing during your tenure as CEO. When you step back and think about your time at Warner Music, what's been the biggest change for the industry, the company, the one you think will have the biggest impact as we all look forward over the next five to 10 years? Well, thanks for the question, Ben. Happy Thanksgiving. I think the easy answer is streaming, but at least what I believe at Warner, it's really been for us a shift in our mindset, and that shift has been driven by our evolution from an Anglo-American music company to a global music entertainment platform, from thinking about our business in terms of rigid formats, to really moving to offering fans access to unlimited, ubiquitous music in every way, shape, and form in the real land and the virtual worlds. We moved from a narrow set of artists deals to expanding our definitions of artists and partnerships and offering much broader suites of services. And the mind shift has really been built on a foundation of running Warner as one company and one team with a common set of goals. And I think that, at least for us, that as the ecosystem becomes more and more complex, that by having that mind shift, and by working as one team, that that connected tissue that we provide between artists and fans, and what we do to move the value of music to its appropriate place, will just become more and more apparent as time goes by. And I'm happy to say that with my colleagues, I played a part in creating that mind shift, and I'm very confident that we will continue to embrace, adapt and adopt, adapt and adopt, as the world of music continues to evolve. Thank you, Steven. All the best in the next chapter for you. Eric, could you just help us think about the emerging streaming opportunity in fiscal â23? Obviously, you're always at work trying to get music valued appropriately, but I think it's potentially a busy year for you in terms of contract renewals. And in particular, given what's happening with YouTube and ad-supported streaming, TikTok is one of kind of paramount import for your business because they seem to be taking share from YouTube and others. So, could you just help frame sort of the year ahead on the emerging streaming front of what we should be focused on, on our end? Sure. So, thanks, Ben, and nice hearing from you. So, again, don't want to get into specific deals, but broadly the category. So, you're right, Ben. So, in fiscal â21, we had a series of deals that we did or renewed. And generally, we do deals in two to three-year cycles. So, â23, we would expect to be the start of that process. Broadly, that category consists of more and more licenses, with growing consumption. We see that category as a growing category for the long, long term to come. Each deal and each contract will be negotiated individually. Some of the companies within that category have been highly successful and scaled, and others have had more challenges. So, each deal will meet where that partner is, but itâs our objective deal by deal to get the full and appropriate value of music, and we'll be negotiating for each deal assertively to make sure each deal is valued properly. The other thing to note is that these deals, as we've talked about in the past, are generally fixed-fee deals. Itâs our objective over time to move these deals to or towards being variable. We know that's not going to all happen in one renegotiation across the board, but we'll be working towards that end. And obviously, as deals move variable, the growth curve would be smoother and in line with monetization and consumption growth, whereas with fixed--fee deals, it's more of a stair step and you try to capture the expected growth in the platform within a fixed-fee over that period of time. So, we'll be working each negotiation and seeing what we can accomplish there. And the last thing I would say is Web3. Web3 is an emerging category that we're actively driving in market experiments. Steve talked about the experiment we're doing in the Sandbox now with others in flight. We see that as an area that over time is quite promising, and we think is going to be a contributor to the long-term growth of our new digital revenue. Hope that helps, Ben. I just had one quick question regarding your calendar year, or your reporting schedule for next year, because I think you guys are shifting from that sort of 53-week that happens every four years, to something more normalized. So, can you just help us as we think about modeling â23 and beyond, where we'll see sort of the greatest distortion? Is it in the fourth quarter of next year? Is that the right answer, and then everything gets smooth after that? Jason, thank you. Good - I'm glad you hit on that. Good question. It's an important one. So, yes, we've now shifted to calendar quarters. And so, we'll see the main real impact in fiscal Q1 of â23. We disclosed that in fiscal Q1 of â22, we had kind of that extra week. As there's a 53rd week, you get an extra week in one quarter. That was in Q1 of â22. So, that will be a comparative item in Q1. But the rest of - for the following quarters in Q - I'm sorry, in fiscal â23, we'll expect a consistent year and year comparison with the same number of weeks. But in Q1, we will have that to address, and we disclosed that last year, and we'll continue to make sure we're careful about that when we report Q1 results. Thank you. Our next question comes from the line of Kutgun Maral with RBC Capital Markets. Your line is now open. Good morning, and thanks for taking the questions. Two, if I could. So, first, Steve, congratulations again on a long and successful run at WMG. If I could follow up on the question earlier and maybe ask it a bit differently. As you reflect back on the last two and a half years following the IPO, are there any parts of the story that you feel remain misunderstood, or at least underappreciated by investors? And second, for Eric, on recorded music streaming revenue, the 10.4% underlying growth was particularly strong, and it certainly seems to be ahead of your peers. I'm not expecting multiyear guidance, and I know the ad-supported piece remains uncertain, but can you help frame the puts and takes for 2023 a bit, and maybe update us on your longer-term expectations, specifically around the subscription front? You had very attractive low teens growth in the fourth quarter. Is that a good benchmark heading into â23? Could it be higher given Apple Music, or are there offsets we should be mindful of? Thanks. All right. So, Eric, I'll go first, and thanks for the question. I do think that our business is to a certain degree, misunderstood, and it's misunderstood in the following context. When you look at the results we produce over the longer term, call it for argumentâs sake, a year, versus the shorter term, our march for the last, I don't know, nine or 10 years, has been steadily northward bound, both by way of the topline and by way of the bottom line. And my expectation would be that that steady march North will continue for the foreseeable future. That being said, I think that many investors evaluate us on a quarter to quarter to quarter basis. And as I believe many of our investors have seen, that quarters can be impacted by any number of extraneous items. But as those extraneous items, whether it be shifts and release schedules, getting a deal done a quarter late versus a quarter early, what we have done, both by bolstering our investments in recorded music, by bolstering our investments in publishing and with publishing now having lagged by way of the growth of digital revenue, is now leading by way of that growth through the focus that we've put on diversification over the last four or five or six years. Diversification, both geographically, that is local language, with emerging platforms, emerging markets, that I think that all of these quarter-to-quarter blips have a tendency to be ironed out over an extended period of time. Again, call it a year, and that the really observant investors will see that despite those blips, that year-to-year, year-to-year, year-to-year, that march North continues. And it's continued this year despite choppiness in a couple of quarters. So, I think it's - valuing us or evaluating us as a quarterly business, is somewhat misguided. And I think evaluating us on an annual basis or a rolling 12-month basis is, at least from my perspective, a far better way of looking at how we are doing, the health of our company, and the trends we're setting. So, hopefully, that answers your question. Good. I fully agree with Steve on that. So, Kutgun, thank you for both your questions. I'll answer your second one on streaming. So, let me break that into two pieces, kind of 2022 and then forward-looking. So, in 2022, on an adjusted basis, meaning looking at the underlying trends of streaming, Q4 grew 10% and the full year grew 13%. Very strong streaming results in a challenging macro market. In Q4, we saw subscription streaming grow low teens, a very strong result. Ad-supported though is significantly affected by the macro environment. Ad-supported declined and declined in the high single digits this quarter. As we look forward, we think there's a lot to be really quite positive and optimistic about. I will point towards Goldman's Music in the Air forecast, just because it gives an interesting and we think useful template to look at. They see subscribers doubling, or quite frankly, more than doubling over the next seven to eight years. It's driven by a couple of components, and each of the components I'll try and address and paint what we think is the picture. Developed markets, which are round, which are penetrated in the 30% now, we've seen market studies and forecasts that predict that increasing to 50s or even 60% penetrations as you look forward five, six, seven years. We think we are seeing consistent growth in developed markets today, and we think there's a lot of runway to be looking forward to. What is now really additive to that is, we've seen price increases just in the past quarter from Apple, Deezer. Others have talked publicly about considering price increases. We think the environment for price increases has changed, and we are optimistic about continued pricing increases going forward, and that is additive, especially in developed markets. We think developed markets for subscription streaming has a lot of growth in front of it, and we're really pleased with the potential and opportunity there. Emerging markets are growing even faster than developed markets. The penetrations across emerging markets on average are still single digits, and have the opportunity to grow into the 10s, 20s, and hopefully over time, even the 30s. Although the average ARPU is lower in emerging market, their rate of growth has increased, and we think has tremendous promise. We've also been investing at Warner into what we think are some of the most promising emerging markets. Steve, in his talking points, talked about our investments in the Middle East, which in â21 was the world's fastest growing market, growing, I believe, 35%, and we're building our market share into that growth. So, we see emerging markets as being a real opportunity for subscriber growth, revenue growth, but also for us to develop real footholds and develop our market share and footprints. Ad-supporting has been more challenging in the short term. Remember before the macro environment was so challenging, ad-supported would grow in line double digits pretty consistently with subscriptions. But when macro environments get difficult, one of the first things that we've seen consistently gets - is affected negatively is ad-supported. We saw it when COVID hit in 2020, and we're seeing it now. The ad-supported market is in decline. Even though consumption of products go up, just monetization has gone down in the short term. When the macro environment starts to improve and economies start to improve, we would expect to see that improve and ad-supported to rebound strongly and go back to growth. We also see the emerging streaming category as one that is still in early stages, with more diversified revenue streams, increased number of partners and deals, and growth within many of the key partners within that category. So, we see - and Web3 as an emerging component. So, we see the emerging streaming bucket as one that is a continued growth area for us, noting that our deals, many of our deals in there are fixed price, that the growth is not consistent. It can be lumpy, but over time, we see it as an extremely promising growth contributor. So, we see streaming as a very diversified form of growth now globally across subscription, social, fitness, Web3, and we're very pleased with how it's developing, and see it as an area that we're really optimistic growth going forward. Thanks, Kutgun. Thank you. Good morning. Steve, congratulations on your retirement from Warner. Maybe two questions if I could. First, on market share, you had some notable releases, album releases in the back half of the fiscal year. Could you maybe talk a little bit more about how those impacted market share in the quarter? And then looking forward, how the release slate is shaping up relative to other major labels as we head into 2030. And then a follow up to Benâs question on emerging, maybe for Eric. The labels are in the process of negotiating with ByteDance owners and looking to expand its regular service. It'd be great to get your latest thoughts on the opportunity you see to improve monetization of ByteDance at a holistic level, whether that's on the TikTok side of the house or with the expansion of ByteDance itself. Thank you. Okay. So, while I canât talk about our release slate in specifics, we did touch upon those albums that we know have either dropped or will drop in the first quarter. But what I will say is that our diversification, our geographic diversification, and our focus over the last decade in growing, not only our Anglo, but our non-Anglo business, has provided us with a tremendous amount of what I would call release resiliency, that we have local, regional, and global superstars bubbling up from many, many, many different parts of the world. And because of - because we've created both a geographic, read domestic music, local language portfolio, along with our Anglo portfolio, Stephen, it gives us a tremendous amount of resiliency by way of quarter in, quarter out, year in, year out momentum, where we have become less and less dependent upon any particular artist, and less and less dependent upon blockbusters, because this portfolio is consistently hitting singles, doubles, triples, and home runs. So, that's kind of on the slate point. On market share, market share moves around a bit, often driven by the strength or more strength or less strength in release schedules. One of the things I would point out though is that while there are various reports on share moving to labels or artists that aren't affiliated with Warner or Sony or Universal, the fact of the matter is, when you continue to look at listening and the listening behavior of people that immerse their selves in music, that we continue to be one of the truly dominant global forces in music when it comes both to share, and as importantly, to hours of listening. So, while you will see small movements, the fact that listening continues to be dominated by Warner, Sony, and Universal, shows, in my view, the fact that - and I mentioned this in my opening remarks, that while access and distribution has become democratized, talent isn't and never will be. Frankly, if talent was democratized, I'd be celebrating my entry into the NBA Hall of Fame. And the fact of the matter is that we seek out real genuine talent, that complemented and supplemented by our resources, our creativity, our skills, create a very meaningful probability that that artist, whether it be on a local, regional, or global level, will be able to be successful. And it's those artists at the local, regional, and global level that are driven by only a few companies in the world, one of which is us, that end up dominating listening hours and the ears of the music-consuming public. Hopefully, that addresses your question, Steven. And I'll take the second question. So, on your question on ByteDance, Stephen, so just I'll start by couching a little bit, just that we don't talk to individual deals, but I can certainly talk to our approach, which I think will be helpful. First is, we work with each partner, each platform. And one of our first goals is to help them - and determine how we can work together to help them expand their products, their services, their reach that's positive to consumption, it's positive to competition, all of which we are - we think are favorable to the music industry and Warner. The second piece is, we take each negotiation and we look at the established growth trends and the projected growth trends of that platform and business, and we negotiate each deal to get what we think is full value for music out of that platform. As platforms evolve and there's more information about how they've achieved over the past several years and more clarity into their product and expansion plans for the go-forward term, we will build all of that into our negotiation and attempt to get the best economics that we can out of that deal. Obviously, as I said before, we also seek to move our emerging streaming deals from fixed to variable deals as best as we can. That requires they have the systems. That requires that we're able to resolve the negotiation in a favorable variable form. But these are all things that come into the equation and we work hard to make sure each deal for every single partner is right-sized and structured to help them succeed, to fully value music, and continue to build and expand our partnership. Hope that helps, Stephen. Thanks. This is Ashton for Vijay. I just had a quick question on some of these DSP price increases. Is there sort of any dynamics with the price increases in sort of changes in payment terms versus what you were getting before the price increase? Or is that a negotiation that comes up when DSPs increased price? Ashton, I think - sorry, it was a little faded, but I think your question is about price increases and how that affects our economics, if I have that right. And so, what we have said and will continue to remind folks is that our - certainly our major DSP partners are generally all on similar economic terms in a very tight band, and are generally variable deals. So, as price increases roll through the market, we generally expect to share in the upside that that generates. So, as the average ARPU per consumer increases, that's positive and favorable for our economics. What I would say is that each affiliate is a complex mix of how they generate their revenue. They operate across both developed and emerging markets. Subscribers are growing in both developed and emerging markets. Each affiliate has a different mix for what their growth is, the different percentage from developed and emerging markets. ARPUs are different in developed markets and lower in emerging markets. But price increases obviously raise the whole boat and are favorable for us and the industry. And we're thrilled to see that price increases are starting to roll through. It's something we've been advocating for years and years, and it's really nice to see that distributors are starting to recognize that as well. Thank you, Ashton. Thank you. This concludes the question-and-answer session. I would now like to hand the conference back over to Steve Cooper for closing remarks. Thank you. Just a couple last points. I want to thank my Warner colleagues, our artists, songwriters, partners, board of directors, and shareholders, for allowing me to lead the company over the last 11 years. It's honestly been just an enormous amount of fun, incredibly interesting, and one of the greatest experiences of my working life, and I'm really honored to have been a small part of the incredible Warner Music Group journey. Number two, thanks again for joining us today, and I hope that everyone has a very happy Thanksgiving, and a wonderful holiday season. So, goodbye for now.
EarningCall_1942	Okay. Great. Hi, everyone and thank you for joining us. My name is Shannon Cross and I'm the IT hardware analyst at Credit Suisse. I'm now joined by Rob Thomas. He's the SVP of Global Markets for IBM. And with that, Rob, would you like to introduce yourself and tell us a little bit about your role and we'll get to Q&A? Sure. Thank you, Shannon. Rob Thomas, I've been at IBM since 1999. So, number of different roles. Started in consulting, was in Micro Electronics for a few years and then spent a decade plus in software and took on go-to-market about 18 months ago. And go-to-market for us is all of our countries around the world, technology and consulting as well as our ecosystem partnerships. So that's what I've been spending a lot of time on. Great. So, IBM is a significantly different company than it was just a few years ago. So, maybe from your vantage point, can you talk about where you see the biggest changes culturally in the company, but also how you deal with partners and where your focus is from a revenue perspective? So, let's talk about what's different because I agree with your point. I think it's a very different company from even just two years ago. Why is that? One is focus, I think from his first day, Arvind has been clear the -- it's going to be about growth and everything we're going to do is going to be about growth and driving cash flow. And that starts with a focus strategy. He said on day one, hybrid cloud and AI. And what you've seen over the last couple years is us getting more explicit about what that means. And it's investing in areas like data, automation, security, all of which run on our hybrid cloud strategy with Red Hat. It's about building a vibrant consulting business, and we can get into that a little bit. So, number one is really just focus and getting alignment to the whole company behind a -- on one hand, I think the best strategies are simple. They're never simple to execute, but it's simple in, these are the things that we want to be good at, which we think are relevant in technology for the next decade plus. Second has been about transforming the go-to-market, and that's really been about revenue focus, getting a more technical go-to-market. So, we can talk a little bit about that and changing perception with clients. And then third has been ecosystem. We can't be the leader in hybrid cloud unless we have a vibrant ecosystem that's viewing that as a platform that will drive growth for them. So, we've done a lot of ecosystems. So, I think it's really those three things that are fundamentally different from where we were a couple years ago. And I think it's encouraging that you can see it in the results more to do, but you can see highlights of it. So, when you talk about hybrid cloud, I mean, I went back say, oh, I don't know with the pandemic, I lose track of time. But seven years ago, 10 years ago, there was this focus that everything was going to go to the public cloud. And that customers were just that, that's where we're going, that's where we're going to be and all these data centers and everything else is just -- it's over. So, I guess, when you talk to customers, how are they sort of balancing their infrastructure and plays into your consulting business significantly, I think, as well and trying in terms of trying to help customers optimize their data center infrastructure. So, what are you hearing from them and what sort of trajectory do you think, or how long do you think hybrid cloud will remain sort of a focus? Well, there has been a complete 180 in, I'll call it, the last five years, because I do think there was a view that every company is going to choose a singular public cloud and move everything to that place. We've had the view on hybrid cloud for a while now. And I would say I think the world has now seen the hit the way that we do, which is public cloud is a critical part of the future of technology, but it's not the only piece. It's about how do you integrate that with your private cloud strategy? How do you run in a multi-cloud environment? And while five years ago every client was saying, I'm going to choose one public cloud, I don't talk to any client that says that today. Their only question to us is how can you help us go faster on hybrid cloud, which is a dramatic shift, which is why I say it's a bit of a 180 and I feel we're really well positioned for that. So, I think that's good. Then you add to the, I would say the tailwind we did not expect was what's happened geopolitically in the world in the last year, which has led a lot of companies and governments to say, I can't be dependent on a single provider, which is why you see now more discussion of I need a sovereign cloud strategy. I need a local cloud strategy. And I think all of that plays to the investments that we've made in Red Hat and Open Source, because Open Source is about technologies should be available, you should have the flexibility to use it how you want. And so, I don't think that this is a phase. To some extent, the world where computing can happen in a bunch of different places is the world we've always been in. The anomaly was when we said everything's going to be in this one place. So, I think this is the new normal. And then it extends to things like edge cloud, which I think will become more predominant. This is why we're making investments in areas like software defined networking, which we think be fundamental to multi-cloud computing. So, I think this has a long runway. Great. And how should we think about IBM's go-to-market given this evolving environment that we're in, how -- a couple years past Red Hat, how are you thinking about having the two different sales teams and go-to-market approaches? Where do you integrate them and how do you leverage each other's capabilities? The -- let's maybe go back to just some basics on what we've done in the go-to-market and then I'll answer Red Hat specifically. Number one is we put a lot of focus on building expertise in the sales team. We've asked people to become an expert in technology or an expert in consulting. So, we have very few that are actually overlaying all of IBM, if you will. That's all about expertise, because that's what clients demand. Two is we have built a much more technical go-to-market. Two teams in particular. We built a pre-sales team that's called client engineering. And this is a team of engineers that goes to the client and says, how can I be helpful? You're trying to solve a problem on, improving your server utilization, reducing your storage footprint, modernizing applications, doing data science, whatever it may be. And this team will engage and do the work. And this is something we used to charge for. And I think we had to catch up to a modern go-to-market where engineering skill is expected and it's part of the sales process. We also built a post-sales team called customer success. So, once a client's bought a product, how do we actually get them up and running quickly using the product to get results for their business and then ultimately consuming more? So, this is a big change and it's a material amount of our sales capacity now that used to be zero, that's now double-digits in terms of percentage. So, it's material in terms of how we're engaging with clients, and I think that makes a big difference in perception. And then obviously results over time. And then to the Red Hat piece, by design from day one we've said Red Hat will be independent because we don't want to compromise what they provide as an open partner to all partners. So -- but we IBM, we will prefer Red Hat and a sales cycle will walk in and say if you're interested in cloud packs or solving a problem with data, the best way to run that is on Red Hat. So, we will prefer Red Hat. The Red Hat team by design we keep independent, because we're happy if the client uses Accenture to implement Red Hat or wants to run a managed service of Red Hat on AWS or Azure. So, we want to maintain that independence there. There was an announce -- we did a month ago, I think that speaks though to the value where technology we had developed in IBM. We said the best place to land, this is in Red Hat. So, we announced a project called Project Wisdom, which is basically if you go into Ansible, which is for building automation and scripting, this is a natural language interface. So, instead of having to write a 100 or 200 lines of code, you just say launch an Ansible script and all the code populates. So, it was an AI for code project that we were working on. We said the best places for this to show up is in Red Hat. So that's the leverage Red Hat gets of being part of IBM is around innovation and new technology. And then we partner as we need to support clients. And maybe we can talk a little bit about the consulting business because I think there's -- I get a lot of questions about, well, if there's a downturn it's going to get hit and I think, I mean obviously Kyndryl took a chunk of stuff that would really get hit, but how are you thinking about the ecosystem around the consulting business and go-to-market and positioning in what appears to be somewhat of a slowing macro? Again, I think the best strategy of the simplest, if you go back two years, the simple moves we made in consulting, number one was we want to build big meaningful partnerships. So, we went out and proactively partnered with AWS and with Azure where we now have billion dollar pipelines with both. We've built on the work we've done with SAP through the years. We built a bigger partnership with Salesforce. We built a big partnership with Adobe, just to name a few. It was about picking a handful of strategic partners where we thought we could drive multiple billion of revenue, that is working. Second is, we said it's a labor based business. We have to do hiring, obviously. We've done a lot of hiring in consulting and I'll tell you it's been encouraging to see the response to people intrigued, interested in what IBM is doing. And it's been very easy to bring people on board, get them skilled up in the different areas in consulting. So, I think that's been positive. Third was we had to restart the M&A engine. We hadn't done a lot of consulting M&A in previous years. We've now done like it's 14 in consulting in the last two years. So, again, three things. Build strategic partnerships, higher M&A and all of that's driven really great growth for consulting as you look over the last few quarters. Now to your point on the macro. Anybody can really predict the macro, but one is technology is deflationary. And everywhere that we see inflationary pressure companies that can put technology to work, that helps solve that problem, which is positive. Secondly is we are confident that technology growth will outperform GDP growth, two to four points somewhere in that range. And so I think you'll see continued interest in what we're doing there. I think one good example to kind of bring it to life. We did this deal with McDonald's where we've taken over their automated ordering. And if you think about it, it's really hard for McDonald's to hire people. Wages are going up dramatically. And so, if you can actually do automated ordering that instead of having to hire four people, you can hire two people. That's a great application of technology. It also includes services work on helping that get set up and implemented. It's a good example of that is going to help regardless of the macro environment. And so, just one example. Yeah. I was laughing, because I've actually used that example when we have a dog -- so when we were moving across country, we had to stop and you can't take dogs into restaurants, so you go through a lot of fast food. And I was amazed by how much automation there is now in fast food. And I've used it as an example of where -- with all the higher costs and that and productivity needs, there's a huge opportunity for IT. So, it fits in with my thesis. I appreciate that. Yeah. No, it's good. You just -- and you can leave the dog in the car quickly. So, I guess, AI is a significant topic of discussion. You've mentioned it a few times here. Where are the biggest areas that you see AI running through the portfolio and where do you think customers are sort of on their journey of understanding how they can use AI to improve their processes? We decided to focus our AI investment in three big areas, which I think are broadly applicable for enterprise technology. One is natural language, because business is all about language documents understanding. Two is automation, whether it's automating IT processes or business processes. And third is trusted AI, which I think we're still early on, but as companies get more AI models into production, how you understand how decisions are being made, bias detection, drift detection, those become very important capabilities. So that's where we've invested in core R&D I would say over the last couple years for AI. What does that mean for clients? There's five use cases that I see gaining a lot of momentum for AI. One is customer service. We talked about McDonald's. That's one example, but this also applies to any customer service. Regions bank is using Watson assistant to field all their customer service questions as an example. So customer service is one. IT operations, instead of having to hire a bunch of people to manage your systems, can you use software to do part of that work? Understanding potential defects, improving meantime to resolution when you have an issue. So, IT operations is second. Third is cyber security. And I think the line between AI and cyber is actually blurring and there's so much happening in cyber. The only way to keep up is through software, not through throwing more humans at it. So that's happening. Sustainability is a fourth area. Understanding data sets, how does that fit into reducing energy costs, energy consumption as an example. And last I would say serving employees. I think the best example of that is what we implemented in IBM, which is we're using AI now. It's kind of an interface across all of our HR systems. So, employees don't even know what system they're using. They just get a simple natural language query box. They can ask questions, they can get answers. And I -- you think about those kind of the two bookends, customer service, employee experience, I believe every company will use AI for that at some point. They may not know it yet, but I think it's inevitable, because it's just a way more efficient way to deal with Q&A type challenges. You could probably sell some to Credit Suisse based on my onboarding experience I had a few months ago, but â¦ I guess, one of the concerns investors have had is with regard to your ability to grow sort of the core IBM software. So, I think Red Hat is somewhat understood, but I don't think there's a great, or maybe that's not fair, but I'm not sure there's a enough understanding of sort of what lies within your core software bucket and where you see growth and opportunity. You talked about AI, what specifically are you doing maybe in security? Just any more color you can give would be helpful. Sure. I think growing in software requires three things. We talked a little about go-to-market and ecosystem, so I'll park that because we covered that. The next two is innovation. Organic and inorganic. You have to get innovation going because that's going to drive growth. I'll talk a little bit about that. And then third is around product led growth, which is really a new motion, which is different than a traditional direct Salesforce. So, let me talk about the latter two. On innovation, I'm actually pretty pleased with the progress we've made in the last couple years. In security, we've developed Cloud Pak for security, which is the next-generation security event monitoring system. We've done acquisitions like Randori for attack surface reactive for end point. So we've now built out a portfolio that covers, I would say the vast majority of the components for this term, XDR, extended detection and response. And I think there's only maybe one or two other companies that have the breadth of a security portfolio that we do. I think this is probably a misunderstood part of IBM today that people haven't caught onto yet, but we're a big player in cybersecurity. Next is data. We've been in data forever. Data warehouse, data governance. We've now released a product around Data Fabric, which is called Cloud Pak for data. Data Fabric is the idea that you shouldn't have to move your data to actually analyze it. So, how can we actually do data governance and understand all of your data regardless of where it sits? And I think this is what the next-generation data architectures are going to look like. They're going to embrace unstructured data and structured data. That's what the future warehouse or lake house is going to look like. So, we have organic work going on. We acquired a company called Databand, which is about looking at your data pipelines. Where is data moving? Where is it not moving, where are there issues? And kind of your data life cycle. Automation has been probably the biggest bet in the last two years. We built Cloud Pak for Watson AIOps, which is understanding all your IT systems. We did three acquisitions that complement that Instana for application performance management, Turbonomic for optimizing all of your IT resources around that. And then myInvenio, which is a little bit on the side around process mining, understanding IT processes that flow into your system. So, in each of those areas, it's a combination of organic and inorganic, and innovation is what will drive growth. So I'm encouraged by the progress there. In terms of product led growth, the reason I say this is newer for us is our traditional model has been sell to large enterprise clients through a direct Salesforce. Now we evolved that, how I talked about with ecosystem partnerships. But the next step is how do we get to a bunch of clients that have never bought IBM or never considered IBM. And that universe is still enormous. And the most valuable real estate IBM has is IBM dot com. If you look at the traffic that we get there is significant, but we do very little today in terms of converting people to a product page, a product trial, and the nurturing their journey through that product. That is going to unlock a lot of growth for us in software. So it's really those three things; continue what we're doing on go-to-market, continue and actually increase the innovation engine, and then product led growth is a new motion, it's a cheaper go-to-market because you compliment that with digital sales along with IBM dot com. And that's a new motion for us. Great. And maybe switching to a totally different area, talking a bit about your mainframe business, sort of how do you see that fitting in strategically over a long period of time? Obviously, it's sort of stabilized. I would -- I mean, you've got to benefit right now because of the refresh cycle. But where do you see mainframe fitting in, infrastructure as a service? Just I'm curious as to how you position that to customers over a longer period of time. If it's possible after all these years, I still think mainframe might be a little misunderstood. And what I mean by that is, this is a transactional system. It does that one thing and it does it incredibly well. And if you think of sub millisecond response times to this date, there's no other system in the world that can do that. And companies that use the mainframe, it's not like their side project, it is their core business. So, they will not run without the mainframe. So, we're really pleased with the innovation and the new system, particularly the Telum processor, which is I think the first on chip influencing delivered for AI. So, you can do real-time fraud analytics as an example, as a credit card swipe happens. And so, clients are seeing that innovation and they're getting a lot out of that, which is good. The number one question we get from clients on mainframe is how does this fit into my hybrid strategy? So, we're helping them build an architecture around where that fits. I think one great example, just at a conference this year, Citibank was talking about how they've taken their MongoDB workloads and they've consolidated that onto the mainframe on Z Linux. Why would they do that? MongoDB is something completely different. True. But they've got the mainframe. They know it's highly energy efficient. And if you can take all of the other hundred servers that would be running MongoDB and you can run it on the system that you already own, makes a lot of sense for them. Itâs energy efficient? It's capital efficient. And I think you're going to see more clients get, I would say, more aggressive in how they're utilizing workloads on the mainframe because it's there. And it's part of what their business. I think in part this is why you've seen stabilization of the transaction processing annuity which we're encouraged by. Mainframe has a long time to go still. So, I'm optimistic here. And maybe talking about some of the future for IBM and how you think about it. You're obviously investing significantly in innovation and research in that. I'm interested in what's going to happen with quantum computing over some period of time. I think IBM is a bit more optimistic in terms of timeframes than maybe some others are. But -- and we'll see if it blows up encryption, but that's a whole another story. So, how are you thinking about -- well, areas that you're most interested or excited about as you look forward to the next several years? One thing we've started working on is a 10-year roadmap for enterprise computing. I think this is something that clients want from IBM is where is technology going to go? And there's a few -- think of it this way, in the short term, it's more like GPS coordinates. Like, we know what we're going to do for the next few years. As you get out, it's more like a compass, it's a direction. But quantum computing is certainly one of those areas. We announced the 433 qubit system just earlier this month. We continue to build out the quiz kit, which is the developer platform for a quantum, and the adoption of that is going very well. To your point, don't know exactly when commercialization will happen, but we're confident we have great technology that's a step ahead of others. I think quiz kit is the key step to watch over the next couple years, because that's where applications will be built that are designed for quantum. So, we'll see how that continues to progress. In terms of other areas, it's what's the future of hybrid cloud? And we're thinking about things like multi-cloud computing. When people think about multi-cloud today, it's really about how do I integrate what's happening on different clouds? Multi-cloud computing is, can I build an application and then just run that wherever is most suitable location wise, cost wise, I think there's something to come there, but we're early days of thinking about things like that. In AI, we've invest -- been investing heavily in large language models. We now have what I think is one of the larger systems in the world. It's an exaflop system for training foundational models on language. Why does that matter? That feeds into all of the use cases I talked about for AI. It's one reason why we were able to take technology from McDonald's and make it way better in a short period of time, is because we've been investing in these foundational models. But we're at like billions of parameters today that will continue to increase over the next few years. Security's a big part of that roadmap. Like I said, I think AI and cyber, probably the line blurs where it becomes much more about your cyber defense is only going to be as good as your AI. How well do you understand events? What's happening? Can you predict what could go wrong? So, I'm encouraged. We're early days on thinking through this roadmap concept, but it's a good way for us to get alignment with clients on this is where IBM's investing. It's all the areas we talked about, data, automation, security, hybrid cloud. How does mainframe fit in with hybrid strategy? And I think this is an important part of making today's IBM well understood by clients. And as you think about like the roadmap, how do you add in your partner ecosystem and -- so you're not just -- if it's not big blue, we're not going to sell it. And making sure that your customers are comfortable with your willingness to work with others in that. Well, just this month we announced a new initiative around embedded AI. It's become clear to us that many companies, particularly other software companies, tried to build their own AI and they realized it's very expensive, and it's actually very hard to do. So, the purpose behind embedded AI was making our AI library as our foundational models available to other software companies. Companies like SingleStore have announced they're using NLP. Accubot is using some. We've got some other big announcements to come that I can't share yet, but I'm actually really encouraged where we're making partners part of all the roadmap capabilities that I talked about. We've worked with other global systems integrators like the Deloitte, like EY, where they're setting up cybersecurity centers, managed service capabilities based on IBM technology. So, everything I described in the roadmap is actually available to partners. And the one thing I've heard from partners that I think is positive is they have more, I'd say, insight into transparency into what we're doing in products than they ever have before. We make them -- when I enable our sales team to start the year, partners are invited to all that. They can see exactly what our sales team sees. That was not true 18 months ago. And so, in all of these areas, we're encouraging partners as much as they want to participate with us. And how do you -- from a comp perspective, how do you sort of incent your partner ecosystem? I'm just trying to figure out from a competitive landscape. Because again, I think it used to be more sort of IBM first, and I mean, obviously, Red Hat first here, but you seem to be much more willing to work with people. So, maybe from P&L perspective, I don't even think how you think about it where you do sales comp on your internal employees versus your channel so that everybody feels like they're sort of adequately respected. I think the fundamental change we made here, which has gotten a lot of positive response from partners was around how we segmented clients. We have a set of top clients, which we work with partners, but we have a big direct sales presence. For everybody else we have declared a partner first model. And so, as I look at my SG&A reallocation, I've reallocated a lot of SG&A to basically business partner, sales people on the IBM side that can only hit their quota by working with partners. There's no other way for them to hit their quota. That was not true before. And so, they're just like a direct salesperson. They have a number they have to get, but they have to fulfill and work with partners. So that's a pretty big change. So there's now a huge part of the world for how we define it, that is partner only. We have sales people that are only paid if they're working with partners that's going to have a positive impact. And then back to my point on product led growth, then as we get leads on the web, the digital team is cultivating those. Those leads get passed to either directly to a partner or do one of our partner managers who then has to close that working with a partner. So, the product led growth motion is actually all going to play out in terms of success for partners, which I think will be a positive momentum flywheel for us. Great. Well, with that, I think we've come to the end of our discussion. Thank you so much for joining us and look forward to watching your journey going forward.
EarningCall_1943	All right. I think we're live. All right. Welcome, everyone. So I'm Chris Caso. I'm the new semiconductor analyst at Credit Suisse. So I'm really excited to be here at this conference. Attendance Iâm told is the best that weâve had in 10 years. So people are excited to get out and about post-COVID and find that out of things. And obviously, with a lot of turbulence in the market we have a lot to speak about. So for our first semiconductor presentation today, pleased introduce NXP Semiconductors. With us from NXP is Kurt Sievers, CEO; and Bill Betz, the CFO; and Jeff Palmer, VP of Investor Relations is with us as well. So gentlemen, thanks for attending today. Yes. Thanks much, Chris and thanks for having us. Indeed, it looks like a very well attended event. I'm curious for how you run the discussion. Well, let's get started and I'll -- Jeff told me to be gentle. So I will do my best. But I would be remiss to not talk about some of the things that are on investors' minds, obviously. And Kurt, one of the things that -- discussions weâve had for much of last year and probably longer than that, has been -- itâs always been curious to you, I think, is that you sit in front of investors and handle questions about the potential for a slowdown and when is this going to end? And usually immediately after those discussions, you get on the phone of your customers and theyâve been yelling at you for more products. And I guess maybe thatâs a way of starting. And the macro conditions have certainly changed over the past several months. But the supply-demand dynamics in your space have not -- thereâs been some areas of slowdown and some not. So how do you reconcile that? And I guess the question that all investors are asking is, is it just a question of when that things are going to slow down for you? Yes. No, certainly, it has changed. I mean the whole macro uncertainty is not leaving us alone. I mean, we clearly see, I would actually say, a significant weakness in the consumer exports business which is our IoT business, inside 40% of the industrial IoT segment. And also the low, mid and mobile which is largely the Android business. Now that's not new. We've had this now for a while. And I think we are treating it with a lot of care which means we don't want to jam the channel and we try to learn actually from what we have done wrong in the past in similar situations. However, at the same time, the automotive and core industrial indeed continues to be very, very resilient. So I continue to have these calls. They don't yell at me, by the way. I mean they've all learned that being constructive is the better way to deal with the situation. Since there is a lot more we will jointly do in future. But the matter of the fact is that in core microcontroller product categories as well as analog mixed signal categories, we are sold out into automotive and core industrial. From an order visibility perspective into next year, we have these famous NCNR orders. That also continues to be the case, obviously, for next year. So we have about 85% coverage of next year's NCNR order load from those 2 markets on NXP. Now is it just a question of when it comes down? I don't think so. Because I think the demand drivers in automotive and industrial are structurally different ones to the consumer businesses. The consumer businesses have really benefited from the surge in demand through this working from home which came with the pandemic. While that demand in automotive and in core industrial had nothing to do with the pandemic. I mean that is a structural secular demand which has to do with electrification and all the good content increase trends which is why for sure, a weaker macro is kind of broadly bringing down the number of cars which are being sold. But we believe that the content increase is so much dumping any potential issue on the SAAR that we are quite confident on next year's numbers to be in a good place. Right. And one of the things that's always sort of a hallmark of a downturn in semiconductors is inventory where customers tend to build too much inventory. And I think that has happened to some extent in the consumer space. But as we're saying earlier, your customers have been clamoring for product for much of the last year. And is the potential that just because of the shortages that happened and the lack of industry capacity that happened during the pandemic that just in certain sectors such as industrial and automotive, those customers weren't able to build the accesses that have been in prior cycles. Yes. So fully agree with you. In the consumer segment, we try to avoid the inventory build which is why indeed, we limit our channel inventory to 1.6 months which is almost a full month below the 2.5 target which we have. And mind you, now it is us limiting it. I mean in the past 2 years; we couldn't bring it up because we didn't have enough supply. Now we actually keep it down in order to not jam the channel. On the auto and industrial side, you never have ultimate visibility of customers' inventory. I mean I would be lying if I said, we know exactly how much is there. But it is very obvious that it is still very, very thin. I would go that far that the supply chain is still dysfunctional which means any little change in say, we ship a few days later. We have a test on maintenance in our -- in one of our factories or there is a FedEx issue in transportation. We immediately have the calls that a car factory is down which tells me that there is nothing in between. I mean it's just empty. So I think there are 2 stages, Chris. The one stage is to make that supply chain functional again. And that means all the different stages between us and the car company are filled to a level which is enough to buffer any variations in supply. Second stage will be and I think that's what you were referring to, is the target or the learning from this period of supply shortages to build some buffer stocks. More than actually they had in the past. I am very, very sure. The second one is nowhere near. Nobody has been able to do this because there hasnât been enough supply. Everybody is still fighting to get to the first stage which make -- which is about making the supply chain per se functional, bringing it back to fill levels like we had before this whole turmoil. Right. So right now, your customers still -- the hand to mouth in that industrial and auto space, that's still where you think we are. Which is, by the way, a very -- it's a very interesting situation for us because we -- the past 2 years, everything was short. I mean that was pretty simple. It was just everything short and we tried to produce and ship as much as we could, any place. Now it is, of course, much more differentiated because indeed, the -- those consumer markets donât have that anymore. While for us, the majority of our business being auto and core industrial, they absolutely still have it. And the trouble is, it is not fungible with each other because you might be tempted to say, yes, what the heck, I mean, if you have enough consumer IoT, why canât you shift this and help the automotive side of the house and the core industrial side. The trouble is, it is largely not 100% but itâs largely different process technologies which we can swap. Right. And that was going to lead to my next question which is the difference in the supply demand dynamic for the different processes. And whereas some of the leading-edge stuff or maybe kind of the trailing edge or the leading edge is freeing up because of consumer. But we've heard from your peers is sort of 55, 65 nanometers even some of the older geometries are still pretty tight. Yes. It's really, I'd say, between 28 and all the way up to 180 nanometers. There is still a lot of stuff going in 180 which is not old products, by the way, it is specialty processes with very high voltage capabilities, et cetera. And that whole bracket probably really with a specifically concerning field 55, 65 and 90. That is indeed what keeps us busy. And you know that a lot of this we are sourcing from foundry partners which I think gives us very transparent forecast for their supply capability through all of next year. And that's why it is what I said in the beginning, from anything we can see today, that demand which we have on hand will continue to surpass supply capability also through next year in those particular nodes. There is other things which are fine. But those are the majority of the auto and core industrial supply. And whatâs being done to add capacity in those nodes? Because, obviously, itâs been short for some while. The availability of process tools has also been constrained. So again, another potential difference in this cycle is that some of the excess capacity that the industry would have or had adding prior cycles has been difficult to do so. So maybe you could speak to that. Yes. So tactically, indeed, unfortunately, I have to totally confirm what you say. Bill will tell you that we thought we would move to 10% CapEx in Q4 which we don't because we don't get the tools. I mean, we wanted to spend it but there is a -- also that part of the supply chain is actually so much in delay that we couldn't even make the CapEx operation which we wanted to. How is our capacity being added? For us, it is a 2-leg approach. We have our internal manufacturing facilities which cover around 40% of our wafer supplies and 60% are with third-party foundries. We maximize for anything which is NXP proprietary technologies, our internal footprint. I mean that's what we spent the CapEx for. So we don't do the overflow model anymore but we only run internally what only we can run to maximize the output for that. That's in full swing and it will deliver gradually every quarter more supply. On the other hand, we, of course, work with the foundry partners to get more and more supply from them. They are adding in their world. And all of that has helped us through the past -- yes, it's 10 quarters now, every quarter more and we see this also continuing through next year. So when I say next year, our supply capability is just maybe 85% of the demand. That is on a higher level than what we had this year. So I mean, it's not like we are stuck on the same level. It keeps going up. But it's just that the demand is also higher. What doesn't work and that has led to some confusion is there are those Tier 2 foundries. And I think we've all heard that Tier 2 foundries, especially in China, are actually underloaded. And they are operating in these mature nodes. But first of all, we have no real appetite to source from China, given the geopolitical situations. But secondly, it is also that our -- especially automotive and core industrial customers do not accept those foundries anyway. So we are, from a safety, reliability and quality perspective, we have to work with the Tier 1 foundries. So it is traumatic [ph]. But while there seems to be overcapacity in those foundries in China, we still continue to be short because we can tap into that capacity. You can tap it. Yes. I mean there's some bifurcation between the capacity. Maybe shift a bit and speak to some of the product cycles and some of your product-specific things. But -- and I think what was -- one of the things I noticed from the last Analyst Day was that your growth drivers, we speak about auto, it's not all of auto that NXP seems to be very targeted in certain areas. Things like Radar, some of the domain controllers and things like that. Before I get into some of those things, maybe you could speak to how you choose those markets, kind of the project selection process which gets you into some of these markets where what you used to say in the past 1.5x market share of your competitors? That's exactly the key. So we have -- and when I say we, it really starts with Bill and I. We have a very, very stringent focus in the company to only operate in segments where we can achieve a relative market share of at least 1.5. The whole idea behind that is that we believe by doing that, we can out-innovate competitors through scale. I mean, if you spend 16% R&D but have 1.5x more revenue in absolute terms than your competitor, you will spend more on R&D and you can actually come with a better roadmap and a better product proposition to your customers. Now not the whole company is at that stage. I mean we constantly have to renew and we add new segments and we grow into them. I think at the moment, it's like 60-plus percent of all of the company's business is actually in this relative market share leadership position already. And that leads then indeed into 2 things. It is an enormous focus to be the best in certain areas. But it also means that Bill and I say no to certain things. I mean if the teams cannot come with a plan where they credibly achieve that position over a period of time, we will either immediately stop or we do it for a year and see if we get closer and stop them. So it's a tough process. But I think for this ever need of scale in our industry, that's really what makes us successful. Now bringing that back to product examples, I mean, this is how we got to the leadership position in mobile wallet, for example, in mobile, where we -- I think we have a relative market share of 7 or 8 or something. So really, really strong leadership. It's similar in Radar, in Automotive, where the 3-year growth is guided to $1.1 billion in 2024 which is 22 -- I think, 25% CAGR over the period in a large and growing business and we made it now to number one. And I think with the design wins which we have in-house already which we just have to execute on now. We will even expand that number one position going forward. But you also have positions where we don't have it yet. That is in battery management for the electrification for the car is a good example. I mean, we are actually behind ADI, they -- after they acquired Maxim, they actually got into a strong number one position. But I believe with our value proposition in battery management which is full system solutions, including automotive ASIL-D microcontrollers, we are design winning faster and work towards that relative market share leadership position. So you see we have that in all stages. Mobile wallet, we are far ahead already. In Radar which is a fast emerging segment, we are right in the middle of just number one now. And now expanding to the number two. In Battery Management, we come from behind but I think the dynamic, the momentum we have is also going to boost us ahead. And those are what we call growth businesses which were like $3 billion revenue for the company in 2021. And we're going to double them to $6 billion in 2024. So when you think about the growth of NXP, as you said, 8% to 12% which, by the way, is twice the speed we had before. I mean we came from more like 5% or so in the 3 years before. Now we are doubling this to 8% to 12%. It's really made up of 2 elements. It is those growth businesses which are more like 20% to 25% CAGR, $3 billion to $6 billion and a core business which we think is going to grow with market, say 5%. Why is that core business only growing with market? Because this is where we have these high RMS positions and we can't outgrow the market. We are literally the market in those positions. But -- so it's really those 2 elements, those 2 legs which are driving NXP's growth. Right. And how do you segment out? I mean, in between the 2, the sort of higher RMS sort of baseline business and new businesses? In the past, you used to say something like 75% of your business would grow at SAAR plus a few points. And then there was a 25% of the business which is higher than that. Does that kind of framework still apply right now? Well, it has tilted because the relative share of those pieces, especially in Automotive which are growing much faster, has actually become bigger. I think the 75%, 25% doesn't fit anymore. It's -- that portion has got bigger which is also why we have -- we guided automotive 9% to 14% which is also faster than we had guided in the past. And admittedly and now I know I opened a big box of discussion but all of those 8% to 12% for the company or 9% to 14% for automotive were not comprehending price. Now we all know that we are in a, I'd say, at least somewhat unusual period for the semiconductor industry where price increases. And I actually think consistent price increases are the name of the game. So the reality is when we -- when Bill and I, when we gave that guidance in November last year, we didn't comprehend price increases because we didn't know how much we could actually do. And we also didn't really comprehend much movements of the SAAR. So those elements are kind of modulating now positively, I have to say, where we are currently going. Right. And as you speak of price increases, this is about the time of the year where at least your U.S. auto customers will typically negotiate for next year. In addition, we've heard from some of the foundries is that, particularly, on some of the lagging edge processes that the price increases are starting to be implemented for next year. Given all that we've seen and the changes in the macro, is that still likely to continue? And maybe you can speak to us about the conversation you're having with your customers? Yes. So both is true. The one is -- it all starts with the imbalance between demand and supply which I spoke to earlier, in parts of our business. And that has to do with this trailing edge problem. And by the way, I would say it's just that this industry, we all collectively have underinvested in the years maybe between 2016 and 2020 or so which is why we have that whole situation now. And somebody has to pay for it because there's a lot of depreciation of all that capacity which is being added. So yes, the annual price negotiations with the car customers are happening as we speak. I mean this is always this time of the year. In Japan, it's actually shifted by a quarter. They do this in April. But fundamentally, there is this annual once-in-a-year price negotiation. Secondly, yes, the -- those nodes I spoke about before which continue to be chronically short like 55, 65, 90. They continue to see from our vantage point, cost increases. So our input cost with our foundry partners are going up next year for those nodes. So we have no other choice. It's not that I particularly like this but we have no other choice than passing on that increased input cost to our customers in such a way that we actually protect our gross profit percentage. We've done this, I'd say, successfully over the past period. And I see no escape from continuing to do this also into next year because, again, the cost continues to go up. We will not let loose on our gross profit performance. So we are increasing prices as we speak. Right. And although the gross margin percentage hasnât been changing as a result of that, certainly, gross profit dollars have benefited as you raised price on customers, you keep the same percentage, the gross profit dollars go up. Bill, maybe I can ask you, does that lead to some degree of resiliency in the margins as you go into next year, both because of, one, the pricing environment? And then secondly, just kind of these tight supply conditions, what sort of levers do you have to pull if we use these some more incremental macro weakness as you go into next year? Sure. On the pricing, it really doesn't impact our gross margins because, as Kurt mentioned, we're just offsetting the higher input costs. Now what's a bit different is internally, what we manufacture is greater than 90 nanometers very specific IP proprietary mixed-signal type of technologies. And we see these utilizations staying in the high 90s. They're not coming back down. If you recall, when COVID hit, we brought utilization for these factories well below 50% as well as the company's revenue -- overall revenue structure of the revenue fall through, the company has been really built when we merge with Freescale. From a scale standpoint, of the fixed cost is really above $10 billion. So we feel very comfortable that we will stay in our gross margin long-term Analyst Day model that we provide between 55% and 58% regardless of what the revenue is going to do next year. This is a big difference to the past. And it comes back to how we are retooling our internal factories. Our internal factories used to be exposed to kind of all the markets which we serve which is why we had a pretty significant swing in gross profit when demand came down. Now because of the supply situation, we have actually maximized these factories for these proprietary technologies which are almost exclusively for automotive and industrial which means our internal loading or utilization is, to a very large extent, a function of the automotive and core industrial market. And since that continues to be very resilient, Bill says what he says which is that we feel quite protected next year from a loading perspective which is very different to how it went in the past. Right. Weâve got about 5 minutes left. Is there any questions from the audience? Iâll let you guys think about it if you do. But just bringing -- following up on that one as well. One of the things is also different in the industry now versus the past is that, for some of those foundry agreements, there are long-term agreements that are in place. And weâve seen with GlobalFoundries, for example and some of the handset that theyâve been in force. That was one of the questions when things slow down, where they actually be enforceable it looks like they are. How has that applied to NXP. And in some of the areas that have slowed down, there are long-term agreements in place, Iâm sure for you. How have you been able to handle that? Yes, I can. We have like $3.8 billion or so of long-term agreements sitting there but that's over multiple years. I think it's 5 years or something. So it's a really long period of time. So when you calculate that back to revenue for the year, it's actually very little. So I can very straight and very clearly say, we absolutely face no issue with this at this particular moment. And that is largely because most of those agreements were actually for automotive. And there is no issue on demand. Actually, I wish we had more of these agreements to get more supply. So it's -- we have the opposite problem. I mean, I wish we had a bit more because then we could actually supply more into automotive. Right. Iâll check again if there are any questions, otherwise -- make sure itâs hard to see. Just pivot on to maybe cash flow as well. And what youâve talked about is about a 25% free cash flow margin. With the plans that you have going forward, how do you manage that, especially given the uncertain environment? And obviously, your CapEx, for example, is not as high as you would have liked which is benefiting cash flow. As we go into 2023, is there any impact on cash flow as you sort of catch up on some of these capital investments that you wanted to make in 2022? Yes, Chris, let me take that one. This year, we'll spend about 8%. As you mentioned, we wanted to spend $10 million. Next year, we're projected to spend between 6% and 8%. And we'll be able to continue to drive to our long-term target of 25% of excess free cash flow that we want to go drive for the company related to it. So it's balancing it, all the needs. And then our return policy, obviously, our number one priority is to continue to invest in the business. That's the best use of our cash to grow the top line in a profitable manner. Then we're going to continue to do these small tuck-ins and which we'll demonstrate them. We disclose depending on the size but we continue to go after talent, small teams of talent around the world. Specifically, in AI software capabilities, low power and so forth. So that's the next step of our capital allocation policy. As you could see, our dividends, our dividends are running on a trailing 12 month around 21% of cash flow from operations. So I think over time, we want to get that to about 25%. So we have some room there. And clearly, the buyback in Q2, we were able to put some extra cash on the balance sheet just to prudent thing to go do. And then you saw we continued to buy back in Q3 and Q4 recently. So no change in our capital allocation policy and we feel very comfortable with our balance sheet and cash flow generation of the company. Yes. Question on inventory. I think you build a little bit, you're at about 100 days. Where do you target? And do you think you're going to have success building inventory? And then if you could talk about customers, where do you see inventory levels? It looks like balance sheets are quite high. But are you getting feedback of any inventory overhang customers wanting to work down? Yes. For us, our inventory is still quite low if you think about it. If weâre controlling the channel at 1.6 to make sure that we donât pull it all to 2.4 overnight, thatâs something that we looked at very carefully. If the demand is not selling through, weâre not going to ship it in and we watch this on a weekly basis and it gives us opportunities to potentially redirect this material or allows us to actually us, NXP to rebuild our value bank, to be able to give us more options for that future growth, specifically industrial and auto spaces. So weâre going to be very careful. Weâre going to be comfortable of running a little bit more inventory on the balance sheet. And to be honest with you, compared to our peers, weâre probably one of the lowest. Yes. And let me add on the customer side. There are pockets of certain products which tend to be high for a certain period of time which is this golden screw problem where one part was missing from somewhere in the industry. Everything else is piling up and then it's flushed through at the moment. But when you overall look at, say, car company or Tier 1 inventory which appears high, then you really have to discount this for the higher prices. I mean inflation sits on this quite massively. Secondly, the largest part of the value of the inventory of our customers is not semiconductors because they do high-value goods with steel and plastics and what have you which is all much more valuable than semiconductor. So it doesn't say much -- if you look at their DIO, doesn't really say much about the semiconductor position. And I can only say in the auto space and also in the core industrial space, so with customers like Schneider, ABB, Honeywell, et cetera, we are not worried at all about inventory at this stage. I mean, I don't have the crystal ball. I don't know what this is going to look like in 4 quarters. But at this point, absolutely not.
EarningCall_1944	Good day and welcome to the Chico's FAS Third Quarter 2022 Conference Call and Webcast. All participants will be in a listen-only mode. After todayâs presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. Good morning, and welcome to the Chico's FAS third quarter â22 conference call and webcast. For reference, our earnings release can be found on our website at www.chicosfas.com under Press Releases on the Investor Relations page. Today's comments will include forward-looking statements regarding our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, which speak only as of today's date. You should not unduly rely on these statements. Important factors that could cause actual results or events to differ materially from those projected or implied by our forward-looking statements are included in today's earnings release, our SEC filings and the comments made on this call. We disclaim any obligation to update or revise any information discussed on this call, except as may be otherwise required by law. Certain non-GAAP measures may be referenced in today's call. A GAAP to non-GAAP reconciliation schedule is included in our earnings release, presentation posted this morning on the Chico's FAS Investor Relations page. Thank you, David, and good morning, everyone. Our robust momentum continued. We posted another quarter of outstanding sales growth and operating income and our seventh consecutive quarter of year-over-year double digit EPS growth, resulting from continued strong store and digital sales and solid expense leverage. Our strong performance and quarter after quarter momentum demonstrates that our strategy is working and we are very pleased with the substantial progress toward our three-year plan. The power of our portfolio, three unique brands and execution of our strategic pillars are driving our continued strong performance and we remain confident in delivering over $2.5 billion in sales by 2024. Let me cover some highlights. We posted another quarter of very strong bottom line results with diluted EPS of $0.20, more than 30% over last year. This performance was driven by comparable sales growth of nearly 17%, combined with solid expense leverage, and this performance was on top of a 28% comparable sales increase in last year's third quarter. Customer behavior remained healthy during the quarter. Consistent newness, innovation, and product enhancements drove strong digital and store traffic and sales growth. We generated greater year-over-year full price selling, average unit retail and spend per customer. Our apparel brands continues to deliver exceptional results with Chico's posting a 29% comparable sales gain and White House Black Market recording comparable sales growth of 17% in the quarter. AUR was up in both brands to last year. Chico's customers overwhelmingly responded to our elevated product and fashion newness, building complete outfits with solution-oriented product. White House Black Market customers responded to our versatile dressing, seasonless fabrics, and product innovation to meet for work from anywhere needs and special occasion wear. Our Soma performance improved compared to the second quarter with particular strength in our foundations business. Soma comparable sales grew 35% compared to the third quarter of fiscal 2019. Soma continues to take market share in non-sport bras and panties according to NPD, indicating the overall long-term power and strength of the brand. We continue to make investments in cutting-edge product innovation. Strategic marketing continues to drive more customers to our brands. With total year-over-year customer count up high single digits, spend per customer up over last year's third quarter, and the average age of new customers continuing to trend younger. Our 14% sales growth and solid expense leverage delivered on operating margin of more than 6%, well above last year's third quarter operating margin of 4.9%. We strengthened our balance sheet ending the quarter with $141 million in cash after repaying $30 million of debt. Our four strategic pillars, customer-led, product-obsessed, digital-first and operationally excellent continue to guide us to deliver on our three-year strategic plan. Let me give you a brief update on each. We are customer led, focused on community engagement and creating extraordinary and memorable customer experiences, forming lasting relationships, and increasing customer lifetime value. Store and digital sales both grew by double-digits for the quarter. The power of our three unique brands is driving growth through three powerful platforms, creating long-term connections, and enabling our customers to interact with us in a seamless manner. Our physical stores are community centers where our customers experience our products in the most exciting way possible and the knowledge and enthusiasm of our stylists and bra experts drive sales and brand loyalty. Stores are the community connection that so many customers are searching for in a disconnected world. Digital is often the first impression of our brands and is a community hub for content and a great way to teach, share information and inspire. And our social stylist skillfully connects customers to stores and digital. Chico's FAS has a uniquely strong foundation with some of the most loyal and dedicated customers in retail. Our loyalty programs that were recently relaunched are continuing to exceed expectations in enrollment, customer sentiment, and redemption rates. We are strengthening our already strong customer relationships and adding new customers through these elevated programs. We are product obsessed, continually delivering innovative and best-in-class merchandise to our Chicoâs, White House Black Market and Soma customers, offering beautiful solutions that inspire confidence and joy. At each brand, we are focused on elevating AUR and driving full price sales growth. At both apparel brands, customers continue to respond to our elevated fashion and product offerings in nearly every apparel category, demonstrating that product enhancements and innovation are moving the brands forward and that customers appreciate higher quality and are receptive to paying for value and solutions. At both Chicoâs and White House Black Market, customers bought complete outfits and accessories instead of single items, which increased AUR and basket size. At Chico's, style, fit, comfort and solutions are driving our revenue increases. Customers responded enthusiastically to our product innovation and fashion, including in tops, knits, wovens and sweaters, pants and denim, jackets, dresses, jewelry, and shoes. She's focused on completing her head to toe look with easy care, wrinkle-free, climate-right fabric. At White House Black Market versatile tailoring and feminine details in seasonless fabric drove the business in key categories. Whether she was looking for casual pieces or something dressier, customers responded to our newness in tops and sweaters and in woven, bottoms and premium denim dresses and jackets. Soma continues to make investments in beautiful solutions that continues to fuel growth in our foundations business in both bras and panties. We are delighted to welcome Chris Munnelly to our team as SVP of Merchandising and Design at Soma. I am confident that Chris, who has a 30 plus years of apparel experience and a proven track record, will work with our expert foundations design team to drive Soma growth in this evolving business. We are digital-first, leveraging technology to engage and deliver to our customers across channels and brands. Over the trailing 12 months, we grew our total customer count by 8%. Chicoâs grew by 11%. White House Black Market was up 14% and Soma added 4%. Spend also rose high single digits over the last 12 months. We are continuing to attract new customers to our brands and they are trending younger than existing by 10 years at Chico's, three years at White House Black Market, and four years at Soma. Each digital touchpoint inspires the customer to find solutions and build for wardrobe across brands. And we are driving frequency of visits online and especially in store. Our customized digital styling tools, My Closet and StyleConnect continue to drive sales and engagement is growing. These tools further nurture and grow the multichannel customer who is so valuable to us, spending more than 3x single channel customers and fueling overall growth. Combined digital tools grew significantly over last year's third quarter, fueling the most growth in stores. Digital tools are driving higher average order value in both channels. StyleConnect is so powerful it now represents 13% of total FAS sales. Our mobile apps are exceeding our expectations with downloads and engagement growing month over month and driving higher average order value and conversion than the site average. Our apps are being designed to become the key hub of our new loyalty program. We are really excited to add the StyleConnect feature to our app in January. Buy online pick in store has remained a customer convenience. Revenues not only increased double digits year-over-year, but add-on store revenues are growing as customers are responding to coordinating items that our expert stylists suggest. And last, we are operationally excellent. We are continually focused on diligently managing our inventory, cost of sales, supply chain, expenses and real estate, generating healthy cash flow and delivering a strong bottom line. During the quarter, we had solid gross margin performance while slightly lower than last year. Higher raw material costs were partially offset by freight, occupancy leverage and higher average unit retail. Our year-to-date gross margin was 300 basis points ahead of the prior year. We are focusing on constantly improving our sourcing, logistics and operational processes to help drive efficiencies and lower costs. We have carefully managed our calendar and inventory flow to assure product will be available to our customers in a timely manner. We have also prudently controlled our mix of ocean versus air freight with air costs for the third quarter down 95% from last year's third quarter, reducing overall freight costs by nearly 75%. Thank you, Molly, and good morning, everyone. The third quarter marked another great performance where our product and execution delivered growth and profitability across channels. We posted diluted EPS of $0.20, an increase of more than 30% over last year and our seventh consecutive quarter of double digit year-over-year earnings growth. Bottom line results were driven by strong top line as well as expense leverage resulting from a more flexible cost structure. Third quarter total sales of $518 million increased more than 14% over last year, and nearly 17% on a comparable sales basis, driven by greater breadth and depth of product complemented by strong traffic both in store and online. Looking at the brand level, apparel was once again the leading performer for the quarter with Chicoâs posting a 29% comparable sales increase and White House Black Market generating a 17% comparable sales gain. Soma posted a third quarter comparable sales decline of 6%, primarily affected by the continued slowdown of the lounge and cozy categories. But Soma comparable sales are up nearly 35% compared to the third quarter of 2019. Continued innovation and active inventory management resulted in higher AUR and year-over-year growth within the core foundation, bra and panty categories. Third quarter gross margin was 40% compared to 40.7% last year. This year's 40% gross margin is a healthy normalized margin indicative of steady inventory flow and full price selling. Gross margin this quarter sits 470 basis points above the third quarter of fiscal 2019, and reflects our focus on product, quality, and full price selling. SG&A expenses for the quarter totaled $176 million or 33.9% of sales compared to 35.8% in last year's third quarter. The 190 basis points of leverage was driven by higher sales and ongoing expense management in the face of higher inflationary pressure. During the quarter, we leveraged marketing expense, our second largest expense bucket within SG&A, and our marketing efforts continue to drive traffic and help generate active customer growth across all three brands. For the quarter, we posted $32 million of operating income, an increase of nearly 45% over last year. Our higher sales and expense leverage produced an operating margin of over 6%, well above last year's margin of 4.9%, clear evidence of the focus we place on sales, earnings and cash flow. EBITDA for the quarter was close to $42 million and nearly $170 million for the first nine months, well above all of last year, and more than 2x what we generated in the full year of 2019. Now let's turn to our balance sheet and overall financial strength. Our cash position, total liquidity and operating cash flow remain very strong, providing us with the flexibility to manage the business and make investments to further propel our growth. After repaying $30 million of debt, we ended the quarter with cash of $141 million and total liquidity of nearly $330 million, inclusive of capacity on our credit facility. At the end of the third quarter, total inventories were $304 million compared to $278 million one year ago. The year-over-year 9% increase primarily reflects strategic inventory management to align assortments with seasonal consumer demand to support our planned sales growth. As we move into the fourth quarter, we believe our inventory levels are appropriate and we have the ability to maintain healthy full price sales. Based on our fourth quarter sales expectations, we expect to end fiscal 2022 with lower customer facing inventory than last year. Now, let me give some color on our outlook for the fourth quarter and full-year. We believe we remain on track for solid top-line growth for the fourth quarter and full-year. We are seeing very healthy consumer behavior in both channels as measured by traffic, conversion and average dollar sale. Therefore, we have not adjusted our plan for the fourth quarter, even though, we are cautious based on the macroeconomic environment. Both existing and new customers are continuing to show up for us because we are delivering the style, innovations, uniqueness, and quality that our customers expect, and we are continually attracting new and younger customers to our brand. We are currently forecasting that we will sustain healthy gross margins through full price selling, product mix, occupancy leverage, and supply chain cost management, and believe we are well down the path to reach our annual margin target of 40% by 2024. Continued full price selling and strategic price adjustments will continue to support higher AURs. Managing our air, ocean freight mix has resulted in favorable year-over-year expense, which is accruing to gross margin, and we are actively managing our inventory to fulfill higher demand and support a strong finish to another great year. Because we actively manage expenses and have the ability to flex our cost structure with the environment, we feel well prepared should economic conditions start to impact sales. To date, our investments in store labor, our biggest expense bucket are supporting higher sales and our marketing programs continue to drive customer growth. We are continuing to make prudent capital investments that will fuel traffic and conversion across all three channels. Our planned capital expenditures for fiscal 2022 are expected to total between $65 million to $70 million to build out our digital and marketing platforms as well as invest in new Soma stores and upgrades to our existing fleet of Chicoâs stores. On the digital side, we are building out our connected commerce platform, which will offer customers a seamless, personalized integration of in person and digital experiences. We opened 10 standalone Soma stores during the quarter and plan to open 14 more in the fourth quarter, bringing the total for the year to 27. In addition, we will have renovated 37 of our most productive Chicoâs boutiques by year end. And due to the continued improving productivity and profitability of our store base, we now expect to close 26 stores this year, down from our original target of up to 40. Also, although Hurricane Ian did not have a material impact on our financial results for the quarter, four stores were heavily damaged and are expected to remain closed for the balance of the year. Let me also highlight that our cash flow and EBITDA base continues to grow, and we expect our financial position to strengthen from here. In addition to allowing us to fund strategic investments, strong cash flow will allow us to navigate an uncertain environment that has presented challenges for most retailers. Growing our EBITDA and cash flow base is allowing us to invest in our three year plan. And although we are seeing some pressure on SG&A, we expect ongoing investment to support higher growth and expense leverage in the coming years. So with that, for the fourth quarter, we expect total sales of $535 million to $555 million; gross margin rate as a percent of sales to be in the 35.4% to 35.8% range; SG&A as a percent of sales to be in the 32.7% to 33.2% range; an effective tax rate of approximately 25%; and diluted EPS of $0.07 to $0.10. For the full year, we expect total sales of $2.153 billion to $2.173 billion; gross margin rate as a percent of sales to be in the 39.2$ to 39.3% range; SG&A as a percent of sales to be in the 32.3$ to 32.4% range; an effective tax rate of approximately 23%; and diluted EPS of $0.89 to $0.92. In closing, we are well positioned to fuel our existing momentum and remain confident in our three year strategic plan and our ability to create shareholder value, both now and over the long term. We look forward to keeping you posted on our progress. Hi. Good morning, everyone, and congratulations on the nice progress. In terms of current trends, what we've been hearing about November to date or October, any way you'd want to frame the current environment and what you're seeing and what your promotional plans are as we're going into the fourth quarter? And then with the new merchant talent at Soma, what's your view of the progress that we should see at Soma going forward? And just lastly, supply chain easing. How would you frame the tailwind benefit to that as we move through the fourth quarter and into 2023? Thank you. Thank you, Dana. Our current business and customer remain healthy, evidenced by our Q3 results and driven by our strong digital and store traffic, our higher AUR and ADS, our increased customer frequency and also our spend overall from our customers. So we are not seeing any changes in our consumer and look forward to the fourth quarter ahead. As it relates to promotional plans, we have certainly built into our calendar product that we built to be promotional and that has been strategically built for that key Black Friday and Cyber Monday events. We do plan to be less promotional, however, competitive to fuel growth in the Q4 time period. As it relates to our new merchant talent, I am really excited about the opportunity to continue to propel the brand forward. The success that we're continuing to have in taking market share and growing the bra and panty business, is just a no pun intended foundation just for the strong business in general and our opportunity to really leverage the expertise that Chris brings in terms of growing our apparel and our sleepwear business even greater. And then your last question as in regards to supply chain, we do see that the supply chain is easing and that the ports have more normalized; and that in transit times in terms of on ocean, those windows are definitely narrowing. So we've been able to take our extended calendar, reduce it a little bit to be able to make decisions closer to customers, but we're still watching it very closely, because the situation is fluid. Hey, guys. Congratulations. The stores look absolutely stunning, absolutely stunning. So I wanted to follow up on that. Could you talk a little bit about -- you've had delivery issues, would you say at this point deliveries are timely, goods are flowing the way they're supposed to, your floor sets are going the way they're supposed to, or is there still room for improvement there? And I can't remember, do you have the ability to chase? Is that something you typically do? Yes. Thank you, Marni. Actually, we've had the benefit of goods being early, as we discussed in our Q2 call where we had put inventory ahead of demand. So that is -- that really helped us in October where we were fueling the demand by actually pulling deliveries up that we had received early. So we were actually being able to put -- we were able to put holiday in front of the consumer a little bit earlier, and we've been able to manage the flow of inventory in all three brands. So that's actually been serving us that we moved the calendar 10 weeks last year. And so we continue to see that we're receiving goods early and that's why we believe that that's an opportunity for us right now as we go into the balance of this year. As ability to be able to chase, we do as most do in terms of platforming fabric and dyeing basic color so that we can chase bodies and get things half made. And we've also moved some production to be more near shore in this hemisphere to be able to tighten some time. But it's still not the chase that I think most of us in the industry would like to have at this time. That's fair. And then can I just follow up on Soma for one second. You guys are leading and have led as far as your customer service, but also things like StyleConnect. Are you -- are your Chicoâs and White House sales associates using those kinds of tools to also sell her into Soma, even if it's just digitally to get her familiar with the brand to raise brand awareness? Because it feels like from the outside looking, the brand awareness for Soma is still very low, and while the trend has moved away from sleepwear we all know that. I'm thinking just bigger picture, the opportunity is still really there and your foundations business is good. Are you using your banner stores to prop -- send customers there? Yes is the simple answer. A change that we did earlier this year is that we combined the management of all three brands in the stores organization so that we have very tight geographical areas of management and that has allowed us to really work as an FAS team. And they are one team that promotes -- both Chicoâs and White House promote each other's brand as well as Soma. What's to come next year is that the re-platform that we have in place will allow us to actually have a universal cart so that when you check out, you will be able to put Soma in the apparel checkout. And that will come later in the year with the re-platform. So there's a lot more good things on the horizon being able to leverage Soma, to be in every Chicoâs and White House Black Market basket. And thank you. This concludes our question-and-answer session. I'd like to turn the conference back over Molly Langenstein for any closing remarks. Thank you. Our results and momentum validate that our pillars are fueling our strategy. We are customer-led, product-obsessed, digital-first, operationally excellent company with a portfolio of three unique brands on a clear path for continued profitable growth. We are on track to achieving our three year plan and generating meaningful shareholder value. Before I close, let me take a minute to say a few words about our Fort Myers headquarters and the impact of Hurricane Ian on our associates and community. First and foremost, our concern was for the safety and wellbeing of our associates, and thankfully all of our associates are safe. We created an employee assistance fund supported by the company, along with the generosity of our associates, Board members, business partners, and that eased the financial burden of reconstruction and losses incurred by many of our associates. 24 hours after the storm, our corporate campus became the host for over 3,000 Florida Power & Light men and women, and a distribution hub for Red Cross volunteers who tirelessly work to serve our community. Lastly, we have four damaged stores that remain closed, including our original Chico's Sanibel store. We will rebuild. We are a resilient company, surviving and thriving during COVID and emerging stronger in the third quarter post Hurricane Ian. This is because of our amazing associates and their tenacity, action and true sense of collaboration during difficult times. Thank you to our teams for making a difference. Have a wonderful Thanksgiving and holiday season, and thank you for your interest and time. We look forward to speaking with you again during our year end conference call in February.
EarningCall_1945	Good afternoon, and welcome to Cooper Companies Fourth Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. After the speakers' presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Kim Duncan, Vice President of Investor Relations and Risk Management. Please go ahead, Ms. Duncan. During today's call, we will discuss the results and guidance included in the earnings release and then use the remaining time for questions. Our presenters on today's call are Al White, President and Chief Executive Officer; and Brian Andrews, Chief Financial Officer and Treasurer. Before we begin, I'd like to remind you that this conference call contains forward-looking statements, including all revenue and earnings per share guidance and other statements regarding anticipated results of operations, market or regulatory conditions or trends, product launches, operational initiative, regulatory submissions and closing or integration of any acquisitions or their anticipated benefits. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption forward-looking statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10-K and Form 10-Q filings, all of which are available on our website at coopercos.com. Also, as a reminder, the non-GAAP financial information we will provide on this call is provided as a supplement to our GAAP information. We encourage you to consider our results under GAAP as well as non-GAAP and refer to the reconciliations provided in our earnings release, which is available on the Investor Relations section of our website under quarterly results. We finished this year with CooperVision reporting its seventh consecutive quarter of double-digit organic revenue growth and CooperSurgical posting an eighth consecutive quarter of double-digit organic revenue growth within its fertility business. Demand for our products and services was very strong in Q4, and we're seeing that continue into fiscal 2023. I'm extremely proud of the dedication of our Cooper employees and the hard work it took to post another year of record revenues in fiscal 2022, and I look forward to another record-setting year in fiscal 2023. Moving to the numbers. Consolidated quarterly revenues reached an all-time high of $848 million, and we closed the fiscal year with record revenues of $3.31 billion. CooperVision posted quarterly revenues of $562 million, up 11% organically and reached a new record high of $2.24 billion in fiscal year revenues. CooperSurgical posted record quarterly revenues of $286 million, up 15% organically and reached new record fiscal year revenues of $1.07 billion. For the quarter, CooperVision's growth was led by our daily silicone hydrogel portfolio and myopia management products, while CooperSurgical's growth was broad-based with strength in PARAGARD fertility and our broader medical device portfolio. Non-GAAP earnings per share were $2.75. This was lower than we were forecasting primarily due to commercial spending tied to product launches and elevated distribution costs, and Brian will cover this later in the call. For CooperVision, in Q4, and reporting all percentages on an organic basis, revenue growth was strong and diversified in all geographic regions and across all product categories, spheres, torics and multifocals. The Americas grew 5%, EMEA was up 13%, and Asia Pac grew 16%. This performance was driven by new product launches, expanded product ranges, market-leading flexibility through our customized offerings and growth in key accounts. Regarding product details, daily silicone hydrogel lenses grew 20%, with especially strong growth from MyDay and from clariti in the Asia Pac region. Daily silicones continue to be the main driver of growth for the contact lens industry, and we offer the broadest portfolio in the market with MyDay and clariti available on a broad range of spheres, torics and multifocals. Our silicone hydrogel FRP lenses, Biofinity and Avaira, reported another solid quarter of 6% growth. Regarding product launches, we remain extremely active. The MyDay multifocal launch is going incredibly well, and the feedback from customers and practitioners remains outstanding. In the meantime, the MyDay toric parameter expansion launch has been overwhelmingly positive in the U.S. and Canada. With over 4,000 SKUs, we now match our standard Biofinity toric range and have the widest daily toric range in the market by a wide margin. Not only does this expand the daily toric category for everyone, but for many FRP toric wears, this is their first opportunity to enjoy the freedom of a daily contact lens. We'll be rolling out these expanded parameters in additional markets as we move through fiscal 2023 and look forward to continued success. And lastly on MyDay, we're excited to be bringing MyDay Energys to the market. This lens uses the same innovative technology as Biofinity Energys to alleviate digital eye strain, and eye care practitioners are excited to be getting this technology in a premium daily offering. We started seeding the U.S. market and a full national rollout is scheduled for early spring. Combining all this MyDay activity truly exemplifies CooperVision's leadership in the daily silicone hydrogel space and our focus on offering practitioners a wide variety of market-leading technologically superior products. Outside of MyDay, demand for Biofinity remains especially strong to the point where we're somewhat capacity constrained. We've increased price and production, especially in the extremely high demand made-to-order extended range torics and toric multifocals, and we'll continue to focus on increasing capacity on a broader scale moving forward. Moving to myopia management. We posted revenues of $26 million, up 29%, including MiSight up 88%. For the full fiscal year, we reported myopia management revenues of $93 million, which was impressive given the negative impact of currency and ongoing COVID restrictions in China. For MiSight, we're rolling out an expanded parameter range and launching in new countries, and I'm happy to report that MiSight is now available in 41 countries. Within this, we're seeing increased fitting activity from both independent optometrists and key accounts, and we're continuing to see a positive halo effect with our MiSight customers accelerating their use of other CooperVision lenses. All this is a good sign and points to a strong fiscal 2023, where we expect myopia management revenue of $120 million to $130 million, up roughly 35% at the midpoint in constant currency. And as a reminder, MiSight contact lenses are the first and only FDA-approved soft contact lens proven to slow the progression of myopia in children aged eight to 12 at the initiation of treatment. The product is backed by extensive clinical data and remains a shining example of CooperVision's leadership in the contact lens industry. Moving to SightGlass. We've been making progress with these myopia control glasses as part of our great joint venture with EssilorLuxottica. This includes selling in China and pilot programs in Canada, the Netherlands, the U.K., and Israel. In the U.S., the JV submitted an FDA application to be the first spectacle lens product to receive FDA approval for myopia control, and we hope to receive a positive response by calendar year-end. And to conclude on the importance of myopia management and why it needs to become standard of care, the risk of visual impairment and eye complications such as glaucoma, grows exponentially with vision loss. So, preventing higher levels of myopia is critically important for the long-term health of our children's eyes. To finish on CooperVision, the contact lens market is performing exceptionally well with growth of roughly 9% in calendar Q3. There are still COVID-related challenges, especially with respect to staffing shortages in optometry offices negatively impacting patient flow, but progress is being made. Meanwhile, the long-term growth drivers of the industry remain intact. This starts with a macro growth trend and more people needing vision correction with an estimated 50% of the global population expected to have myopia or nearsightedness by 2050, up from roughly 34% of the population today. This is driven by a variety of factors, including greater levels of screen time and less time outdoors, especially among children. Other industry drivers include the market's continuing shift to silicone hydrogel dailies, the increasing focus on higher-value products, such as torics and multifocals, and higher pricing, which is running ahead of historical trends. We expect global growth to remain healthy and believe we'll remain a leader with our robust product portfolio, ongoing product launches, fast-growing myopia management business and leading New Fit Data. Moving to CooperSurgical. We posted a great quarter with growth throughout our portfolio. Fertility reported sales of $109 million, up 15% organically, its eighth consecutive quarter of double-digit organic growth. Success we've seen throughout the product portfolio and around the world, and given our momentum as we enter fiscal 2023, we're continuing to invest in our team and in our fantastic product portfolio, which includes leading consumables, capital equipment and genomics. Demand remains very strong, especially among our key accounts, so we need to keep building infrastructure, investing in our people and delivering the products and services required in this high-growth market. Regarding the overall fertility market, the future looks bright. There are several industry growth drivers, but one of the key factors being women delaying childbirth. The average age of a women's first birth in the U.S. and several other developed countries now stands at a record high of 30-years-old and age is one of the key factors in needing fertility assistance. Additionally, factors such as improving access to treatments, increasing patient awareness, improved product offerings, such as cryopreservation, increasing fertility benefits coverage, and technology improvements for both male and female in fertility are driving the industry forward. In total, it's estimated that roughly 15% of reproductive aged couples have fertility challenges and that over 750,000 babies are born annually through fertility assisted measures, and these numbers are growing. Regarding CooperSurgical's market positioning, we compete in a portion of the market that's roughly $2 billion in annual sales, and we forecast growth of 5% to 10% for many years to come. Within this, we're well positioned to continue delivering strong results with the broadest portfolio in the industry, a market-leading commercial footprint and strengthening key accounts. Moving to office and surgical products, which includes OB/GYN medical devices, PARAGARD and stem cell storage. We posted sales of $178 million, up 58%, and up 15% organically. Within this, PARAGARD grew 19%, and office and surgical medical devices were up 13%. PARAGARD posted strong results rebounding from several tough quarters, and OB/GYN medical devices benefited from strong demand, especially for surgical products, combined with clearing and backlog. Lastly, our stem cell storage business grew 2%, in line with expectations against the difficult comp. To conclude on CooperSurgical, we made a ton of progress this year: our fertility business continues to post great results; our office and surgical products closed the year strong; and we completed an incredible amount of integration activity associated with several acquisitions, including the Generate deal. Before I turn the call over to Brian, let me say this was a great fiscal year for Cooper. We reported record revenues and made significant advancements throughout our organization. As we enter fiscal 2023, demand remains strong, supported by stable consumer activity and price increases, our investment activities, including new product launches and capacity expansion are going well, our employees are highly engaged, and we're continuing to execute on our long-range strategic objectives. Having said that, we are aware of global inflation, geopolitical risks and other factors that could cause a global recession, and we're thus managing our investment activity with prudent cost controls and weâll continue to be vigilant in our operations. Most of my commentary will be on a non-GAAP basis, so please refer to our earnings release for a reconciliation of GAAP to non-GAAP results. Consolidated gross margin was 65%, down 250 basis points from last year, primarily due to currency and higher costs associated with supply chain challenges. Before moving on, let me say our Q4 operating income did not meet expectations. The primary drivers were commercial spending tied to product launches, an elevated distribution costs tied to shipping and inefficiencies associated with capacity expansion and automation efforts. Some of this activity will continue in fiscal 2023, and I'll touch on that in guidance. Moving below operating income, interest expense was $23 million with higher rates, and debt balances driving the increase. The effective tax rate was 14.2%. And non-GAAP EPS was $2.75, with roughly 49.6 million average shares outstanding. Regarding earnings, FX negatively impacted the quarter by $0.75, which was $0.11 more than we had built into our guidance on our September earnings call. A large part of the $0.11 was attributable to the remeasurement of foreign currency-based intercompany trade receivables, including exposures from before we began mitigating certain balances. Free cash flow was $36 million, including CapEx of $95 million tied to capacity expansion. And net debt reduced by $31 million to $2.61 billion. For the year, we're guiding to consolidated revenues of $3.455 billion to $3.515 billion, up 6% to 8% organically, with CooperVision revenues of $2.325 billion to $2.365 billion, up 7% to 9% organically, and CooperSurgical revenues of $1.13 billion to $1.15 billion, up 4% to 6% organically. Non-GAAP EPS is expected to be in the range of $12.30 to $12.60, based on $106 million of interest expense and a 15% effective tax rate. For interest, we're assuming a 50 basis point rate increase from the Fed in December, another 50 basis point increase in February, and then an additional 25 basis point increase in March. For the tax rate, we're assuming no discrete items. For currency, we're using yesterday's rates with a little conservatism given the FX volatility. This results in year-over-year FX headwind of roughly 2.5% to revenues while being neutral to EPS. From a quarterly gating perspective, we expect consolidated Q1 revenues and earnings to be slightly less than Q4 with currency continuing to have a significant negative impact. After Q1, assuming rates hold steady, the currency impact will lessen and ultimately turn positive towards the middle of the fiscal year. During Q4, we ramped up investment activity and expect that to continue. As an example, we accelerated work on roughly doubling our U.S. CooperVision distribution center to get the building shell done before winter, and we now expect to be utilizing this additional 150,000 square feet of space this coming summer. We are also expanding other distribution and manufacturing locations at CooperVision and CooperSurgical, and implementing substantial automation. Additionally, we're adding significant capacity to our contact lens manufacturing footprint. We saw some of this activity in Q4 with CapEx of $95 million, and we expect it to continue with CapEx being around $400 million this fiscal year. Near-term demand is strong and long-term growth trends are very positive. So, this activity is needed to support our growth initiatives. Having done this type of expansion work in the past, we know we'll get it done and probably ahead of schedule, but it does create inefficiencies. When you're dealing with an already strained global supply chain, it makes things even more difficult. We built expectations around this inefficiency into our guidance, along with inflation assumptions and believe we've sufficiently captured everything. In total, for fiscal 2023, this means strong revenue growth, slightly improving gross margin supported by price increases, and higher-than-normal OpEx, resulting in our operating margin being up slightly year-over-year. To conclude on guidance, note that this does not include the pending acquisition of Cook Medical's reproductive health business, but does include the acquisition of SynergEyes, a small specialty contact lens business we closed on November 1. Regarding Cook, we're exploring options to get regulatory approval, including the potential sale of certain Cook assets, and are hoping to close by June 30, 2023. Great. Thanks, guys. Well, I'll start on maybe MyDay Energys. I know it's very soft launch, but any early feedback on the lens? And you got a competing lens for digital eye strain that's priced at the really high end of the market. And does that give you any thoughts on how you can price this or get a little bit more aggressive on the positioning of MyDay Energys in the market? And then, I'll ask my follow-up. Yes. So, Jon, the response so far from eye care practitioners has been pretty positive. A lot of them know this technology, because they've used it with Biofinity, so they're comfortable with it. They've been requesting it in a more premium daily, which is obviously MyDay that were given to them now. So, I'm optimistic it's going to do well. We're just getting it in the hands of key opinion leaders starting really here in November, and we'll continue to expand that out in the coming months. But positive response on that. It will be priced at a premium to the sphere, to the MyDay sphere. I won't go into pricing details yet as we don't have it out in the market, but it will be a premium priced product. Okay. Helpful, thanks. And then, maybe to shift gears, Brian, this one might be for you. Just any details on costs -- the low $13.00 EPS number for '23 last quarter on the soft guide, and now the $12.45 at the midpoint that you came out with this afternoon, is it all attributable to some of those elevated OpEx costs that you called out on the distribution side that seems to be playing a role in '23, or are there any other variables we should be thinking about? And then just sort of tack on to that is, do you really see those higher distribution costs is somewhat transient, call it, a '23 event and hopefully that subside as we think about '24? Thanks, guys. Hi, Jon, yes, good questions. I'll take the second part of your question first. Yes, there's a good part of that, that was transient that really was particular to the quarter. And then, there's an element of the inefficiencies and just elevated OpEx that will persist into 2023. Now, I touched on some of the things that drove our guidance, including the strong revenue growth, gross margins improving, driven by price increases, and operating margins up slightly. We are assuming a modest recession, including those inflationary pressures and those continued inefficiencies. And then there, of course, the rate increases and some conservatism perhaps on FX. But the nice thing is, obviously, currency was brutal last year. It's going to be bad in Q1. It will improve quite a bit after that. But we got hit hard with increased costs in 2022. Those will settle down a little bit. But we are factoring some of that in. We are seeing some normalization at freight and wages. We'll annualize some of those, and we're seeing some improvements already, but we did not factor some of those improvements into our guidance. So, in short, yes, the elevated OpEx is taking our EPS guidance, maybe a touch lower than where we were three months ago. But it's still not materially different from where we had set guidance, where -- what we had said about a quarter ago about driving to low single-digit earnings growth. We just have higher interest and just some of the elevated OpEx that we've factored in perhaps for a little bit of conservatism as we start the year. Hi, it's [Leah] (ph) calling in for Larry. Thanks for taking our questions. Can we talk a little bit more about the margins, gross margin and operating margin? You talked about the higher distribution costs and some investment for new products. Can you help us bridge from fiscal Q4 through fiscal '23, how to think about that cadence? Do things get -- do the margins get worse before they start to improve, or is it mostly stable? Yes. So, on margins, Q4 to next year, I touched on -- I gave a little bit of guidance in my prepared remarks just around Q1 being a little bit lower than Q4. Some of that -- gross margin is going to be somewhat similar, but OpEx is still going to be elevated. We saw some of the issues that we dealt with in Q4 kind of bleed into Q1. As you work through the year, like I said, currency improves, gross margin will improve from price, and then operating margins, while they're going to be up slightly year-over-year, they are being held down a little bit from the elevated OpEx. The cadence and the gating around revenues is going to be pretty similar to the way it is typically. And -- so that's basically the gating. Did you -- did I answer your question, Leah? Yes. Thanks, Brian. Just to be clear, you said both the revenue and margin will be lower in Q1 versus Q4? So, revenues will be a little bit lower, and gross margins probably a little bit similar, but you've got higher OpEx, and certainly higher interest expense, which will drive your EPS a little bit lower versus. Okay, thanks. That's helpful. And if I can just have another question on the guidance. You talked about $120 million to $130 million in myopia management revenue. What's assumed on SightGlass in that? And what do you assume about SightGlass launch cost in the guidance? Thanks. So, there's nothing in there for SightGlass revenue. As you know, Leah, that's a joint venture that we have. So, we don't recognize revenue from that other than a little bit of the product that we distribute, but it's pretty minimal. We've assumed continued cost there. We've had expenses associated with SightGlass that have been rolling through our P&L every quarter. We've assumed that will continue. The only thing that I would probably highlight that's not factored in there is what happens with FDA approval. If we do get FDA approval, I'm sure there will be incremental launch costs associated with that activity. And we'll obviously pull that out and highlight that specifically, but that's a little bit of an unknown. So that's the only thing that wouldn't be in there. Hey, guys. This is Dan on for Jeff. Thanks for taking the questions. On the kind of 7% to 9% CVI organic guide, it looks like maybe you got 150 basis points of tailwind from myopia management. We were just wondering kind of what is the pricing assumption in there? I know I think you mentioned it being a little bit higher than this year. So, what's kind of the organic ex price, ex myopia kind of CVI growth you're expecting? Yes. I think that price this year ends up being somewhere around 2% as a positive. And that's probably true for us, and an industry comment, it's going to be somewhere around in that range. So, yes, when you look at the 7% to 9%, depending upon how you want to look at that compared to prior years and so on and so forth, you've got 1%, 1.5% coming from myopia management and a couple of points coming from price still within that. Okay. And then just one follow-up on PARAGARD. I know this quarter you guys had an easy comp. But we did see some data starting to suggest the office visits improve and just IUD use improve overall. So, what are your kind of thoughts on the end market growth for IUD and PARAGARD into '23? Thanks. Yes. I think that it's okay, but I wouldn't go really any further than okay. When I look at fiscal Q4 certainly and how we started this year, I mean, we've got some good numbers there because of rebound activity. But if I look at actual patient traffic with respect to OB/GYN visits, specifically associated with IUD, we haven't really seen much of an improvement there. So, I think there are signs of potential improvement, but I wouldn't read too much into that right now. I think we'll still have a challenging year, if you will, with PARAGARD in terms of getting a lot of unit growth out of it. Thank you. A couple of questions. You're talking about a 9% contact lens market growth that absorb, say, 2% price, maybe that makes a 7% market grower. That's higher than the normal average. What's driving that growth? Yes. It's -- boy, there's a lot of good demand out there when it comes to contact lenses, I can tell you. And I would say it's probably true for all visual correction companies. We were running pre-COVID. We got up to running kind of a round for a market, 5% to 6% and maybe there was a 0.5% or a point of price, something like that in there. It's stronger than that right now. So, whether it ends up being -- the shift I talked about to torics, the shift to multifocals, the shift to daily silicones, that kind of stuff that was happening before is still happening. You're getting a little bit, honestly, I think, from COVID. I think that you had so many kids who were inside and so many people who have not been able to go to the optometrist, that you're still seeing a push there. I mean you can still talk to retailers in optometry offices about issues they're having, meeting the demand from patients. And some of that is not enough optometrists and changes in optometry, work habits and so forth, but there's still staffing challenges, there's still demand-related challenges that are out there. So, I think it just ends up being a better industry, frankly, than it was even years ago. The macro growth drivers are arguably stronger than they were pre-COVID. Yes. I think that you've got a couple of different things that pushed gross margins higher and lower, and you certainly have currency in there that ends up starting to be a positive to help us. But the price increases we're talking about also flow directly through. So, at the end of the day, we're expecting to see improvement year-over-year in gross margins. I won't go into specific numbers on that, but gross margin should be up year-over-year. Hey, good afternoon. Thanks for taking the questions, and sorry if any background noise here. Al and Brian, within that 7% to 9% organic revenue guide for CVI, can you help us understand how you're thinking about the geographic build-up within that guide? I asked -- the Americas performance was a little soft this quarter. Just curious how you're thinking about the growth contribution if you look around the globe for fiscal '23. Yes. The Americas is kind of in line with market, if you will. That's where we've been running a little bit here for CooperVision for a couple of quarters. And then, we've been outperforming in Europe and outperforming in Asia Pac. I would assume that that's going to continue. We put up some good numbers, right, there's -- in Europe, and there's some questions about that in terms of what happens with the consumer there, but we're continuing to see good demand in Europe. Our key account strategies are really successful there. So, I'm expecting us to continue to put up solid results in Europe. Asia Pac is certainly coming back. We posted a good quarter. As you'll remember, pre-COVID, for a number of years, we were double-digit in Asia Pac. We've got a great presence there, a great team there, and I would expect us to continue to put up strong numbers in Asia Pac. The Americas, I think, continues to kind of grow around in this area. I do think one thing that could help, the Americas somewhat end up being priced. We all talked about price, but the key on price ends up being the net price that you realize, taking price and then offering discounts or other activity to retailers and people doesn't get you the true price. You have to look at the net price increases. I think as an industry and us included, everybody is doing a better job focusing on that, saying, hey, we have to get the net price increase. So, I think that's going to help the Americas market a little bit as we're in 2023 also. Okay. That's helpful. And then, Al, as you're thinking about pricing for next year, I mean, your stability for fiscal '23, 2% next year versus 2% you just put up. But I thought there was a supposed to be maybe some lagged effect on some of those key accounts you have, the contract resetting. So, I guess is the 2% tailwind for pricing next year, is that just conservatism, or are those contracts not resetting like we thought they were? Just curious how you're thinking about that dynamic. Thank you. Sure. Yes. I think that -- I don't think we got 2% last year in terms of price increases. We did not. CooperVision did not get 2% in terms of price increases. So, I think we were probably more in the 1% to 1.5% kind of range for price increases. And I think that increases to 2%, which picks up the things that you're talking about. And I think that will -- that bodes well, if you will, when you think about that from the perspective of what that means for like Q3, Q4 this year and probably fiscal '24 also, because the things that you're referencing are all future positives for us. Hi. This is actually Lily on for Robbie. Thanks for taking the question. We've heard about supply and manufacturing issues from both you and some of your competitors. So, do you think this is affecting share? And have you seen any benefits or loss from these dynamics? I don't think we've seen really share shifts. We've all had our challenges I think that it cost us some. We met a lot of the customer expectations through expedited shipping, that kind of thing. And that's some of what Brian was talking about, right, which is those costs to meet consumer expectations can get expensive. I think at the end of the day, when you're talking about share shifts and so forth though, it takes a little bit longer to see that. The practitioners setting what they want to fit they need to go through a period of time where they're unable to get product from someone before they really start changing their fitting behavior. So, I don't think we've seen shifting share dynamics because of that. We've been taking share, I would say, for the same reasons that we've taken it historically. Great product portfolio and a great sales team out there executing. I don't think that weâve really seen much in terms of share shift because of supply chain challenges or shipping-related issues. Got it. And then just a follow-up. The [silicone] (ph) daily number came in pretty well above what we were thinking. So, maybe just on the competitive environment there, is there any color you can share on what you've been seeing in terms of share capture versus trade-ups from your own base? Thanks very much. Yes. I think that people are underestimating the power of CooperVision's daily silicone hydrogel portfolio. I know there's a lot -- it's complicated, right? And it's probably -- it's more complicated than some of our competitors in terms of the offerings that we have. But when we talk about something like the MyDay toric parameter expansion launch that we're going through, I mean, I understand that's a hard thing for people to understand or get their arms around, but it's powerful and it's important, and there's incredible traction associated with that and great annuity streams on high-priced products. So, I think at the end of the day, that's probably what it is. And if you think about that in the context of not only a product like MyDay toric, but also the multifocal and you think about Energys, a really, really strong product side. And by the way, I don't want to ignore clariti, which is doing really well, especially in Asia Pac right now. So, it's not surprising to me that we're continuing to put up strong daily silicone numbers. And I would expect those to continue as we move through 2023. Hey, thanks for taking the question. I just want to focus on MiSight. Can you give some color on how patient volumes are trending through optometry offices and if staffing is impacting MiSight at all? And then, any color on MiSight retention rate through the quarter? Thanks. Sure. Yes, MiSight was a positive this quarter, better than my expectations. The myopia management number, if you will, in total we get the 93 million, but Ortho-K was weaker than expected. We ran into some issues in September and October with our Ortho-K product line in China. And we all know what's been happening in China. And our Ortho-K sales came in definitely lower than expected. The flip was true on MiSight, where we posted some good numbers. I was happy with that. The fitting activity is pretty strong there. The interest in activity we're seeing from some key accounts and retailers and so forth is positive. Retainage [of wears] (ph) was positive again definitely this past quarter. So, some good positive trends with respect to MiSight. It's almost a little under the surface, if you will, but I was really happy with our Q4 performance there. Hi, good afternoon, and thanks for taking the questions. Maybe I'll start with the guidance. The organic guidance at least calls for a slowdown, CVI 7% to 9% versus, I think, it was 12% in fiscal '22, and CSI, 4% to 6% versus 8% in '22, and below the 5% to 10% market growth you call out. So, just wanted to ask if this just kind of the comp dynamic, you are facing tough comps, or are there any change in the market place that's causing the slowdown? So, yes, tough comps is part of it, as a matter of fact a couple of years with pretty decent performance here in tough comps. We're seeing strong results so far this quarter. We're not seeing anything to really indicate a material slowdown, that's for sure. Having said that, we're giving guidance for the full year. So, when you think about the factors Brian mentioned talking about guidance, right, and the potential that we're factoring in a moderate recession and inflation and other items that are out there, yes, we try to take that all into consideration and give what we though were prudent guidance ranges. Okay. Got it. And then maybe a two-parter on the M&A front. I guess, any update on the map around the Cook deal? Help us think through kind of the impact from selling assets needed to get the deal done and higher interest rates. And then, on the SynergEyes deal, maybe give us a brief overview on that, and kind of how it fits into your speciality lens portfolio? Thanks so much. Sure. Yes. On Cook, I'll stay away from commenting anything on that. We're actively out in the market right now, trying to see if we can make a transaction happen. And depending upon what happens, we'll obviously have a decent impact on what the final numbers will look like, right? Obviously, some things have moved against us, interest being clearly one of them. When you update for interest rates, that's clearly more negative than it was when we announced that deal. But I'll kind of stay away from commenting beyond that just because there's a lot of activity behind the scenes on that one now. On SynergEyes, yes, a nice little specialty business here in the U.S., around $20 million in revenues. We paid about $30 million for that business. Just a nice little tuck-in into our specialty business unit. They have cool hybrid lens and some other technologies that will fit well into our space. As you know, we're a leader in the specialty space, whether it's things like MiSight and Ortho-K and scleral lenses and so forth. So that's an important part of our legacy, our history, and something we want to remain a market leader in. So, tucking in that technology is a positive for us. It's new to us. We don't have that technology. So, it's adding something new for us. So, yes, that's kind of a story behind that one, small deal though. Thank you. Hi, guys. Brian, you mentioned during the prepared remarks, assuming a mild recession in your guidance. Can you guys talk more about what that means in terms of assumed headwinds? In what ways across CVI and CSI are you assuming modest recession could potentially impact growth? Is it too mixed [indiscernible] in lens, fittings, anything you can provide in terms of qualitatively would be helpful. Sure. Hi, Steve. Yes, I mean as it relates to the recession risk comment, we factored that into our OpEx assumptions primarily, but also the revenues and cost of goods. We feel we can hurdle the latter two with price increases. Regarding OpEx, you still have wages and freight, for example, that we put in assumptions in around inflation. As I said earlier, we're seeing some improvements in normalization. We didn't factor them in, though, into the guidance. So, not putting that inflation abatement or any upside that we're starting to see, we're starting the year off. We want to be a little bit conservative. We've got the full year ahead of us. We want to be prudent, as Al said. So, that's kind of what we put in. And then, of course, just some of the commentary around interest rates and FX, of course, also maybe a touch conservative there, too. Got it. Okay. Great. And then just a quick follow-up. I appreciate the comments on CapEx for this coming year. Can you talk about overall what you're thinking regarding free cash flow this year, either quantitatively or just directionally versus FY '22? Sure. Yes, I mean operating cash flow should be better than last year. You still have things like interest and taxes that will offset some of the operating cash flow versus last year, but still net-net, operating cash flow up probably just a bit, just slightly. And then with the $400 million CapEx that I cited, you're probably somewhere around $300 million of free cash flow in 2023. Great, and thanks for taking the questions. Just the first one is on Europe. I understand the Asia growth. I think that seems like it's been a great market for you for a good amount of time. Just help me understand how you guys are doing like double-digit growth right now in Europe? And maybe is there a difference in how consumers purchase contact lenses in Europe than they do in the U.S.? Is it more of a subscription service versus like a sale at the optometrist? Yes. Well, part of Europe is we have a really strong team there. Debbie Olive runs our team. I was just over in Europe with our Italian team who's crazy strong. Just really, really proud of that team, and they're executing incredibly well. I wouldn't highlight anything necessarily where I'd say, hey, there's a different subscription model and so forth. There are differences, but they're more subtle. But the team is just executing well all over there, especially with respect to key accounts. Our key account team is really, really strong, and they've been executing and being successful there. So, we're taking share and believe that there's a decent chance we're going to continue to be able to do that moving forward. Okay. And then on the investments you're making in distribution and capacity, I remember a couple of years ago you were kind of really making major investments to drive that. Just help me understand like -- put this investment that you're making -- these investments that you're making in the context of the investments that you made a couple of years ago? Yes, that's a good question. Yes, we took a decent step forward a few years ago in terms of investing in our distribution networks. What I would kind of describe this is we did a bunch of that work in some of our big distribution facilities and our big manufacturing facilities. We've continued to see significant growth around the world. So, we're needing to expand. Now, one of the great things about this that actually gives me some comfort is a lot of the technology is already in some of our distribution centers as an example. We're rolling it out to other distribution centers that used to be small that have now gotten larger and we need to automate or automate sections of that. When I look at manufacturing, we were upgrading a lot of our lines and improving a lot of our lines as we move to like really high-volume production. It's expanding on those high-volume lines. So, this is a pretty big expansion, though. I mean, I step back and kind of look at it, and Brian talked about the numbers, I mean, it's pretty sizable dollars. So, we're going around. We're doing this expansion. We're building out capacity to really support a long-term growth story. I've talked about that in the past, right? I continue to say that we're in some great growth markets when it comes to contact lenses and fertility. And we're investing accordingly to be able to continue to put up strong top-line growth for many, many years. So, this is real. I mean we're spending some money and doing some hard work to do it. And why we're doing it, by the way? It is hitting the P&L a little bit, but let me give you an example on that side of things. When you're doing an upgrade on some packaging lines as an example, let's just -- let's say you're doing an IT upgrade, right, we're continuing to run those lines, while in -- at the same time, we're putting in the upgrades, right, and we're not disrupting service. So, we'll get inefficiencies by doing two things at the same time, right? As soon as we're comfortable that the new upgraded system is better, then we'll stop using the old system, and we'll get rid of it and get rid of those duplicate costs. So, we've done this before. We're doing it again. We're trying to maintain high customer service levels. We're trying to meet the demand that's out there from a long-term perspective. We're entering into contracts that are tied to long-term growth. So, there's things that we're comfortable that the demand is there. So, anyway, long story there, I guess, Matt, just kind of saying that I'm excited about it. I think there's some really cool things that are going on and are going to support a lot of long-term growth for us. I'll give you one closing remark, and that's that if FX rates stay where they're at, I am certainly happy that we're going to spend less time talking about currency. I mean last year, currency was negative to us around $2.32, I think, so a pretty significant hit to EPS and a big hit to the top-line. As Brian mentioned, FX is still a decent negative to us in Q1, but then it actually starts turning the other direction to the point where it actually starts moving positive. If that holds where it's at right now, that's going to put us in a good position to get back to the back half of this year, where all else being equal and holding steady, we could be back up to double-digit EPS growth. So, I'm excited to get currency behind us. I'm excited about what the team is doing right now, and the momentum that we have, and the investment activity that we're putting dollars behind. I think our business is in a really, really good place right now. So, with that, I'll thank everyone for the call, and say happy holidays, and look forward to speaking with everybody in the future. Thank you.
EarningCall_1946	Good day, and thank you for standing by. Welcome to the Urban Outfitters, Inc. Third Quarter Fiscal '23 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the conference over to your speaker for today, Oona McCullough, our Executive Director of Investor Relations. Ma'am, you may begin. Good afternoon, and welcome to the URBN third quarter fiscal 2023 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the nine and three month period ending October 31, 2022. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission. On today's call, you will hear from Richard Hayne, Chief Executive Officer; Frank Conforti, Co-President and COO; and Melanie Marein-Efron, Chief Financial Officer. Following that, we will be pleased to address your questions. For more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com. Today, I'll begin the call with some brief remarks regarding our third quarter results and make a few observations concerning the consumer and the macro environment. I will then turn the call over to Frank and Melanie, who will provide more brand details along with our thoughts about future performance. Overall, third quarter business performed in line with our expectations, as discussed on the August call. URBN delivered 4% total revenue growth in the quarter against a strong third quarter last year. Retail segment comp sales also grew by 4%, and higher AOV and AUR were the principal drivers of positive comps. Nuuly also contributed to total revenue growth was an exceptional quarter that delivered revenues 178% above the prior year. Positive sales gains from the retail segment and Nuuly were partially offset by a wholesale revenue decline of 3% and a 200 basis point adjustment to total revenues due to currency exchange rates. On our August call, we noted a bifurcation in our customer shopping behavior with brands offering higher price points and serving a more affluent customer, posting better results. The Anthropologie, Free People, FP Movement and Nuuly brands, all have customers who have been able and willing to spend despite the inflationary environment. In the third quarter, the customers of each of these brands drove strong demand. To date, in November, we have seen a slight softening in demand. We attribute this to the unusually strong build in demand during early November last year, when many shoppers felt supply chain problems would lead to empty shelves during the traditional holiday period and thus made purchases early. Overall, sales in November are on track to achieve our Q4 goal of delivering a total company comp in the low single digits. Not all our brands, however, serve an affluent customer. Urban Outfitters' customers are younger with less discretionary income and accumulated assets. And the current elevated inflation around necessities like rent, food and energy has had a greater impact on them. These customers are transacting less often, and when they do shop, they're looking for a deal. The UO brand in North America began the quarter with heavy inventory left over from the bullwhip effect brought on by COVID-induced supply chain issues. The brand is working through this excess inventory and is planning to be much cleaner by the end of Q4. The brand also faces some operational issues, like product over assortment. In Europe, the UO brand performed much better, benefiting from extra strong store traffic, positive AUR and excellent marketing efforts. Urban Europe, Anthropologie and Free People all drove strong full price sales in Q3. If the current macroeconomic situation doesn't deteriorate further, we believe the customer bifurcation will continue at least through the holiday season. As a result, we believe the Anthropologie and Free People brands could continue to post nicely positive results, while the Urban brand might continue to underperform. Looking forward to Q1 next year, the health of the economy remains highly uncertain. But assuming we avoid a major recession, we believe there are several reasons for us to be optimistic. Supply chain costs have dropped precipitously over the last six months, and our speed-to-market capabilities are almost back to FY '20 levels. These improvements, combined with other actions we launched to build margins like reducing our choice count by eliminating many smaller buys and placing deeper buys of the alpha product should result in favorable IMU compared to last year. We also remain committed to entering the spring selling season with leaner inventories, which would give us the opportunity to deliver lower markdown rates, especially at the Urban Outfitters brand. Lastly and maybe most importantly, we believe strong fashion trends remain in place for all our brands. Finally, I'm pleased to report that response to Nuuly, our apparel rental business, continued to excel in Q3. On a quarter-over-quarter basis, active subscribers grew by 37%, surpassing the 100,000 sub milestone in early October and now posting in excess of 120,000 active subs. Strong subscriber growth is allowing the brand to leverage expenses and make solid progress toward profitability. We look forward to celebrating Nuuly's first quarterly profit sometime in FY '24. With that, I will now turn the call over to Frank to provide more detail on our third quarter performance by brand. I will begin my commentary discussing our total company third quarter results versus the prior comparable quarter, followed by some more detailed notes by brand. Total company sales grew by 4% to a third quarter record of $1.2 billion, driven by a total retail segment comp increase of 4%, and the Nuuly segment sales increase of $23 million. These increases were partially offset by a 3% decline in wholesale segment sales and foreign currency translation that reduced sales by approximately 200 basis points. The growth in Retail segment comp sales was driven by a mid-single-digit digital channel comp sales increase and a low single-digit positive store comp. Nuuly's robust increase in sales was due to a significant increase in subscribers from the prior year. Wholesale segment sales decline was due to a decrease at Free People. Although sales were positive, operating profits declined in the quarter. The decline in operating profit was largely due to increased markdowns during the quarter. Markdowns were higher than last year because the markdown rates last year at all brands were exceptionally low and because each brand had excess inventory in certain categories. Although each brand's markdown rate increased versus the low prior year rate when compared with FY '20, this performance deferred. The Urban Outfitters brand markdown rate increased the most significantly versus fiscal '20 due to elevated inventory levels, a miss in execution and a highly promotional environment. The Free People brand recorded only a slight increase in markdown rate versus FY '20, and the Anthropologie brand delivered a strong improvement in their markdown rate. I will discuss more on each brand performance later in my commentary. Total inventory increased 19% versus the prior year. This represents a 25 point reduction from the year-over-year increase of 44% in the second quarter. Each brand has worked hard to improve its inventory to sales alignment, and we believe inventory will show a further reduction by the end of Q4. The 19% third quarter inventory increase is due mostly to higher inventory costs, earlier receipts than originally planned and excess slower selling product in certain categories. The Urban Outfitters brand in North America has the most inventory to clear, and we'll continue to deploy incremental markdowns throughout the holiday season to improve their inventory to sales relationships. We are working towards our inventory position being in line with sales performance by the end of the fiscal year. In Q3, the IMU variance to last year was slightly positive. As the quarter progressed, we began to see the benefits of lower inbound transportation expenses, a more reliable sourcing and supply chain network and the impact of internal initiatives. As a result, we currently believe that IMU could be nicely favorable in the fourth quarter compared to the prior year. We also believe there is still much more opportunity for further improvement in fiscal '24 and beyond. I will now provide more details by brand, starting with the Anthropologie Group. The Anthropologie team delivered an impressive 13% retail segment comp in Q3. This increase was driven by double-digit positive store and digital comps. By category, apparel, home and accessories delivered positive comps in the quarter. The brand delivered nicely positive comps in each month during the quarter. When compared to fiscal '20, Q3 comps remain mostly consistent with the first and second quarter results. Fourth quarter comparisons against last year continue to get more difficult, but we believe the brand comp sales versus fiscal '20 could remain consistent. This would produce retail segment comps in the mid- to high single-digit range for Q4. The Anthropologie consumer remains optimistic and is choosing fashion newness that is versatile across multiple parts of her lifestyle, whether it's going out or returning to the office. They are responding well to more dressed-up categories like dresses, pants, jackets and shoes with heels. The brand distorted into these trends as they have seen customer interest wane in more casual fashion. Anthropologie intentionally brought holiday receipts in earlier to cater to the customer's desire to dress up and celebrate all occasions in their life. This is true for both apparel and home. Home categories that lean into decorating for guests and entertaining are outperforming other items in the home assortment. The team's execution of the brand strategy to target a slightly younger customer, under the age of 40, is gaining traction. Marketing and creative teams worked collaboratively to create and deliver incredibly compelling campaigns that have successfully attracted new, younger customers. New customers in the quarter increased by an impressive 24%. We remain optimistic about the brand's performance for the holiday season. Now I will call your attention to the Free People Group. Once again, the Free People team produced a strong quarter, with Retail segment comp achieving an 8% gain versus last year. Retail segment comp was driven by double-digit growth in the digital channel, while store comps were flat. Retail segment comp sales by month were fairly consistent in the quarter. During the quarter, the brand achieved growth across all major categories with particular strength in accessories, apparel and FP Movement. The FP Movement brand delivered another outstanding quarter, delivering 28% Retail segment growth on top of a very strong multiyear comparison. New and existing Free People Movement stores continue to exceed expectations, which bodes well for continued growth of the brand. Early holiday trends remain positive for the Free People Group, and we believe the brand's Retail segment performance could look similar in Q4 to the third quarter. The Free People Wholesale segment delivered a 4% decrease during the third quarter, driven by weakness in department store accounts, partially offset by strength in specialty account partners. We believe the Wholesale segment sales will decline in the fourth quarter and into next year as our department store partners are planning future orders more conservatively. Additionally, Free People wholesale inventory levels remain higher than we would like, and we are planning on meaningfully reducing our inventory through closeout channels. The planned increase in closeout sales will significantly weigh on wholesale profit rate in the fourth quarter. Now moving on to the Urban Outfitters brand, which delivered a negative 9% Retail segment comp in Q3. UO's negative comp was a result of disappointing performance in North America due to double-digit negative store and digital comp sales. We believe the macro environment in North America is having an outsized impact on the Urban Outfitters customer. This customer shopping behaviors have changed due to reduced discretionary income. They are shopping less free and when they do visit, they are converting at a lower rate. While we know the macro environment for the Urban customer may remain challenging for some period, we also know we can execute better. We believe our product distortion, presentation, inventory management and marketing all have room for improvement. Lastly, as noted, inventory levels in North America are higher than we would like. As a result, the brand in North America will need to be more promotional to clear through excess inventory in Q4. In contrast, Europe continues to perform remarkably well, delivering a 13% retail segment comp for the quarter. Customer traffic was exceptionally strong in stores, inventory levels are in a better position than Q2 and we believe the brand is gaining market share. Reg price and total sales comps were positive for the quarter in all major categories. We believe UO EU can continue to deliver positive Retail segment comps in the fourth quarter, although we do note that the macro environment is getting more difficult due to record levels of inflation. As we look at Q4 for the Urban Outfitters brand, if North America's performance remains consistent with Q3 and with the increased inflation potentially negatively impacting the EU consumer, the global Urban Outfitters brand could deliver results below Q3's results. I will discuss our thoughts on the fourth quarter and full fiscal year '23 financial performance. Based on current sales plans, we believe our URBN Retail segment comp sales could register low single-digit positive for the fourth quarter. Our growth in the retail and Nuuly segments is likely to be partially offset by lower sales in our Wholesale segment. Additionally, similar to the third quarter, we believe foreign exchange could negatively impact total sales growth by approximately 200 basis points. Together, this would result in total company sales growth in the low single-digit range. Moving on to gross profit margin. Based on our current sales plan, we believe that fourth quarter gross profit margins could decline by approximately 50 basis points compared to the prior year. We believe merchandise margins could be flat in the fourth quarter as the favorability in IMU, due in part to lower supply chain costs versus prior year could be offset by higher markdowns needed to reduce inventory levels, particularly at the Urban Outfitters brand. Higher carrier rates primarily resulting from higher fuel and peak surcharges than last year, could deleverage delivery expense and contribute to a decline in fourth quarter gross profit margin rates. Moving to SG&A. We believe SG&A growth for the fourth quarter would increase at a similar rate as our sales growth of low single-digit range. Inventory has remained elevated for the past year due to higher inventory costs resulting from increased inbound freight costs, planned earlier receipts to protect sales against a volatile supply chain and excess slower selling product in certain categories. Based on our current sales plans and receipt expectations, we believe that our inventory growth versus prior year will end the quarter in line with sales performance of the fourth quarter. We are currently planning our effective tax rate to be approximately 25% for the fourth quarter and 28% for the full year of fiscal '23. Capital expenditures for the fiscal year are planned at approximately $225 million. The spending is primarily related to providing increased distribution and fulfillment capacity and new store openings. Lastly, we are planning to open 10 new stores in the quarter, while closing 11 stores. Our new store number includes four new Free People Movement stores this quarter. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. That concludes our prepared remarks. I thank our brand, creative and shared service leaders. I also thank our 23,000 associates worldwide for their hard work, dedication and amazing creativity. I thank our many partners around the world for their extra effort in helping us overcome the numerous supply chain disruptions we faced over the past two years. And finally, I thank our shareholders for their continued interest and support. Okay. Great. Thank you so much. Really appreciate you taking the question. Dick, I wanted to step back from the third and fourth quarter ups and downs and just take a glimpse into next year. You've had -- I'm just interested to hear how you think about the Anthropologie and Free People divisions, both having had just such an excellent year this year, how do you -- how does the team go about lapping that next year? And on the other side of that coin into 2023 are opportunities, it would seem, at the Urban Outfitters division. If you could maybe talk about your -- just big picture outlook for Urban as we look into next year? And do you see opportunity top line, margin, bottom line? Or what do you think the biggest opportunities are for that brand next year? Thank you. Sure. Kimberly, thank you very much for the question or should I say questions. FY '24, I think will be a very different year than '23, as we've said a couple of times on our prepared statements. FY '23, sales were largely driven by increases in AUR and AOV. And we're negatively impacted by freight during the whole year, almost all of the year. For FY '24, I think that both the Anthro and Free People brands, we'll have to rely more on getting new customers and increasing the number of transactions we have because I think the AOV and the AUR will be largely static. I'm not suggesting there won't be any increases, there probably will be. But given the inflation environment and now -- I think quickly, in our industry, some deflation around the supply chain, I don't think there's going to be a lot of room to increase prices dramatically. So we are going to be spending more money on marketing to get new customers. And we will hopefully convert those customers in greater numbers than we did this year. You're right, the Urban Outfitters brand has significant opportunities. I think that we've made a couple of mistakes. I think that we probably raised our prices a little more than we should have. I think the customer is telling us loud and clear that she doesn't like that. And she's buying more when we offer her promotions. Now I think that, that's a mistake on our part, but I also think it's a result of the macro climate with that particular customer group who is a little bit more challenged economically and inflation is really hurting them quite a bit. So I think we will offer prices that are a little bit sharper at Urban Outfitters in FY '24. And I go back the whole notion of what we call a high-low assortments where we have sharp price points with opening price points, but also offer more elevated prices in items that clearly had value. So I think that I can go on and on and on probably much longer than anybody on the call would like, but I think that, that gives you an outline. Thank you. And I apologize it's Kimberly Greenberger. Thank you. Please standby for our next question. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open. Thank you. I wanted to follow up on the answer to Kimberly's question around the Urban AUR. Can you just quantify where that is versus pre-pandemic levels? And if you have strategies to reduce that without necessarily reducing your gross margin? Thank you. Lorraine, I believe I don't have the exact number in front of me, but I believe the Urban brand in North America is -- AUR is up about 5%. That's pretty close, as I say, close to pre [indiscernible] ones. And I think that it wasn't necessarily -- we didn't raise prices according to a plan, again, to save the opening price points of some of the items we sell, but it was more -- I don't want to say across the board, but it was many more items than we probably should have done. So I think that when we plan for FY '24, I expect that we will plan not up much in any of the categories, but actually bringing some prices down versus what we are doing right now. This is Frank. Just to sort of add to the both Kimberly and Lorraine's question as it relates to next year and some of the some of the positives that we have going, honestly, for all three brands. One, we've talked about a slight improvement here in IMU in the third quarter and an improving trend, and we believe we've had some positive IMU in the fourth quarter. And that is due in part to significant improvements in the cost as well as speed of the supply chain, and that should continue to be a nice tailwind. We're hoping this should continue to be a nice tailwind into next year. Secondarily, I also just want to talk about the markdown rates. As we're adjusting our inventory and getting that to be more in line with sales and believing inventory can probably even lag sales next year, driving a faster turn, lower rates of supply, again, due to improved supply chain. That in and of itself should help our markdown rates. So one part of markdown is obviously the difficulty that TAM leaders have in getting fashion right and the other is just dealing with excess inventory. And knock on wood, we've made significant improvement in our inventory position from the second quarter to the third. We think we're going to make notable improvement from third quarter to fourth entering to that fiscal '24 full year with much leaner inventory and hopefully then have less reliance on having to markdown up to go through some excess inventory. So both of those things, I think, should be positive, not just for the Urban Outfitters brand, but for all of URBN as we head into next year. And Lorraine and Kimberly both, just an update on the AUR. The prior year, the AUR at Urban was actually up almost 20%. And so when you see -- think of a compounding effect of 5%, which might not seem like a lot, but when -- 5% on top of the 20%, I think it's more than the customer can afford and more than they want. Thank you. Please standby for our next question. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open. Yes, thank you very much. My question is on inventory. I think all are. I guess when we look forward into -- and it's for Retail and for Wholesale, I'm trying to separate the two of them. But for Retail and specifically, when we look forward into Q1 ending inventory up about 32%, Q2 up about 44%. How much of that was in transit? And that in transit portion, if it's double digit, your inventory on the balance sheet should go down double digit, but not impact your ability to comp. Is that a fair assessment? And then I just want to follow up on Wholesale. Yes. Adrienne, I guess, just to take a step back from the pieces of in-transit comp what was here and what wasn't here. I think the crux of your question is could we manage to a negative inventory next year and drive positive sales in both Retail segment and Wholesale, certainly for the first half of the year. I think you are being -- I think our inventory could be negative and still drive positive sales in both channels as we did have some excess inventory in certain categories and classes at each of the brands. And I just want to be careful here, while I believe what Frank just said is absolutely correct that we could have negative inventory and still have positive comps. We have to be also very concerned and aware of the AUR, the Retail price versus the units as -- anybody that's been in this business for a while knows, you need a certain number of units in the stores to make the stores look full. So the merchants -- the core merchants are dealing not only in cost and Retail, they're now having to look very closely in units. Okay. And I guess that was my follow-up was, does -- so mall traffic, do you expect mall traffic to be negative, flat and conversion to be higher? I'm just trying to figure out if AUR is effectively flattish, units are flattish or down. So how -- what's the back fill? Is it conversion? Is it traffic with footfall has to go up, right? I think when we look at traffic, we look at it in total. And whatever channel the customer wants to shop us, we're happy to serve the consumer, right? Whether it's digital or stores, we want to drive traffic to our business. And that always has been and always will be our jobs. And I think about the momentum that both Anthropologie and Free People have in their new acquisition, net new customers going right now as we enter into holiday and then into next year, we feel like there's good momentum that they have there to continue to drive increased transactions as we look forward next year both going their customer bases. Obviously, Urban is facing a different macro environment and a different level of execution right now. But certainly, we believe with cleaner inventory and some of the work that the brand is doing right now, there is opportunity for them next year. So with AUR may not be as big of a tailwind as it was this year, I think the growing customer [indiscernible] our job to continue to drive traffic both to retail or stores is how we're thinking about driving positive growth next year. Yes. And to that point, I think that you can take a look at both the Anthropologie and Free People brands and see the difference the Anthropologie brand has excellent store traffic and put up nice store comps as a result whereas the Free People had basically flat traffic in the stores and flat store comps. However, they grow 8% comps and all through the digital. So it's a little -- I don't think that we're necessary -- I don't think we necessarily need store traffic in the malls to go up in order to drive nice comps. If it happens and it happens because we're executing better wow, that's great. But I don't think it's a necessary functions. Thank you. Please standby for our next question. Our next question comes from the line of Matthew Boss with JPMorgan. Your line is open. Great, thanks. So Dick, could you just elaborate on current selling trends that you're seeing in November, your overall view of consumer spending this holiday season? And then, Frank, on the expense front, could you just elaborate on the investments that you cited next year to drive sales? Or how best to think about SG&A dollar growth maybe relative to sales next year? Sure, Matt, pleased to do that. If you look at the quarter-to-date performance by brand, Retail segment comps for Anthropologie are currently high single-digit positive. For Free People, they're mid-single-digit positive just on the cusp of high digits. And for Urban Outfitters, the low double-digit negative. When you put all these together of the Retail segment comp in November is currently running a strong low single-digit positive comp. This is basically what we believe the quarter will end with. So we did see in the first 10 days or so of November a slightly softer sales. I think a number of people have reported that, and we saw it as well. And we're attributing it to the prior year's strength when we saw an awful lot of customers shopping early because of the media around -- there won't be any Christmas is sure there's not enough inventory. And so everybody seemed to have purchased their holiday gifts in the first couple of weeks. We don't think it will be like that this year. We believe that the consumer is quite aware of the fact that there's plenty of inventory out there. And what they're doing is waiting for big promotional events that normally occur on Black Friday and Cyber Monday in order to make their purchases. To support that, we see record amounts of product being put in carts, probably waiting for this coming Friday and next Monday. So we think that overall, the holiday is likely to be more promotional than last year, but it's not going to be -- I don't believe it will be a total blood bath. It will be more based on the type of stores and the customers that the stores are serving. Matt, this is Melanie. Just wanted to take your question about next year's investments. Right now, we're currently in the middle of our budget process for next year. So we're still finalizing plans, and I can't give you a number quite yet. But I will say that we work really hard to manage SG&A growth expense closer to sales next year. So stay tuned in March. Thank you. Please standby for our next question. Our next question comes from the line of Paul Lejuez with Citi. Your line is open. Thanks guys. Just a couple of quick follow-ups. The November slowdown that you saw, I was curious if that was even across all three brands? And then sorry if I missed it in inventory, but did you say how you're managing units in the first half of next year? And then last, just curious if you can give us any sense of mall versus off mall suburban versus urban performance this quarter. Sure, Paul. The November slowdown we did observe it with all three brands. I would say -- but I want to emphasize it was a slight, slight slowdown and -- detectable, but slight. And we have -- that has since passed and our sales right now are performing very nicely. As far as next year's units, if I was saying, the merchants in our business have to be very aware of and concerned about when there's this kind of increase in retail prices that they don't buy to those retail prices solely, but take a look at the units that are available because the size of our stores, even though we are opening smaller stores across the board than we did three or four or five years ago, we still have to fill those stores. And customers are very sensitive to how full a store is in terms of number of units. So that's one of the parts of the equation. That is not to say that we can't do more business with fewer units and fewer retail dollars. It's just to say that, that is a factor that we have to take into consideration. Thank you. Please standby for our next question. Our next question comes from the line of Dana Telsey with Telsey Group. Your line is open. Good evening, everyone. Hi Dick, as you think about the channel performance, the difference between stores and digital, how would you highlight each by brand? And then it seemed like intimates was softer in some of the different brands. Is that the casual cozy in favor of the occasion dressing? Or any way you'd frame it in terms of difference in performance by brand? Thank you. Sure, Dana. I'll do my best, but I'm going to rely on the brand groups to kick me under the table if I say something that isn't correct. As far as channel differences are concerned, in the Anthropologie brand, they were very similar, actually. And the comps were double-digit in both channels. So that was good. And I'd say that when you look at it by category, what they classify as intimates or loungewear was a little softer than their apparel, but that was largely because they deemphasized that in this year because they're going out in "apparel" was doing so incredibly well. So they did that on purpose. If I look at the Free People business, the -- as I said, I think earlier, the digital business outperformed the store business. And there, I don't -- I think intimates did very well. It's improved. Our intimate business has consistently improved every quarter coming off of how to react to the customer from a launch perspective into a more fashion perspective and intimate. Okay. Well, that's what I would consider very well. So thank you. And actually, in the Urban Outfitters brand, both channels performed similar in that they were both down. But in that particular case, intimates was their best category. So I don't know what you're going to draw from all that. But I don't think there's a consistent theme there. Thank you. Please standby for our next question. Our next question comes from the line of Janet Kloppenburg with JKR. Your line is open. Hi everybody, and congratulations on a continued nice result. I just had a couple of questions on Urban Outfitters. It seems like you've got the inventory plan in place and the pricing strategy evolving. What I was wondering about is how you feel about a turn in the business from a merchandising execution standpoint, when will the assortments be positioned the way the team thinks that they should be? And when might we see an inflection there? And how you're thinking about an inflection there? And then we've seen some softness in the upper-end furniture business. And I know Anthropologies have been tracking pretty nicely at least through the third quarter. Maybe you could talk about your outlook there, that would help a lot. Thanks so much. Sure, Janet. Again, I'll make a shot briefly and then ask Tricia to talk about it because she's much closer than I. In general, the furniture business that Anthropologie is doing quite well. Now they are a little bit more promotional than they were last year. But I will say look, other than that, the sales are quite strong with Urban Outfitters. When you look at the merchandising, I assume you're talking about both in-store and online. Online, we're interested in redoing our website and renovating that. And that would, I think, give a whole new look to what we're doing. And I hope that we would get to that by midyear or a little bit after that. As far as the store is concerned, we have plenty of things that we're planning to do in the store to draw more attention to what we think are the alpha items, the better items. And that's done with imagery and also done with just taking out some of the styles, so there's fewer styles available. And the ones that are available have more depth behind us. And so I think you will still see changes, and that should start early in the season. And Janet, I would add on the Anthropologie home business. I think nice double-digit demand in Q2 and the nice high single-digit demand and great price demand as well as some promotionality as we head into Black Friday. But we're also getting the benefit, I think, of shorter transit times. And we're able to ship and lessen our backorders pretty significantly. So demand trend remains consistent. And our net is doing quite well as we now are shipping out and shortening our back order time line. I think I can also add to the Urban outsiders group. The speed to market is going to be a key to Urban's continued success to react to the customers trend -- evolution of the trend of what they want the customer in urban is very fast and being able to keep up with them going into the spring season, I think will be a big change that we need to see. Thank you. Please standby for our next question. Our next question comes from the line of Jay Sole with UBS. Your line is open. Great. Thank you so much. Dick, would it be possible to elaborate on what you're seeing in the denim category right now? Sure. I can elaborate on it. For most of the year, denim has been downtrending some from the prior years. And we think that will continue into the fourth quarter. However, I think we're all pretty excited about where denim might go next year. And so I hope that we will have a comp -- a positive comp in the denim category next year with -- that's in Urban Outfitters. In Anthropologie they've seen amazing numbers in their denim by going into, I guess, what you'd call a little bit dressier denim. And their denim business extremely strong. And Free People denim business have done nothing but go up for the last four years, five years. So we're very pleased with that. Thank you. Please standby for our next question. Our final question comes from the line of Marni Shapiro, The Retail Tracker. Your line is open. Thank you, guys. And congratulations, and just in case I forgot best of luck with the holiday. But I wanted to dig a little bit more into Urban. I feel like everyone is picking on them, but I want to understand the customer is obviously under pressure. She's coming in less frequently to the store and the site you're watching for buy on promotions. But I'm curious, is she buying the fashion there? Entering Q1 and Q2, there was not much of what I would deem I guess, the right fashion, the fashion I see her going for. And ending Q3, there's more than there was a quarter ago or two quarters ago. And even walking there this week, it looked the front of store looked very different. Obviously, still inventory to clear, but it felt very different. I guess I'm asking in a way, how do you know that it's the economy pressuring the customer and not the assortment pressure in the customer, is she buying this fashionable price or is you even holding back there? Okay, Marni. How're you. Nice to talk to you. I will take a shot at it and pass it over to Sheila, she'll probably get the correct answer. What we see with the Urban customer is we believe that it's a tough macro environment for them, and they certainly have less disposable discretionary income to spend, certainly less than the prior year when the government gave them a lot of money. So that's one thing. But we see them pulling back more than you would expect. If that were the only thing going on. So I'm led to believe that it's partially our assortment and how we are presenting that assortment. We do see the customer responding to fashion items. And they seem to be responding very strongly to those fashion items. I would say the problem we're having is there are not enough of them. Now that could be our problem or that can just be a macro problem of -- she doesn't need that many. So I -- this is a question that we ask ourselves on a daily -- at least a weekly basis, if not daily. Is it the price architecture? Is it the assortment? Or is it a macro issue? And I guess, every time we talk about it, where we come down is it's probably a combination of the three, and it would be very difficult for me to even hazard a guess at which of those three is most important. Sheila, do you have anything you want to add to it? No. I would say, obviously, we take the merchants to take the assortment as the most controllable aspect of our business. And we take that 100% of it on as an assortment issue even though we believe it's not 100%. So there's definitely more that we can do. She's reacting to fashion in embellishment and sparkle in a very nice way. We wish we owned more. There's definitely key highlights within our bottoms assortment that feel very strong. So we just have to -- as we go in and I spoke to [indiscernible] opportunity because I think as Urban changes trend more quickly than not, we have the ability to react that much stronger. We are studying some warm stores with some fresh ideas in December. So hopefully, we'll have an indication of some sense of forward change that will help the merchants do a stronger job come Q1 year. Okay. I think that, that concludes the call. I wish you all a wonderful, wonderful Thanksgiving. Look forward to speaking with you in a few months. And that includes Kimberly Greenberger that other folks got wronged. So thank you very much, and have a nice Thanksgiving.
EarningCall_1947	Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Red Cat Holdings Fiscal 2023 Second Quarter Financial Results and Corporate Update Conference call. [Operator Instructions]. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through March 15, 2023. I would now like to turn the call over to Joey Delahoussaye, Vice President of CoreIR, the Company's Investor Relations firm. Please go ahead, sir. Thank you, MJ. Good afternoon, everyone, and thank you for joining us for the Red Cat Holdings fiscal 2023 second quarter financial results and corporate update conference call. Joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer; and Joseph Hernon, Chief Financial Officer During this call, management will be making forward-looking statements including statements that address Red Catâs expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Red Catâs most recently filed periodic reports on Form 10-K and Form 10-Q and in Red Catâs press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time-sensitive information that is accurate only as of today, December 15, 2022. Except as required by law, Red Cat disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Thank you, Joey. Welcome to our fiscal year 2023 second quarter earnings conference call. This has been a tough year for the economy and a brutal stock market. Many businesses and technology companies are battening down the hatches. But at Red Cat, we are focused on growth. The defense industry is growing, not shrinking in the U.S. and NATO. First, let's talk about the current military and defense drone industry. The defense space is going through a huge change. Ukraine war has demonstrated that drones are changing warfare and specifically small drones like the Teal Golden Eagle. Just some recent headlines, drone warfare in Ukraine and the changing battlefield, source CBC; Russia and Ukraine are fighting the first full scaled drone war, Washington Post; The drone war in Ukraine, Financial Times; The Tiny and Nightmarishly Efficient Future of Drone Warfare, The Atlantic; Ukraine Enters a Dark New Era of Drone Warfare, Wired Magazine. Two main developments are going to impact future war says Samuel Bendett, a military analyst at the Virginia-based research group CAN: The proliferation and availability of combat drones for longer a range, more sophisticated operations and the absolute necessity to have cheap tactical drones for close support operations. Just Google, Ukraine drone war, it comes back with 3 million plus results. Drones, and more specifically short range reconnaissance drones like the Teal Golden Eagle are changing warfare. Defense budgets across the globe need to replenish and many have doubled in NATO countries. Many of these new programs like the SRR program of record go well past 2030. Red Cat estimates that small unmanned aircraft fleet size of 64,000 for the U.S. Military and approximately 78,000 for U.S. allies. These projections and research were pre Ukraine war. Red Cat has invested heavily in our supply chain inventory. Most of these orders were 18 months ago. We have invested in a new factory in Salt Lake City that can produce tens of thousands of drones per year. We believe we are well-positioned now to meet the growing demand for made in USA drones. The Teal drone is a great drone. So like an iPhone, it's nothing without the apps. Our open platform has allowed for two great partnerships to give the war fighter a complete out-of-the-box system. We have announced partnerships recently with Reveal Technology and Tomahawk Robotics, and expect to add to this list of partners. Each Teal drone now ships with a fully licensed version of Kinesis software from Tomahawk Robotics. When you add the Reveal mapping capabilities, you can give the warfighter tactical advantages not seen before on the battlefield. I could spend an hour on the capabilities we are bringing to the table with these three companies. Let's talk about Skypersonic. The Skycopter is an inspection drone and we expect the Infrastructure Bill to produce large contracts in late 2023. We are on our second version of the Skycopter. It is a much more reliable drone now. We have also found a new market for the Skycopter, the military. The Skycopter is a great solution for GPS denied flying. This includes caves, abandoned buildings, tunnels and any other place you don't want to put a soldier at risk. We have received some great initial feedback from recent demonstrations for the U.S. Military down in Fort Bragg. As you know, we have a $90 million contract with the Border Patrol. We are one of a handful of companies in the contract. They recently gave us a purchase order for approximately $1 million. They gave similar contracts to two other companies. We believe we are in a bake-off to replace the existing Chinese fleet. We expect to ship this order in January 2023. We believe we are well positioned with our capabilities to fly at night when most missions take place. Red Cat's mission is to dominate the night, and we hope to expand the Border Patrol contract throughout 2023 and beyond. SRR, otherwise known as Short Range Reconnaissance Tranche 2, SRR T2, program of record. Tranche 2 is going according to plan. We have weekly meetings with the Army and the first flyoff is in January, 2023. This is an alpha version of the new Tranche 2 bird. We are excited to demonstrate the capabilities of our new drone and payload. We are also pleased to report the Tranche 3 has been cancelled. They are adding Tranche 3 to Tranche 2 to accelerate the program. We believe this will increase the contract size of Tranche 2 as it absorbs Tranche 3 capabilities. To summarize, we are excited that our brand new factory is now producing the newest version of the Golden Eagle. We expect that the 2023 to be an explosive year for drones. Thank you, Jeff, and to everyone for joining the call today. I will now provide some financial highlights of our results for the second fiscal quarter, which ended on October 31st. Year-to-date, our revenues for the first six months of fiscal '23 increased 41% compared to the same period last year. This reflects contributions from all of our wholly-owned subsidiaries. Most notably, year-to-date revenues for Teal increased significantly on a year-over-year basis as it begins to generate revenues from its military contracts and relationships. During the quarter, much of our focus continued to be on building out the Teal organization and preparing it for the multitude of revenue opportunities that are emerging, some of which Jeff just described. We doubled the size of its manufacturing facilities, both to increase its manufacturing capacity and to house its workforce, which has more than tripled since we acquired Teal. While this strategy has resulted in higher operating costs, we strongly believe that controlling the manufacturing process internally best positions us to take advantage of sales opportunities rather than relying on third-party manufacturers. Operating expenses totalled $7 million in the second fiscal quarter compared to $3 million in the same quarter last year. This increase largely reflects our people and facilities expansion at Teal, which at this point is significantly completed. After careful deliberation, the company has decided to sell the Consumer segment and exclusively focuses efforts and resources on the Enterprise segment, which means Teal and Skypersonic. As Jeff noted, the war in Ukraine has changed the rules in the battlefield with drones playing an ever-increasing role. We believe that our initial government contracts are a positive indication regarding the future scope and size of additional contracts. We will realize a profit on the sale of the Consumer segment and the proceeds of $18 million will provide non-dilutive capital to support our growth initiatives. We ended the third quarter with almost $33 million in cash and marketable securities and remain in a strong financial position. [Operator Instructions] At this time, I would like to turn the call to Joey Delahoussaye of CoreIR to read pre-submitted questions for management. Joey? Thank you, MJ. Jeff, over the last few weeks, we received a few questions from investors recently. And -- but this would be a good chance for you to address those for all investors. Why don't we just dive right in on these questions? Yes. I think it's on track. They have recently filed their S-1, which is part of the IPO process for them, which gets the clock ticking so that we can get to a close because that's -- their IPO is one of the conditions to close the deal. And I know they've submitted their S-1 to the SEC. So that is a good first step. And so as soon as they get reviewed and get the okay, they'll get up to the market to IPO. And we will be able to get -- as Joseph mentioned, that will raise $18 million for us of non-dilutive capital. Okay. Great. And in past press releases and conferences, you've mentioned having exposure to the Ukraine conflict and possible international sales being part of your pipeline. Do you have any update on how some of the international efforts may be going? Well, there's no contract wins yet, but we are still -- and that's expected because of the timelines of the RFPs, but we do have quite a few RFPs and our team will be in Europe and Africa. They actually just got back from Africa in -- starting in late January, and they'll be there for a couple of months because there's a lot of activity there, specifically with our new bird that we'll be bringing. So we hope to get some of these RFPs or at least a couple of them I know that we should be finding out if we're down selected in January, which is good. So yes, there's a lot of activity, not only in Europe and NATO and Africa right now, we are working on two different things in Africa. But also in Asia, we're starting to get quite a bit of activity on some pretty large contracts. Okay. Great. And then last one. In your prepared remarks, you gave an update -- a bit of an update on the Army's Short Range Reconnaissance program. Is there anything else that investors should possibly know about where that stands? Yes, we just found out about this, and they basically took Tranche 3 and all the capabilities that were going to be required for Tranche 3 and they absorbed them into Tranche 2. We believe this is also because of the activity in the Ukraine. Everyone needs drones now. They don't want to wait another three years for the Tranche 3 program to get the drones that they need for the warfighter. So that that's a pretty significant change for us. And we're pretty excited that how far along we are in this process and that would actually not have to finish in May through September, and they start the whole process and we demo for Tranche 3 late next year. It's all going to be -- those three years are going to get combined right in the Tranche 2. Wow, that's pretty interesting. Does that mean then that the Tranche 2 program is possibly a bigger in award value now that it's combining, I guess, essentially elements from Tranche 3? Yes, absolutely, it would be much larger than Tranche 2 would have been by itself. And when we looked at the beginning of the program for the SRR program, it looked like it was going to be about a little under $0.5 billion program of record that was years ago. Tranche 1 ended up being $100 million. So now that Tranche 2 and Tranche 3 are combined, if we fill out the rest of that program of record, it could be a very substantial contract for hundreds of millions of dollars. Yes, it's pretty exciting. And also we typically would get additional capital from the Army for Tranche 3 prototypes. So we were hoping that we also get additional capital from the Army early next year for the additional features and prototyping. So this is really good news for us. Actually, it's great news for Red Cat and Red Cat shareholders. We're pretty far down the process. We now have a factory that's capable of handling Tranche 2/2 and 3 now. We -- there's a lot of contracts out there across the globe, and itâs a brand-new Golden Eagle thatâs just starting to come off the production line. Itâs flying great. We've got the best payload in the industry, basically that for -- that means best camera for most people to understand that. And with that new camera and the thermal capabilities, we can dominate the nighttime and nighttime is when all the missions take place. So the Golden Eagle and the new Teal capabilities with the new payload are made specifically for the military, for the Department of Defense and very much focused on the Army, Marines and Navy. So we're building drones for the military. We're not a consumer company that happens to make some drones for the military. We're only focused on the military and don't make consumer drones. Great. Well, Jeff, thanks for those answers. Those were the last of the previously submitted questions. And I'd like to turn the call back over to you for any other closing remarks. Well, I don't have any additional remarks. I just want to thank everybody for jumping on the call, and we'll talk to you when we do our next quarter. Thanks, everybody.
EarningCall_1948	Okay. Great. Good morning, everyone. Happy to kick off our 10th Annual Credit Suisse Industrials Conference. I couldn't think of a better person to start our conference then Jennifer Hamann, who is the CFO of Union Pacific. Jennifer has been CFO for about 3 years, I believe, and has been with Union Pacific for close to 30 years, which is quite remarkable. So obviously, someone who knows the company very well. And Jennifer has a couple of opening comments that she'd like to make, and then we'll get into some Q&A. All right. Well, thanks, Ari. Good morning, and good morning, everyone. We don't have any slides to show you today. We do have an updated pitch book that's out on our investor website. It's by the link for the webcast for this event. So you can look at that for a little bit of updated information. Obviously, I want to remind everyone, maybe making some forward-looking statements today. Those statements are subject to risks and uncertainties. So please refer to the investor website and our SEC filings for information about those risks. I want to give you a quick update on three things this morning, our operations, our volumes and then just a couple of thoughts to 2023. So operationally, we have taken a bit of a step back. You've seen that in our metrics here in the month of November. We'll be posting new numbers here today. From a freight car velocity standpoint, that will be 186 miles per day, from an operating inventory standpoint it's about 194,000 carloads. And when you juxtapose that against the 7-day car loadings coming out of the Thanksgiving holiday, you definitely see some distortions there. Thanksgiving is a time when you do give us the ability to work on our network. And I think Eric and his team really did a good job taking advantage of this opportunity where volumes are a little bit lighter, moving trains off the network, helping reduce the operating inventory. And so when I look at our 7-day numbers today, that freight car velocity is closer to 190 miles a day and operating inventory is closer to 185,000 carloads. So good progress. Obviously, work to be done. We knew as we started on this journey of improving our overall network performance. It wasn't going to be a straight line. There was going to be some fits and starts. So this is obviously something we're experiencing. You know, the number one constraint that we have had in terms of improving our overall fluidity of the network has been crews, and we've been talking to you about that much of the year. We came in to this event, saying that we needed to hire about 1,400 people. So between training and hiring, about 1,400 people this year. Right now, we're at about 1,500. So we've got about 1,000 that have graduated, call it, 500 or so that are still in training. We're also working with select customers in certain geographic areas where we still have some of that crew tightness to help try to control some of that operating inventory that has come on to our network. And so having the dialogue with our customers to try to meter a little bit of their volume to help us again with the restoration of that fluidity. And then I think it's also important to note that when you look at metrics besides just the freight car velocity, in particular, on the intermodal side of our business, if you look at our trip plan compliance, which essentially is your on-time delivery metric, that's actually in the mid-70 percentile. So we've seen some really good improvement there. And Intermodal, obviously, is one of our most service-sensitive parts of our business. And when you look beyond the crew resources, we feel good about our locomotive supply. We still have 2,000 locomotives that are parked. We're going to have about 80 sidings that we've turned over into service by the end of this year, over the last 4 years. And that helps both from a productivity standpoint as well as just overall capacity. So then if I turn and I look at our volumes, our volumes right now are up about 3%. So they have come back a tiny bit over the course of the last few weeks. Part of that is related to our operational fluidity as our network slows down, that does have an impact on our car loadings. We're also seeing a bit of economic softness in a few places. So if you look at the three different groups that we have and just look at my notes, just to make sure I get all these numbers right, but our bulk is flat right now. And so when you look at the bulk items of our commodities, coal is still up. It's up about 4%. But offsetting some of that are grain and grain products. That's off 1%. Our fertilizer is down about 10%. And then I look at food and beverage, and that's off about 8%. So offsetting some of the coal in the - growth in the coal is impacting the bulk. When you look at Industrial, our industrial products is still up 3%, which is good. So you've got metals and minerals up 13%. Some of that is rock, which is less economically sensitive. Some of that also is attributable to some of our business development efforts, where we've had some good wins. I look at Energy and Specialized, that's up 5%. Industrial chemicals and plastics are off 2% and then probably the most linked economically sensitive one that we've seen the biggest drop off so far is lumber and forest products, and that's actually off 17%. So think about housing, think about paper when you tie that into the e-commerce segment. And then in our premium business, our premium right now is up 5%. So think about that in two different segments. Auto, our autos are actually up about 10%, primarily finished vehicles. Finished vehicles are actually up 23%, as you're seeing more restocking happening in terms of dealer inventories. Parts are pretty flat on a year-over-year basis. And then intermodal volumes are up 3%. And again, it's a little bit of a tale of two stories there. You've got our international volumes that are up 25%. That's off of a very soft comp from last year. And then on the domestic side, that's actually down 9% with parcel kind of unfortunately leading the way there, down 20%. And so that's where you certainly see some of that economic softness play through. So we're sitting here today. We've got basically one month left in 2022. It's a pretty big stretch for us to think that we're going to be able to get to 3% volume growth overall. It's just a very challenging environment for that. Encouraging though, we are still very confident that we're going to be able to reach our operating ratio goal that we set out in October, an updated goal of around a 60% reported OR. So still very confident on that, even though we are seeing a bit of weakness on that volume side. So then last thing I want to talk about just real quickly is 2023. And still a lot of uncertainty there, and I'm not going to give any guidance for the year. But we do see several things that we're very optimistic about next year and some things that I think are unique to Union Pacific that should help us outperform our peers in 2023. Fundamentally though, is our franchise, we've got a great rail franchise. We think it's the premier franchise in the industry, gives us broad reach, diverse markets. And it helps us when you have you know, things like potentially a little bit of an economic slowdown, where you've got exposure to coal, you've got exposure to rock, both areas that we expect to see some good growth in next year. The other thing that is something that we obviously have been working on the last several years. We need to reinforce and kind of double down on that a bit is our overall efficiency. As we embarked on the PSR journey, you saw us drive great efficiency and improve the service product, taking a bit of a step back, but we certainly have the opportunity to get back to those efficiency levels, get back to those higher service levels and are committed to doing that and taking steps towards that, obviously, today, but we're working forward into that in 2023. And that lowers our overall cost structure and opens up the book of business for us and sets up Kenny and his team to be able to go out and compete for new business. And that's another point to raise is that business development piece. You've seen us be very successful with that in 2022. And moving to 2023, we absolutely have some great opportunities and kind of the marquee win there is the Schneider business that will be onboarding. And then the last thing, which some impact in 2023, but I think really is a longer, bigger term picture for us that we want to make sure people keep in mind is the ESG part of the story in terms of the footprint for rail is so much more ESG-friendly than trucks. And as we improve our service product, continue to lower our cost structure, we see that opening more and more doors for us. And I'd like to refer to it as the easy button. So if you're a shipper and you're moving goods by truck, if you convert that truckload onto a rail carload, you've immediately saved 75% in terms of your emissions profile. And so that's a great news story. Not converted a lot of business to us at this point, but we do see that as a great long-term fundamental for us. So excited about 2023, excited about the long-term prospects for our franchise, for our industry and look forward to taking your questions. Okay. Excellent. So that's a great rundown. And definitely, I want to dig into a bunch of different points that you raised there. Let me start on two areas that are kind of topical because they've been in the news. So last week, the SMART Union voted down the proposed labor contract. Obviously, we've had even yesterday, Present Biden weighing in and Nancy Pelosi and Congress weighing in on this matter. What do you see as kind of the eventual outcome of this? Do you think there's a real risk of a strike happening? Have you guys been in touch with Congress? Where do things stand with your labor unions? Yeah. So we're obviously in very active dialogue right now with our unions, with the White House, with members of the House and Senate because we absolutely believe it's critical that we avoid any kind of a work slowdown, work stoppage or a rail strike and we very much want that to happen. It does seem at this point that it is going to come down to congressional action. We're pleased by the White House's statement coming out and urging the passage of what has been before our unions, which is the PEB, plus a little bit of unpaid sick time that was agreed to back in September. And I think it's important to note that 8 of the 12 unions have ratified the agreement, and roughly half of the workforce has ratified the agreement. And when you look at the part of the workforce that didn't ratify the agreement, those were very close votes, kind of a 50-50 kind of split. So I think there's a strong desire by the workforce to get this behind us and move forward. We want to be able to pay the wages that our workforce deserves. And certainly, as part of the package, 24% wage increases over 5 years, we think it's a very strong deal for our employees and look forward to moving that behind us. You never say never in this business. So I'm not going to say there's no possibility of a strike, but it does seem like with the actions and the statements that are being made by the White House and in Congress that they are prepared and are moving forward on taking actions that should alleviate that. So just to be clear, in the case of congressional action, no major changes to the updates that you guys put forward at the end of third quarter in terms of adjustments to â you know, adjustments to the labor accruals that you had recognized? Well, it does depend on what Congress does. So what President Biden urged and what Speaker Pelosi urged in her first communication was to pass the agreements as is. It's my understanding that there is potentially an amendment being proposed that would add some paid sick leave, if that's actually amended to the bill that's being proposed, obviously, that could potentially slow things down. If it's passed separately, that could add potential costs. So I think that's still a little bit of a TBD. We're hopeful that they stick with what the White House and Speaker Pelosi originally came out with, which was passing the PEB plus the tentative agreements. Okay. Understood. And then so the other item that's kind of been in the news, the STB obviously has asked Union Pacific to come down to Washington and discuss the use of embargoes and kind of specifically the STB sited that UP has been using embargoes at a much higher rate than some of your peers. Maybe you could talk about - obviously, it's still early stages, but what's kind of the expectation there in terms of what's the outcome from those hearings? And then specifically, maybe you could also discuss why has UP used embargoes more frequently than peers? And kind of how do you guys strategically think about using that to control the flow of freight on the network? Yeah. So let me start maybe with what an embargo is and what an embargo isn't. So it really is a tool of last resort for us. As a common carrier, we don't have other mechanisms to fully suppress volumes coming on to our network. And so you'll see in the case of a derailment or maybe a weather outage or different, maybe of a facility for one of our customers has closed or even for safety concerns, you'll see embargoes be put in place to help control that flow. What you have seen us do here more recently are somewhat we would call congestion embargoes. And it's what I referred to in my opening remarks, where we are very much working with our customers, and many of our customers have employed what I'll call self-help where they have taken deliberate measures to help pull back on some of the volumes that are on our network, help ease some of the operating inventory. But in cases where that hasn't been able to fully happen, we have put in place embargoes. I think it's important to note, though, that an embargo can be done with 100% permit. So you allow permits for the customer to continue to ship against that embargo. So when I look at these congestion embargoes that we have put up here recently, there are, I don't believe any where we have fully stopped service to that customer or prevented them from shipping any quantities from a certain location. So you are able to permit against that. And so I think it's important to understand some of those distinctions. And again, it's a tool of last resort. It's not what we want to do. But in terms of trying to regain fluidity on the network and to be able to provide service to all of our customers in some select locations in areas we have done that. In terms of outcomes relative to these hearings, I think it will be an educational process for the Surface Transportation Board. Our opportunity to educate them more. We're certainly in constant contact with them and they've been talking to them about the different steps that we have been taking. They asked in May for all of the railroads to be providing them with biweekly updates. We've been doing that as part of that, we've been talking about some of the operating inventory actions that we've been taking. But I see this as an opportunity to educate. Certainly, the customers will come, and I know some of the customers are upset with us because of some of the embargoes and so I'm sure there will be some venting that occurs. But net-net, we want to serve our customers. We want to grow with our customers. To do that, we have to have a fluid network, and this is just one of the tools that we've been using. We've seen - so this year, we've seen the SCB be a little more aggressive in terms of their stance towards the railroads. What do you think their objectives are here? Is it just to raise attention to the issue? Or do you think there is some actions that eventually come out of this? From an investor standpoint, do you think there's anything that people should be worried about in terms of the STB maybe changing the operating environment or the kind of dynamics between railroads and their customers in the coming years as a result of any kind of STB actions? Yeah. I mean in terms of their motivations, that's certainly a question probably that's better for the STB. But they are our primary regulator from an economic standpoint. And we, as a quasi-regulated industry, when you think not all of the commodities that we move are regulated, but certainly a subset of those are - is ensuring an equal access and an open playing field for customers. And we very much support that. When we look at some of the things that the STB wants to do in terms of making it easier to bring rate cases, doing things that would help it be easier for our customer to potentially bring a complaint or protest a rate. We're supportive of those things. We want to be able to compete, and we're open to that. In terms of any long-term impacts that it could have, it's probably early days to comment on that. But I think, first and foremost, we need to fix our service product. And that's always been our best defense from a regulation standpoint and for our customers is to serve them and serve them well. We recognize that, and that's where our full attention is on. So let's turn maybe to kind of the macro, the revenue side of things. In terms of speaking of the service product, you said that the volumes may be kind of taking a little bit of a step back in fourth quarter and maybe seeing that kind of volume target is a little bit less achievable. How much of that do you think is attributable to kind of the macro environment? What are you guys seeing in the macro environment versus how much of that is kind of issues related to service and maybe customers looking for other solutions because of the service that they're getting at UP... I mean it's hard to parse that out, Ari. But certainly, when I look at some of the commodities that I named off or you think about the forest products, think about parcel, industrial chemicals and plastics, those certainly are economically sensitive parts of our business, and we are seeing a bit of a pullback there. You think about finished vehicles. So you would typically put that in the category of an economically sensitive part of the business, yet finished vehicles is up 23% because of the lower dealer inventories. When I look at our bulk network, that's probably an area where you could probably most clearly point to and say those volumes could be stronger if we were operating more fluidly. So again, coal up 4% or 5% here in the quarter. We know we're not meeting all of the coal demand that's there. We know that there's still further opportunities there. You could probably say the same thing in rock where although the rock volumes are up strongly, there's still more demand there for us to be meaning [ph] So I think it's in segments of our business. It's certainly not across the board, but that's probably how I think about it. Fair enough. Fair enough. And then one of the things I thought was interesting you mentioned it today, and I've also heard Lance Fritz, our CEO, talk about this. But that expectation that UP can outgrow the industry over - just to be clear, is that 2023 or is that over the longer term? And then what are the real drivers of that growth? What are the categories within that, that you think really can be powerful kind of growth drivers for UP? Well, certainly, it's 2023 in particular, and it's in large part because of the new Schneider business that we're bringing on. But as well, it's also because of some of the pent-up demand that we know is there and again, areas like coal, rock, some of the other business development wins that we have had in steel, autos. And really across the board, I can point to different segments of our business, biofuels where we've got business wins. And so that's really - while it's a 2023 comment, our longer-term expectation of ourselves is to be able to have our volumes outpace industrial production. And we think that's a really strong setup for us. It's something we've not done historically as a company. And for us to be able to do that kind of year-on-year, we think would be a very strong statement. And what enables that is our franchise. We will further enable that as our service product and our cost structure and then also just the appeal to the trucks and being able to take that business off the highway. So let's talk about pricing then. One of the things you were pretty adamant about on the third quarter earnings call, which was great to hear was this idea that the rails can continue to price above inflation. Obviously, we've seen the rails have a great track record of pricing above inflation. Maybe you could dig into that a little bit more. In terms of your conversations with customers, both to what extent service has been an impediment to getting pricing and then kind of what drives that optimism for being able to continue to price above inflation? Yeah. Well, I'll first channel my inner Kenny Rocker, who's our Chief Marketing Officer, and he would tell you price is never easy to get regardless of what the service product is like. But we recognize we do provide value to our customers. We know that relative to other modes of transportation truck, in particular, there's still a cost advantage to rail beyond the ESG benefits. And so we - that's our imperative. And we look at each of our pieces of business individually, and each piece of business needs to stand on its own and earn its own return. And pricing above inflation is - is kind of a key metric for us in terms of ensuring that we're getting that, but that's not what's driving us going out into the marketplace. We're going out and we're competing, and we see a marketplace that has inflation in it, too. And so that's where we need to continue to provide that value to our customers and demonstrate to them that we can help partner with them and help them grow in an economic way. Do you feel like customers have been pretty receptive to the notion of price increases that might be in the kind of, I don't know, mid to upper single digits? And are they pushing back because of the service issue, I guess... You know, customers are never going to welcome a price increase. That's - no one should do that. And none of us welcome that when price increases are presented to us in our daily lives. But when you see things, I mean, inflation is not anything that any of us are immune to. It's in the headlines daily. When you think about the labor inflation that we're facing here in particular with the PEB, those are well-known factors. And so when you look at the inflation in our cost versus perhaps others, while it's high, it may still be less than what their competitive alternatives are. So one of the things I don't want to sound like a criticism because I think the numbers were quite strong. But if I look at where revenue per carload was up for UP, it was up about 15% year-over-year in the most recent quarter. If I look at some of the peers, it was up kind of closer to 20%. Do you think there's an opportunity that maybe UP has been under pricing relative to some of its peers are less aggressive on pricing than some of its peers. Is there anything to that? Or do you think it's more mix related? And then as we think about 2023 also onboarding Schneider, which is obviously a lot of intermodal business, do you think that maybe weighs on that yield, kind of the overall yield picture a little bit? Okay. We've got a couple of different questions in there. So I'll maybe start with the current comparison. So mix is an impact. We talked about mix in the quarter that we had a little bit of negative mix in the third quarter. I would also say within that, though, you have the ability to move the volumes. And so the way that we count price, I think we do it in a very, what I'll call, purist fashion. If I give somebody a 5% price increase, but I don't move their freight, I'm not realizing that 5%, and that's not how we count it within our yield calculation. So when you think about some of our service challenges, if we're not moving the freight where we put good strong prices into the marketplace, that has an impact on us. And so as you see us improve our network fluidity and move some of that carload volume, I do think we're putting a stronger, stronger prices into the marketplace. We're winning business with that, but we then also have to move it. So I'll set that aside. Now moving on to 2023 and your Schneider commentary, if intermodal is going to be our growth engine for us next year, and it certainly feels like it will be with Schneider coming on, that will have a negative mix impact for us when you think about that just in terms of the average revenue per car. Also looking into 2023, it's hard to think when you think about just kind of overall total yields that fuel is going to increase at the same level that it did in 2023 versus 2022. In fact, if you see an economic slowdown, my expectation would you actually see fuel take a step back. And so that's going to be a factor when you're just looking at those high level yields in 2023. Got it. Got it. So feel taking a step back, obviously, would have an OR benefit there. And so maybe it's a good opportunity to kind of transition and talk about margins. We've seen UP have to walk back kind of its OR target this year. You guys started the year talking about a 55 OR now we're talking about kind of closer to 60 granted [ph] it sounds like that's on a GAAP basis, so maybe a little bit better than that on an adjusted basis. But maybe you could talk about that progression of - what were the reasons we had to walk that back. Was that mostly fuel? How much of that was attributable to service? And kind of as we think about what that could look like for 2023, where - how should we be thinking about what that number looks like? Yeah. So I'm not going to give any guidance for 2023. I'll just set that aside. With each of our quarterly earnings releases, I think we do a pretty good job of laying out the components of our operating ratio. Fuel certainly has had a negative impact from an OR perspective. It's been accretive in terms of EPS and operating income, but it has had a negative impact to the operating ratio. You also have the inflation coming in higher than what we originally thought. We came into the year. We thought it was going to be a higher than normal inflation year for us at around 3%, and it's actually closer to 5%. And so that certainly is having an impact as well. And then you do have some of our service challenges, and we know that, that has brought additional costs into the network as well. So I would say it's all three of those factors that have come into play different than our expectations coming into 2022 that have led us to walk back the operating ratio. What does the time line look like for that? And kind of what are the steps to getting there? Is it mostly pricing? Or are there still cost cuts that you can realize across the network? Yeah. So we are still very confident that we can get back to that 55 target. We've not set a date on that, but we would look to make progress, obviously, starting next year. In terms of the levers that help us achieve that, it's the same levers that have gotten us to this point. It's volume, it's price and it's productivity. We've taken a step back, obviously, this year in terms of our efficiency and productivity. So next year is going to be a great opportunity for us to make up that lost ground and then start to move forward on that. We've already talked about price and price above inflation. And then the volume piece of it and being able to efficiently leverage the volume across our network. There's no special sauce, so to speak, in terms of getting to that 55, but it's absolute execution on those three fronts. So one of the things I want to switch and kind of talk a little about cash flow, obviously, being in the CFO seat. I think you have a great perspective to offer on this. So one of the things that's impressed us certainly over the years has been UP's ability to just generate cash flow pretty consistently and in good environments, bad environments. How should we think about kind of the level of confidence going forward that UP can continue to demonstrate really strong levels of cash flow? And in terms of the things you worry about that could maybe alter that course or negatively impact that cash flow generation. What are the kind of things that you look for - for kind of key risks to that free cash flow? Well, I mean, you've seen it a little bit here this year in terms of - as our operating ratio deteriorated, that certainly has an impact on our operating income growth and our cash flow. And so [Technical Difficulty] those are certainly things that we will be working on next year to bring back in line and just start to make progress on. But again, the business fundamentals, I think, continue to be very strong in terms of being able to generate strong cash from the business. There's nothing - if you think about it in terms of that long-term dynamic of being able to grow the business of being able to bring more profitable business onto our railroad and then move it efficiently, that's going to translate into higher operating income and obviously strong cash generation. So again, in terms of risks, it's primarily what execution, I guess, and service? Is that the biggest thing we should be watching for that? Well, I mean, execution and service is certainly the thing that we are absolutely focused on and is critical to our performance right now. Beyond that, though, it is continuing to be very disciplined on that pricing standpoint and making sure every piece of business is profitable. And then it's growing the volumes that can move across that very efficient franchise. It is those three levers. Got it. Got it. Okay. And so UP has a great track record also of buying back shares, using that free cash flow to buy back shares. I think you guys have repurchased about 4% to 6% of your outstanding shares each year for the last couple of years. How do you think about your ability to kind of continue to do that? And I know you have a target out there for $18 billion to $19 billion of buybacks through 2024, which I think would represent kind of close to 15% of your float. Do you still feel comfortable about that target, that $18 billion to $19 billion target? And how do you think about the ability to kind of continue to buy back shares at that kind of 4% to 6% rate for the year? Yeah. So I think it's important to level set in terms of how we prioritize the use of our cash. So first dollar goes back into the business in terms of our capital investment. You know, the railroad is our lifeblood. It's our engine. And so that's where we put our first dollar of cash. Our next priority is our dividend. And so we have a dividend target of 45% that we think is appropriate for our business. We want to be able to give our shareholders that you know, more certain return on cash. And then the excess cash is where we use it for share repurchases. And what that has historically meant is not only use of excess cash from operations but also using our balance sheet. And so we have since 2018, you know, we put forth a new target that we were going to increase the leverage on our balance sheet, and that has been a big sustainer of some of those share repurchases. So we're at a point today where I would say the balance sheet is largely optimized. So as we generate EBITDA, that generates additional capacity on the balance sheet and obviously, generating EBITDA, generating more operating income and cash. So those are the levers that we look to and the priorities that we put to it. In terms of how we think about that '23,'24. It's really going to come down to what's the economic outlook and how are we performing in terms of being able to translate that into cash. Certainly, a difference that we have right now is with our operating ratio with it being closer to a 60 versus a 55, that has an impact on that cash generation. The economy inflation looks a little bit different than when we laid out those targets back in - at the May Investor Day in 2021. So I'm not going to confirm that guidance right now, but we're going to be looking in 2023 when we sit down in January and talk about how we see the year playing out, and we'll have that discussion. But those are the three priorities for our cash, and I think it's important to think about it in that context. When we sit down with you in January, we'll be talking to you about our expectations for the year. And historically, we've talked to it not only in terms of how we think the company is going to perform, but then how we're going to use the cash in terms of our capital, dividends and share repurchases. Got it. Okay. So I want to open up the floor to any questions from the audience. I still have a couple if no one has any, but I want to make sure we give folks an opportunity if they have anything. So I'll tell you about. In the meantime, let me ask you know, at least have a couple of minutes. But - so there's been a lot of speculation about the impact of the CP KCS merger, and that's kind of expected to go through in January, February, perhaps. I mean, obviously, kind of STB will have the final word. But maybe you could talk about - one of the things that's been notable about UP is you've often highlighted you're the only railroad in North America that has connections to all six major gateways between the U.S. and Mexico. Obviously, CP kind of having control of KCS alters it landscape a little bit in terms of having that kind of single-line network between the three major economies of North America. How do you think about the risks to UP from that merger? And how do you think about kind of defending your position as kind of being the kind of premier carrier out west? Yeah. So to your point, we still feel very good about our franchise position relative to Mexico. And even with the CP KCS merger, we'll still have the better route structure north south of the border and the more diverse destination points as well when you think about where that freight ultimately wants to origin or destine north of the border with our franchise. But the things that we have talked to the STB about and have been very public about in terms of our you know, concerns relative to the merger is, we want fair and equal treatment. And so what that really boils down to is rates south of the border that they'd be proportionate so that our customers aren't de facto being forced to ship on CP KCS, by the way that they're pricing their business south of the border for a joint CP KCS move versus a UP KCS move. The other thing we want to do is ensure that there's equal access to the new bridge that they're building in Laredo. And then the third item is that because this company will be using our trackage [ph] rights, they have trackage rights on us, particularly in Houston, which is a very busy part of our rail network. We want to make sure that any growth that they're going to be moving across that network that there's capital investment made first. So we're happy to compete. We just want to make sure that it's a level playing field. Yeah. So the question for those of you who maybe didn't hear it is, if volumes are weaker, how are we confident that we can still hit our OR target for 2022? It is the things that you mentioned primarily mix. So we're seeing the mix be a little bit better in terms of the business profile that we're moving. And I would say fuel while still a headwind for us in the fourth quarter, it's probably a little bit less so than we originally thought. Curious, how do you push pricing when service metrics are behind on that target? Especially when we're seeing truckload rates deteriorating... So the question about price and service is one, and we were actually talking about that a little bit earlier in terms of how are you able to do that? It really is about the long-term value proposition that we can offer to our customers. And setting aside some of the current issues and talking with our customer's long term about what they need from us and what we can provide to them and helping them understand that long-term benefit of rail capacity. We are an integral part of many of our customers business, and they know that we are still - even if we're raising our prices - pricing above inflation and making sure that we're earning a solid return, it's still a very economically efficient option for them, and they are set up to benefit from that as we improve our car cycle times, that's fewer cars, if it's a customer who owns their cars, that's fewer cars that, that customer has to own and put into their fleet. So it's not only an OE aspect for them, but it also can be a capital investment aspect for them as well. So it's difficult in the environment where you're not providing good service, having those conversations and trying to put that aside. But most of our customers, you know, we've worked with them for decades. And so they understand that and they know the long-term benefits that we can provide. [indiscernible] Follow up just on the diesel cost pricing. How is it priced? What kind of a lag? And then do you give back some of that pricing when diesel arbitrates? So I think you're referring to our fuel surcharges. So we do separate from the pricing discussion that we've been having, we do on our business have fuel surcharges that, by and large, are pegged to on-highway diesel fuel [ph] prices. And if you look at our website, you can see the table or the scales that are there. And those adjust on a monthly basis. For the most part, we do have some, particularly in the intermodal sector that actually update weekly, but most of our mechanisms update monthly, and there is basically a 2-month lag there between what the on-highway diesel fuel price is and what our surcharge looks like. But those move up and down. And so as prices come down, you see the surcharges come down, and that's all done separately. Okay. Great. So I think we're a little bit over time. Jennifer, thank you so much for joining us. This is certainly an interesting discussion, and we look forward to hearing from you on fourth quarter earnings.
EarningCall_1949	Ladies and gentlemen, thank you for standing by, and welcome to Xiaomi 2022 Third Quarter Results Announcement Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. [Operator Instructions] I'd now like to hand the conference over to your host today, Ms. Anita Chan, Head of Investor Relations and Capital Markets. Please go ahead, madam. Good evening, ladies and gentlemen. Welcome to investor conference call hosted by Xiaomi Corporation regarding the company's 2022 third quarter results. Before we start the call, we would like to remind you that the call may include forward-looking statements, which are underlined by a number of risks and uncertainties and may not realized in the near future for various reasons. Information about general market conditions is coming from a variety of sources outside of Xiaomi. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for the company's financial prepared in accordance with IFRS. Joining us on the call today are Mr. Wang Xiang, Partner and President of Xiaomi Corporation; and Mr. Alain Lam, Vice President and Chief Financial Officer of Xiaomi Corporation and Chairman of Air Star Digital Technology. To start, Mr. Wang will share recent strategic update of the company. Thereafter, Mr. Lam will review the business and financial performance for the third quarter of 2022. Following that, we will move on to the Q&A session. Thank you. Thank you, Anita. Good evening, everyone. Thank you for joining our third quarter earnings call. Since 2022, our whole industry faced many challenges, including rising global inflation, foreign exchange fluctuation, a complex geopolitical environment and COVID resurgences in Mainland China. These challenges have not changed materially in the third quarter of 2022 and have continued to impact overall market demand significantly. The global smartphone market declined nearly 10% year-over-year in the first three quarters of the year. And in this quarter, global smartphone shipment reached lowest point compared to the third quarter over the past nine years. Despite the challenging environment, due to our global scale, our long operating histories in global markets and our brand and channel advantages, our business remained resilient. In the third quarter, our total revenue -- our total revenue, adjusted net profit, smartphone shipments and the smartphone margin all achieved growth quarter-over-quarter, more so than any other time. In times of difficulty, it is vital to invest in our long-term capabilities to lay the foundation for high-quality sustainable growth. With this in mind, we continue to advance our business strategies and strengthen our foundation. Our third quarter total revenue reached 72 -- RMB70.5 billion with smartphone revenue reaching RMB42.5 billion. IoT and lifestyle products revenue of RMB19.1 billion and Internet services revenue of RMB7.1 billion. Meanwhile, we have been actively investing in advancing our smart EV and other new initiatives. Our adjusted net profit reached RMB2.1 billion in the third quarter of 2022, which included RMB829 million of expenses related to smart EV and other new initiatives. In the complex and ever-changing overseas market, we cooperate openly with our global partners, leveraging our global scale to mitigate single market risks. In the third quarter, we maintained our number three position in global smartphone shipments with market share of 14%. And in Europe, we ranked number two with market share growing year-over-year and quarter-over-quarter to 23%. In this quarter, more than 75% of our smartphone shipped to overseas market and our smartphone market share ranked top three in 52 markets and among the top five in 64 markets. We further strengthened our position in the premium smartphone market, and our newly launched premium smartphones have been very popular. Xiaomi 12S Series and Xiaomi MIX FOLD 2 received over 98% and 99% positive ratings, respectively, on JD.com. In this quarter, in Mainland China, our smartphone market share in RMB4,000 to RMB5,000 price segment grow year-over-year of 5 percentage points and grow year-over-year of 2 percentage points in RMB6,000 and above, demonstrating the competitiveness of our premium products. We continue to invest in R&D and strengthen our long-term core competitiveness. In the third quarter, our R&D expenses reached RMB4.1 billion, an increase of 26% year-over-year. Among over 30,000 employees at Xiaomi, nearly half are R&D personnel. In terms of smart EV and other new initiatives, we have invested over RMB1.8 billion in the past three quarters. Our smart EV business is advancing smoothly and has established an R&D team of more than 1,800 professionals. We believe the global total addressable market for smart EV exceeds trillions of dollars, while the current market is still very fragmented and very early in its development, leaving plenty of room for us. We have been actively promoting sustainable corporation development. In August 2022, Forbes China released its first China ESG 50 report to recognize companies that follow best practices in ESG and list Xiaomi among China ESG 50 list. In October 2022, Xiaomi was selected into Forbes' world best employers list for the second consecutive year. In addition, we participated in education equality initiatives in Malaysia, Thailand, Vietnam and Singapore, providing digital education improvements to local students. We believe it is necessary for us to spread ahead social responsibilities even against macroeconomic headwinds. In the coming New Year, despite the challenges at home and aboard, we remain confident in our ability to seek certainty in times of uncertainty, thanks to our relentless investment in our core capabilities, our global scale advantage and our strong cash resources. More importantly, we will remain agile and strategically balance profitability and scale, while improving operating efficiency. Meanwhile, we will commit to investing in R&D and the long-term driving forces to lay the foundation for healthy and high-quality sustainable growth. And together with all of you, we will fall ahead of -- against the headwinds to weather every season as no winter last forever and no spring skips its time. With that, I will hand it over to our CFO, Alain, to discuss our third quarter results in greater detail. Alain, please? Thank you, Xiang Wang. Good evening, everyone. Now let me go into more details of our third quarter performance. As Xiang Wang mentioned, in the third quarter our performance remained resilient despite the ongoing macroeconomic headwinds. Our revenue reached RMB70.5 billion and adjusted net profit was RMB2.1 billion this quarter, which included expenses of RMB829 million for smart EV and other new initiatives. Our revenue as well as our adjusted net profit both increased quarter-over-quarter. Our three business segments remained healthy. We ranked number three in terms of global smartphone shipments. The number of connected devices on our AIoT platform increased by more than 40% year-over-year, and the number of our MIUI MAU again hit record highs, reaching 564 million globally and 141 million in Mainland China. In the third quarter, our global smartphone shipment achieved market share of 13.6% and our smartphone shipment has increased sequentially over the past two quarters. We have continued to steadfastly execute our smartphone premiumization strategy and our newly launched smartphone models have earned wild-spread positive reviews. In the third quarter in Mainland China, our premium smartphone shipments increased 14% year-over-year and our smartphone ASP increased 9% year-over-year. Xiaomi 12S Ultra, which was launched in July and Xiaomi MIX Fold 2, which was launched in August generated over 98% and 99% positive ratings respectively from JD.com. During the Double 11 shopping festival, our cumulative paid GMV from all sales channels exceeded RMB17 billion, and we ranked number one among Android smartphones in terms of both sales volume as well as sales value on each of the major platforms, including Tmall, JD, [indiscernible]. In the AIoT categories, we achieved 147 number one rankings by sales volume or sales values on Tmall and JD. We also continued to make steady progress in our off-line retail business despite the continued COVID-19 outbreak, which caused the temporary closures of many of our stores during this quarter. Our retail store GMV increased by 12% year-over-year during the festival, which included 190 million GMV from our integrated online-to-offline business. Our integrated online-to-offline business includes on-demand delivery and in-store pickups from our offline stores based on orders placed online. We continue to increase our R&D investments to strengthen our core competitiveness. In the third quarter, R&D expenses reached RMB4.1 billion, increasing 26% year-over-year. And the number of granted patents to us exceeded 29,000 globally. We continue to invest in our technology, talent and the proportion of R&D personnel to total employees increased to 48%. Furthermore, Boston Consulting Group named Xiaomi as one among the 50 most innovative companies of 2022. Now let's dive deeper into each segment, starting with smartphones. Ongoing macroeconomic headwinds continue to affect overall industry demand. And this quarter, global smartphone shipment was the lowest third quarter shipments since 2014. Against this challenging backdrop, our global smartphone shipment increased by 2.8% quarter-over-quarter to 40.2 million units, achieving a second consecutive quarter of sequential growth. And our smartphone revenue reached RMB42.5 billion. We are committed to bringing cutting-edge technologies to the mass market at affordable prices. In October, we launched the Redmi Note 12 series and orders exceeded 350,000 units within the first hour of launch. Within this series, the Redmi Note 12 Discovery edition is equipped with a 200 megapixel camera and a proprietary 210-watt HyperCharge solution that can fully charge the smartphone in only nine minutes, further demonstrating our pioneering technology. We also launched Xiaomi Civi 2 with lightweight and attractive design. It is our first smartphone equipped with dual ultra-high-definition front cameras, which enhanced self-portraits and videos with natural realism and depth of field. We continue to advance our overseas businesses and maintain leading positions in major global markets. In the third quarter of 2022, our smartphone shipment ranked among the top three in 52 markets and among the top five in 64 markets. In this quarter, our market share improved year-over-year in Europe, the Middle East and Latin America. In Europe, we ranked number two with market share increasing 1.8 percentage point year-over-year to 23.3%. In the Middle East, we ranked number two with 17.6% market share, an increase of 1.3 percentage points year-over-year. In the emerging markets, we ranked number three in both Latin America and Africa. Our global scale and competitive products have attracted more overseas carriers to partner with us. At the same time, we continue to deepen our relationships with existing carrier partners. In this quarter, our carrier channel market share in Europe increased by 1.7 percentage points year-over-year to 19.9%. And our carrier channel market share in Latin America increased by 1.5 percentage points year-over-year to 16%. Furthermore, our smartphone market share through carrier channels ranked top three in 38 overseas markets. Let's look at the IoT business. Connected users and devices are now leading consumer AIoT platform continues to grow. As of September 30, the number of connected devices on our AIoT platform reached 558.3 million, up 40% year-over-year. The number of users with five or more connected AIoT devices reached 10.9 million, up over 35% year-over-year. In September, MAU of our AI assistant grew 9% year-over-year, and MAU of our Mi Home app grew over 20% year-over-year. In this quarter, revenue from our AIoT business decreased 3.8% quarter-over-quarter to reach RMB19.1 billion, primarily due to a decrease in revenues from AIoT products, such as air conditioners, partially offset by increase in revenue of smart TVs and [indiscernible]. Our smart TV business continues to maintain a leading position globally. In the third quarter, global shipments of our smart TV grew year-over-year to reach 3.3 million units against an overall industry decline. We maintained our top five global ranking, and overseas smart TV shipment achieved its quarterly high. Overseas shipments, excluding India grew over 40% year-over-year. Our Smart Home Appliance business achieved robust growth in the third quarter of 2022 with revenue growing more than 70% year-over-year to achieve another record high. Our air conditioner shipments exceeded 1 million units, increasing over 70% year-over-year. Our refrigerator shipment exceeded 340,000 units, an increase of over 150% year-over-year, achieving a record high. In October, we launched our first Redmi Pad product with a low blue light, high protection display, offering a comfortable viewing experience. During the same month, we launched Xiaomi Book Air 13, our first laptop with a screen that can be flipped 360 degrees to meet our users' needs in multiple settings. We continue to maintain our lead in variable products. In the third quarter, our TWS earbuds shipments ranked number three, and our variable band ranked number two in Mainland China. We have been enhancing the connectivity between our variable products and smartphones, which has made our premium variable products more appealing and more competitive. In August, we launched our premium Xiaomi Buds 4 Pro and our premium Xiaomi Watch S1 Pro. Among the connected users of these two products, over 50% are users of our premium smartphones. We continue to explore new blockbuster AIoT products. In September, we launched two energy-related IoT products. First, the Mijia Outdoor Power Supply 1000Pro, which is equipped with a 1 kilowatt hour capacity and 1.8 kilowatt hour -- 1 kilowatt -- 1.8 kilowatt high-power output, satisfying the power needs of outdoor activities and home emergency use. Second, we launched the Mijia Solar Panel 100 watts, which efficiently capture solar power in affordable portable design and itâs water and dustproof. Now let's look at Internet services. In this quarter, our global MAU reached 564 million, an increase of 78 million year-over-year. In Mainland China MAU reached 141 million, an increase of 14 million year-over-year. In addition, our global TV MAU exceeded 54 million, all key metrics achieved record highs. In the third quarter, our Internet services revenue remained stable and reached RMB7.1 billion, an increase of 1.4% quarter-over-quarter. While macroeconomic and industry-specific headwinds presented challenges, our global advertising and gaming revenue still achieved quarter-over-quarter growth. Notably, this year our gaming business has achieved three consecutive quarters of year-over-year growth. As our overseas user base continues to expand, our overseas Internet services revenue achieved another quarterly high of RMB1.7 billion, up 17.2% year-over-year and accounted for a record high 24.2% of our total Internet services revenue. Benefiting from diversified monetization channels, our advertising business in Mainland China and overseas, both achieved quarter-over-quarter growth. In Mainland China, revenue of brand and performance-based app increased, driven by a more diversified advertiser base and higher monetization efficiency. Overseas, our performance-based advertising revenue and pre-installation revenue, both again hit record high, driven by deeper collaborations with global partners and strong content operators. In the third quarter, our Mainland China TV Internet services revenue reached another quarterly high, and accounted for 15% of Mainland China Internet services revenue. As we further expanded our content offerings, our TV pay subscriber exceeded 5 million, providing an additional source of recurring revenue for our smart TV business. Let's move on to more detailed financials. In the third quarter, total revenue was RMB70.5 billion, as mentioned before, and 50.5% came from overseas overall. Smartphone revenue was RMB42.5 billion, IoT revenue was RMB19.1 billion and Internet services revenue was RMB7.1 billion. In the third quarter of 2022, overall gross margin reached 16.6%. Smartphone gross margin increased quarter-over-quarter to 8.9%, mainly due to improvement in gross profit margin in Mainland China. IoT gross margin increased -- IoT gross margin decreased quarter-over-quarter to 13.5% mainly due to enhanced promotional efforts of our smart TVs overseas, as well as increased impairment provision on our inventory. Internet services gross margin decreased quarter-over-quarter, mainly due to decline in gross profit margin of our fintech business and higher revenue contribution from our gaming business. In this quarter, our operating expense ratio decreased 0.3 percentage points quarter-over-quarter to 14.5%, mainly due to reduced promotional activities. Excluding EV and other new initiative expenses, our operating expense ratio would have been 13.3% in the third quarter, a decrease of 0.7 percentage points compared to the previous quarter. As we continue to increase our R&D investment, R&D expense ratio reached 5.8% this quarter. In the past year, we have made progress in managing our expenses. Our total operating expenses this quarter reached RMB10.2 billion [Technical Difficulty] supply situation has normal and maintain our raw material inventory at healthy level. First of all, as we continue to reduce our [Technical Difficulty]. We have been actively promoting sustainable corporate development. In August, Xiaomi was selected to Forbes China's first-ever China ESG 50 list, which recognizes our efforts in ESG. In October, Xiaomi was named as one of Forbes world's best employers for the second consecutive quarter, demonstrating strong endorsement of our practices in talent development, as well as social responsibility. We have been actively promoting public welfare initiatives. We responded rapidly to recent natural disasters and made donations to support those in needs. In addition, we have been promoting education equality initiatives in countries such as Malaysia, Thailand, Vietnam, as well as Singapore. Thank you, Alain. We will now proceed to the Q&A session. Please ask no more than one question at a time so that we could allow more investors to ask their questions. Meanwhile we read your questions in Mandarin followed by English recap. Thank you. The question-and-answer session is now opened. [Operator Instructions] Our first question is come from Andy Meng with Morgan Stanley. Andy, please go ahead. [Foreign Language] Xiaomi has started smartphone inventory stocking since the second quarter this year. Could you share with us the latest progress of the stocking and inventory balance in China and other overseas markets, including India and Europe? Based on latest observation what's the smartphone net outlook in the fourth-quarter? And how does the latest industry dynamics affect your gross margin profile in the coming quarter? Thank you very much. Thank you, Andy. Thank you Andy. I think if you look at the numbers. I think we are making good progress [indiscernible] our inventory level. So the level decreased by 9% year-over-year and quarter-over quarter I think is a good - very good signal. But regarding to -- we would take how long to get to the normal level. I think we will continue to utilize the promotion season like in Q4 to clear the inventory. So we think our inventory level right now is in progress. I think probably end of this year or maybe the first -- beginning of next year we'll get to normal level. We are working very hard on that. By the way the inventory actually is -- I think not -- I think it's -- a lot of inventories on the -- is not that in inventory, actually we are confident that we can clear them all. That takes a little while. I think to answer you -- to supplement the answer from Xiang Wang, Andy. As you can see from our reported inventory levels, the raw material inventory has stayed at a relatively healthy level. It has increased slightly this quarter because we have to stock up on some of the new SoCs for our products in the second half of the year. So that's the raw material part. But overall, we think that it is at a pretty healthy level. On the finished goods side, I think as we mentioned last quarter, after the 6/18 event, our inventory in China has largely been normalized, and that hasn't changed this quarter. India after Diwali has become -- has gone down to a pretty healthy level, although I think it might take another quarter or so for that to be cleared. And in the overseas market, I think is what Xiang Wang is saying, that still will be our major focus for this upcoming quarter as there are several large promotional events that is happening in the international market this quarter. So as such, I think that we are on the right track. As you can see, our finished goods has come down significantly between in the last couple of quarters as part of our efforts. In terms of gross margin, our Q3 gross margin has increased from our Q2 gross margin, partly due to the fact that our -- the premium products that we launched in China in Q3 carried pretty health margins. And as such, I think that, that has helped our gross margin overall. In terms of how we look at Q4, we hope that our gross margin will continue to improve. I think as we work through our inventory level, as we have less impact of provisions of our existing inventory, we think that our gross margin on our smartphone business will get back to a much more healthier level in Q4. [Foreign Language] Thank you management for taking my question. And my question will be about the overseas market, which appears to be a gross drag across the smartphone and IoT business lines. And also, if you look at the Internet services revenue, overseas markets also show a sequential slowdown compared to the first and second quarter this year. Could management share some outlook on how we should look at the growth for the overseas market across different business lines and specifically, for the IoT market, what is the original breakdown? Thank you. Yes. Thank you, Timothy. I think we are -- in some of the global markets, like Europe, we are growing our market share. Right now, in European market we are 23% even with the macroeconomic downturns in Europe. So we think we will -- we try to maintain our growth there. And also, the Latin America, we also see the positive trend. So -- and overall, although the global smartphone shipment dropped about 10% because of our scale, I think we will find the growth area, continue to put our resources there to grow our business there. So, yes. Alain, probably you can -- Yes. Look, I think Timothy, I'll get to the Internet first, and then I'll get to the IoT afterwards, right? On the Internet side, I think there's no denying that overall the global ad market has also been not in a particularly robust stage -- robust form this year, right? I think if you look at the global advertising market, it hasn't been growing that much for this year. So I think -- despite that, I think given that our users have continue to grow, we have managed to increase our revenue year-over-year, as well as quarter-over-quarter. I think that's something that I think is the overall market that has slowdown that has caused our Internet market -- Internet services revenue to slow down. But given our user growth is still quite healthy, I think we've been able to outperform the market. I mean that's the first one. On the IoT side, I mean, obviously, we are certainly hurt by the macroeconomic impact that has impacted the global economy, right? Especially in Europe, right? I think that the inflation -- the ForEx fluctuations, et cetera, that means that the European demand has softened quite significantly in the IoT market. And as a result, some of the categories like vacuum [indiscernible] like our scooters have seen quite meaningful decline in terms of revenue. And as such, I think that's something that we've been very -- we've been very closely monitoring the situations over there. And obviously, as Xiang Wang mentioned in his opening remarks, we haven't seen that much significant changes in the third quarter. I think we need to -- as a result, I think we need to focus on some of these major events that are coming up, Black Friday and Christmas, et cetera, to clear out some of our inventory in the channels to prepare us for next year. And then next year, we also look forward to kind of doing more product, introducing more SKUs to the international market. [Foreign Language] Now let me translate the question in English. So I just wanted to ask, any directions or expectation on the expenses for EV and other new initiatives in the fourth quarter and the 2023, because the original expectation to spend around like RMB10 billion before the productions of EV. Is that still on track? Or it could be like something adjusted due to the macro situations? And what should we -- what should we expect on the next milestone for the EV status given now we know that the ADAS filter is actually ongoing? And then what should we expect in the coming few quarters time to time? Thank you. Thanks, Kyna. I think, first of all, the EV expenses will continue to ramp up, right, as we're getting closer to our launch, which we're still expecting in the first half of 2024. So as we -- as you can see in the past three quarters, our expenses have ramped up gradually, and that we expect that to continue in the Q3 and Q4 of this year. So I think that's the overall. I think -- so I think that's the first question. As we continue to invest in our headcount as well as our CapEx, I think that we expect expenses will continue to increase. Right now, our R&D team has already exceeded 1,800 people. So we continue to increase the headcount in our EV business. In terms of the development, right now, we haven't talked about the development in the public. So probably, we'll say that to be -- to still in stealth mode at this point. So we have not talked about some of these developments in public. So I hope you understand. I think we try to stay in the low profile now in EV side. I think the two things is, we continue to expect our first car to be mass produced in 2024 first half. And then second is our number of employees have exceeded 1,800 people. Yes, sorry. I think most of my questions were answered earlier, but still want to double check whether you'll be able to share any considerations regarding the manufacturing side of the EV business, whether it will be internal or external? Any color will be very helpful. Thank you. [Foreign Language] [Foreign Language] I mean, we don't have any particular update at this point. I think, obviously, we are considering different alternatives, and we are considering all the possible alternatives. So it's not -- it is still under consideration. [Foreign Language] In the third quarter, the gross profit margin of smartphones dropped a lot, and there is no significant improvement quarter-on-quarter. And what are the main factors? How about the trend of the first quarter? Thank you. I think there are a couple of factors, right? Number one is, obviously last year we're still enjoying a global supply constraint, right? As a result, I think that our smartphone shipment as well as our smartphone gross margin, we were enjoying pretty healthy growth as well as margins. I mean, this year the situation has obviously changed quite dramatically. Our -- so I think that the overall year-over-year, there's not -- there's a decline, I think, for that reason. . In terms of quarter-over-quarter, I think that there are -- if I look at the three regions, three major areas, right? Number one is our China business. If you look at the gross margin, it has gone to a pretty healthy level given that we have launched some of our premium products over in China. And as you said, there have not been as much promotional events in the third quarter as compared to the second quarter. That's the first one. Second area is India. So obviously, India third quarter is Diwali, right? As we're preparing for Diwali, as we are launching into Diwali, the gross margin in India in the third quarter tends to be much lower than the second quarter because of the -- as well as the fact that we are trying to clean up our inventory, some of the inventory in India. So as a result, I think quarter-over-quarter, we've seen a decline in terms of gross margin. Overseas market, I think it continues to remain healthy despite the fact that we've been trying to also make a big effort in terms of clearing our inventory over there. So the overseas market, excluding India, remains reasonably healthy. Again, there was some degradation compared to last year given that we've been trying to clean up our inventory as well as the fact that there's some degradation probably over the last quarter, again, because we are making a more enhanced effort to clean up our inventory. And as a result, I think overall you get the result of China better -- much better; India, a little bit worse; and then overseas kind of flat to a bit worse-ish, right, to get to that level of Q-over-Q comparison. Does that make sense? [Foreign Language] We see that revenue of smart -- large home appliance increased over 70% year-over-year, which is much higher than the 25% growth rate in the first half of the year. So could management just share the reason for this strong growth? And what is your long-term development strategy for this category? Thanks. Yes. I think -- thank you for the question. Actually, I think for the air conditioner, actually, we have a very good product, but also we thank to the weather. So actually, we ship a lot of air conditioners to the market because of the weather and a very good product. And others, we are also working very hard to make up -- find the best-selling features, refrigerator and washers. So they're also doing good as a start. Actually, the good progress for us is we -- our Mi Home actually offline channels, just sell a lot of big appliances, like product through our offline channels. This is also a very good signal so that we can sell not only smartphones, wearableâs but also bigger appliances in our offline channel. And also, we are using the platform -- the Internet platforms -- online platforms to combine online platforms with our offline stores has also helped to drive the revenue growth for the bigger appliances. One of the key things as Xiang Wang mentioned is obviously the weather in China was extremely hot in the third quarter. And as a result, our air conditioners, despite dropping -- volume dropping, shipment dropping Q-over-Q, but is still a massive increase from our last -- from our Q3 of last year because of the supply and surge in demand due to the weather. But at the same time, I think we are getting more competitive in our products. Last year was obviously -- we're still ramping up this business. And as a result, I think you've seen a significant increase in our growth. Also, I think that in terms of strategy, I think we've been much more focused on premium products this year. I think if you look at our strategy going forward, we'll continue to focus on the premium segment of these white goods products, which means that we're probably more focused on higher ASP products and as a result, it will also help our overall revenue as well as ASP. [Foreign Language] So I have a question about the smartphone market outlook in 2023. I was quite surprised that Xiang mentioned that this last quarter was the worst quarter in last nine years in the smartphone market. So what are the new future we required to attract this consumer to buy the new phones? And what are the opportunity and challenge for Xiaomi to achieve sustainable earnings growth in this market? Thank you. Thank you. Thank you for the question. Actually, it's very much related to the global market, the total size of the market. So in the last quarter, actually, the global market dropped almost 10%. So that's why itâs the lowest quarter in the past nine years. And also, in China, actually, the total market dropped 11%, even worse. But I think we will get back to the normal, but we still see a lot of uncertainties because of the global economy. Many, many factors to impact the total market, for example, the inflation and also the U.S. versus other currencies. So we very closely monitor the dynamic of the global trend. We are -- we remain confident because I think with our strategy we are going to do -- continue to invest in the mid and high tier products. But at the same time, we continue -- we will also continue to offer a lot of very, very competitive market for the global users from the entry level to meet [indiscernible] products. So we are prepared for the recovery. So we remain confident on that. So we just need to closely monitor the dynamic. Another area we see is the Q2 -- Q3, if you compare Q1, Q2, Q3, you can see our shipment steadily grow quarter-over-quarter, although the growth rate is not very high, but you see the resilience of our market. What would be the normal level of smartphone shipment globally based on your experience? So this year, it's a very abnormal level because of the macro environment? Yes. I think of the -- dropped 10%, right? If you want to get normal, you have to grow 10% from current level, and that's definitely -- get to the normal. So we still in the -- a lot of uncertainties. We don't know when we can see the recovery. But we're seeing that the -- I would say, the rate of decline is kind of stabilized. Yes, thanks for taking my question. My question is slightly similar to what [indiscernible] asked. So for China smartphone, if you look at the numbers this year, we're running at about 270 million, 280 million units. Overall installed base is 1.3 billion to 1.4 billion users. So roughly, we are running at something like a five year replacement cycle, which we have never really seen in the past. So could you talk a little bit about what is your expectation or what is a steady-state number for China smartphones? And when do you expect a bit of a recovery? Like what are you penciling in for 2023 for China smartphones? Do you expect some recovery next year? Or you think that it's still going to be relatively muted compared to 2022? Thank you. Well, I think -- Gokul, I think to answer your question, I think Xiang Wang actually answered a very similar question just now. We -- Yes, specific to China. Specific to China, because the replacement cycle in China, at least, numerically look extremely long, 4.5 to five years, which I think we have never been in any market. So I just wanted to understand your perspective on this. Well, look, I think that -- we think that this year -- we think that next year, right, will roughly be the same as this year, I think at best. I'm not sure that the 1.3 billion, 1.4 billion, I think that's something that we need to verify that. But obviously, from an overall macro perspective we expect that next year will probably stay at a similar level. One thing is obviously, the development of the secondhand market in China. People -- some people are buying secondhand phones in China. The second one is obviously the extending the life cycle of each phone. But I mean, I've seen some surveys recently that suggest that it's probably two to three years as opposed to four to five years. But I think against this macro environment, we continue to stay relatively conservative in terms of our overall -- in terms of estimated the overall size of the market for next year. So based on the third-party company, BCI Data, actually the life cycle for a smartphone right now in 2022 is 27 months compared to 22 months in 2017. So that's their data. Thank you. And now, we will now invite the last question. And the last question is come from [indiscernible] Securities. Please go ahead. [Foreign Language] Currently, our retail channel is facing pandemic challenges. If the pandemic is over next year, what will be the positive impact to the sales of premium phones and IoT products? Thank you. Yes, I think if we can solve the pandemic issue, so I think you will see a very positive effect, because right now, we have almost 2,000 stores staying closed. They closed because of the pandemic. And also, right now, based on the latest data, actually, half of our high-end smartphones are shipped from our offline channels. So right now, we have -- we maintained about 10,000 stores. So we'll see a very good potential to grow our smartphone if the pandemic is over by the year 2023. So can we propose it will be related -- highly related to the number of stores? Like currently, we have 10,000. And if we increase the number to like -- to 12,000, then can we expect something like 20%? Or how do we quantify the number? I think right now, our strategy or plan is to optimize the store, optimize the -- actually to improve the efficiency of each store, not just simply add the number of stores, so we will do optimization for our geographic coverage and the focus on increasing the efficiency of each store. Of course, compared to our competitors, we have much less stores in China, but we still believe we should -- there is a big room for us to improve our efficiency of each store. That's the focus for us right now.
EarningCall_1950	Great. Thanks everyone for joining us this morning. A pleasure to have with us the team from Stryker. We have CEO Kevin Lobo with us this morning. And from investor relations, I think in the back room we have Jason Beach and Lara Mordoh in the background. If I just look back at this year, Kevin this execution from Stryker itâs been phenomenal, that third quarter for close to 10% organic, really, really strong. Maybe just talk about what you're seeing on the macro front right now. How a procedure, body and civilization training, anything that we watch out for in the macro front? Yes, well, thanks. Certainly, you saw us we actually raised the range of our organic sales growth. So that tells you that we feel very confident about Q4, at least. And then going into next year, the order book is extremely strong for all of our capital equipment, be it large capital or small capital. And what we're seeing with elective procedures, hip and knee procedures in particular is a nice steady tailwind. So things picked up meaningfully in September, that's continued into October, November and I think that will continue throughout the rest of 2023 and even into 2024. We'll have this sort of modest tailwind. In the past when we've had these periods of strength with based on pent up demand, we've had these spikes, and then kind of a settling down back to normal market growth. I think because of the staffing challenges the hospitals have, they just can't spike the way they used to. But there'll be this gentle tailwind. And we feel great about our position, obviously, given our strength in robotics and cementless for knees. And then in in hips, obviously, the Insignia Stem is off to a great start. It's about 40% of the way through its launch, it takes time to do these full implant launches, as you know, but that combination with Mako, Mako hips now at 30% of the hips is pretty dramatic, because it flat line to 20% for four or five years. So we're pretty encouraged about the momentum that we have both in hips and knees, and we expect that to continue. Fantastic. And I think we have a couple of points you mentioned out there, Kevin. Just out, on the utilization front, Europe has been a little spotty, some of the peers card have developed markets, as softening because of stacking challenges. We haven't seen that more on your business, anything on utilization or China lock downs that's noteworthy here. Yes, the only areas, the only pockets of disruption that are like say meaningful are really in Asia Pacific. So obviously China, as you know, still in the zero COVID mind-set. And then Australia for us is a big market, and they're still having issues with cancellations of procedures and they haven't been able to work off their backlog. And then as you know, the U.K. has a giant backlog. They're actually doing pretty good volumes. So the volumes are fine, but they have a giant backlog that built through COVID and that's our country with the highest market share for us in Europe is the U.K. based on the Exeter hip stem and historic strength. But Europe for us was very strong. In Q3, we expect another strong Q4, we're not seeing much in the way of slowdowns. Again, they are gated by some challenges around staffing just like the U.S. is. But we see healthy volumes there. We saw healthy volumes in Q3, you saw our international growth outpaced U.S. growth. And that that has been happening, frankly, since 2019, for Stryker, so our globalization efforts are finally bearing good fruit. And that's in spite of China, of course, being very challenged. No, I like I say the volumes are getting better, progressively more stable there. There are cancellations that occur here and there. But it's not really a problem right now. I think it's the markets healthy, and the hospitals are learning to equip and to deal with it. You have the RSV of course you have difficult flu scenario COVID still around, but it's not nearly as disruptive as it was even two quarters ago. We're seeing we're seeing pretty good momentum and pretty sustained momentum. Understood. And since you brought up Insignia, Hip and now Mako, maybe let's start there, U.S. have 30% growth in here now in third quarter. It's really, really strong. And you mentioned now I was not aware of Mako is now 30%. What changed? Is there something different about Insignia, the implant itself that's driving this acceleration? No. So there's it's a combination. As we launched the Hip 4.0 Software, if you recall roughly a year ago, maybe a year, year and a half ago. So that software took time to sort of get that adopted and in updated throughout our Mako footprint. So that was the first step, the software was a very important change made the registration faster provided information on pelvic [ph] tilt. And then that combination with Insignia, which obviously was a necessary gap in our portfolio, for a fit for purpose direct anterior stem. Of course, you can use the athlete to for direct interior, meaning our surgeons do, but this collared stem was a gap in our portfolio. And so that combination has increased the demand for our products and the growth of our hip business. So it's not just one thing, it's the two together that are very, very powerful. And when we launched the Insignia stem, we launched it with compatibility with Mako. And so we're seeing the stem being adopted, both robotically as well as in manual procedures. But again, only 40% of the way through we did prioritize competitive accounts for the early parts of this launch. And we'll eventually be able to launch that through the rest of our systems. In some cases, some surgeons may choose to switch from Accolade to Insignia but for now we're very focused on competitive business. In some cases, they were using our cup but not our Stem. And that's obviously the first place you're going to go when you launch a new product is to convert that stem business when they're already Stryker loyal customers, maybe using our knees using our cups, but not using our stems because they wanted to call it Stem. And if I go back in time, Kevin, back in the day, I think when Mako was seeing this lease kind of trends, we were seeing 100, 200 basis points of shared gains. Is that something we can expect from the hip side as well? Well, we're excited. I don't know if it'll be to that degree, but we expect to gain share. I don't think there's any question we should be growing faster than the market. We had a period of time when we did that when we first launch Accolade I and II. And then we grew slightly below the market for a period of time because of that gap in our portfolio around direct interiors. So we will outpace the market will repeat to the same degree as knees, hard to say, I don't know that it's as compelling. The robotic, offering for hips. If you have a large deformity, it's fantastic, the larger the deformity. So we're seeing that in Asia Pacific where hip says, the hip volume is similar to knees, or even higher in higher number of hips than knees in Asia Pacific, but they also have larger deformities. And the larger the deformity, the more Mako makes it an obvious benefit for you. So I don't know if I give you those kind of numbers but definitely outpacing the market. And we've done that in Q3, and we will do that for the foreseeable future. Understood. And as we think about hips overall in the franchise here, is that market [Indiscernible] volumes and with a little rough shout rates, high singles, is that the right way to think about Hips? Understood. And then shifting gears underneath it again, really, really strong here. You know, how much of this is just actually working on increasing our install base, right make, maintenance, install base growth versus growth and persistent utilization. It's a bit of both to be honest with you. So, obviously through the pandemic, we continued to, to have large numbers of installations of Mako all the way through the pandemic. And that's bearing fruit for us. Obviously, with over half of our knees being done on Mako, and the utilizations increasing, itâs just hospitals are buying their third or fourth or fifth or sixth Mako, so that the demand is absolutely continues to be very, very strong. And they're very happy when they do the procedures. And so that and frankly, ASCs, were selling a lot of our Makos and ASCs. A higher percentage this year, then we have historically of our Makos are going into the surgery centers and high demand for that, which is great. So the surgeon doesn't want to have to switch when they moved from their hospital to performing their procedures in the surgery center, they want makeovers in the surgery center. So we expect this to continue. It's hasn't slowed down. The percent of procedures using Mako continues to climb. The percent of knees done cementless continues to climb as well. And as you know, we've have a long history many, many, many years with cementless and a giant head start versus the competitive set on cementless as they're just starting to launch their products or relaunch some of their products. And correct me if I'm wrong, but I think the last period was maybe a half release or now cementless, is that wherever we are? That's that's where we are. Roughly half and it continues to climb. Now it's not climbing as rapidly as Mako utilization, but it's continuing to grow, which we're very excited about. And the accounts that have Mako index above that. So they're well north of 50%. If you have a Mako you tend to do a lot more cementless than if you don't. So there's a synergy between robotics and the beautiful cut that you get from a robot with you can do one millimeter re-cuts with the robot. And so that type of precision combined with cementless, it's a it's a very, very beautiful combination. Understood. And then I know there were some installation delays in third quarter. Has that situation changed since the quarter, I know there was some supply chain sort of issues here that impacted the quarter? Yes, so let me so supply chain issues really didn't impact Mako. So our supply of Mako is fine, the supply chain. The supply chain issues really affected medical significantly, even though they had good organic growth of 13%, it would have been a lot higher. If we had more product and instruments, it affected those two divisions the most. It's affecting a little bit of everybody but it's most acute in medical. And then secondarily in instruments. Mako, we have good supply of the electronics and the components, the issue is just being able to get the Makoâs placed in the accounts and installed in the accounts and it's getting better. I would say fourth quarter is going to be certainly better than third quarter, it's going to be a good quarter for Mako, the demand is still strong. They're being pushed out for various reasons, delays of construction, staffing, availability, there's various reasons that they're getting pushed out a little bit. But we still feel very strong about our offering. Obviously, we have competitive offerings that they try side by side. So now that we have every major player with an offering, it has slowed the purchasing cycle a little bit as they assess the different technologies, but we love our chances. And now that you mentioned, all cooperative offerings are there in the market. Have you seen any change in win rates, in maker win rates when you go up to win business? And what do you think are we here in adoption, robotics in large joints? Yes, I'd say we're still in the early innings. So sort of less than we're not yet at the fifth inning, we're somewhere in the third and fourth inning probably is the way I describe it. I think robotics will become standard of care in orthopaedics, as it has become standard of care in other as you know, prostate or other procedures it has become standard of care. It will take time before that happens. But we're still in the early stages, and our win rate is just as high as it has been historically. So the reason I say that is the win rate is they're buying a new piece of capital, and they're going to assess different technologies. Right? That's that's if there are some accounts, let's say they're a loyal, competitive account, loyal surgeon who does not want to change implant. And so that's an account where we don't really have a fair chance. Right? So I'm not worried about that, that business. It's when they are open to technologies and we get to try our products side by side our win rate is very high and we frankly encourage our customers to try the products because they sometimes complain about the price that we're charging. And we say, well try them side by side, just do a side by side comparison. And we know we have the winning solution in the marketplace. That's helpful. I know there was some transition here from a selling perspective more from an offer and sell to a higher lease. Are we through that transition here? And should we start seeing those numbers being reflected from a growth perspective in 2023? Yes, there's a lot of dynamics at play here. So in terms of the shift towards more financing, all of our ASC deals are financed. Because you have you have partial physician ownership, they don't have the same capital budget as a hospital. So as our ASC penetration of Mako increases, the proportion that are in ASC is you're going to see financing increase. But that still provides tremendous value over the lifetime of the deal. And so we're really agnostic, as long as they're paying for, for the robot, how they pay for it, it's not so important to me, even though I might lose a little bit of other ortho revenue in the short term, it pays itself over the life of the deal. And they these deals tend to be five to seven year long. So they're long deals. And that's great for us because we lock up the volume over that long timeframe, fixed pricing over that entire timeframe, versus the annual three year grind that we have in the hospital environment. So we are very excited when we were able to do these ASC deals, and certainly our sports medicine business is the largest beneficiary of these deals, because every ASC does sports procedures. They may not do shoulder, they may not do foot and ankle, they may not do spine, but they always do sports. And then they always do large joints. Understood. And switching back to supply chain, the comments you made an order books and backlog etcetera. Where are we in the -- in the supply chain? And can you give us a sense on are things improving? Is the backlog being work? Or where are we on that front? Yes, we have not worked on our backlog. It's actually built up over the course of this year, because the orders keep coming in. And we just are not under we are unable to ship out of the backlog in medical and instruments. So we have a backlog that's well north of twice the normal size that we have. And it's just it's getting better. But at a rate that's clearly not as fast as I would like. It's slowly getting better, itâs the way I describe it. And we hope that we'll start to be able to eat off our backlog going into next year. But our sales teams are continuing to win deals. If you think about procurement, the ProCuity bed is doing exceptionally well, from an order standpoint. I just can't, I can't get enough parts to ship it. Same thing on the defibrillator side, where we're having tremendous order strength, just an inability to get the product that we need. Either it's the availability or the extortion pricing. Sometimes it's so obscene, that we're just like we're not going to buy, we're going to have to wait a little bit. We are taking it on the chin in the margin, as you see. And we're willing to sacrifice some margin to be able to provide the product to our customers, especially lifesaving products that's not something we want to sort of hold them hostage on. But we, that's getting better just at a slower rate. I wish I could tell you when we'll be out of the woods. I don't know yet. But we're not doing as much spot buying. So the spot buying that we're still doing some, but we peaked around June, June, July. And that's starting to come down which is which is great, because over six to nine months later, you're not going to see those high costs in our P&L as they bleed through inventory. So the spot buying reliance on spot buying is definitely getting better. We're still doing some I hope that we completely stop sometime in the first half of next year. That's my hope. But we're not there yet. Understood. And just one on this backlog Kevin, when you say it's twice as large as historical cycles, right? I think, historically, backlog has given you a Stryker three to six months of visibility doesn't mean you have now basically six months plus given the size of this backlog. Yes, I would say have visibility up to nine months easily because of the size of the backlog. And the backlog even it even includes the booms and lights in our industry division. So it's really across a lot of our portfolio. Its supply chain is not the reason for Mako. But Mako stays stable from a supply chain standpoint, but virtually most of the other capital parts of our business are challenged from a supply chain standpoint, different degrees of challenge. I think endoscopy is a little less than and medical by far is the most. So even though we had great growth it would have been incredible growth. If we could have been able to supply more products. So looking forward to being able to start to eat into that backlog. But as I say, the orders keep flowing in. And we're not getting any order cancellations. So all of our orders at Stryker have POs that are signed by hospitals, customers and sometimes we do require deposits, which are non-refundable. So there's, that tends to be a pretty strong commitment from a hospital. And we don't have any history of orders being cancelled in our business. And we're not seeing any signs of that so far. And the balance sheets are still pretty strong for hospitals, even though their margins are being squeezed. They can withstand tight margins or even slightly negative margins for a period of time. So as long as it doesn't, it isn't prolonged; I think we're going to be fine. We're largely a recession proof company, not no one, no one is completely recession proof. But, but we're largely recession proof and we don't have as our reliance on large capital is much less than it used to be as Stryker because of the diversification through our acquisitions over the past decade. Large capital is about 9% of our sales and, and even that large capital, Mako, for example, there's still strong demand for that. And that's one of the elements of our large caps. That's actually helped a lot commentary Kevin. Just on the CapEx, some of your peers have, it's been a mixed messaging to be honest. Some were cautious, other some cautious, but now we're sounding positive. What differentiates Stryker, is this is across the board share gains for Stryker that's driving these orders strength? Well, I think our portfolios are a little different. First of all, if you think about something like Mako, we're still in the early stages. If Mako was maybe more mature, in its robotics was more mature, then the notion of replacing or upgrading, you could probably delay that. There's still words earlier in our cycle. So that's let's put that Mako thing to the side. And the other areas, for sure, in medical, it's there's a lot of share gain. And there's a bit of I would call it pandemic induced demand. So something like defibrillator is there, you go through COVID. And you want to make sure you don't have you run out of things. You want to make sure you have the number of defibrillators you need. So we were getting a lot of new demand plus our sales force has done an exceptional job of creating new demand. So, having defibrillators in every single NYPD car, that wasn't the case a year or two ago. So they're winning big orders and new orders. And the demand is just extremely strong. So a little bit of the safety is focused on safety is a bit of a tailwind. For Stryker, we have a lot of products in our safety portfolio, whether it's defibrillator or whether it's smoke evacuation in the operating room. So that's provided a bit of a tailwind for us. And something like ProCuity that's pure share game, where we have a fantastic product that's winning in the marketplace. We are winning in accounts that we never sold beds in before. And so that will continue. It's year two of the launch and a bed launch, typically year or three or four is where it takes time to use our big sales that the sales cycle is longer for event than it is in other product categories. But pretty excited about that being able to win new business. That's the key we have -- on the ProCuity comments here. Is there any way any historical context here and what those share [Indiscernible] is that a five point shared gain or any way to quantify what it means? Well in unlike stretchers, in beds, weâre number two, right. And we have been closing and gaining share and closing on the number one player. So we have plenty of share to gain. It's not like power tools or some other categories where we have very, very high market shares. In this case, we look forward to one day becoming number one in this category, but we have plenty of room to gain share, not just in the MedSurg category, but also in the ICU area where we were kind of a distant number two and ICU part of the ProCuity launch, there's multiple models, and then the high end model of ProCuity does play very well in the ICU, where we've historically been a very small player. So we're pretty excited. There are there's a plenty of market share that we can go after, given that we are number two in that category. Well, we don't really sort of give out all these sort of micro numbers. But it's a big category, no question, not just in United States, but also globally. And we are also not a very strong player historically, in the international markets. And so this is this is very, very, very, very big market. I don't think I'm going to give out numbers unless Jason wants to jump in. Jason was in the hot seat out there for a second. But back on U.S. instruments, that's another one area which was impacted along with Mako. But some of these products that you call Kevin, like smoke evacuation, Steri-Shield, these seem to be like that secular trends that could last for a while. Yes, smoke evacuation for sure is going to be a giant market, right. You have nine states that are now mandating legislation for smoke evacuation. And already seven more states have it pending legislation to mandate smoke evacuation. So that's an enormous tailwind. And this is a business that's been growing very strong double digits for Stryker and will continue. And it's just market. It's just new market growth, which is pretty exciting. And even some of the European countries are starting to really look into this. It's I'm not saying they're mandating it everywhere yet. But it's starting to happen. So we're really excited about being well positioned in this space. Well, I mean, this is all new market growth, right. So it's this 20%, 30% growth in smoke evacuation. I see that continuing for the next five years. It's not a giant piece of our overall portfolio. But it's exciting. And, you'll see the instruments business, it'll start to become a much more meaningful part of instruments. And instruments, everyone thinks power tools, well, things like Steri-Shield, things like smoke evacuation are going to start to really provide a great tailwind for growth within instruments. And just since I mentioned power tools, just wanted to let you know, I don't know if we've announced this all publicly yet. But we have launched system nine in the U.S. just about a week or two ago. So it's in the early stages, obviously, but a little bit ahead of schedule. So we were initially planning for that to be a Q1 launch, it is now launched, it's been launched in Europe, and now launched in the United States. So that that's it's nice when the launch is a little bit ahead of schedule. And then the camera, we're slated for Q2, and then the LifePak defibrillator end of the year. So we're not going to see a lot of benefit in 2023 will launch in Q4 outside the United States. And then inside the United States, hopefully, the beginning of 2024. It's it's a little harder to predict because it's a PMA. And it goes through a different FDA process. So it's less predictable than the 510-K tech products. That's that's helpful commentary. On this System 9, is there some historical analogy, Kevin on what a new launch would look like and what the curve would look like? Well, certainly, we have high adoption, customers are used to it, they're used to moving from System 6 to 7 to 8 to 9. And typically, year two tends to be the largest spikes. You get, you get a nice lift in year one, and then a, an even bigger lift in year two, that's kind of typically how our, how our two launches have gone. Customers are able to switch pretty quickly. What's a little bit different this with this launch is, as you as you launch this product, you need to buy new batteries? So in the past, you've always had been able to use the old batteries. And so this is a little bit like Apple when you buy an Apple phone, and you have to get a new charger. And that's because we have a fantastic solution for batteries now, with incredibly important data for customers coming out of the batteries and preventative maintenance. And, and so it'll be there, there's value provided, but it does provide a little bit more of a lift, probably on the top line than we've had historically, because historically, you could buy the handsets, but still use the old batteries, this time, you're going to have to buy a new battery set as you buy the new hand pieces. But so we're excited about it. It's going to provide really good benefits to customers. They're used to it, then they know that changes are going to happen that it's going to be lighter, it's going to be better to use, it's now in terms of battery life, and, and even autoclaving better capabilities than we've had before. So it will be a very successful launch as they have been in the past instruments. This is their bread and butter. They know how to do this. That's a level of detail we don't you don't normally provide. I -- you know that power tools is the largest portion of instruments. And when instrument says their power to launch go back in history there that division typically will get double digit growth. They're normally either a high single digit or low double digit grower. When you have a launch here, we tend to like to, expect kind of that low double digit growth for the division. It carries -- it will carry the growth for the division. So that's a little bit of color I can give you. That's helpful context for sure. On the camera, again, I think the last time you launched a camera that's like we brew like -- I think if I'm not mistaken. Should we think about the current camera is as in line with historical launch cadence is anything different about the new camera. Now just think about it like another terrific new product, it'll be higher priced. Obviously, I'm excited, the faster we can switch on cameras, the better because the product, availability of chips is much better. And our margin profile, because right now we're, we're getting squeezed on our margins because of the high price of components. So our margin profile return to a healthier margin profile, the faster that we can switch customers, but the customers are going to get terrific benefits and amazing resolution, better lighting for some procedures, like sports and neuro where our prior camera was fabulous for general surgery, but not as fabulous in some of the other procedures. We've addressed those issues. So the customers are going to love this new camera, there's no question on that. And again they're used to the upgrade cycle and the ICG visualization is tremendous. I had a chance to see the cameras out in San Jose recently to see the camera, it looks awesome. So we're very, very excited. And then even the cabling of the -- the cameras makes it even more reliable than prior cabling. So this is just going to be a great solution. And as you say, the double digit growth kind of expectation, when you launch something, is something that we that we'll look forward to. Again, a year or two tends to be a little bit bigger than year one, but our sales teams know how to do this upgrade cycle. And we've been gaining share, frankly, in cameras, especially in Europe, where our endoscopy business tended to be more of a sports business. It's now fast becoming a very strong business. We're actually we were not number one in cameras. Five years ago, we're now number one, and really starting to pull away. So we're very excited about it. It'll be good. Because right now, right now we're paying high prices for the components. And we'll go back to paying more normal prices. So 1688 margins have been squeezed, based on the supply chain, the unfortunate reality of today's supply chain. When you launch something new, you you get sort of you get back to normal pricing for your input costs. And so that margin profile will improve. Now you won't see it in the price, but you'll see it in the gross margin. Understood. That's helpful. And then, one on the last one here and you didn't bring up LIFEPAK. But that's a newer segment. And I haven't really focused on it. How big is the product line and how should we think about the launch year? Yes, again, we don't disclose that the different categories, but I would tell you physio control. When we bought physio controls, a physio control LIFEPAK was the biggest piece of physio control. It also had the LUCAS product for automatic chest compression, and then the lower priced defibrillators, right. So like when I say LIFEPAK, I'm talking about the big LIFEPAK defibrillator that's used in the back of the ambulance, and a little bit in hospitals, not the ones that are on the walls, in gyms. And those are also defibrillator, but those are lower priced ones. And we do sometimes use the LIFEPAK brand on those, but the one I'm talking about is the big professional defibrillator that was the largest portion of physio control. Physio control and we bought it was about $500 million of revenue. And we have grown at double digit since we've owned it, which I know surprises people, because when we did the deal, it wasn't so popular. But it really fits beautifully within the Stryker portfolio. And so take the $500 million at double digit growth since we've owned it. LIFEPAK, that professional is the largest portion of that $500 million. So I'm not giving you specifics, but hopefully that helps a little bit. Now that's certainly helps. And I remember physio control, and certainly, I was one of those, I would call it skeptics, but certainly it seems outside your comfort zone but it's fascinating to see double digit growth in that. And I think the way to think about you know, when we do deals the technologies we'd like to solve customer problems. And we'd like to be providing technologies into our existing call points as much as possible. And we were already selling in the back of the ambulance. We were already selling in the in the ICUs and in the hospitals. And so it's just a new technology to the same call point and we merged our emergency sales force. So the sales force that was selling power cots, we merge that with the physio control sales force, and that's the largest portion of the sales are made in the emergency. So think about it, it was really an emergency product, an emergency medical technician product. And that's what Stryker does very well as our distribution sales force network is they know how to perform, and they know how to sell. And so we just brought new technologies to an existing call point. And maybe we didn't explain that as well, when we first did the deal. But that was the deal logic for us. And why we felt we were uniquely positioned to be able to grow this faster than just your average for each other med tech company, because we're already in the call point. That makes total sense. And in a segway nicely -- this recent acquisition of Vocera, what was the call point synergy here, Kevin. And again, there was some transition here some impact, you called out? You know, what changed? Yes, so that's one where we've known this company for a long time. And they run side by side with our medical sales force. So that same sales force that sells ProCuity as well as the warming products no hospital as surfaces in the hospital. So that sales force this is a business that's in that's been put together with medical run by Jessica Matheson, who's a phenomenal leader, our entire medical division is just loaded with just a great talent. But anyways, so they â we run alongside the Vocera team. Weâve now connected Vocera to our ProCuity bed and we are showing customers. So if you lower the bed rail for example, the batch of the nurse getâs an audible warning that a voice warning to the nurse telling them that the bed rail has been lowered at patient number â in this room, which is pretty amazing. And so weâve been able to do that pretty quickly. Weâve only did close the deal in earlier this year and to make that connected already with ProCuity is pretty exciting. But we see this as a really amazing platform that we are going to attach much more products to, not to expect the products, but even categories we donât play in, weâve been approached by one outside company to actually attach their product to Vocera which is really exciting happens sooner than I would have expected. But we want this to be an automated workflow, technology play for our customers. As I mentioned before, we like to solve customer problems. This takes cognitive load off nurses, this reduces errors, that's another safety play in the hospitals, the retention rates extremely strong. Yes, we had a little bit of a hiccup on sales. So we had flat sales growth versus the prior quarter because we really want to move more of the business to the cloud. Itâs better for us, itâs better for our customers, itâs better for cyber security. Itâs better for a lot of reasons. Long-term, so sometimes when we do deals, we take a little bit of a short term pain that benefits us longer-term as you saw with Mako, as youâve seen with some other deals. Weâre still going to grow the business overtime. It will â we still feel largely positive on the technology. But I think fourth quarter and first quarter will be flattish sales, and then weâll get back to the double-digit growth that we had. The order book still strong â moving to the cloud requires a â to go through more paces with the IT departments and hospitals. And if they insist on staying on premise, then of course we have an on-premise solution, weâll do that. But itâs easier to manage from an updating from an on-going maintenance, cost to serve and frankly benefits the customers; it helps them as well as us if we can do this migration to the cloud. And the cloud offering is a strong offering. What weâve said, is look, we are still selling Vocera. Weâre still, weâre not sales growth is negative, but it will be flattish rather than the 15% to 20% growth that what youâre accustomed to seeing and thatâs â itâs an intentional sort of effort on our part. No, look itâs been a challenging year. No thereâs no two ways about it. And the biggest part of the challenge frankly is that ischemic, itâs all been ischemic by the way. Hemorrhagic has been very steady. So the growth in hemorrhagic and you know weâre the market leader in hemorrhagic has been strong. Itâs the ischemic segment that has been surprising. So the market has slowed down. Canât put a finger exactly as to why the market has slowed down. We think it has to do with just the patient profiles or the people who passed away during COVID, that a lot of those patients potentially could have been candidates for stroke as they were with [Indiscernible] just looking at the demographics and patient profile. So that probably explains it, Iâm not sure, but thatâs our best guess. And then you have new competitor entrance as well, companies like [Indiscernible] who are coming into the market for mostly for aspiration, a little bit for achieving because FDA relaxed their requirement. So thatâs the other factor, but itâs secondary to the market. Itâs like where do this market go. And itâs a market where weâre still treating a fraction of patients and it should come back. Iâm bullish a long term on neurovascular, it was our fastest growing division from my 10 years as CEO for the entire time and itâs still growing extremely well outside the United States, both ischemic as well as hemorrhagic. So I'm still bullish long-term on neurovascular. But yes, it's been a more challenging year, a little bit of a puzzling year in some degree related to the market. I have a portable MRI company who thinks they might extend the stroke treatment window. Maybe I'll send the details, Jason. Post this. And if I wrote all of this in that, Kevin, how are we thinking about that festival [ph] 22? I mean, the comps matter. I know this year was really, really strong. Would that be a concern. Any other variables we should be thinking about for fiscal 2023? For 2023? Well, I let me give it in two ways. So on the top line, I feel bullish, I'm feeling we're going to continue to have a really good year next year. Our order book is very strong. We have this sort of gentle tailwind of procedural benefit and then we have new launch cycle of product. So I feel very bullish on the top line. As it relates to gross margin, I think youâre going to see stress in the first half of the year for sure, and it will get better in the second half of the year. Recall that the real impacts for us started more in Q2, so Q1 was not a terrible year for gross margin. So if you think about your comps, look a few ones are not going to be pretty from a gross margin standpoint we have all these high prices spot buyers that are going to believe through the P&L. It will get a little bit better in Q2 and then Q3, Q4 will be healthier. So kind of think of gross margin stepping up over the course of the year and weâre not out of the woods on the margin squeeze. Itâs going to be a bit more challenged again next year, but certainly a lot better here on the bottom line we mentioned, we expect to have stronger earnings growth. How do I define strong? Well stay tuned, weâll tell you at the end of January, what we mean by strong but certainly not looking to â it wonât be like 2019, but it will be a heck of a lot better than this year. Yes, look I think you saw the negative impact this year. I think $0.35, $0.40 something like that. Look, if rates it depends how rates move between now and January, but right now just looking at the way it is right now. Youâd probably have a similar kind of negative effect, more pronounced in the early part of the year. Again, so a little bit more bad news for the first half year-over-year when you think about the comp, but then obviously if the rates have been pretty negative the second half of the year. So the second half of the year would be more flattish from an impact next year versus this year. Understood. And then maybe the last few minutes here Kevin. If I had to sort of look at the Stryker spend here, itâs maybe but not remarkable. But as you think about those adjacencies for Stryker [Indiscernible] how is the deal funnel pipeline looking like is that, again, asset valuations being where they are? Is this a more conducive environment for M&A activity? Well, look, we like the fact that valuations have come down in potential targets. Now, whether those owners believe this is reality yet or not to be determined. So we, obviously this timing of this drop, and the fact that the assets haven't really traded too much has been good for us because we've had to pay down in debt that the $3 billion that we purchased for Vocera as well as $5 billion for Wright Medical. So we've been in debt paydown mode. Obviously we announced service endovascular, so that's, that's one deal we've announced hasn't closed yet. But we announced that kind of smallish deal. But, but we want to get back to doing deals. Once we get the debt levels to a better place, and we're on, we're on target right now, in terms of our debt pay down. So going into next year, certainly we'd like to get back to doing deals at some point next year, getting back towards a normal, more normal rhythm. And as you say, if the assets values stay in a lower mode, then certainly some assets that we liked, that were unaffordable, may be affordable. So we're hopeful we don't like the fact that the market evaluations have hurt us. But we but there it is good. From the standpoint of some of the companies, especially the ones that are not making money, high growth not making money, those were those who have been hit harder than the people who are high growth and profitable. So stay tuned. We certainly have our list of â our divisions are all still working on deal. They didnât slow down in their efforts, pursuing targets. There are tuck-ins at every business has a list of deals they want to do and then we already talked about thereâs a few adjacent spaces that we like that we continue to survey and hope that we can land the plane in the next year or two with one of those other adjacencies. I can hear that Jason now bringing out his Christmas shopping list in the background I think. In the last quick 30 seconds, I know you guys made strategic investments on the balance sheet and the inventory levels. Should we catch them or should we pass them down. When should we expect that to get back to that 80% level? I think weâre going to give our guidance in January obviously, but weâre pretty committed I think. Next year youâll see us back in that normal kind of cash flow range, free cash flow range. Fantastic. I think with that weâre at the end of time. Kevin, this is extremely helpful. Have a wonderful holiday season.
EarningCall_1951	Good day, ladies and gentlemen, and welcome to the Corteva Investor Relations Webcast Call. At this time, I'd like to turn the conference over to Kim Booth, Vice President of Investor Relations. Please go ahead. Hello, and thank you for joining today's call to discuss Corteva's agreement to acquire Stoller. Joining me today are Chuck Magro, Chief Executive Officer; and Dave Anderson, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will take questions. Robert King, Executive Vice President, Crop Protection Business Unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found on our Investor Relations website. Thanks, Kim. Thank you all for joining us today to discuss this milestone in Corteva's journey to become the leading global agricultural technology solutions company. Last week, we announced an agreement to acquire Stoller Group, one of the largest independent biologicals companies in the industry. This transaction significantly expands our biologicals business with Stoller's immediate scale and margin accretive earnings, driven by its operations and sales in more than 60 countries, and 2022 forecasted revenue of over $400 million. Working with Stoller throughout the negotiations, we have been very impressed with its people. They clearly share our passion and commitment to address challenges around food security and develop sustainable solutions that bring value and productivity to the farm. Coupled with our previously announced agreement to acquire Symborg, an expert in microbial technologies, this reinforces our commitment to providing farmers with biological tools that complement evolving farming practices and help them meet changing market expectations. Now before we get into the details of the acquisition, I'd like to make a few comments on both our strategic direction and the future of biologicals in agriculture. As many of you know, we recently reviewed our strategy, portfolio and footprint and the results of that effort of several important portfolio decisions, including the exit of commodity glyphosate products and the methanol business outside of Brazil as we tilt the CP portfolio to more unique, differentiated and sustainable products. This is an important strategic shift for Corteva, which aligns with our purpose core values and formula to create long-term value for both farmers and our shareholders. This effort, along with the full program we outlined at our Investor Day in September, intended to improve our EBITDA margins by 100 basis points to 150 basis points per year for the years 2023, '24 and '25. We have built a simple but straightforward plan to deliver approximately $4.4 billion in operating EBITDA at the midpoint by 2025, with margins in the 21% to 23% range. Today, we remain on track to do just that. The acquisitions of both Stoller and Symborg are another shift in our portfolio. Both companies are leaders in their space with strong revenue and earnings profiles, and will all support the 2025 financial framework. The biologicals market is expected to be the fastest-growing crop protection segment in the industry, representing 25% of the overall market by 2035. As the demand for sustainably produced food continues to grow and the regulatory environment becomes increasingly complex, we believe biologicals will represent another solution for growers to do more with less. This acquisition, combined with our leading innovation capabilities positioned Corteva as one of the largest players in this attractive market. Now back to Stoller with over a 50-year history, Stoller is a leader in the biological space and operates in several key markets with an expertise in plant health and nutrition. These markets serve the increasing demand for sustainable solutions, and we believe there is significant value and opportunity to integrate these solutions with our high-value seed treatment business. Last week, I spent time in Brazil and Argentina and met with many ag retailers, co-ops and large farm operators, and I will tell you, Stoller has a reputation of trust, performance and reliability. Their products are being used in very technical applications to help improve yield and plant health. Stoller brings immediate scale technical expertise and significant commercial presence in high-growth markets particularly Latin America. And we believe we can leverage these strengths to build an industry-leading biologicals business by investing in innovation, commercial expansion and operational excellence. Stoller's expertise in plant physiology and stress mitigation complements our crop protection and seed knowledge by allowing growers to get the most yield and quality from the natural resources utilized to grow their crops. We will be able to bring full agricultural technology solutions to farmers. Corteva brings an industry-leading innovation organization, a global manufacturing platform and a world-class genetic improvement. We have a proven track record of natural product discovery, including our Spinosyns franchise, which is set to exceed $1 billion in sales in 2023. In addition, Corteva brings market access to Europe and the United States from our leadership in core crop markets. We see this market as a tremendous opportunity for Corteva, but science and technology will be necessary to unlock the full potential. We are investing to accelerate our presence in this market. New legislation and regulations continue to limit the usage of traditional farm inputs, putting significant stress on the productivity and quality of crops. Biological solutions will continue to be relied on more and more as a complementary tool for the farmer to enhance efficacy as new active formulations and delivery methods come to the market. At the core of Corteva's biological strategy is our vision to deliver a pipeline of robust, innovative and sustainable solutions that complement our crop protection and seed products and deliver values to farmer. Our industry-leading end-to-end R&D capabilities from discovery through launch and beyond will be fully leveraged to differentiate our biological products from the current market standards. Once the respective transaction has closed, the complementary resources and capabilities of Corteva, Stoller and Symborg will come together to form a leading biologicals business to accelerate and expand with a rapidly growing market. Thanks, Chuck. I'd like to direct you to Slide #8 for a brief summary of the transaction. We've agreed to a purchase price of $1.2 billion, which includes working capital. It represents a 12x multiple based on Stoller's '22 expected EBITDA. And we anticipate the transaction will be accretive to our operating EBITDA and operating EPS in 2023. And we expect this to close in the first half of 2023 pending regulatory approvals. And as Chuck mentioned, Stoller has significant commercial presence in key growth markets specifically Latin America, and we believe we have the opportunity to expand their presence into other geographies over time. In addition, Stoller's market focus is strongly aligned with our core crops with about 50% of the sales in fruits and vegetables and about 40% in row crops. And combining Stoller's presence and know-how with our industry-leading innovation engine will support execution of our strategy to bring more differentiated, sustainable solutions to customers. As a reminder, if you look at Slide #9, this is the balanced capital allocation strategy that we laid out at our Investor Day in September. It's essentially a 50-50 split of investing for growth while also returning cash to shareholders. Importantly, we remain on target to repurchase $1 billion in shares this year and the announcements to acquire both Stoller and Symborg clearly demonstrate our commitment to invest for growth, while following a disciplined financial criteria. Looking now at Slide 10 and closing out the comments, just summarizing a few key takeaways. Stoller is one of the largest independent biologicals company in the industry with a strong commercial engine and financial profile coupled with our announced plan to acquire Symborg, the transaction will accelerate our growth in biologicals and enhance our industry-leading crop protection business. And finally, we believe this represents a significant value creation opportunity with accretive revenue and earnings growth as well as margin expansion. Thank you, Dave. Now let's move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. It's Vincent Andrews from Morgan Stanley. You didn't mention anything about synergies or cost synergies or even revenue synergies for that matter. So is there any quantification you can provide? And I'm also kind of wondering because you mentioned investment needed to build out Stoller in the U.S. and Europe, is it the case that whatever the synergies are, is going to get reinvested to provide that revenue opportunity? And could you maybe size that revenue opportunity over what period of time? Yes. Vincent, let me start, and then I'll have Robert King give his perspective. So look, this transaction is pretty interesting for us. We've been looking for some time at a way to enter the biologicals business with the appropriate platform, global reach that would complement our overall portfolio. And certainly, we found that with Stoller so the way we're thinking about it from a deal perspective, value accretion. As you know, the economics are quite attractive for us. There's a strong strategic fit but there's also a very nice financial return on this investment. So when we think about this transaction, we're very pleased with where we landed from an overall economics perspective. Now to your point and your question on synergies. There will be synergies with -- obviously, when you buy a company like this with things that you would normally see cost synergies on. So think about the entire back office, how we're going to integrate that over time. But I will say that, that was less of a driver. Really, what got us interested is the ability to be able to move our existing biologicals products and solutions through the Stoller platform, same with the Symborg products. We're going to move those through the Stoller platform. And then we're going to use some of Stoller's existing products, which are very exciting and be able to put those into our seed treatment applications from a plant health and nutrition perspective, that's the trend we're seeing a lot of strong demand for value creation when it comes to what we're putting on our corn and soybean seed treatment applications. So overall, that's the major driver is really growth in our product portfolio, growth when it comes to seed treatment and then international expansion. And Robert can talk to you a little bit about that. So go ahead, Robert. Yes. Thanks, Chuck. As you begin to look at this, as Chuck outlined there, this deal is really about building the foundation for us as we build this biologicals business. There is opportunity for us to do other things, and we will do those things. But the synergies, as Chuck talked about, is not the deal driver. This business is really all about -- Stoller is a rare opportunity. And so by being able to work with them to form this partnership and acquire the business, puts us in a leadership position in the biologicals business as we look forward. And this is going to be the foundation of what we build forward. Think of it as the backbone and the structure that we'll build upon. They bring a good commercial model that really centers around education and bringing integrated solutions to the farm. And this is something that we can combine together when you begin to think about -- it fits well with us. We can buy Corteva's innovation engine, Stoller's customer-facing solutions that is tailored to the acre and the on-farm solutions and then Symborgâs emerging pipeline, we believe this is a big step forward for us to execute on the strategy that we laid out back in September. Hey, Chuck, just a couple of things. Why is Stoller willing to sell now in their life cycle? Why is now the right time for them to sell? Yes. So David, good question. Ultimately, you should ask Stoller that, but our understanding is that after the Founder passed, this went into a [indiscernible]. So it was only a matter of time because I think that, that was ultimately the endgame was to monetize the work that had been done. I think from a Stoller perspective, they were looking at where can -- what's the best combination to continue the wonderful work that Jerry Stoller did and started 50 years ago, right? This company has got 50 years in the biologicals industry. And so we had a lot of -- we have a deep relationship with Stoller. We've known them for years. As I mentioned, we've got a great cultural fit. We have the same values and purpose when it comes to trying to bring technology solutions to farmers. So ultimately, I think if you were to ask me, I would say Corteva is a natural owner of this asset. It is really clear to me that we have overlapping purpose, we have an overlapping value. Our footprints are complementary. And the timing, I think it just happened to be when we were starting to ramp up our strategic thinking around biological. So good timing for us. And I think from their perspective, they were, for some time looking for what's the next level of opportunity for them. How can they continue the work that Jerry started all these years ago and who is the best company to do that with? And I think it was a good -- came to the right answer, I think, for both us and for Stoller. Yes. So they really prioritize LatAm because of the growth in the market. I think there's some uniqueness in those markets, especially in Brazil around what the crops need to drive ultimate yield. So they -- and they've got a lot of deep science, technology, commercial experience. A lot of their senior management team is from LatAm so I think that, that is certainly what we're seeing. And as I mentioned, I was in Argentina and Brazil last week, and I didn't meet a customer that hadn't worked intimately with the Stoller portfolio in the organization. So it was really great to see. I think the opportunity now for us is to continue to build in LatAm, which is a growth market but also invest. So Vincent asked this question, invest in bringing those products into the United States and into Europe, where we're strong. So if you look at Corteva's portfolio, we're very strong in LatAm, but we also have a lot of commercial and science muscle in the United States and in Europe. And we think given the challenges that we're seeing with traditional chemistry, there's going to be a lot of opportunity in those three primary markets. So we're really excited about integrating their product slate from Plant Health and Nutrition into our existing portfolio and using our regulatory and science knowledge in Europe and the U.S. to broaden the overall portfolio. Great. I'll set up an easy one this morning. So Chuck, obviously, you've had a distinct familiarity with the marketplace for quite some time. Can you just comment on the length of your familiarity with the specific asset, whether it's you, Sam, members of your Board in terms of how long they've really need Stoller as it's now become part of your portfolio? Yes. Yes, Chris. So look, the company is very well known at almost every level in our organization. So we've had discussions with them for years commercially strategically for as long as -- when I asked the question when I first joined, for a very, very long time. So there's not much that we hadn't talked to the Stoller organization about we've looked at collaboration from a science and R&D perspective. We've looked at commercial, we've looked at strategic opportunities together. I took the opportunity when I joined Corteva to really get to know the senior executives at the company. Robert has spent a significant amount of time with their senior team. So overall, it led us to the belief that acquiring this company using what they've built commercially and technically as our -- as the Corteva biologicals platform. When we're looking at these decisions, oftentimes we have to look at build versus buy. And so we also looked at a parallel path of what it would take Corteva to invest capital organically and to build the capability that we are acquiring with the Stoller acquisition. And in the end, it was a no-brainer that this was the best path forward to create value for farmers and for our shareholders. Got it. And just a super quick follow-up. Just given the geographic footprint, I mean it's obviously a great outlook in Latin America. Can you just very quickly touch on any differentiating factors in terms of your growth trajectory? It seems like you're utilizing some -- your platform versus theirs in certain areas. Any quick comments on that, especially to develop further scale in Europe and the U.S. would be of interest? Okay. Well, maybe what I can do is have Dave talk about the view of the financial journey for this. I recognize that the big unknown right now is when we'll get regulatory approval. But maybe Dave can give you a high-level thinking and then Robert can talk about it operationally. So Dave? Yes. So, Chris, good morning. So the outlook continues very favorable. Let me talk about maybe the market first. The outlook, as Chuck referenced, and Robert in his response referenced to an earlier question, the outlook for the market remains quite positive overall and specifically continued growth demand generation in LatAm but also Europe, which is still in kind of early stages in terms of the market development. But the opportunity there, we think is rather significant. It would be Europe, you could think about us being in line with the kind of that overall high single digits compound growth rate that we're anticipating for biologicals in total. So those are two very important markets. U.S. is significantly weighted to fruits and vegetables as opposed to any right now today for us in terms of opportunities, room applications, but that could emerge and could present itself over time. In terms of what we're looking at on the financials, as we've communicated, we'll be accretive, we believe, we're assuming the close on the transaction sometime in the call it the first quarter to early second quarter of the year, obviously, subject to regulatory approval. So accretive in terms of, obviously, revenues but also EBITDA and EPS for 2023. And over time, also accretive, Chris, very importantly to the numbers that we've laid out in terms of EBITDA margin, not in a significant way but there'll be a positive adder to the -- obviously, the Crop Protection business and then to the overall Corteva. So kind of it checks the box, we think on all dimensions. Hopefully, that's helpful. Yes. Just a couple of things to fill in the color around the numbers that Dave was talking about there. When you begin to look at growth opportunity, I think we first got to look at the biologicals market that is growing larger than the conventional crop protection market. We're in the high single digits is what we expect biologicals to be growing out through 2035. So significant growth in the market, not only globally, but then when you then narrow down to your specific question around our regions and what do we do in other places. Stoller has really fine-tuned their model within Latin America, specifically in Brazil. Tropical climate and all the variables that go with that. And so now it's an opportunity for us to really begin to work with their leadership team, the Symborg leadership team and our internal expertise to begin to say what does that look like in other markets. And I'd specifically call out Europe markets because that is an area that is facing challenges that none of the other regions do. When you begin to look at social pressures, regulatory pressures, et cetera, and specifically in the fruit and vegetables markets there, we believe that we can bring some customized solutions to them. But we're going to bring the leaders of these different businesses together with us to be able to form that out and shape that after we get to close and begin to work through the first several months. Good morning. Just two questions. I'm not sure, David, if you were commenting on when you said accretive and some of the numbers you've laid out, you've laid out a number of about -- guiding to about $4.4 billion EBITDA for 2025 for Corteva at the midpoint. Would this be adding to that number? How much would it add to it? And then my second question would be, on Slide 5, you talk about roughly 10% market growth for the different buckets of products that Stoller dealt with. Would Stoller deliver about that number? Or would they be above market growth, below market growth? Maybe you can do it by bucket, please? Sure. Yes, I mean I can take the first part of that one. So -- good morning, Joel. So in terms of the -- just to kind of clarify, good question to clarify, the Stoller and Symborg acquisitions will support the attainment of our '25 goals that we laid out, 2025 goals that we laid out for Investor Day. So there's nothing that we would say today that would change the complexion or the direction of the numbers that we've laid out in terms of what we're targeting to achieve. When I say accretive, what I'm saying is that they'll be incrementally positive to the sales growth rate to the dollars of EBITDA margin into the margin percent over time. But we've got to put this in the context of the size of these businesses relative to our overall crop protection and particularly relative to overall core tab. So the kind of the bottom line is they'll be supportive. The first part or the second part of your question, Chuck, do you want to take that one in terms of market growth? Sure. So Joel, look, what we would expect -- and this is just rough is because Stoller has such a strong presence in LatAm, we would expect that they'll be able to grow nicely with the market. The upside for us will be in Europe, we'll be able to probably grow above market once we get sort of everything aligned to go to market as well as in the U.S. So I think that's how you have to think about it is growth along the market in LatAm and then there's some upside in Europe and in the U.S., but that will take some time. So I want to make that clear. We have a little bit of work to do with regulatory with getting our organization ready in Europe and in the U.S. but it's a pretty attractive overall thought process when you can grow with market in LatAm, especially Brazil, when you know the growth rates that we've seen over the last three or four years, and we expect that to continue and then upside in Europe and the United States. Ladies and gentlemen, this was our last question. I will now turn the conference back to Kim Booth for any additional or closing remarks. Great. Thank you. And that concludes today's call. We thank you for joining and for your interest in Corteva. We hope you have a safe and wonderful day.
EarningCall_1952	So thanks for joining us. Looking forward to the conversation. I wanted to just start, just talking a little bit about the evolution of a recipe you guys recently and if anybody's not seen the slide deck from the Analyst Day, that they hosted a great Analyst Day event just a month or so ago, but one of the things the messages I felt coming out of the company was that the company started as a product company, right, and you're evolving into a much bigger platform company. So, maybe that at a high level, maybe you can help us appreciate what that means, what that evolution looks like as we think about the next five years or whatever it might be time arise and wise, on that platform journey for the company. Absolutely, Aaron. When we started, we are very focused on just data centers switchers and all of you largely have thought about us as this hardware box company. We sell boxes with some software on it and that software is fairly complex, right. It's about US and television the US and US as our operating system, added together at least 25 million lines of code today and is highly programmable and a very, very high quality stock. So when you look at IT operations and networking as part of IT operations, no longer just a silo. It has to be for integrated with everything that the teams are doing because provisioning and automation and security and business outcomes are all interrelated. So the way we've developed our stack, just now to a point where US is truly becoming a platform, as you can run it on any of the hardware we have, but in the end, you can program it. You can use it the way you want. Cloud vision, which is our automation stack, is not just about automating the network. Now we are helping enterprises automate the automation. There's more integration, not on our integration happening between cloud vision and all the other provision systems that exist. So getting into the deep glue of enterprise IT, that's where this is truly becoming a platform and it's easy for people to deploy it, they love the product already and I think there are long ways to go from here into many of the other used cases that all adjacent from right here. Yeah and that kind of you mentioned cloud vision, but the EOS thickness of what you're doing, everything wraps around a US, right, it's an unmodified Linux Kernel, how far can you take this? Maybe talk a little bit about some of the adjacencies that you're most excited about right now. I would say one thing about EOS that is maybe not always appreciated is how do we get the high quality? The architecture is already great, that it's foundational to everything that we build, but the way networking has worked in the industry for decades is you write a feature and then you throw it over the wall to a test team and they test it and they find some bugs. They find the bugs, develop being fixes the bugs. Then you test a little bit more. Then you ship the power to the customer. The way we think of this is how do you build a test framework where the product always works? So instead of having thousands of QA engineers, the size of the test team, the QA team at Arista today is eight megawatts. Our software development team writes all the test cases, fully automated infrastructure. We scale that to a point where we run about 150,000 test cases every day on every product, on every release we've ever shipped and that keeps on improving on its own because if there's a bug, you are likely to find it and then you add the test case and that bug will never escape again to our customer. Very different than what our competition has been doing for two or three decades. When you take that, that's the customer's love it and it just works and now look at other used cases. We constantly get pulled by our customers into other segments saying if I can run EOS and cloud vision, why can't you do campus networking for me, and that's really how we got into campus. Had they enough pulled from the customer interest in there, the same thing is not happening in a little bit in the routed band environment. Not just inside the building, but how do you leave the building and how do you go out? There's good opportunities there. We've already been doing some of the work and routing with our cloud customers and some of the service providers, we can apply this to enterprises as well and the same is true and applying other layers on top, for example, awake and NDR is a massive strength in our product portfolio. That's never going to be the primary revenue driver, but what we do with our network detection and response system is build a network where you can detect threads based on what's going through the network and that's just an extra layer of protection that today doesn't exist. The customers love that as well and that's integrated into the campus products from day one. So when you buy an Arista Campus switch, it has threat deduction already built in. You turn on a license and you get that feature and so on. So I think there's a lot to be done there and that's how we grow in the adjacencies too. Yeah -- but that's the kind of that. When you think about that competitively, the competitors are still fragmented across their product portfolio. So from a competitive perspective, the durability of what you're talking about, appears extremely strong, right. You don't see the competitive landscape being able to moderate or change their path forward very effectively to compete against that single operating system approach. I think that are right and we have some good competitors as well. So it's not as if this is an industry that is lax and there's no competition. It's very intense competition, but to a great extent, you're right, I think competition are always ahead of the execution. For us our execution is ahead and we want to keep it that way. So shift gears a little bit, so I don't think you'd ever get into a discussion with a financial analyst that wouldn't ask you about the demand environment and one of the things that we're seeing in networking is this this kind of question of networking spend seems to be so far fairly resilient and there's been some concern and choppiness overall macro dynamics and stuff like that. So, as you look at it, how are you currently seeing or how would you characterize the demand environment and certainly segwaying that into kind of the visibility that you see from the customers as you engage with them. Whenever this crisis, everyone has to prioritize and today there might be a macro and already happening, but in the end, companies cut back on free lunch and drinks and free laundry, not on networking because networking is essential. You cannot really make two of your business and run your workloads without enough bandwidth and the right connectivity and security and so on and between. We are already seeing that. Our customers are telling us this is critical to the infrastructure. In addition, I think networking is this one place where we glue everything together and if you become a bottleneck, it significantly reduces the efficiency of the entire infrastructure. Regarding spending so much on computer, storage or other things, you might as well spend a little bit more to have ample bandwidth in between the right connectivity, the right segmentation, so that you don't disrupt any of your business floors. So we think some of that. The same applies to cloud companies. The cloud companies might slowdown in how many racks. They're adding to their third data center depending on demand, but they do not slowdown in DCI build-out if they have to build a new region, they will do the DCI build out upfront, the data center interconnect to get to the right outcome for that region. So we are seeing healthy demand as a result of that for networking and specifically our products. Yeah and is -- how about that same kind of question succinctly to the enterprise piece of the business? That's one thing in the aristocracy. A lot of people ask you about the cloud and I'm certain that we'll talk more about the cloud, but the enterprise momentum that you've seen has been fairly remarkable. How do you characterize the enterprise demand environment that you're seeing right now. So look, for enterprise, there are two big pieces of our business. One is the enterprise data center. It continues to be healthy. We've seen good growth. We continue to see good growth over there. You have campus, which we say call it as an adjacency, but it's growing really well. It's starting to near roughly 10% of our annual revenue. So to at some point and with the near future, it may not be just an adjacency. It will become our core business. It's growing very, very well. Because of the way we're exposed to enterprises through large enterprises, which I think either feel the -- or macro event later in its cycle or certainly don't try to cut back as much or campus, we have such little penetration and good growth, but we won't feel the macro upfront. I think we'll be the last company to find out their macro event on the first one. That demand has been good and sales teams are opportunistic, right? They'll find the customer that is still willing to spend a lot of money and choose that as the best opportunity and what's happening in campus is there was this debate during COVID on do you upgrade or replace the campus or not because people are not coming back to the office, but now often so that even if you come back to the office one day a week, you still need that network to work because when you sit there, what are you going to do? You're going to read a conferencing all day with all of your colleagues all over the world. So you have to invest in that network and infrastructure and upgrade no matter what, which is what many enterprises are doing as well. How about -- I don't know if you guys ever talked about this, but I just want to ask a question anyway. How much of your business comes from, what you would characterize is kind of infrastructure refresh or replacements versus net new footprint build-ups, and obviously that applies probably to the cloud vertical in particular, but just curious how you think about that mix of business for rest of the day? This is something that's extremely hard to measure for us or for anyone else. So I'll put that out as a caution. Do not try to infer this into some mathematical model that immediately results and this is what the spin is going to be. It varies quite a bit by customer as well. But the way to think about the cloud even and this applies to the enterprise as well and the enterprise I think the math is fairly straightforward that data centers they try to refresh between five to seven years. If there is supply shortage, then become seven years. If there's no shortage, they try to do maybe five, six years, but at least that duration, they're not going to replace prior to that. Campus environment, people have spreaded their assets much longer. This is one analyst report we've seen where the average life of our campus, which that's deployed somewhere in the world today might be between 10 to 12 years. It's been sitting out there that long. Cloud, on the other hand, does repress a little bit faster and they need the efficiency too, but the way to think about the cloud is you have DCI. PCI, the data center interconnect and the backbone, the primary job is to send as much traffic as possible over longer distances. Long distances could be 100 kilometer or thousands of kilometers. So there's a newer technology that can get you from 100 to 400 gig. They deploy that quickly, but if they've just deployed 100 gig last year, they're not going to retrofit that immediately with 400 gig as an example. They're going to wait at least three, four years before they even have cycles to go back and revisit that site. But compute is a bit harder to understand. On average, cloud companies also would like to refresh their upgrades every five years or so. So on a simple map basis, one-fifth of the infrastructure should get upgrade every year, but what happens is whatever is high end of compute being sold today, two years from now will be sold as mid-range compute and five years from now, it will be sold as low end. A lot of reuse that happens and depending on the skew and the architecture and that without re-users succeeding or not, the models actually vary a lot. If on top of that, you put supply shortages and they haven't managed to work the way this was became wishful, thinking that I would also like to repress when there's such shortage. So as a result, some of these things got pushed out, but it does vary by customer, but that's the overall goal that they're trying to get to. Try to get the roughly every five, six years or so. So, shifting to the next topic, which is, and I think you alluded to that a little bit in the response here, but you have a tendency to talk probably a lot about 400 gig a little bit. I'm curious of Arista's position at 400 gig, I think you gave from market share metrics at the Analyst Day, but maybe help us appreciate you being able to maybe even take share at 400 gig cycle. Where do you think we're at in the 400 gig cycle, and then I'm definitely going to ask you about 800 gig using 1.6 after that. Right. So, a lot of exemptions in that question, I think I'm really glad you're asking this because this this perception that there's a 400 gig cycle, what if there is no 400 gig cycle? Customers -- the cloud are deploying 100 gig in high volume. We showed this at the Analyst Day as well that 100 gig actually continues for the next five to seven years. Doesn't really slow down much. On top of that, you have 400 hundred gig for certain used cases and those used cases today are data center interconnect or backbone, as well as AI. And the big BCI has been going on based on availability of 400 gig products and rear optics things like that. AI is somewhat newer relative to DCI, but still starting to happen. But customers will continue deploying more efficient 100 gig for a couple of years to come. So 400 gig really gets layered on top. It's not a cycle by itself. It's getting added on top and we've done phenomenally well, I would say in our execution with our key customers, our top cloud customers, some of the tear two cloud as well. And they are extremely happy with us. This whole notion that someone puts out an announcement that just because they finally made a product that somehow they take away 100% of their share, it's just not true. We talked about the 25 million lines of code. A lot of those lines of code were written based on requirements by the cloud companies. You take some of our competitors a decade to catch up to all of that and the automation and the APIs and the streaming telemetry and so on, but customers do want to be multi-vendor and often that got confused for someone else who is going to take away a lot of share. We've done very well in forensics so far. I think the market analyst reports have been published up to Q2 or Q3 results of this year and we have the number one market share in 400 gig ports globally in the OEM vendors. There are two cloud companies in the US that put their own white boxes. They continue to do so with their own 400 gig products. So if you exclude that, we are doing significantly better than our competition. But at the same time, but also maintaining a very strong share, the number one position almost 40% plus market share in 100 gig as and on top of that adding 400 hundred gigs. So I think this is good execution by the entire team at Arista, especially with the cloud vertical and some of the high end high tech. And you mentioned in a segue off that that answer the question will be, it always seems to come up this soft, the white box competition, right, and you've been fairly candid in the past about how you see it evolving and I think you just mentioned a little bit, the lines of code and how you work very tightly with these cloud customers is an important attribute when we think about that white box risk competitively. Just maybe for the audience shares, your thoughts on white box. How do you see that competitively if at all? This discussion has been on the table since our IPO. This was the number one risk flagged at our IPO that somehow will lose our business to white boxes. What you have to understand is why do these cloud companies use white boxes in the first place and for every company, the decisions they've made at the time they've made them have been different reasons. Google did this in 2005. Guess what? There wasn't any competition in the market at that point. They looked at one networking company and asked them, hey, can you give us a wave last network at the right price? They said, we can't, build it on their own. Amazon looked at this whole space in 2010. In fact, they talked to us at that time, but we were a very tiny start-up. So they didn't really think AWS could run on infrastructure from a start-up. They decide they'll build on their own and they have religion and vertical integration if you didn't know. So they didn't do like to build. Everything on their own or buy their own planes and ships and build their own switches when they can. I'm good for them, right. They can get the right results if they have the scale to put the investment into that. Come 2013, 2014, when Facebook or Mirror had to make that decision, they had a different viewpoint. They said, you know what, the market is a lot more competitive now. They talked to us. They said, let's partner and you saw the result of that in the first switch that came out around 2017, 2018, with Tomahawk One and that was the product that was a Tomahawk Three that was a product where essentially the two companies co-developed it together. Said, from build versus buy to build and buy, they been extremely happy the outcome because they are multi-sourced. They get all of their requirements met to their data centers specs. During the supply chain crisis, they were so thankful that we were there for them to get them the supply we could and the delivery is we could and so on. Look at Microsoft, our biggest customer and they've looked at other cloud companies too and realized, what if a risk is competitive and be able to supply all this gear to them and meet every used case from top of Rack, to Spine, to DCI, to Band, to Edge and so on, then why go to the pain of building something on our own only to not even sort of be as competitive. They be somewhat behind and it's not worthwhile. So all these companies have made a decision that in today's time, it makes sense to not build on their own, but buy from the industry because the industry is extremely competitive, but the ones who were building on their own, won't easily go back to buying from the industry because they're locked into their own stack with the right software development 10, 15 years, as I mentioned, 25 million lines of code in US. Guess why these cloud companies have millions of lines of code in their own stack as well. Who's going to port all of that work, which is why I think this entire industry remains largely status quo. There might be a plus minus 5% shift here and there and it's not going to be a massive shift in either direction I think it's a misconception for anyone to think there's a risk, if anything. I mentioned this on one of the earnings calls as well with at least one large cloud company for a few year's cases. Not everything, but for a few years cases is considering going from white boxes to buying from the industry. So if anything, it's actually going the other way, not more towards five boxes. You just answered the question I'm going to ask because I thought that why not the reverse? So you're seeing at least one hyperscale cloud customer. Maybe used cases because they have additional functionality that's required that doesn't exist in the internal stack. It will take them too long to build it. At the same time, they will go to the process and announce them converting and actually using products on the outside in cases places they've never used done so before. So they have to change their controller logic. The upstream not bond software that has to adapt to that as well. We'll see if that happens or not, but certainly I don't see any of these companies saying, you know what, we're done and will only build white boxes. I want to add one thing here, but absolutely, this this is -- we had lots of one-on-one's today. This was the number one topic today. This has been the number one topic for the last ten years. So, on white boxes, for some of our largest cloud customers today, we are working with them on their architectures from 2025 to 2027 and in places where we are deeply entrenched, we are working on how do you cool a 1,000 watt chip still keep it efficient for the customer? How do you get the signal integrity on a standard PCB technology for six, seven inches of traces at 100 gig and 200 gig, which are the next gen speeds. And our customers are amazed by the contribution that our teams are able to bring to the table. And as a result of that, they have no interest trying to do all of this by themselves and many of you don't see discussions and meetings that are happening that are three, five, seven years out. We are in these meetings daily, which is why we are so confident that these customer bases are not going to go back to white boxes. They actually need us to develop all of this and get there as quickly as possible. So I think this question is going to tie together a little bit. At the Analyst Day, your colleague Andy, one of the cofounders of the company, gave as always a very good presentation overview. Talked about 800 gig and 1.6 TBA, maybe even faster cycles and I'm going to dovetail this within the context of AI fabric networks, right? This idea that as we see more GPUs attached in servers, they're consuming just a massive amount more of bandwidth. So maybe connect the dots there. AI fabrics, the Arista opportunity and again, kind of help us appreciate how that's being driven by AI -- you know GPSs? Absolutely. Around 2012, 2014 timeframe, IP storage or Ethernet networks was a very big deal. You ought to do in a loss less way and 40 gig was just coming around to the market, but wasn't enough. The price got saturated very, very quickly with storage traffic. Then came 100 gig and everyone was so relaxed. Finally, there's enough network IO that I'm not congested and dropping traffic all day. The same thing is happening with AI today. At 100 gig speeds or even 400 gig speeds, the AI will just consume all the bandwidth and you're still congested in dropping and the reason this matters is the way AI works is if you have a 1,000 node cluster, the 1,000 GPUs, you're doing a transformation of a data set and if one of the nodes is still not done because it's waiting some packets to come back, all the other 999 nodes are wearing. Waiting for that transaction to complete. Facebook Meda published a paper on this and they showed that most of the GPUs for many of the AI benchmarks are waiting for network IO to complete for a third of their cycles. So 33% of GPUs are completely wasted. So if you gave them more bandwidth, they could do the same job in the same amount of time with only 66% of the GPUs or they can finish the entire job in 66% of their time, if you get them all the GPUs, but in any way you look at it, it can be a lot more efficient in a significant cost saving. So all these companies, the AI groups within these companies are coming to us and every other company saying, can I go faster? That's where the need for 800 gig comes up. Those are the companies sitting down with us and talking about 200 gig, which are not even coming to the market. Now they will come back two, three, four years from, the best case and they want to start designing that in now because they know that as soon as 1.60 comes the market, they can consume it. So immense opportunity. The AI clusters are already starting to get large and when they get large, you need a nice systematic network that works. You can monitor it. You can provision it. You can automate it. There's nothing better than the IP lease pine designs we've done so far, but now tuned towards AI workload and get the right monitoring and buffering and other mechanisms in there and as a result of that beginning pulled into a lot of these opportunities. I think AI high speed internet, IP will all converge with every generation of technology that comes out now. And I think at the Analyst Day, you guys talked about that representing $2 billion to $3 billion adjacent market opportunity for the company, arguably in the very early innings of seeing that opportunity materialize. I guess where I get confused a little bit sometimes is, how does what you're talking about, Ethernet side, where does InfiniVAN fit in or is it Ethernet versus InfiniVAN or both coincide in the context of AI fabric network buildup. So what's the delineation there if there is any? Well, there are certain workloads that are latency sensitive. and HPC environments if you look at the top 500 clusters, many of them use InfiniVAN for that reason. For the many workloads we are seeing in the large public cloud, that are not latency sensitive, but they need a loss left network. They are IO sensitive. You cannot drop the packet. If you give them a better Ethernet network, like we have with our AI Spine, which has very deep pocket buffers, give you a contrast, an average top of rack switch today has about 32 megabytes of packet memory and we're trying to get all the packets to without dropping with this congestion, you buffer them up into 32 megabits. The AI spine we have like the 7800 has eight gigabytes of packet memory per chip. That's a lot more packet memory than you would imagine, but you need that to have that completely lost this architecture. That's the kind of tradeoff that you're looking at. These products cost a little bit more, but in the end that you can see 1 GPUs, why not. So I think that's why we are headed towards these architectures in a way that nothing else can scale to right. You can build a 256 node implement cluster, but if someone says, can you build me a 32,000 node cluster and operate it like a cloud and just not have to bring down the whole cluster for maintenance or operations on you need to be back into the leaf spine type of architecture we've done a distributed mechanism essentially to really scale this up. So it's interesting. We've seen obviously Meta made some fairly public announcements around their AI RSC deployment, a big driver of their CapEx spend. We've seen recently NVIDIA announce the collaboration, multi-year collaboration talking about multi thousands of GPUs deployed in the AI projects. When we see those kind of things, do we think, hey, those are net-new adjacent network build-out said that obviously as part of that $2 billion to $3 billion TAM opportunity that's starting to materialize for Arista. Absolutely. I think as you see more AI move to the cloud, that's a great opportunity for Arista. That's in a nutshell, how you can measure it. The specifics are different business cluster, Meta has different types of architectures, different types of architectures and so on. Okay. In the two minutes we've got left, I want to ask you about software strategy, right. At the heart of it at the end of the day, Arista was founded on the software differentiation as far as the strategy and you've obviously talked about expanding in adjacencies around that core software. How does the company think about monetizing software? Is there an evolutionary path, where we start to think about Arista being a software-centric line-item subscription line-item, just curious as to how you guys thinking about that internally. Yeah. So the software line-item is actually quite significant already, but the way to think of software subscription or a SaaS model is that you're delivering value where the customer appreciates the subscription model, they can turn it on, turn it off, number of seats, number of features and so on at any given time and they're getting constant value every month, every quarter, every period with updates, then a subscription model is justified. In places like CloudVision, CloudVision is pretty much offered only as a subscription product to our customers. And it can run on-prem or in the cloud and when it runs on the cloud, you have significant value and how we manage CloudVision for our customers, so that's what they manage and run and automate their infrastructure. But it's all offer as a SaaS model. We have our licenses for routing and so on that are a line item they get added on, if you want to turn on more functionality on the switches, you're paying more for the product as well. What we don't like to do is, do an unnecessary conversion of hardware to subscription to show it like subscription. That's essentially a leasing model. There's no real value to the customer other than telling them, you need to pay more if you keep on using the product longer. That's not what they like, because they think they are buying something else perpetual. So I think that's somewhere in-between. They're not trying to do an artificial shift just to please Wall Street. I think it has to be organic in your business and then the results will show. You see this in CloudVision, you see this in Awake part of our business, you see this in our DANZ Monitoring Fabric. These are all subscription offerings. In the 45 seconds we do have left, I mean is there anything that I didn't ask you if there's any comments you might have on supply-chain dynamics or anything else that maybe we should have asked you or takeaway from this discussion? Look, supply will recover. We've said this in earnings calls as well probably towards the end of '23 is our best case guess, but let's see what happens to the whole world. Best opportunity in front of us is still growth. Cloud has long-term systematic growth. This is a sector that has ups and downs. It comes with the segment, we can't ignore it. But at the same time, when I ask the cloud customers what are their plan for the next 10 years, 15 years, 20 years, they just see growth. Enterprise, datacenter, we are still underpenetrated. Campus, we're just starting. It's tremendous growth opportunity and I get as excited as I was at the time of the IPO that we still see that growth and great opportunity to keep on taking share.
EarningCall_1953	Thank you, operator. Hello everyone and thank you for joining iQIYI's Third Quarter 2022 earnings conference call. The Company's results were released today and are available on the Company's Investor Relations website at ir.iqiyi.com. For the call today, our CEO Mr. Yu Gong will give a brief overview of the Company's business operations and highlights, followed by our CFO, Mr. Jun Wang, who will go through the financials. After the prepared remarks, the senior management team will join Mr. Gong and Jun in the Q&A session. Before we proceed, please note that the discussion today 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 are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statement except as required under applicable law. Hello, everyone. I'm very pleased to take this opportunity to report on our progress in the third quarter and share our views on the business. Through efforts in the first 3 quarters this year, iQIYI has completed an iconic turnaround, with business performance far exceeding the targets we set at the beginning of this year. There are 2 parts to this iconic turnaround: First, we have been growing the non-GAAP operating profit for 4 consecutive quarters, starting from Q4 last year. And for the first 3 quarters this year, we achieved nearly RMB 1.2 billion in non-GAAP operating profit, a sharp reversal from the operating loss of RMB 2.5 billion over the same period last year. This non-GAAP operating profit in Q3 alone exceeded RMB 500 million. Meanwhile, we generated positive operating cash flow for 2 consecutive quarters. Second, our market leadership remains unchallenged, and our market share in September actually hit historical high on the content side. According to Enlighten data, we remained #1 in terms of effective video views for our exclusive dramas, more than our competitors in the second and the third place combined. As for the mobile user metrics side, we were also #1 across core metrics, including user base, user engagement and user stickiness. Our subscriber base has grown from 95.6 million on June 30th to 106.2 million on September 30th, representing a net addition exceeding 10 million. How did we largely improve financial performance while gaining market share? The key is our long-term commitment to original content. We are glad to see that the original content has become a main contributor to our content supply. Among the drama, we launched in Q3, 65% were original content, a historic high. Meanwhile, the hit ratio of our original content improved significantly. As many of you know, iQIYI's popularity index is an influential indicator of content and popularity. Of the 6 blockbuster dramas with a popularity index of over 10,000 in our history, we launched 4 this year, and 2 in Q3, both are original titles. Hundreds of millions of users binge on our original content blockbusters, which drive up user base and a market share, and translate into the huge improvement in our financial results, from loss to major profitability in a single year. Behind these titles is our unique approach to content production and operation, which is our core competitive edge. As such, our iconic turnaround is very difficult for others to replicate, since it is based on our years of expertise and extensive library of original content. With original content as the key to our success, we will continue to execute our Calm Growth strategy. This means seeking value growth points while ensuring overall operating efficiency, enhancing content investment and marketing spending in an appropriate manner. With this strategy, we will continue to provide users with appealing content and superior services, and further drive the healthy developments of our business Membership services have always been our most important business segment. We are determined to roll out strategies and allocate resources to support the continuous growth of our membership business. The average daily number of total subscribers in Q3 was 101 million, a net gain of 2.7 million compared with Q2. September was strong in particular. The number of subscribers at the end of September surpassed 106 million, grew by over 10 million compared to June 30th and over 2.6 million compared to last September. We are happy to see that even after summer vacation ended, subscribers continued to grow in September for the first time in the past 4 years, and the average daily subscribers of this September also reached its highest level compared to all the past Septembers. Based on our latest subscriber numbers, the strong momentum continues. Such success was mainly driven by premium content, indicating that users still have strong appetite in paying for excellent story telling. Our core competitive edge lies around the ability of consistently supplying high quality content, discover and produce exceptional original content. Meanwhile, we strategically emphasized on bringing more privileges to members across wider content categories, which led to improved monetization ability of our subscriber base. One important point to note is that the original content has become a major contributor to our membership revenue. In Q3, the top 3 revenue contributors were all original dramas, namely: Love Between Fairy and Devil, Chasing the Undercurrent and The Heart of Genius. Our multi-season variety show, The Rap of China 2022 also adopted earlier access for subscribers, and ranked among the top 5 revenue contributors for the quarter. On a separate note, membership services revenue was slightly below our expectation in the third quarter. This was mainly driven by 3 factors: first, the temporary decline in consumer sentiment in May, June and July due to pandemic resurgence; second, the delay of certain key dramas; and third, the significant reduction of marketing spending as part of our business stress test. Starting from the second half of August, we successfully reversed the trend with a series of premium content releases including Love Between Fairy and Devil, Chasing the Undercurrent, and Thousand Years For You. Also the reasonable increase in marketing spending and recovery in consumer sentiment also contributed positively to strong growth in subscriber numbers. As a result, this September marked as the strongest September in our history. This means, the strong performance of our membership business was not fully reflected in our Q3 results. In Q3, our monthly ARM continued to grow annually, but had small dip sequentially. We offered promotional discounts during summer season to encourage more users to experience our service at a relatively lower price point. We believe the value created by these subscribers will be reflected in the future. Moving on to content strategy and performance. In the past 3 quarters, we achieved significant results in improving both quality and efficiency. Even though we launched fewer titles than last year, we were able to generate more premium works. The performance of our dramas was outstanding in Q3, especially for original dramas, as we had big improvement in areas such as content supply, revenue contribution, success rate, and word of mouth. One of the best ways to understand the success of our content is to understand our commitment to the original content strategy that we set long ago. So, our performance during the quarter was no accident, and is replicable. Our investments in original content over the past years have been productive and bearing fruits. I'd like to share some data: among major dramas launched in Q3, original dramas accounted for 65%, the highest in our history. Meanwhile, the success rate for original content have also increased. Two dramas broke the popularity index of 10,000 in Q3, with 2 more dramas breaking 9,000 score. All 4 were original content. This breakthrough in original content was driven by the unique and effective content methodology we established, which runs through processes from content creation and production to post-broadcasting, powered by a strong team of professionals and supported by a mature and highly efficient operating mechanism First, we focused on improving the content creation and production qualities of our in-house studios. We also have sophisticated supporting teams with highly experienced professionals across different functions backing these studios through the entire process. Second, we have established a mature and highly efficient mechanism running through the whole process, enabling highly efficient decision-making, strict quality controls and optimal content scheduling. The key to this mechanism is a profound understanding of the content industry as a whole, based on over a decade of experiences in the industry. This forms a high barrier that is had to breakthrough in the short term. The breakthroughs in original content have improved the overall quality and influence of our content, giving us absolute advantages as the industry leader. In terms of market share, in September, effective views of our dramas ranked #1, with the greatest lead in our history. Effective views of our exclusive dramas took an absolute lead, more than the sum of competitors in the second and third positions, according to Enlighten. In terms of popularity, we launched the iQIYI popularity index back in 2018, and since then, only 6 titles received a score above 10,000; and 22 titles received score above 9,000. In other words, titles with a popularity index of over 10,000 are considered potential franchise titles, and over 9,000 are household blockbusters. Among the top 6 popular dramas, 4 were released this year, and 2 in Q3. For the first 9 months, a total of 7 dramas broke 9,000. Our content has also received great word of mouth. Users actively discuss, rate and recommend our content on social platforms. On the third-party platform douban.com, 9 of our dramas launched in Q3 received a rating of over 7, the best quarterly performance in our history. The performance was driven by our carefully refined content scheduling based on our content reserve and user demand. For the 2 dramas breaking a popularity index of 10,000 in Q3, Love Between Fairy and Devil tapped into the demand of young generation audience during the summer vacation, it's creative story telling set it apart from other titles in the same genre. Chasing the Undercurrent, although the storyline is oriented to relatively matured users, but well-liked by a wide range of age groups, and with high viewing completion rate. In addition to dramas, we maintained our output of premium content in other categories. For variety shows, the effective views of the multi-season show The Rap of China 2022 was leading the online variety show market in Q3. The second season of The Super Sketch Show has attracted the largest advertising budget among the variety shows we launched this year. In addition, our original animations recorded solid growth in both the number of titles launched and revenues. During the quarter, our IP franchise format also achieved great performance. We launched both the original drama and animation based on the same IP, The Love Between Fairy and Devil, and saw great synergies. Membership revenue of this original animation stayed as #2 on the animation channel during the entire summer vacation, just behind the Japanese animation One Piece. Entering into Q4, we will maintain the strong momentum of Q3 by launching a number of highly-anticipated dramas, including New Life Begins, Wild Bloom featuring top leading actress Zhao Liying, and Unchained Love featured the leading actor from our blockbuster drama Love between Fairy and Devil this summer. We continued to explore new content themes that cater to diversified user demand, such as the recently launched drama series selections targeting female audience. Please also anticipate a good selection of variety shows, children's animations and movies slated for release. Moving on to advertising. Similar to our peers, we fought against macro headwinds and increased advertising revenue by 4% sequentially. For brand advertising, the revenue recovered sequentially and the year-over-year decline narrowed compared with last quarter, reflecting the attractions of hit dramas and variety shows in the peak summer vacation season. We saw sequential recovery in the number of brand ad clients in Q3, as well as recovery of ad demand for international brand advertisers. For performance ads, we saw revenue increases both annually and sequentially. Heading into Q4 and next year, we face the same challenges as our peers, as Q4 is a traditional off season for advertising, and macro recovery takes time to be reflected in advertising budgets. Currently, we expect continuous sequential recovery in advertising business for Q4. For next year, if macro economy recovers and with absence of pandemic resurgence, we shall anticipate to see year-over-year recovery also. Technical innovation has always been part of our core values. We are committed to bringing the best entertainment experience to every user. At the same time, we hope to promote the industrialization of long-form videos to drive the robust development of the Chinese video industry. This ambition is reflected in our daily work as our engineering team focuses on every product detail. A recent example of our approach to product improvement was the optimization of the bullet chat quality and distribution algorithm, which improved the user interaction and stickiness. Average daily number of users that activated the bullet chat feature increased year-over-year in Q3, and the daily average number of bullet chat interaction increased by 50% year-over-year. We also continue to utilize in-house developed tools to improve content production efficiency. The iQIYI video production management system acts as an efficient tool to help production teams. By the end of Q3, the system have been applied to 5 iQIYI original dramas. In addition to improving efficiency and production quality, the system also saves costs and effectively controls budgets. For overseas business, in Q3, we saw healthy growth in membership revenue both annually and sequentially, reflecting the popularity of our premium content and improved operating capability. Premium content launched during the quarter had solid results both in terms of monetization and word of mouth. Hit Chinese dramas on our domestic main app also performed very well overseas, further extending the IP value on a larger scale. Top dramas under our Sweet On Theater brand, including The Love Between Fairy and Devil and Thousand Years For You, had sound performance. Premium content also drove improvements in monetization. For example, advertisers recognized the value of our theater model, and we attracted partners such as Lazada and Realme as title sponsors for Sweet On theater in Thailand. In the first 3 quarters of 2022, we again demonstrated the powerful execution abilities, professionalism, and strong unity of everyone within iQIYI. For 3 consecutive quarters, we outperformed by continuously improving fundamentals, demonstrating our value to everyone. We achieved growth in market share while significantly improving our financial performance. As content is our core competency, we are confident that we will be able to deliver blockbusters on a continuing basis as we have worked out replicable methodologies for both original content production and operations. These methodologies lay a solid foundation for healthy growth. We believe that we have achieved an iconic turnaround in the context of an extremely challenging macro environment this year, and we will continue to deliver values both to users who love our content and stakeholders who are as confident as we are in the prospects of long-form video. Now, I will hand over to Wang Jun for financial details. Thanks, Mr. Gong, and hello, everyone. In Q3, we booked RMB 7.5 billion in total revenues, up 12% sequentially. Our non-GAAP operating profit reached RMB 524 million, increased 53% sequentially. Meanwhile, we have been generating positive operating cash flow for 2 consecutive quarters, and recorded nearly 200 million operating cash flow in the third quarter. These encouraging results demonstrated the resilience of our business under extremely challenging macro environment and the pandemic resurgence. Within the revenue lines, we recorded membership services revenue of RMB 4.2 billion. As Mr. Gong mentioned in his opening remarks, the performance of our membership business was back-loaded and the current Q3 result is not a full reflection of the strong momentum we observed. During the quarter, the number of subscribing members grew from 95.6 million as of June 30, 2022 to 106.2 million as of September 30, 2022, representing a net addition of over 10 million during the quarter. Now move on to the cost and expenses. The third quarter cost of revenues was RMB 5.7 billion, representing a cost saving of RMB 1.3 billion compared with the same period last year, or down 19% annually. Content cost, a significant component of cost of revenues, decreased 18% annually, and up 12% sequentially. The sequential increase is the result of operational initiatives under our calm growth strategy. We launched more hits during the quarter, bringing more subscribers, and generating more profits, which forms a virtuous cycle. Our gross profit margin, which is a direct metric to reflect the ROI of our content business, consistently expanded in the past 4 quarters and reached historical high of 24% in Q3, compared with 7% in the same period last year. Meanwhile, with the continuous optimization of our business operations, our total operating expenses decreased by 470 million year over year. The expanded gross margin and disciplined operating expenses combined contributed to our non-GAAP profit expansion. For Q3, non-GAAP operating profit was RMB 524 million, compared with the non-GAAP operating loss of RMB 1.1 billion for the same period last year, and it's up 53% quarter-over-quarter. At the end of the third quarter, the company had cash, cash equivalents, restricted cash and short-term investments of RMB 5.0 billion, compared with RMB 4.9 billion in the previous quarter. Our operating cash inflow reached a 196 million during the quarter. Going forward, we will continue to execute the Calm Growth strategy and our commitment to achieve healthy business growth remains unchanged. We are confident in our ability to generate value for our stakeholders in the long run. For detailed financial data, please refer to our press release on our IR website. My question is about the membership business. Can management talks about the Q3 overall membership business performance as well as the growth driver. Is it coming more from the number of subs or from the ARM side and also what are the key drivers going forward? The slight decline in membership revenue was due to 3 factors mainly. First, the temporary decline in consumer sentiment in May, June and July due to the pandemic resurgence in the first half of the year. Second, the delay of certain key dramas during June and July. And third, the significant reduction of marketing spending as part of our business stress test. And starting from the second half of August, we successfully reversed the trend with a series of premium content releases, including Love Between Fairy and Devil, Chasing the Undercurrent and Thousand Years For You. And also, the reasonable increase in marketing spending and recovery in consumer sentiment also contributed positively to strong and continuous growth in subscriber numbers. As such, our membership services revenue grew from a relatively lower base of the sub number in July. The strong subscriber number growth started to pick up in August. As a result, the performance of our membership business was back loaded and the current Q3 result is not a full reflection of the strong momentum we observed. In Q3, there are 2 months left for the summer vacation. And among our user base, there are a large number of students in this group so that they are the potential users for us. So therefore, we offered promotional discounts during the summer season to encourage more users to expand our services at a relatively lower price point. That's why it caused some of the fluctuations during the third quarter. And for our entire membership business going forward, our main goal is to grow the membership services revenue while achieving healthy performance on the subscriber numbers and ARM. And in terms of growing the sub numbers in the future, it comes from 2 aspects. One is the continuous investment in content, namely especially for the head of premium content. And also the second point is continued investment in marketing spending. For the ARM growth, it comes from 2 reasons. One is the lowering of the discount in the past years and also that increase in the listing price of our member business. Thank you. Congrats on the strong results. My question is related to the video content. So IT has successfully released the numbers of heat drama this quarter this year that received very good feedback. So can management share with us how will IT ensure in the future that you will also have a very high hit ratio for your drama? We launched the ITE popularity index back in 2018. And since then, only 6 titles received a score above 10,000, 4 were released this year and 2 in Q3. And this perfectly demonstrates that there are a long-term commitment to original content. The original content has become one of the main contributors to our blockbuster content. The success was mainly contributed from 3 factors. First was mainly attributable to the powerful production team that we have built through our in-house studios, which contains highly experienced professionals with various creative styles. We also have very sophisticated supporting teams across different functions to support these studios through the entire process, which runs through processes from creative ideas development, content production, broadcasting and marketing. At the script level, we rely on the professional teams and get them relative flexibility in screening the creative ideas, emphasize on polishing scripts, which build a solid foundation for the content creation process. At the production level, once we have the solid content creation foundation in place, we will follow by rigorous process before projects entering into the billing process. In addition, we will collaborate with highly professional, creative and reliable partners in the production process, select the most suitable actors based on our comprehensive forecasting mechanism. All of the above will safeguard the continuous creativeness and the high quality of our original production. The second factor was contributed by we have established a mature and highly efficient mechanism running through the entire process from developing an idea into original drama series to broadcasting and marketing it. This mechanism enables highly efficient decision-making, strict quality controls and optimal content scheduling based on user preferences. And going forward, we will continue to seek an effective balance between embracing the diversity of content creativeness and efficiency in the production process. The third effect is that our intelligence reduction system is getting more sophisticated, which also helps in terms of increasing the possibilities of creating blockbuster content and improving efficiency. My question is mainly regarding cash flow. I noted that we have a meaningful improvement in free cash flow and operating cash flow with a positive free cash flow this quarter. So can you give us more color on the driver behind it and how should we look at the trend going forward? So I think that to answer the second part of the question first, yes, we are very confident that this trend could continue in the future. And behind that, we do see if we can review the entire process of the turnaround, we will say that the starting point of the turnaround is a very disciplined expense management. It's a very ROI-focused talent strategy, and we have continued to do that throughout the 3 quarters. But on top of that, in the third quarter, we do see some new catalysts coming in and these UCAs including a virtuous cycle, which starts with our investment in the content. Then our investment content generate more hits, more hit titles and give users more value proposition, which in turn attracted more members than creating possibility for generating derivative revenues. Then on top of that we will cover into the profit then in turn, bring us more free cash flow. And we will certainly continue to do that, and we do believe this success is reputable, which support the trend -- which supports the positive free cash flow trend. So that's point number one. So on top of that, we also like to comment that because we have been very much focused on original content, as you guys have been asking questions around that. Now original content means IP value and IP value can generate derivative revenues with higher margin and this is consistent with our experience and observation of the media conglomerates globally. So this if not -- this creates the whole new opportunities for the company in the future. Congratulations on the really solid result. My question is on the content regulation overall environment for the long-form video. Could management share some color on this? About 2021, is last year in the 2021, there are different authorities that roll out different policies that kind of tightened the photograph regulatory environment for the online video space. But as we entered into 2022, until now the regulatory environment seems to be relatively stable, and we haven't seen major changes in such process. The main current focus for us is to increase quality and optimize content quantity which not only applies to us and our peers, and we are glad to see that coincidently also applies to the various government authorities and then they would roll out policies that's actually positive to such process. After the three quarters of time for ITE, we now figure out a perfect balance between the quantity that we show for content and also the amount of marketing spending into this market to promote our content. So going forward, based on the success of our past 3 quarters and under the comp growth strategy, we believe that we can have healthy and sustainable growth for our business going forward. Thank you, everyone, for joining our call today. Please do not hesitate to contact the IR team for the management if you have further questions, and see you next time. Thank you. Bye, bye.
EarningCall_1954	Good morning. And welcome to the Powell Industries Fiscal Fourth Quarter 2022 Results Conference Call. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Please go ahead, sir. Thank you, and good morning, everyone. Thank you for joining us for Powell Industries Conference Call today to review Fiscal Year 2022 fourth quarter and full year results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until December 13. The information on how to access the replay was provided in yesterday's earnings release. Please note that information reported on this call speaks only as of today, December 6, 2022, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and actual future results may differ materially from those projected in these forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international, political and economic risks, availability and price of raw materials and execution of business strategies. For more information, please refer to the company's filings with the Securities and Exchange Commission. Thank you, Ryan. And good morning, everyone. Thank you for joining us today to review Powellâs fiscal 2022 fourth quarter and full year results. Weâll make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Powell delivered a very strong fourth quarter to close out our fiscal year. Our deliberate and strategic efforts are yielding tangible results that are creating a more resilient, diversified and less cyclical future Powell that will lead to stronger growth across the economic cycle. I'm also incredibly proud of how our team has performed since the onset of the pandemic and its adverse effects on our business. After a challenging period of lower industrial activity throughout fiscal 2021 and into early fiscal 2022, we now enter our fiscal 2023 with the highest backlog in Powellâs history. And across all the business, we are on an extremely strong financial footing while macro-economic factors such as elevated costs and the global supply chain certainly remain headwinds, we are in a very solid position to continue to execute our strategic initiatives and deliver improved profitability. Total revenue in the fourth quarter was $163 million, which was 26% above the prior year and higher by 20% sequentially. By market sector revenue from our oil and gas markets totaled $60 million and grew 24% compared to the prior year, while our utility revenue grew to 42% to over $40 million. Traction saw a modest decline of $3 million to just under $14 million. And petrochemical revenue fell 37% to $15 million. Revenue for the full year increased 13% to $533 million led by 15% growth in oil and gas, 13% growth in petrochemical, 10% utility, partially offset by a 24% decline in traction revenue for the year. I'd like to take a moment to note that beginning this quarter, we are breaking out in a new market sector which we are calling commercial and other industrial. The sector consists mainly of markets where Powell has not historically had a strong focus. It includes applications for our products and datacenters, automation and cryptocurrency mining among others. For the full year, our revenue in this market sector more than doubled to over $56 million, which notably was higher than our revenue from our traction market. Order activity in the quarter was strong as we secured $259 million in new bookings. That figure is the highest quarterly totals since our second quarter of fiscal 2020 and is the sixth consecutive quarter of rising new gross order activity. Our book to bill ratio in the quarter of 1.6x was equally strong, and was the fourth straight quarter with a book to bill over one. As we highlighted on prior calls activity in our core oil and gas markets has lagged the overall recovery of the broader market activity. I am pleased to share that Powell was awarded a large industrial order to support the production of liquefied natural gas which we located on the US Gulf Coast. This significant award in our fourth quarter was complemented by continued robust activity, small to mid-sized project orders that spanned across all of our end markets. For the full year, new orders totaled $719 million, an increase of 78% compared to fiscal 2021. Our team's delivered a gross margin in the quarter of 20.6%. This was a sequential improvement of 650 basis points and 320 basis points higher than the prior year. We did benefit from a non-recurring event driven by a positive recovery of project related costs on a municipal project from a prior year, which contributed 130 basis points to the fiscal fourth quarter. After adjusting for that one-time benefit, strong project execution. favorable services mix and positive close outs helped to deliver the underlying margin growth. Michael will explain these effects in greater detail shortly. Moving to the bottom line, we reported net income of $8.7 million in the quarter or $0.73 per share, compared to $3.3 million, or $0.28 per share in the prior year. The net income line benefited from the aforementioned cost recovery, which contributed $2 million, or $0.17 per diluted share. Full year net income was $13.7 million, or $1.15 per diluted share. During fiscal 2022, the company had three non-recurring events that when combined, contributed $0.80 er diluted share. Lastly, we ended the year with a total backlog of $592 million. This is the highest backlog in Powellâs history and represents sequential growth of 18%. And is 43% higher than the end of fiscal 2021. Our project backlog is well balanced across the markets we serve with the utility, commercial and other industrial sectors comprising a growing share of the backlog. Overall, from a commercial standpoint, the fourth quarter was another step in the right direction and marked the continued return of our key end markets. Turning to our operational performance, we continue working diligently to mitigate the effects of a higher cost environment. While the prices for key commodities such as copper and steel have improved compared to previous levels, the price and availability of key engineered components remain material headwinds. Our teams are working hard to identify and address these price increases early enough to factor them into our bidding process and ensure they do not create significant cost overruns on current and future project activity. We continue to have an extremely strong focus on productivity and strong project closeout to protect our margins. We are also implementing pressing initiatives to align projects to the current cost environment where and when possible. We continue to closely monitor the cost of labor and our level of staffing across the business as we work to support the growth and timing of execution of our improved backlog. While not a major headwind currently, we certainly appreciate the difficult nature of finding and retaining qualified employees as well as the rising costs of labor across the economy. Our human resources team has been working extremely hard over the last several quarters. We have an incredibly talented and resourceful group across the company that I am very proud of their tenacity, dedication and creativity have helped Powell effectively navigate the difficult labor environment thus far. I'd like to conclude with a quick recap of our strategic initiatives and where our attention has been focused throughout fiscal 2022. It was on this call one year ago that we formally introduce our three areas of focus for Powell. One year later I am very pleased with the progress we have made around each of these areas. Powell continues to develop and expand our established and reputable line of electrical automation solutions. This past year, we released several digital products that will help our customers safely and reliably control the operation of the breaker. Additionally, we recently released a new and innovative product to measure and control the operation of switchgear, the Powell's first digital current measurement sensor. And we have taken our first steps to offer secure subscription-based service contracts, helping our customers protect, monitor and control their high value assets and ensure peak performance. Our Global Services team is delivering strong results in line with our strategy. I'd like to take a moment to congratulate and thank all of our teams and our service business. Their performance in the fourth quarter and for the entire year has been very strong. While there remains more work to be done, we have taken significant steps to expand Powell 's value proposition beyond installation and commissioning of our electrical products and solutions. This past year, we have demonstrated our ability to offer increased value to our customers providing value add engineering earlier in the project during the development phase of the power network solution. And we have demonstrated our ability to take an expanded scope of site services to help our clients more efficiently and cost effectively to meet their schedule and project requirements around the modification or repair of their electrical distribution systems. I'm confident that our service strategy will continue to build on these initial successes and be a true differentiator for Powell and for our customers going forward as we expand our portfolio of value-added services. And finally, in addition to our digital products, our research and development teams have made good progress in our low and medium voltage product offerings. This past year, we have further expanded our Low Voltage FlexGear product with additional Low Voltage Breaker offerings. Powellâ FlexGear is the only ANSI offering that provides a common platform, allowing our customers to use any commercially available low voltage air circuit breaker. Also notable this past year, our medium and high voltage bus team in Chicago led the adoption of our bus solutions to commercial markets. This is one of the contributing factors that led to Powell introducing the new commercial and other industrial sector noted earlier in my comments. And last, we welcome a new Vice President of Research and Development, [Marshall Monae Jr] joined Powell this past fall. Marshall brings a proven track record of over 30 years successfully mapping and developing products and solutions that help customers improve their operations. Dennis Thonsgard who has contributed an impressive 50 years of service at Powell is transitioning from the R&D leadership role, a position he led for over 12 years to helping me further develop our organic and inorganic roadmaps in support of our growth strategies. Dennis is an invaluable part of Powell success. He has held roles in operations, and he led the development of what today is Powell global service organization. Overall, I am very excited about the path we are on and where Powell is positioned within the broader electrical distribution and management ecosystem. Our status as a leader in engineer to order value added solutions for complex electrical distribution applications is ideally suited for a growing number of electrification requirements across the globe that is driving increased demand for Powell often with new applications. With that, I'll turn the call over to Mike to provide more detail around our financial results. Thank you, Brett. And good morning, everyone. I'll begin first with the fiscal fourth quarter business results and then move to the total year fiscal 2022 results. Revenues for the fourth fiscal quarter of 2022 increased by 26% to $163 million, compared to last year's fourth quarter of $130 million. And were higher sequentially by $27 million as revenues increased across all of our market sectors on a sequential basis. Notably, we successfully executed a number of projects in the commercial and other industrial market sector this quarter, making accretive gains in markets where Powell has not historically focused. As Brett mentioned, as a result of the increasing activity across commercial and other industrial applications, we determine that it is appropriate to add an additional sector to our reporting. As such a commercial and other industrial sector has been added to our traditionally reported sectors, which will encompass applications such as data centers, pulp and paper and mining applications among others. Growth in these markets is a core component of our strategic initiative. Net orders for the fourth fiscal quarter were $259 million, a $138 million higher than the same period one year ago, and strong demand spanning across most of our core end markets. Our industrial end markets remain very active specifically within the gas market, evidenced by securing a large LNG project in the quarter. Complementing the positive recovery of our core industrial end markets. we also continue to see positive commercial activity across all of our end markets. As a result of the strong orders in the quarter, our fourth quarter book to bill ratio was 1.6x. Reported backlog at the end of our fiscal fourth quarter was a record high $592 million. $177 million higher versus the end of fiscal 2021. The substantial increase in the order book was driven primarily by the strength across our oil and gas, utility and commercial and other industrial end markets. Overall, we were very pleased with the orders performance across all sectors in the quarter and the resulting backlog position as we enter our fiscal 2023. Compared to the fourth quarter of fiscal 2021, domestic revenues of $133 million increased by $38 million or 41%, while international revenues decreased by 15% to $30 million on the winding down of large customer projects in the Middle East and Asia. From a sector perspective, revenues from our core industrial sector increased by 4%. The utility sector was higher by 42%. While the commercial and other industrial sector was higher by nearly 3x versus the same period one year ago. These sector increases were offset somewhat by traction, which was lower by 18% versus the same period a year ago, as we successfully wind down a large municipal project in Canada. With respect to the year-over-year volume increase across our core industrial sector, this was driven by a 24% increase in oil and gas revenues while petrochemical sector was lower by 37% versus the same period a year ago. We reported $33 million of gross profit in the fiscal fourth quarter of 2022, which was higher by $11 million, or 49%, versus the same period in the prior year. Gross profit as a percentage of revenues increased by 320 basis points to 20.6% of revenues in the fourth fiscal quarter compared to one year ago. The higher margin rate was driven by an increase in services volume across the business, coupled with a favorable mix of faster and service work in the quarter, as well as broad based project productivity and associated project close outs. Notably, the margin rate also benefited from the favorable closure of a long-standing prior year claim related to costs associated with a US based municipal project, which generated $2.5 million of gross profit or an incremental 130 basis points to the margin rate in the quarter. Selling, general and administrative expenses increased by $4.5 million or 27% in the quarter versus the prior year, attributable mainly to variable performance-based compensation. SG&A expenses were $21 million in the fiscal fourth quarter or 13.2% of revenue, compared to 13.1% of revenues a year ago, and the higher volume in fiscal 2022. Overall, the team remains diligent managing overhead costs while continuing to focus on addressing the critical resource requirements necessary to fulfill the order book. On a net reported basis, fiscal fourth quarter net income was $8.7 million, or $0.73 per diluted share, which included $2 million of nonoperational income attributable to the previously mentioned prior year municipal project cost recovery, generating $0.17 per diluted share. We generated $24 million of free cash flow in the fiscal fourth quarter driven by favorable project collections and strong working capital performance in the period. CapEx spending during the quarter was $686,000. Now recapping our total year fiscal â22. Revenues of $533 million increased by $62 million, or 13% compared to the prior year. Orders were $719 million, 78% higher versus fiscal 2021 led by the sustained recovery of our oil and gas end market, coupled with the continued market penetration in the utility sector and the incremental growth in the commercial and other industrial end markets. Gross profit as a percentage of revenues was flat year-over-year at 16% successfully offsetting the inflationary headwinds and supply chain challenges that we encountered throughout most of fiscal 2022. Selling, general and administrative expenses were higher by $3.6 million versus the prior year. Overall, net SG&A expenses as a percentage of revenues were lower versus the prior year by 100 basis points and 13.3% of revenues in fiscal 2022 versus 14.3% in the prior year. We reported net income of $13.7 million, or $1.15 per diluted share. During fiscal 2022, we had three non-recurring events, two previously noted in the third fiscal quarter earnings call, and the municipal cost claim recovery impacting the fourth fiscal quarter that when combined contributed to $0.80 per diluted share in fiscal 2022. Total fiscal year 2022 free cash flow was a usage of $6 million versus a cash usage of $33 million in the prior year. At the end of fiscal 2022, we had cash and short-term investments of $117 million, $17 million lower than our fiscal 2021 yearend position, the company holds zero long term debt. As we look forward to fiscal 2023, we're encouraged with the current commercial momentum across our core end markets, and are optimistic that this will continue throughout fiscal 2023. Based upon our fiscal year end order book at $592 million, coupled with the strong commercial activity that we're presently experiencing, we anticipate solid revenue growth into fiscal 2023 versus the prior fiscal year. Additionally, as a result of the pricing actions and cost discipline initiated throughout the past 12 to 18 months, as well as the anticipated productivity that the operational teams are focused on, we expect continued improvement in project quality, resulting in increased profitability across the business in fiscal 2023. Based upon these dynamics and accounting for the typical seasonality that we will experience during the first fiscal quarter of 2023, we expect to significantly improve total year outlook in terms of revenue and earnings versus fiscal 2022, excluding the nonrecurring items that I mentioned previously. Good morning, Brett and Mike. And thanks for taking the questions and congratulations on a great quarter. I guess I want to start with some prepared remarks. Brett, you kind of talked about the $0.80 of onetime items kind of suggests that we should use as a starting point of $0.35 for fiscal 2022 as the number going into 2023. Is that how we should look at it? And if so, you've mentioned the seasonality in the business in the press release, has a seasonality playing in Q1 versus Q4. Thanks John. Yes, absolutely. That's how I would look at it underlying gross margins are still where our operational focus has been, always is and will continue to be even more so heading into next year with the backlog and sure we can continue to make incremental growth on those margins and improve the overall profitability of the base business. The seasonality it is, it always hits us first quarter, we fight the two holiday periods, just from a spin down spin up time and managing through. So there'll be some of that as we kind of plough into the fiscal year. But then, at this point, we expect to recover in the Q2 and on throughout the rest of the fiscal year. Okay, and it seems like the services business was a sizable contributor to the profitability in the quarter. Can you talk a little bit about why that was the case? What percentage of revenue, it wasn't a quarter, maybe relative to the third? Any kind of context there would be helpful. It was a very significant contributor to the year. I think two general themes. One as we come out of the pandemic, just sort of the pent-up demand in aftermarket brownfield work that was not being done in â20 and â21. There was certainly some of that, that's the short cycle comments that both Mike and I alluded to. And then there is the element of the strategic side where the team did a nice job taking a risk approach to other projects out there to expand our services both on the front end of the project as well as the back end of site services to prudently look at the jobs and make commercial tenders into these markets to test our strategies and to build capability into the team, and we're successful throughout the year, these jobs tend to be a little quicker on the cycle than a long run capital project. Not always some of the service jobs that are larger, they are a little longer but definitely contributed to the success of the financial year. Okay, and I hate to put you on the spot, but looks like the adjusted gross margin this quarter was about 19.3%. You have record backlog. I remember a time when 19%, 20% gross margin was eminently achievable. Is this a run rate that you can maintain for the full year or there? I can think of headwinds, but are there enough headwinds that kind of prevents that from materializing? Yes, no, I wouldn't sit here today and say it's a full year. I'll call it a gold. But we're, today, Powell that sits versus those years past is that theme of we got a lot more mouths to feed on our footprint than what we had 10 or 15 years ago. We do have a sizable backlog. And it is across all divisions, which is nice power to have heading into the year. But our goal would be to increment from the underlying operational gross margin coming out of the year without the one time. Mike, you had anything. Yes, I think, Brett, you hit it right on the head, the mix that we're experiencing over the last year and looking into fiscal â23 is substantially different than you refer to prior periods back in when gas was really going to a little different mix heading into â23. Good morning, Brett. Good morning, Mike. Can -- I was wondering if you could add a little color to the LNG award. How big it might be? Bigger than a breadbasket. And then maybe also maybe the sequencing of revenue and cash flows that might be associated with that project, and also maybe the margin profile of the LNG award. So first comment I'd make is, as we've kind of mentioned, all of last year into the fall in the spring, the activity continued to pick up this is a greenfield award, it is in line with what we classically would call a mega project. So back in the days, when the offshore market was screaming, we usually used to call that kind of in the $30 million to $50 million range. This is on the north side of that. And so it's a very complex project with a lot of challenges to it, which is where we're well built, the burn rate on this will go two plus years. There's a lot of when they get difficult, there's usually a lot of uncertainty in the back end of the project, it has a little bit starting off, but it's a job, we know very well, high complexity, and we're pretty excited to have it. On the margin side, just general pricing comment I'd make is it is still competitive, but I think we've made some progress on price in the market throughout the entire fiscal year. But still cognizant that it's a competitive world, and generally, the larger the job, it draws more attention competitively. So there's a little bit that woven into this one as well. No, I'd call it a meat and potatoes, but just a general statement. It's just the complexity of how the electrical distribution, not just the electrical design, but the mechanical designs, these LNG facilities, they're being squeezed in the small footprints there on the coastal area, which had a lot of challenges mechanically on the building side. So when you combine the two together, John, it's just the engineering side of it. It is constant throughout the entire project. And given that our, we carry 10% of our employees are engineers and designers, there's a lot of changes that happen and we just do it really well, really fast and efficiently. And I don't think you're going to be piling that model. Okay. Good. And then lastly, can you talk a little bit about maybe the, if you're seeing or the prospects I should say, for improving on the international front? Obviously, that's been geographically a weaker area. Might we see some improvements in 2023? Yes, Mike noted in his comments about their sort of the winding down of a couple of projects in Asia. I think we, the end 2021 there was sort of a pause in market activity in terms of where we participate. There are some projects, I just did some touring this fall traveling around in mostly in Asia. And then I've got a trip planned for the Middle East in the next year. So we see some things starting to spin back up. And I do think that we'll come back mid to late next year. Okay, so you've done projects with them and you understand how each side works. That's good. What, I don't know if you can answer this, but looking out to fiscal â23. what percentage of capacity do you think you might be operating at? Now your sales were close to a record and I know you do some capacity; you sold some operations. But what percentage of capacity do you think you might be operating at in fiscal â23? John, the first question, firstly, I'd respond your question is the growth and the record backlog that we shared on the call today, as a result of Q4, you're right to look at it but it is much broader based. And maybe what we've seen in the past run up when we saw these sorts of levels. So if you think about â12, and â13, as we were building Canada, Canada's participating so and then the UK business, so everybody is spread more evenly. And not just the US Gulf Coast oil and gas. Remember, that market just started coming back really last couple quarters, even though the bidding activity was strong, it's nice to see it come back, because we were sharing on previous calls that it was getting close, and it's good to see it get over the edge. Overall capacity, a little bit timing dependent, because these large projects tend to move around in the schedule. On average, I'd say we're somewhere in the 60% to 75% range. But we are watching the curves, we are thoughtfully thinking about where we could push that up if we needed to. So I'm pretty confident that with what we have today. And with what we're looking at in the funnel, we're well positioned to take the top side of that in the next couple years. We do. I mean, if it continues to grow in the pace, it's at, I wouldn't say that we're -- we'll continue to have manpower challenges. But I think some of the changes in the macro side, the consumer side is slowed down this past summer, I've seen some indications from our operations, we've done a little bit better when we go out into the market and bring in different skill sets, whether it's in the factory leadership, or even on the engineering side we're doing I think, a little better overall there. So as I look out if we're successful at the same pace into the next two years, wouldn't be without its challenges, but I think we're well positioned to overcome it and really capitalize it. That's helpful. And I guess finally, the new segment, commercial and other industrial, does that replace the all-other segments that you segment out in the financials? Yes, hi, John. This is Mike. It actually carves out from that bucket and segregates these new markets that we're seeing all this accretive growth and so yes, it is a subset of that traditionally reported other buckets. Okay, good. So and the new segment will be basically everything that you talked about a year ago in terms of electrical automation, service expense, and all of that kind of thing. It would be in there. This would be -- the other segment, a specific sort of the end market segment. We've always done work in pulp and paper. We've done work in data centers, although sporadically it just become more consistent over the last 18 months and started rising on the revenue side. So we felt it was prudent to carve it out in the segment. Good morning. Fine. Congratulations on a strong fourth quarter and on getting that LNG business good for you. Just one little housekeeping, your utility business, what segment will that show up in utility? Is that going to be in the new business, a new segment or in an old segment? Where will that be reported? That has been reported in its own sector, and it will continue to be reported in the utility sector. No changes there. So I think heading into the year flattish up, to up a little bit. But in line with what we've talked on our strategic plans and with adding to the team with Marshall and others, there's some work we've done this year to allocate that capital into longer term. Look at the market 5-10 years out, we've made some moves this year on investment. And I think as Marshall comes on, and the team spins up, I think in future years, we would anticipate increasing that but not quite yet into next year. Most recently, S&C Electric, also had started his career with Eaton and Schneider in his background, so really well rounded on the primary and as well as the secondary side of switchgear, which fits us perfectly. That's great. You're, I guess, coming to the end of that large LNG project you won a couple of years ago, I wonder number one, when you finish it up? And number two, how has it gone? Number two, it's gone very well I think from all aspects, it hasn't been without its challenges. We knew heading into the project, I really give credit to the project team. And the commercial team that secured the bid, they've done a great job, from the outset of the securing the job, identifying the risks, managing those risks with the project. Certainly staying very close with our client, with the engineering partner and the end client. And I think I'm, all I can say is I'm very pleased with how it's executed. It still is somewhat ongoing, although it'll be tailing off as we get through the bulk of â23 year. I see. And earlier in this call, you had a little discussion of the impacts on gross margin of the changing mix of business, and I didn't really understand the point you were trying to make. Maybe you could take another go at it. As your mix changes, some of these new lines of business grow services and other technologies and stuff. How will that affect your margins? Yes, Tom, this is Mike. When you look at our mix, the question that John brought up back five, seven years ago, when gross profits were in the high teens, that mix contained a lot of oil and gas work. As Brett alluded to the oil and gas sectors now, we're just beginning to recover. But what we're seeing that supplementing a lot of this volume is utility type of work, commercial and other industrial work, which typically doesn't carry the margins that the oil and gas work did back in back five, seven years ago. So that was my comment on the mix when you look versus prior years, right. Yes, the complexity of those jobs from what Powell is built for in our 75-year history. It's not to say they're easy, but they're just not as in depth or complex with a lot of changes on loads, because you don't have all of the process changes that happen on an industrial facility. So it's been a great build in our diversification last year. And we look to continue that both in the market side as well as the development side. And then the other part is the service bus, it did pick up this year, that also has a tendency to have a different phasing on the cycle. And it makes it complexities but it's been a really nice add to the story under pressure. It's when you're putting, especially on the labor side, and you're bringing a lot of talented labor to bear on a project with on the design side or site services it tends to bring in a higher margin in some of the products. Just a couple points here. I'm curious about the project that contributed $2.5 million to revenue. Was that a recent project, how old are the projects, is it older? Yes, John, this is a project that we executed. We actually won I think in 2013 or â14 is executed over a number of years. And Powell incurred costs via change orders several years ago, and due to the uncertainty of recovering the timing and the recovery of those costs. The cost flow through the P&L, but the revenue was not recorded. Now in this last fourth -- fiscal fourth quarter, that project was finalized by the ultimate end user and the general contractor. And the amounts were defined and settled. And as a result, Powell recovered the majority of the cost that we had incurred several years ago. And that's a $2.5 million uplift in margins this quarter. All right. And Brett you kind of referenced, your travel to Asia, your upcoming trip to the Middle East. I'm curious about the opportunity pipeline today versus, say three months ago? Is it still as robust? I mean, are we looking at exit backlog in fiscal 2023 that's similar the exit backlog in fiscal 2022. Just your thoughts about what's out there relative to what you were seeing, in order to capture it. It's still pretty strong, John, hard to say what the exit backlog will be. I think the potential to have a strong backlog at the end of â23 is definitely there, the oil and gas side that has been building for the better part of 12 to 18 months. And as we shared certainly very appreciative to have received that award in Q4. But the oil and gas part continue. There isn't just one project, there's a number of things that are percolating in that core market that are ongoing, and we'll definitely continue to pursue them throughout â23 and probably into â24 at this point. So I think that will be an increasing return to that core market. On the broader, I don't expect any change in the utility cadence. We've talked about that for a number of years, five, six years, we continue to have a very strong strategic focus, especially in our home countries of the US, Canada, UK. So I expect to continue there, incrementally gaining share where we can continue to execute and it demonstrate utility customers that Powell is the best solution, and then the broader markets that have kind of come up last 12 to18 months, maybe a little bit more uncertainly in the latter part of the year. But as I sit here today, pretty robust activity. So I think, at least in the first half, it'll continue at a good clip. This concludes our question-and-answer session. I would like to turn the conference back over to Brett Cope for any closing remarks. Thank you, Joe. Overall, we are pleased with our financial performance in the quarter and for the full year as our core end markets continue to improve. We are seeing the early success, the early successes of our growth initiatives and are entering fiscal 2023 with very encouraging momentum. I would like to thank our nearly 2,000 talented employees for their enthusiasm and exceptional service to our customers. Their strong focus on operational excellence, safety and a commitment to improve combined with a can-do spirit gives me great confidence that Powell 's future is very bright. With that thank you for your participation on today's call. We appreciate your continued interest in Powell. I look forward to speaking with you all next quarter.
EarningCall_1955	Good morning. My name is Sylvie, and I will be your conference operator today. [Foreign Language] I will now introduce Mr. Jean-Philippe Lachance, Vice President, Financial Planning and Analysis, Investor Relations and Treasury at Alimentation Couche-Tard. [Foreign Language] [Foreign Language] Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard financial results for the second quarter of fiscal year 2023. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions from analysts asked live during the web conference. We would like to remind everyone that this webcast presentation will be available on our website for a 90-day period. Also, please remember that some of the issues discussed during this webcast might be forward-looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Brian Hannasch, President and Chief Executive Officer, and Mr. Claude Tessier, Chief Financial Officer. Thank you, Jean-Philippe, and good morning, everyone. Thank you for joining us for this presentation of our second quarter 2023 results. We are pleased to report strong results this quarter, especially in the face of the continued challenges of inflation, energy and fuel prices around the globe. We had strong performance in convenience with solid same-store sales, particularly in the U.S. market, which had very strong growth in food and solid growth in all of our categories with the exception of traditional combustible nicotine. We also continued to generate robust fuel margins across all of our platforms. With the pressure in our consumers, we remain committed to delivering consistent value both inside our stores and on our forecourts to help make our customersâ lives a little bit easier. Before we turn to the results, during this quarter, several of our U.S. business units experienced [indiscernible] of Hurricane Ian. It was a massive Category 4 storm and one of the largest hurricanes ever to hit the U.S. It slammed into our Southwest Florida market and moved up to the state and impacting our business across Florida, the Atlantic States and the Carolinas. Thankfully no team members were injured. However, at the peak of the hurricane, we had over 500 stores closed due to power outages, wind damage or flooding. Once again, in the worst of times, our team members pulled together and did a great job getting the majority of our stores reopened to service our customers and our communities in their time of need. For customers, we initiated Red Cross Round-up store campaign and as well as a company-wide fund to help our team members that have been impacted by Hurricane Ian. Now turning to our results, beginning with convenience. Compared to same quarter last year, same-store merchandise revenues increased 5.6% in the U.S., 2.9% in Europe, and decreased 1.5% in Canada. However, I would note that Canada is up strong single digits when you exclude tobacco, which continuously pressured by the illicit trade throughout the country. No doubt, the consumer continues to be pressured from rising prices and we are focused on balancing, providing good values to them while recovering the inflationary impacts on our business. Across the network, our Fresh Food, Fast program was up over 20% the same-store sales and continues to grow across the 4,200 stores globally. This quarter, we launched $5 Pizza Fridays across many of our markets where consumers can purchase both Hot to Go or Take-and-Bake pizzas for only $5 on Fridays. This as well was our focus on the sale of fresh baked cookies are becoming popular items to our customers seeking value, bringing new and returning customers to our stores more frequently and driving overall growth. For dispense beverage, we continue to see good growth in Cold & Frozen as well as continued success with our proprietary Dew Purple Thunder with over 8 million cups sold by the end of the quarter. Our Sip & Save beverage subscription program continues to drive trips, enhance basket, and attract new users while providing great value. With the ongoing inflationary pressures, more than 420,000 subscribers are seeking deals and see the good value offer in Sip & Save. We have also continued to work to improve the online enrollment experience and we are seeing a larger percentage of our customers automatically renewing and signing up online. Packaged beverage growth was driven by strong dollar and unit growth across immediate consumption, carbonated soft drinks and energy drinks. Private brand, including private brand beverages also continues to see strong growth as consumers are looking for value and we meet that need with high-quality products at a lower price point with some of the main brands. In age-restricted beverages, beer sales continue to lead the category in the U.S. and in Europe. Alcohol also performed particularly well with wine leading the way. Across the network, supply chain issues are improving compared to previous quarters. In North America and Europe, we are seeing in-stock positions approaching back toward 95%, so more normal although we certainly have pockets where continues to be difficult. A significant challenge to our European operations has been rising energy costs, which are clearly impacting customers, team members and businesses. We are executing many energy saving initiatives across all of our European business units, including energy consumption and lighting, readjusting temperatures, unplugging unneeded equipment, and these best practices are being shared across all of our countries and work will continue to further accelerate this in the months ahead. While we see energy situation and associated costs as transitory, just having returned from visiting our European stores for two weeks, I can tell you that noticeably changing behavior across these societies. Inter operations, we have reduced demand between 10% and 20% in each of our European countries. This quarter we expanded our data-driven assortment optimization work throughout the rollout to all categories in North America. The current focus is on expanding the distribution of products that are high performing within the business unit and across business in other markets. Additionally, we are leveraging external data to pick up on trends that are not currently visible within our network. With the variability of our European network, we are in the planning phases of assortment work with a plan to have tests in our markets over the coming weeks. And on the pricing front, we continue to tailor our approach, giving the fluid inflationary dynamics in most of our markets. Moving to the fuel business. Same-store road transportation fuel volume decreased 1.9% in the U.S., 6.3% in Europe and 6.5% in Canada. Higher prices and challenging market conditions continue to impact our volumes. To alleviate some of the pressure of the pump, we are working actively to help our customers find value in different ways as we did with our very successful Circle K fuel day promotion in the U.S. this quarter, and we have significant tactical co-activities planned for the rest of the fiscal year throughout our markets. As I mentioned earlier, we continue to benefit from robust fuel margins, offsetting the pressures on volume across the network. In our Circle K fuel rebrand work, we completed more rebrands during the quarter and are now at over 3,500 Circle K fuel branded sites in the U.S. with many business units where the fuel rebranding work has now been completed. We do expect acceleration during the second half of the fiscal 2023 named to be close to 4,000 sites by the end of the fiscal year. In the U.S., we broadened our relationship with our fuel trading partner Musket in order to enhance our competitive positioning investments in the areas where we have significant volumes and customer base. A recent example, we took ownership of four U.S. terminals in combination, in a 50-50 joint venture with Musket, with Jacksonville, Florida to be an example of a market where we both had very, very strong demand and can optimize that asset to our advantage. This quarter, we've also established a supply and trading operation in Geneva, Switzerland, one of Europe's largest commodity hubs. Through a more active market participation, the expectation is to bring incremental value to the European organization as well as diversify our sources of supply. Also in Europe, our EV fast charging network had a significant milestone with the opening in Sweden of our first speed chargers for heavy trucks. Circle K became the first company in the Nordic countries to open publicly available speed charging for the brand new Electrical Heavy Truck segment. We kicked it off with six 360 kilowatt chargers with plans to expand this to 22 sites, in 90 truck charges in Sweden in the coming year. Charging capacity will soon increase to 1,000 kilowatt at the high end chargers. We are making incremental progress and recently launched EV charging network in North America as part of our announced plans to bring 200 EV charging units to our stores across North America over the next two years. So far it's been a positive customer reaction to our integrated offer and the amenities provided by our in-store offerings. While we are starting from a low level, we are glad to see customer acceptance and expect that to continue as density increases in new and existing markets. We are also proud of our recent innovation milestones. We now have over 1,000 units deployed in the rollout of our easy-to-use smart checkout technology. I was out in stores this week and acceptance has been great. We are seeing penetration of eligible transactions exceeding 50% in many of our stores, so we are looking to scale to 10,000 units across the network over the next three years and we also on the fuel side have passed 1 million pay-by-plate fuel transactions on Circle K forecourts in Europe. This pioneering license plate recognition system available in Sweden, Norway, Denmark, and now Estonia will continue to expand in the coming months across the Baltics in Poland. Finally, we've also piloted our new loyalty program in the U.S. and tiered concept in Europe. We continue to remain very pleased with the results in these pilots and we are preparing for expansion in the coming quarters in both the Europe and in North America. We continue to expand the network with the opening of 23 new industry sites this quarter and 53 year-to-date across the network in addition to having 73 sites under construction. While new store performance is exceeding expectations in both merchandise sales and fuel volumes, and remain the core part of our strategy. A combination of rising cost and supply chain constraints that we've experienced will likely continue to slow our near-term ambitions, but we expect these issues to mitigate in the coming quarters. Now before I turn it over to Claude, I want to cover our ongoing progress in staffing. It's been an unprecedented challenge, really 12 to 18 months, particularly in North America. We are seeing candidate flow improve through the quarter. We focus on new technologies to make the interview process easier and bring our time to hire down from days to hours. We've also become more active on social media campaigns â platforms, excuse me, driving more candidate star sites and attracting more early career talent. So again, while now knock on the woods, our staffing levels have improved significantly and are very, very close to normal levels. Thank you, Brian. Ladies and gentlemen, good morning. For the second quarter of fiscal 2023, we are happy to report net earnings of $810.4 million or $0.79 per share on a diluted basis. Excluding certain items described in more details in our MD&A, adjusted net earnings were approximately $838 million or $0.82 per share on a diluted basis for the second quarter of fiscal 2023 compared with $693 million or $0.65 per share on a diluted basis for the second quarter of fiscal 2022, an increase of approximately 20.9% in the adjusted net earnings. We delivered once again a solid quarter with impressive bottom-line growth notwithstanding the challenging inflationary environment. Adjusted diluted net earnings per share increased by 26.2% compared to the second quarter of fiscal 2022 driven by the strong gross profit growth as well as by our cost optimization initiatives, which have helped mitigate the impacts from higher inflation. These strong results have contributed to noticeable increases in our key return metrics as return on equity and return on capital employed reached 22.7% and 16.4%, respectively, up 30 basis points and 50 basis points compared to the first quarter of fiscal 2023. Even with another active quarter in share repurchases, our financial position remains very strong, highlighted by our leverage ratio of 1.2x, providing us with opportunities for the future and resulting in the announcement today of a dividend increase of 27.3% to C$0.14 per share. I will now go over some key figures for the quarter. For more details, please refer to our MD&A available on our website. During the second quarter, excluding the net impact from foreign currency translation, merchandise and service revenues increased by approximately $188 million or 4.7%. This increase is primarily attributable to organic growth and to their contribution from acquisitions, which amounted to approximately $40 million while being partly offset by the disposal of stores following the strategic review of our network. Same-store merchandise revenues increased by 5.6% in the United States, by 2.9% in Europe and other regions, and decreased by 1.5% in Canada. Same-store merchandise revenues in Canada were strongly impacted by increased competition of illicit market in the cigarettes category compared with the corresponding quarter of fiscal 2022. Excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately $78 million or 5.7%. This is primarily due to organic growth. Our gross margins increased by 0.2% in United States to 34%, while it decreased by 0.1% in Europe and other regions to 38.3%, and by 0.9% in Canada to 33.2%. Moving on to the fuel side of our business. In the second quarter of fiscal 2023, our road transportation fuel gross margin was $0.4916 per gallon in the United States, an increase of $0.1277 per gallon. In Canada, it was C$0.1255 per liter and increase of C$0.152 per liter. In Europe and other regions, our road transportation fuel margin was $0.976 per liter, a decrease of US$0.0081 per liter driven by the impact of the translation of our foreign currency operation into U.S. dollars. Fuel margins remain healthy throughout our network due to the favorable market conditions and our continued efforts to optimize our supply chain. Now looking at the SG&A. For the second quarter of fiscal 2023, normalized operating expenses increased by 8.1% year-over-year. This is mainly driven by the inflationary pressures, most notably higher energy costs in our European operations, higher costs from rising minimum wages as well as the incremental investment in our stores to support our strategic initiatives, partly offset by amazing labor market. Despite the challenging market conditions, we have continued to deploy strategic efforts in order to mitigate the impact of a higher inflation level and continued pressure on wages, which is demonstrated by our normalized growth of expenses that was slightly below inflation. Excluding significant item described in more details in our MD&A, the adjusted EBITDA for the second quarter of fiscal 2023 increased by $177.9 million or 13.9% compared with the corresponding quarter of fiscal 2022, mainly due to higher road transportation fuel gross profit throughout our network and organic growth in our convenience operation, partly offset by our operating expense. The translation of our foreign currency operation into U.S. dollars had a net negative impact of approximately $47 million this quarter, and this negative impact translate into a negative impact of close to $0.03 on our EPS. From a tax perspective, the income tax rate for the second quarter of fiscal 2023 was 21.9% compared with 21.3% for the corresponding quarter of fiscal 2022. The increase mainly stems from the impact of different mix in our earnings across the various jurisdictions in which we operate. As of October 9, 2022, our return on equity remains strong at 27.7%, and our return on capital employed stood at 16.4%, both figures are higher sequentially compared to the first quarter. During the quarter, we continue to generate strong free cash flows and our leverage ratios to that 1.2x, 11 basis points lower than Q1 despite having repurchased $205 million during the quarter under our NCIB. Subsequent to the end of the quarter, shares were repurchased for an amount of $396.2 million. We also have strong balance sheet liquidity with $2.5 billion in cash and an additional $2.5 billion available to our main revolving credit facility. Turning to the dividend, Board of Director declared yesterday a quarterly dividend of C$0.14 per share, up 27.3% for the second quarter of 2023 to shareholders on record as at December 1, 2022, and approved its payment effective December 15, 2022. All right. Thank you, Claude. As we reached the middle of our fiscal year, it's worth noting that we are on track to meet and surpass the organic objective of our five-year double again strategy given our strong last four quarter EBITDA performance at almost $5.6 billion. I want to thank all of our team members across the network for remaining committed to the strategy and leading the business forward even the face of monumental challenges, including the pandemic, wars, hurricanes and tough global economic conditions. As we continue to be laser focused on our strategy, we have more tools to engage our customers than we've ever had before and we are focusing on both existing initiatives and launching new opportunities to drive our organic growth. Thank you, sir. [Operator Instructions] And your first question will be from Michael Van Aelst at TD Securities. Please go ahead. Hi. Good morning. I wanted to talk about the volumes actually, and considering the fuel prices fell dramatically over the start to finish in the quarter, can you give us some idea as to how the demand changed as the quarter progressed? Did it get meaningfully better heading into Q3? And then how much of that same-store volume decline do you think is attributable to the rebranding activities, and how long does it take for the stores to recover to normal volumes or prior volumes once they've been rebranded if ever? Yes, Michael, I'll take that. So I'll break down to pieces. So for Europe, there's no doubt the extreme pressures that we're seeing from energy crisis has changed consumer behavior. We see it both in kilometers-driven, but also in speed. We looked at a phone study from Denmark and people have actually increased their average speed on the roads by over five kilometers an hour. So we think we're winning share in Europe both on B2B and B2C. But we've got a transitory negative impact on demand just with the impact in the war and the energy prices. If you look at the U.S., our largest market, couple dynamics. I think we did see both an improvement through the quarters. Prices came down a bit, and we also saw a reversal of an erosion in premium penetration, which typically is impacted negatively by the higher prices. So as prices came down, we saw premium penetration go up, which is very good for us, it's a very profitable SKU for us. Overall demand, I would say we're continued to focus on providing good value, consistent value. The industry remains very disciplined, there's no doubt that its prices are higher. There's a certain segment of the consumer base out there that's looking for the cheapest price on the street. But if you think about who those players are, they can only sell so much and they're only in so many locations and again, we think that's transitory. So as we think about fuel prices coming down, we think we're getting our fair share of the volume and our focuses on just being consistent as the market continues. On the rebrand, Michael, it's really depends on the brand we're switching from where we have supplier brands, where they've had very strong loyalty programs. We have seen some volume erosion with the rebrand. That's also in the context of just a really strong economic equation. Our ability to source fuel today, we think is best-in-class. And so the payoff, despite some volume erosion is really a no-brainer. It's been very, very good for us. And we don't see the same erosion inside the store. I think the bridge to that is getting our loyalty program, we successfully piloted both in the U.S. and in Europe, are ramped up to scale. And we're certainly hoping we can get that out in the market toward the end of the fiscal year. But the other brands that maybe didn't have a strong loyalty, we're not seeing that same impact. And actually we have some rebrands where we just got positive results switching from a partner brand to Circle K. So a little bit of a mixed story depending on where you're at. Good morning, everyone. Claude, I was just wondering if you can maybe similar to the previous quarters, can you maybe break down for us sort of the major drivers or buckets of the year-over-year increase in SG&A expenses? And then secondly, do you expect a more meaningful step down in normalized goal in the second half of the year, as you start to maybe lap against higher comparison? Thank you. Yes. Thank you, Chris. So yes, so to come back to what drove our 8.1% increase in normalized operating expenses, we see the same three buckets that we talked about in the last quarter. So the first one, it's wages. And I would say that wages, the impact of wages is a bit lighter this quarter because the retention measure are moving. So what we see in terms of our labor and how we are structured our wages is instead of retention programs that we had last year, now we are more back to normalized hours. So a lot of the regular time hours, more regular time hours, we always have the salaries and [indiscernible] still over time in our stores. But overall, we're covering all hours and we're good with that bucket, I think we're seeing improving performance on this third of the equation where there, the second, third is inflation. So again, this time it's electricity in Europe that is really strong in terms of increase. You see the inflation figures in Europe, and then mostly driven by energy prices. So there's a lot of impact in our equation from the electricity and energy prices in Europe. And finally, the third bucket is, all our strategic initiatives that we're â that we've put in place. So we see an impact probably â so the buckets are probably, a bit more like 37% and 25%, so the wages being a bit less of an impact in this quarter as far. And we're putting all the initiatives in place also to mitigate those costs. There is a lot of activities that we're putting together, and we have the cost initiatives. We have a couple of example of that or [indiscernible] taking out the store manager offices in a lot of our stores to help reduce the administrative work. We are also doing a lot of the initiatives on labor scheduling, and you can imagine also that a big focus in Europe and in the rest of the network is to look at all the energy saving initiative that we could put in place, to make sure that we're reducing that expense as much as possible in our stores in Europe. So finally, our vision for the second half, we said before that we have easier comps, that are coming our way, so that we're going to start to meet those easier comps in the next two quarters. And with the effect of our initiatives that we put in place, opening, we're going to be able to put some better numbers. But it's early for us and you're going to be proven to before calling a number with the inflation that is happening in Europe. Hi. Thanks for taking my questions. Just to circle back on Europe, I was hoping you could elaborate on the results there. So if we look at Europe, is it fair to say that in local currency, the fuel margins were flattish? And how should I interpret the comment that you made about 10% to 20% lower demand? Is that â did you see that this quarter or is that something that we should see in the future? And just on the back of that, how should we think Europe influence in general? Vishal, on margin? It's a good observation. Actually, our CPL in Europe would've been $0.1105 in the quarter ex currency, so actually up $0.01 a liter. So again, very strong performance, very pleased with that. On demand, it was really around electricity, I think that we were referring to. We've got markets where electricity costs are up 500%, 600%. I spent two weeks there during the quarter, and just the efforts that we're making, the society is making at mitigating the impact of the rising costs and kind of doing their part for Ukrainian war was astounding. I literally got up one morning to go to the gym and had to use a flashlight to go through the hotel lobby, or my phone. So we've got markets where we've reduced our demand between 10% and 21%, and that's just doing a lot of little things at our sites, it's lowering the heat, it's unplugging coolers that we don't think are key. It's raising the temperature of our walking coolers. And so again, will that mitigate everything? I think it depends how the winter plays out there. And again, we view that as very transitory, it's going to be temporary, but it's having the material impact, both on our European P&L, but also just on our team members there. So more to do there, and again, sharing that globally. We're not seeing the same pressures to feeling the same pressures in North America, but certainly very real in our European markets. Okay. Thank you. And just on U.S. fuel margins, the Delta versus Opus, seems to be a bit lower than we've seen over the last few years. I know Opus isn't necessarily the benchmark that you use, but I also know that you have many initiatives in place to kind of expand your fuel margin advantage versus the industry. So I was wondering if there was anything noteworthy that you'd like to point out on the fuel margin, this quarter, which may have caused that that lower deviation? Yes, not really. Again, that does cycle and it's so geographically specific. When I look at our Western markets, I think we had a really strong quarter vis-Ã -vis the market. It just depends on, how liquid are the racks versus the spot market. And again, that picture just varies dramatically geographically. So we just remain focused on continuing to develop capabilities and now allow us to widen that gap. We've set up over a thousand trucks during COVID, which allows us to capture geographic anti arbitrage as an example, our trading group, both in Houston and now setting up in Geneva. So we just remain focused on doing the things that we can control and I don't think there's anything particular in the quarter Vishal that would indicate any erosion on that advantage that we're establishing versus the market. Thanks, and good morning, everyone. Brian, just following up on the last commentary around the trading groups, can you walk us through how having that trading expertise enhances your ability to deliver on the fuel margins and how it differs from, let's say, the way you used to do things and the way others do things? Because I think that's something that we all really need to understand. Yes. It's a longer conversation and I can probably do justice to on the call, but high level and I'll focus on the U.S., we would typically have bought either from the racks or prices established by refiners locally or on the term basis and termed up a 100% of our demand. With the large shorts that we have, we've got consistent rateable demand that's very concentrated in some markets. We're able to act more opportunistically at times, and that maybe when one spot market is significantly advantaged versus another being able to deploy trucks, sometimes hundreds of miles to take advantage of very different cost arbitrages not being turned up on all of our volume and being opportunistic where we think the markets will be long. And there'll be people that are incentivized to cut prices to place barrels in a refinery system as an example. In Europe, it's very much â we're in waterborne markets, we have all import terminals, and so the ability to take advantage of cargos that may not have a home, as an example, Irene, and can be significantly cost advantage needs to be just a term relationship with a local refiner. So again, very long conversation. We've got Investor Day, I think we're trying to schedule for the fall, and I think that'd be a great time to go a little deeper there, if we get the opportunity. That's great. Thank you. And just a question that we haven't really dived into yet, which is the inside store demand in the U.S. and what you're seeing, and particularly what you're seeing around adoption of the food and Halo impact in other categories? I think we've been pleased with the consumer both in Canada and the U.S. Again, if you take Canada, if you take out tobacco, it's been very strong. So despite the inflationary pressures, I think we've been fortunate that unemployment rates remain a historic low and consumers will certainly feeling pressure between the economic stimulus during COVID and the high employment rates remain relatively in decent shape. So as we look to last quarter and what we're seeing in this quarter, we continue to see very, very solid demand inside the store. With regard to â what was your second question? I mean, it was the food, again, I'd say we're in the very early innings of that game, very pleased with the platform we've deployed. I think we're pleased with the decision to continue the rollout during COVID. We've now got 4,200 stores deployed, and I think we said in the commentary that same store sales are up well into the 20 plus percent range. And again, that was even better than last quarter. So I think we've got a good formula to work on, have we got it completely figured out in terms of the food culture, managing the spoilage, making food at the right time, all those things that are so important in food. I'd say that's a journey that'll continue. But again, very pleased, we're ahead of our projections, ahead of our plan for the year, and we are seeing benefit across the store. It's one of those things that if we get right, and we have some other people in the industry have shown us. If you get it right, you can influence a consumer to turn left instead of right. And that's the journey we're on. And again, I'm sitting here today very pleased with where we're at. Yes. Thanks. Good morning. You called out promotional activity as a tailwind for your business, and I know that's been an ongoing journey for you, but was there something new that you're doing, or is it more of a continuation? And obviously it's not a project with a specific end date, but how far along are you in those efforts, maybe perhaps relative to the targets that you shared at your Investor Day last year? Yes. Mark, on promotional activity, I would say the journey we've been on to let data drive our decisions continues, and I would say generally on track with where we communicated from the Investor Day. I'd say the one, maybe headwind we've had is just retaining data scientists. It's been a hot commodity, a hot field, and so the turnover we've experienced in that group, particularly domestically has been a little bit more difficult. We've set up an office in India, and we've been very pleased with the talent we've been able to source there. And so we think that will in the coming quarters stabilize that team and then continue to allow us down that journey. And really that's just â it's really using data to drive our discipline to what promotions really make a difference and which ones are noise. And so you are seeing and should see fewer promotions, but more effective promotions, which should result in both higher sales and higher margin over time. I'd say, the other piece that's happening is, is just with the inflation and we know the consumer's sensitivity to price has been heightened. And so we're doing, I think a few things out there that hopefully convey strong value, whether that's take home, soda packages, some of the things we've done around fuel, that wouldn't have been our norm, so fewer bigger to create that value perception, not just perception, but deliver value back to our loyal customers. Yes. Maybe on the second part of your question, we put the range out for you at $115 million to $210 million of the achievement on that initiative. And we're really â we're well into the range and close to the high point of that target in terms of the benefits from that program. Okay, perfect. Thank you. Switching gears, I wanted to ask about the M&A landscape. You've spoken about more deal flow and multiples being sort of closer to your target range. Any update on that? And I know you've said that you see the energy challenges in Europe as transitory, but does that affect your thinking at all? So on the European, no, again, I view that as transitory, and quite honestly, it probably applies some pressure to some businesses and that's been historically good for us. The balance sheet as Claude said is very strong, the appetite's there. And I guess I just reiterate the comments I've had from prior quarters, until there's a deal, there's not a deal. But we continue to be pleased with the deal flow we're seeing. And I think, it's a question of timing, but I'm cautiously optimistic that this environment with tighter credit, a little higher interest rates, will be better for Couche-Tard than it has been the last three or four years where there's been a lot more competition. Yes. Good morning guys. Just to follow-up on the store, can you maybe give us a sense of how U.S. same-store sales performed through the quarter, and can you also give us a little bit of sense in terms of basket versus traffic and within the basket how much price that we take in the quarter? Thanks. Yes. Actually the results were pretty consistent in the quarter, the exception being Florida. Florida is a large market for us, 800 stores. It was clicking along at ninth mid single-digit, and end of the quarter really at zero. And that's purely the effect of two hurricanes during the quarter. But I'd say pretty consistent. Traffic relatively flat, maybe just down a bit, so basket being very strong and that's just our continued push to make sure that we're pushing price appropriately and recovering the inflationary pressures that we see whether that be on wages or energy or the three buckets that Claude went through. So again, trying to be surgical there not drive the customer away, communicate value where appropriate, but also recover costs. And yes, as of right now, I feel we're doing a good job at that. We're seeing, again, strong demand continue into the next quarter so far. And George maybe just to add also the success of our Fresh Food, Fast program also is starting to show up in our same store sales, so that's what's driving also the basket, so we're very pleased with the results, we seen in Fresh Food. Hi, good morning. I just want to touch on your volumes, your fuel volumes in Canada. It looks like they worsen versus Q1 despite gathering prices declining. And if we look at the U.S. you had a bigger decline in Q1 and smaller decline in Q2. So I'm just trying to understand what's happened in Canada. Is there something specific that you can point to explain the larger decline in the lack of correlation with the U.S.? Yes. We were minus 6.5 in the quarter, so that is soft. So we're taking some efforts, like we have in the U.S. to I think be a little more tactical, a little more gorilla warfare and delivering value to the customer without changing the price might be risky depressing the market. So you'll see more activity in the coming quarters in Canada. If you look at our weakness, it's really concentrated in the East, so I'd say Quebec in the Maritimes. We've got some work to do on harmonizing our brand position there. That's a little bit of a longer term opportunity for us. But that's where we're going to focus our efforts. When I look at Ontario and West, I think we performed very well when you look at Parkland or other public comparators. And so it is fairly isolated to a small part of the country. And again, I'll remind that Canada's 12%, 13% of our total global volumes relatively small. But that aside, we're focusing more on that customer and that value proposition in the eastern part of country in the coming quarters. Thanks. Brian, can you elaborate on the new loyalty program you're piloting in the U.S.? Just talk a little bit about it and explain the new tiered concept that you're experimenting with as well? Yes. So we've had loyalty products across the network of varying degrees. And we've had â one that in Europe has had very deep penetration, but quite honestly, we've challenged ourselves to say, hey, can we go beyond just having another key fob in your pocket or another number, another buying club. And so done a lot of research with partners and selected Brierley as our partner developed the current program and really focusing on the fact that our industry is so much driven by the heavy users. There's different segments, different names for these customers, but we've got a very, very strong group of consumers in our industry that just drive a tremendous percentage of the volume. And so without getting into the details of how, I think the why is, we're going to make sure that the customers that can deliver the most value to us get the most value from us. And where we've launched that and piloted that now in three countries in Europe and a small market in the Carolinas, we've seen very strong net promoter scores and very strong penetration of enrollment both on fuel and merchandise. I think my frustration is that, you know, we wish we had it deployed more broadly and that's really just been a technical issue, getting the engine to work with our various POS platforms that we've got, particularly in the United States. So we're excited. I think the benefit of being delayed a bit is, I think we've really optimized at store level, what the consumer messaging is, how do we get people to sign up, how to motivate our staff to drive enrollment, so we're ready. And again, cost is optimistic that we've got something that will differentiate in the future. All right. Thank you. Good morning. I actually wanted to circle back to Europe real quick. As I guess I was hoping for maybe a little more color on the consumer behavior and really some of the initiatives you've implemented in light of this, for instance, are you seeing more down trading and pullback on spending? If so, are you increasing your promotional spend to help mitigate that? And then also curious to hear the behavior at the pump, our consumers possibly not filling up, but possibly coming more frequently. And then finally, what are you seeing in terms of shift in channels within Europe? Are other channels possibly benefiting from some of these consumer pressures? Thanks. Yes. Thanks Bonnie. I'll start with the fuel side. So there has been a mark change in behavior, and again, I want to repeat, repeat, repeat. We view this as transitory, temporary. We're seeing both lower penetration of premium sales and lower leaders fulfill about 15% lower. But we're seeing more visits. So net-net, volume down mid single-digit, visits up 2%, 3%, but the average fill down 15% or so. And that's pretty consistent across the countries. Those visits have actually translated into the store holding up pretty well. You see us â I think we were plus 2.9 or something close to that for the quarter. And that's with â pretty solid traffic underlying that. So when I look at inside the box, the behavior hasn't been as noticeable in terms of trade down as you asked. Our food continues to perform very well, beverages continue to perform very well, and we don't have the same just because the lack of scale in some of these smaller countries, we don't have the same penetration of private label. So we've seen the brands continue to hold very well. Then when I've asked the question how are we doing vis-Ã -vis other channels? And when I look at the three big Scandinavian countries where I get the best data, I've actually say the channels fared very well vis-Ã -vis grocery, which is our main comparator in those countries. And so, yes, I'm pleased with our results. All the data I see says we're taking share, but there's no doubt, and again, I was in a recent visit, it's pretty stark difference from what we're experiencing here in North America. I mean, societies really buckled down to get through the winter and everybody's doing their part to just minimize their energy demand and that includes driving. Hey. Good morning, guys. I just wanted to ask about the new to industry stores. I know you mentioned rising costs, supply chain constraints sort of slowing your ambitions there. So can you just talk a little bit about what growth might look like given in more favorable environment? And then you also mentioned strong merge sales and volumes in those new stores. Can you just talk about what you might be doing in those newer units that's driving outperformance there? Yes. Anthony, I'll take the last part first. We've got a store model that we've deployed really the last year that is a big part of what we learned in holiday that really flows the customer through our store, you enter in the food area, so the coffee dispense beverage bakery into the sandwiches, you rotate through that takes you into the cold vault both beer and other, and then you end up in the impulse section as you approach the checkout. We've had extraordinary good luck with these. We've retrofitted a few stores just to see the impact of that as we played with design. And it just drives really strong basket improvement. So that's a model we've been deploying, been very pleased, as I said in the commentary with both our results in volume and inside the box, you look at the mix, food just does better. And we've got significantly more cold doors than we would've had in our traditional build, and we just think that's an industry differentiator, that we can continue to provide and really excel at meeting that first occasion piece of the other industries. So pleased with that, a little bit frustrated just in getting them out. I'd love to build 200 a year. We're not going to build 200 this year and just a big part of its just been supply chain and rising costs. It's been hard to find electricians, plumbers, for those of you that tried to do work at your house. But that'll end. I mean, that's going to be transitory as well. And our ambition is to continue to ramp-up the growth that were in TIs. We think it's great consumer response, great ROI for us and our ambitions to do more. But coming through the current environment, it's just been difficult to ramp up the trades, get the permitting and all the things necessary to hit the numbers we want, so continued focus there and again, the ambitions there to do more. Hi. Thank you. Good morning. This is [indiscernible] on behalf of Derek. Just a quick question from our side, just on the fuel volume side, circling back to that, what drove the softness here? Was it more of a function of the higher fuel prices or is it a silly to remote working conditions and general less movement doing framework? I think I've covered Europe pretty well. I mean, it's high energy prices again, transitory and I think covered Canada fairly well. That's an Eastern Canada phenomenon, I'd say in the U.S. I feel good about our performance. There's a couple value players that I think are getting a disproportionate share on the temporary basis. But when I look at our results versus what we see out of Opus, out of EIA, out of the phone company data on movement, I think we're performing well. I think demand is still not where it was pre-COVID. We've still got a certain segment of society that's not gone back to the office five days a week. But that just continues to slowly recover. And I think as we continue to work on building the Circle K brand and making that more value to our customers and innovating with pay by plate in our loyalty platform, our goal is to slowly take share in the fuel space and we feel good about the journey, we're on to do that. Thank you, operator. Thank you, Brian. Thank you, Claude. Thank you all for joining us. We wish you a great day and look forward to discussing our third quarter 2023 results in March.
EarningCall_1956	All right. Great. If everyone can please take the seats, we'll get going. My name is John Hodulik, I'm the media and telecom analyst here at UBS, and I'm very pleased to announce our next speaker is Ted Sarandos, the Co-CEO and Chief Content Officer at Netflix. Ted, thanks for being here. So we've got about 40 minutes for Q&A. I've got a list of questions to go through, I also have the iPad here. So anybody who wants to use the app and log in some questions, I'll work them into the conversation. So first, Ted, as we always do here this late in the year, can you give us a sense of Netflix's sort of priorities as we look out into 2023. Yes. So look, we're like at most companies, happy to get '22 behind. We've -- for our prior -- and [Indiscernible] in '23 are to reaccelerate revenue growth. And so you look at it at the business and how we've done going into this and we've gotten into -- the first half of the year was pretty good bumpy for sure, kind of unprecedented levels of competition in terms of -- and certainly super subsidized competition. And certainly the economy with FX, with all those things. So we're coming out of the year, putting a lot of that behind us and with a real solid plan to reaccelerate revenue growth. Launch, I'd say is one of the things I'm super proud of as an organization is in those challenges at the beginning of the year. This company, which has built an incredible culture, had incredible strength to regroup and not get distracted and to keep building. And I think about things like in six months, we built this ad product from scratch. Our COO, Greg Peters, just attacked this as a challenge to do what is widely viewed as impossible, was to build this ad product and get it up and running. It's up and running and delivering ads. Now we're not patting ourselves on back too hard, it works. It delivers advertising, but this is definitely kind of crawl-walk run. And it gave me a lot of confidence in the organization that this organization can rally and regroup, which we did. Similarly, on the content side, the team kept focus. They stayed the course. This year, in these very tough conditions, we launched five of our most watched shows in the history of Netflix in 2022 and three of our most watched films in the history of Netflix in 2022. So we're super excited about the future. We've got a good plan to reaccelerate revenue growth. And we have got this very fortunate position, which is while our competitors are reinventing themselves pretty radically we get to do exactly what we're doing, just a little bit better every day and stay the course. Great. That's a great overview. And I've got a couple of high-level questions before we drill -- and drill down into some of those growth initiatives, we may touch on the ad here. So first, just -- and this is a question we get a lot. And you sort of touched on it, given all the competition that we're seeing. I mean just how good of a business is streaming. I mean how can investors get confident that this is a good business? Well, look, first of all, it's, if you believe that people still want to watch TV and watch movies and play games, it's a good business. And how you monetize and how you grow it is important. And this is something we've been doing for a long time and have done, and we do it profitably. So I get why people are puzzled at the migration of the -- from linear TV to streaming, how everyone is going to do it, but we're not making that migration. We are in the streaming business. We are profitably in the streaming business. This is a $5 billion, $6 billion business for us, and it's growing. So as long as you are convinced that streaming is going to keep growing. And linear, some of our -- one of our very high-profile competitors, there's a lot of skin in the game on linear, just said, linear television is on the precipice of going off the cliff. And, frankly, I have heard that today, earlier today and yesterday, too. I mean whether its cord cutting or even the ad market, I mean things are not great and -- Yes. So you believe that streaming is going to be the way that people consume content over the next 20, 30, 40 years. Remember, prior to streaming, cable television, pay-TV had 50 years of growth before Netflix. So we're in the early days. We're about 10% of what people spend their time on television today. So we have plenty of room to grow, and streaming is going to continue to be the way that people mostly watch movies, watch television and play games. Right. And then, along with that, long-term margins, how can we get comfortable with what the long-term margins are in this space as the company sort of matures and you expand the offering and expand into these new geographies? Well, prior to the current headwinds, remember, we were expanding margins every quarter. So every year. So we're looking at -- we'll get back to -- back on track, I think, over there once we get through some of these quite temporary conditions. Got you. And does competition play a role in that? I mean, one of the -- and again, we've explored that with a couple of companies today. I mean, is there too much content being made and is there too much competition in the space right now? I think if you look at it in the kind of old media sense and say is there more -- there's a lot more content being made today than there used to be. But it's not all for you. So really, the idea is that we've been doing very successfully, and like I said, profitably, is delivering a really broad, diverse slate of content. We're bringing out something new pretty much every day on Netflix. The multiple titles, multiple movies, multiple series and across every discipline of television. From original Japanese anime in Japan, Mexican novelas out of our Mexico group, our animated series, animated features, big-budget action movies, everything you want to watch, we're making. And I think it's a really important thing to do when you're trying to basically entertain and add value to members. It's very difficult, I think, to have any kind of ability to extract value from consumers unless they are experiencing it. So the core KPIs in this business are very simple, engagement, revenue and profit. So for some reason, when we talk about this business, we get clouded with a bunch of other things like Rotten Tomatoes scores and raw subscriber numbers without any ARPU attached to it. And it's not really a good way to measure the business. I would measure engagement, profit and revenue. Yes. So lastly on competition. I mean, obviously, a lot of competitions in the U.S., I would say, similar to -- in a lot of markets around the world. I mean do you think we're at sort of peak competition? Do you expect any sort of consolidation, maybe rationalization of the spend within the competitors or even some consolidation? If you look at -- it's hard to say, like a lot of the -- what is subscale and what isn't in this market? You guys have to determine that. For us, we really focus on our core business, we've got our hands full with running our core business. And I look at this and say, look, I'm glad, one thing we've never done in our business is take our P&L below zero. We've built a business that is cash flow positive. So we don't have to go to market for funding and continue to grow it. And I think when you look at the conditions of growth and what it's going to take to grow from where the competitors sit today in terms of just size and scale and hours of engagement of those products. They've all got a lot of running room. They've got a lot of room to go to catch up to us. And we have to keep growing, we have to keep expanding on it. At no point do we ever say, okay, that's good. We're going to close from here. That's why we go through like something like Wednesday, that came out last week is, it's chasing Squid Game right now to be one of the most watch shows in the world. And again, what gets really cool about these things is that while we're getting better and better and making original content from all over the world, like Squid Game was this big win because it was a South Korean show that people watched all over the world, including the U.S., especially in the U.S. even. And now you've got Wednesday, which is a top three show in Korea, India, Japan, all the places that really have a preference for local content. So we're strengthening both our ability to make global content but are even better doing it from just about anywhere. And I think having that emphasis on the local market helps us tremendously and then being able to pick those projects that are global, but not by preconceived definitions global, not big the old from America, and we're going to make it big everywhere else. It's going to be storytelling from anywhere to everywhere, which gives us a lot more variety of storytelling. Got it. So lastly on competition. How do you see competition from casual and nonprofessionally-produced content on platforms like YouTube, TikTok, reels and others? Is that a -- do you see that as a competitor? And do you need a platform that sort of caters to that? I don't necessarily see it as a competitor. I obviously pay a lot of attention to it because it's how people spend time. What's been fascinating is as people spend time on TikTok by way of example, what that really does is that they actually use TikTok to express their fandom, which actually grows their affinity for content on Netflix. So the hours have spent on engagement, if you think about it, the way that people get excited about Wednesday early on and started talking about it, they started posting music videos. And they started making their own content based on their excitement about how much they love Wednesday, which grew Wednesday tremendously. So it's not that they're -- certainly, they're a competitor for time, but they're also an incredible marketing platform, and we have to get better and better leveraging to build on that fandom. So if you think about the impact of the music business that Netflix has today, I mean these are kind of zeitgeist data points. But if you think about like Wednesday with all the success on Netflix, has grown two songs particularly. There's Lady Gaga song from 2011 Bloody Mary and Goo Goo Muck from The Cramps. I'm a guy who like the music of the 80s. It's great that my kids now know The Cramps but that's -- a lot of that is Netflix and TikTok that people making those videos and getting them rolling in those two songs, those songs are up on Spotify 9,500% in a week, it's phenomenal. Kate Bush, Running Up That Hill, it's number one. It didn't do that, 37 years ago, didn't even get to the top 25 and now it gets -- hits number one of the chart a week after Stranger Things came out. Well, it does tell you though, that the value -- that's what I talked about is why engagement is so important. It happened because hundreds of millions of people watch the show and having the platform, having that ability to engage a global audience that fast and then create this whole zeitgeist around it. There's not -- and by the way, it's not just music. When The Queen's Gambit was out the sale of chessboard went through the roof. So if you think about things like that, the ability to impact the zeitgeist, I can't -- I don't know of, I have not heard of any of those things happening on other platforms yet. Maybe they will, but I have not seen it yet. Right. So let's switch to content. And as you look out into 2023, can you talk about some of the projects that you're excited about? You mentioned Wednesday as a sort of a recent hit, but are there others that sort of excite you? Yes. Look, I think for 10 years, we have been -- we built an original content organization that has been running really fast. And we had to do in 10 years what all of our competitors had 100 years of experience doing, creating IP and building on stories in television and film world. We started from scratch. In that 10 years, we built a library that has generated more watching revenue and profit than all the other libraries in the distributor space. Super proud of that. Right now, I think we look at a lot of these projects and saying, now what do we do in the next 10 years? We get better at development. We get better at world building and franchise building. Before the end of this year, you're going to see Blood Origin, which is a prequel origin story to The Witcher, which is fantastic. You also get a third season of Emily in Paris, a piece of IP that didn't really exist in the world until a couple until two years ago. And then I think on the 23rd of December, you have Glass Onion, which I think is a real step function in our film space. So when I talk about the growth in television and that 10-year run and the very fact that five of our most watch shows came out this year, that's such a testimony to Bela Bajaria and that television team that they're being able to grow upon and build upon success. And similarly, with Scott Stuber in the film group. Glass Onion: A Knives Out Mystery is , I think, a culmination of a lot of hard work, we've been at the movie space only for a couple of years, like we're on our fifth year of original film. And we've been at the Oscars every year and like I said which is nice. But really what we're after is exactly what you're going to see on December 23, a movie like Glass Onion, that is universally loved by the critics and wildly commercial, but fans really love this film. And they'll be able to all see it on the 23rd of December, and you'll see what we're talking about. But I'm trying -- we're trying to make content that fans love first and foremost. And if critics love it, too, that's great. And if it wins awards too, that's even better but start with the fans. And like I said, that film team has been very focused on that and Scott and his team have been really great at doing that, and I think Glass Onion is a great example. Harry & Meghan, I should have mentioned that, yes, December 8, some people are talking about it right now, as we speak. Yes. very excited about that, too. So again, within the budget, first of all, is $17 billion the right number for content spend? And what can you do within that [technical difficulty] to improve the product and sort of reaccelerate growth that you talked about? Look, I don't know if it's precisely the right number, but it's in the right ballpark, it's in the right neighborhood. And I think if you look at it right now in that model today, some certain segments of our content groups are growing, and we're shifting it around to where they find best use of the money. And the key for me is not that you have to spend more and more money, but it's that, can you get more impact per million dollar spend than anybody else? And you do that by making great content that people care about. You do that by having great relationships with creators that are focused on the audience and making sure that the content you're making is connecting with the audience. And I think our ability to do that is so much better today than it was 10 years ago, and we've done pretty well for the -- in the first 10 years. So I'm pretty excited about having all of that $17 billion to spend with 10 years of experience behind us today. And I can see it in every year, every quarter, where the content becomes more and more impactful all the time. And we're not trying just to constantly beat ourselves. We're trying to be the best in the market. I think at the end of the day, you have to have the content that people love. And even more than that, the steady cadence of hit delivery that we've done, even this year, if you look at it since Stranger Things Season 4 and then followed with Dahmer -- Monster: The Jeffrey Dahmer Story into Watcher or into Purple Hearts and now into Wednesday. And these -- so it's beyond people just thinking, hey, I love what I'm watching. They have to also have an expectation. They're going to love what's next. And that to me is being able to build on that steady out -- smooth out the release slate. It's been really lumpy, particularly since COVID because everything shut down at this -- one thing that he ever happens in storytelling world is the entire world shut down at the same time. so that all these films got backed up and then delivered at the same time, and then people's avails got all tripped up on each other. So I think next year and the year after, you're going to see a much smoother release schedule as well. So the hits will come more steadily. And as you look for growth, especially more outside the U.S. than inside the U.S., do you shift some of the budget from U.S. produced content into more locally produced content? Well, that's been happening organically as it goes. And like I said, the beauty is if you can get the art form right, that locally produced content can play big all over the world. So it's not just the America supplying the world content. The Empress from Germany is a great example that played all over the world for us recently, Extraordinary Attorney Woo from Korea and another Korea success that also played all over the world, including in the U.S. So this cadence of international watching for us, it keeps doubling in the U.S. because people really have discovered storytelling from around the world the way that makes those moves when we move $1 from the English language to non-English production, that it can have a lot of impact. Right now, the number one movie on Netflix is a Norwegian movie called Troll, that people are loving everywhere, including in Japan, Korea and India again. I mean if we can get to the geographic area. I mean, you have such a lower penetration in some of these markets, APAC, EMEA, I mean, are those areas of sort of specific focus in terms of generating content that you think? I mean, obviously, you listed some of the content from these areas, and obviously, a lot of this plays globally, but is that -- is it sort of an extra focus to try to drive penetration and some growth in those areas? Yes. First and foremost, we want those local productions to be hugely impactful in the local territory. And if they're really great, they travel. So that's the nice windfall of doing it right. And in some cases, the biggest example, that's obviously like a Squid Game. So but the chances are, what's really different, the dynamic that Netflix has proven out that nobody else has ever proven out is that it's almost as -- not just that it's possible, but it's almost equally likely that we make a great show anywhere in the world, they could break out all over the world. That's really never been done before. And even thinking about ways like how confident are these local teams getting. This year, we produced the German entry for the Academy Awards, all quiet on the Western front, which has also been a nice commercial success for us, too. And Bardo, which is the Mexican entry for the Academy Award. I don't know that any single production companies ever done it from two different countries in the world. So that's pretty cool, right? Any other sort of genres or areas where you feel like you need to ramp investment within that $17 billion envelope. No, I think it's a constant adjustment. It's constantly turning dials up and down and looking for places who are places where they're doing it better than others. So a lot of times, I think the local taste is determined by the history of distribution in that country versus some kind of genetic predisposition to like or not like things. So I think people's habits are developed by what they could -- what they had access to before. So the reason why no one used to watch non-English-speaking content in the U.S. is we've had an embarrassment of riches of English-speaking content. And so now I think people are looking at this thinking, what are the chances that I was going to be watching new content from Korea. Now I'd say pretty high. And the idea that these folks can be global stars -- that originating on Netflix, that is something that we offer the creative community that nobody else does. And what I mentioned about the hits to the -- music hits and all those things, think about the level of star creation that has happened from Netflix that has not happened anywhere else. And if you get outside of the U.S., it's almost impossible to happen. We often see some of the biggest stars in Bollywood to be completely unknown outside of India. And versus now, I think when we have a big hit show in India, that person is recognized at the LAX. Right. So sports. Obviously, you're standing up the ad tier. Is advertising capabilities the first step into getting you guys into sports. And I say that because we're seeing this against the backdrop of Amazon investing more heavily in sports, Apple and other platforms, putting more in sport, either simulcasting or putting new original or sports right on their platform. If you don't head down that avenue, is it a disadvantage for you? Look, today, renting big sports, we've not seen a profit path to renting big sports today. Not to say there never will be, I'd say, in today's -- the economic models that are built around that are built around the economics of Bay Television and different on streaming. So I'm just trying to figure -- if we could figure out a path that renting big-league sports would be neutral to slightly -- even slightly more, but it's dramatically more expensive, I think, in terms of watching. It's very popular. I definitely agree. I just -- we've not figured out. We are not anti-sports for just pro profit. And we've been able yet to figure out how to do it. And I am very confident that we can get twice as big as we -- without sports. And then beyond that, maybe we'll have to figure out -- maybe by that time, maybe the economics change, or we have the scale to figure that out or something. But today, I'd say we did a really thing that's kind of unheard of in television -- in the history of television is we've built an enormous audience. Imagine you had 165 million households. So maybe twice that in terms of people watch Squid Game without having to premier it after the Super Bowl, right? We didn't have -- we didn't need a big loss leader to build a big audience. And if we can keep doing that, maybe that is our structural advantage to linear television. And with sports. So when you say -- you said renting sports, right? So the idea, and I think you guys have said this before, if you figure out a way to sort of own those sports like F1, which was one opportunity. That would be something you could... Yes. And if you think that we've had a big impact on music, look at the impact Netflix has had on Formula 1. So that should be able to translate, but in this case, if you create the value, it just transfers into higher prices for licensing down the road. Right. And what about other live programming? You have Chris Rock coming in early '23. Is this sort of a test of sort of live events? And could it see you move into live events sort of more fundamentally over the next couple of years? Yes. We did a lot of the plumbing work on live over the last couple of years already. So the technology was there for us. We just hadn't really tested it out. And I think about it for us is things that are creatively benefited by live, like live of the event like Presto's big -- his concert or the results show of one of our competition shows, those kind of things are actually a lot more fun to watch live. So we built the ability to do it. And technically, there's nothing really novel about live television. We should be able to do that. So this is the way I'd say it's mostly creatively driven versus trying to open up other kinds of programming. That's how to make the program that we do today, a little more fun when it's live. Got you. Okay. Shifting to advertising. Obviously, early days of the ad tier. How important is advertising to the growth of the company over the next five years? Look, it's growing. And for us, we -- we've always talked about our company as a choice company. We really care about consumer choice, and which we do. And over the years, we -- one bit of consumer choice we didn't offer was, what about if you are not price -- if you are very price sensitive and not very -- an ad tolerant, very ad tolerant. So there's a lot of folks, my son included, who say, Netflix had priced for that. I'll take that. That seems like a good idea. Because I think you watch an ad to watch a 30-second video on YouTube, it's generation on that way. So for him, I'd say, and there are people like him that will do that. So I would say that it opens the market up to us to that demographic that we've not been appealing to before, which is, again, kind of looking for they'll take the lower price and they don't mind ads. So it opens market in that way. It gives some optionality as we focus on the other piece of our revenue expansion, which will be the kind of the paid sharing, which to give those folks another option as they get into -- as they come under their own Netflix account. So in no way -- but other than that, I'd say that advertising for us is crawl, walk, run. We're definitely crawl right now. We just got -- we just turned it on and it works. Thanks. Great. It will become important as it grows because I think it's a way that people will pay with attention versus a credit card. And this is a way of expanding the offering to our members. And the more choice we have given in the past, ultimately, it has been market expanding. So we think this will be, too. Got it. So can you give us a -- is there a road map you could talk about -- to talk about how the product will evolve over time? And I guess the first part would be, do you expect to launch other ad tiers of other tiers that you guys have now, instead of just the basic tier? So we have multiple tiers today. So it's likely there'll be multiple ad tiers over time, but nothing to talk about yet. And the product itself will evolve. I suspect pretty dramatically, but slowly and gradually in that -- the things that we will hope to bring to advertisers in the future is a better mousetrap. How do we serve your advertising in a way that people could respond to it better? How is it more -- and a more elegant solution for consumers and advertisers. I think today, there's a lot of frustration with ad buyers with streaming services, delivery of advertising only because they're dramatically better than television was. And I think as they look at -- as eyeballs shift, can they have a better experience on streaming with advertising. It can be delivered elegantly in a way that is better suited to what they're watching or what time of day they're watching or would be -- when they -- could we put on a multipart ad because we know exactly which part you've seen already all those kind of things that I think we can toy around with and we'll be better and better. But our goal is we want to deliver a product that is amazing for advertisers and great for consumers. And so we have to do both of those things, and we've always kind of echoing what Reed said last week because they fit perfectly with the two things we care about the most, which is happy consumers and growing profits. You have to do both -- whatever we do, we have to do both of those. Yes. So as you go through this process, I mean, how do you make sure that it's not disruptive to the member experience? Well, as you know, we're an entertainment company with deep tech route. So we do a lot -- we test, we do test everything. So a lot of the things that we try to do, we get out to, and because we're a pretty global footprint ex China, we can get out there and test different markets in different territories and make sure that what we're doing is positive for consumers and positive for the business. Have you guys made progress in reworking the content deals so that they allow ads. You had a sort of a tale of third-party content? Yes. Yes, look, it's pretty small. We're nearly about 90% of watching is covered in the ad tier today, and there's much of legacy content in there that those deals whether flow off or get renegotiated over time. you should expect near -- not complete parity, but the near parity over time, but it's not -- definitely not necessary. Got it. So last quarter, you guys mentioned that churn remains slightly elevated. Should the ad tier help lower churn? I mean, as you guys look at -- you said it increases the TAM effectively. I mean did it happen through lower churn and a bigger funnel, more people coming in? And how would you weight those... Yes, we could. I mean, basically, as I think about it as the ad tiers a lot or the paid sharing, the ad tier gives a place for paid sharing to land. You think about potential for a softer landing for folks either who are paying for the first time or for who are looking, who are -- have some economic strain today. So I think it gives more optionality. And every time we have added more optionality works. I think the other thing that's interesting is that when people join Netflix, whatever tier they join, they tend to stick around in. So we don't think we're going to see a bunch of a lot of migration in the plans. Most because they're satisfied with the product that they joined for. Got you. And what about cannibalization of so you said that people aren't going to shift down from the higher tier but even I mean you expect a lot of existing sort basic tier. Yes. If there's organic demand for the product with that, we want to be able to serve that. It's not good for us, I think to jam folks into a situation not happy with it all. We definitely have a happy member business. Yes. And over time, I mean, you guys sort of laid out that you thought the ARPUs would be sort of similar, how you sort of came up with a $3 discount. But if you run the math on potential CPMs and ad load and all the engagement, which you have, which is dramatically better than any of the other platforms we cover. I mean there's the potential for it to be significantly higher than the $3, the ad ARPU. I mean obviously you've got to get the mousetrap right, you need all the targeting, but I mean is it -- are we right in thinking you could be sort of multiples of that $3 that you choose. Look, there's possible large upside in that for sure, but I would look at it and say, the way you grow advertising revenue is by either -- if you think about it in the CPM universe, you either grow CPMs or just grow Ms. So right now, we've got a lot of eyeballs to watch Netflix, and if they watch in the ad tier that it will grow Ms without -- and then the other one is the better and better you get at the product itself. You can grow CPMs as well. Right. And I think and I don't know if you guys said this on your guys -- with your guys video. But I mean, I think we all take a -- certainly, my team, we take a very U.S.-centric view to the ad market. I mean, it can... Right, right. And it's a much -- very high CPM, I mean -- do you see this as being a big factor driving penetration in these underpenetrated markets like EMEA and APAC? Or is it... It's possible. Good ad markets are also good Netflix market. So the socioeconomic -- the socioeconomic conditions exist for Netflix to be successful in either tier, either with ads or without. Yes. But if you had to say the U.S. market is, is it -- is it sort of half of the upside that you expect from the ad tier or... Okay. Got it. Sounds good. And lastly on add tier, just how should we think the margins for the ad tier sort of versus overall margins? Is there much of a difference? I know you have third party, you have the deal with Microsoft? I definitely shouldn't be beyond the selling cost, there's not -- the hard cost is content that's already spent. So there shouldn't be a lot of additional costs associated with the ad revenue. It should be relatively high margin. Got you. Okay. Let's shift briefly here to paid sharing, which will begin rolling out in early '23. Any other detail you can tell us in terms of, maybe you had tests in Latin America, sort of what the learning -- main takeaways there and when we should expect you guys to move forward? Yes. Look, here's the good news. The paid sharing model is the folks who use -- who we're talking about here, all use Netflix. I'll love Netflix. I watch Netflix for hours. So it's really now going back in and saying, now you may have been on your ex's password, it's time to get your own account, and we're going to create some easy -- the easy soft landing for them to do that. I would say in all those testing that we've been doing around world, it feels a lot like the way you manage a price increase. So it's really -- it's revenue positive and it should be market expanding. So when we look at it, and no mistake, I don't think consumers are going to love it, right out of the gate. And obviously, we've got to land in a way that they will, and they'll see the value in Netflix so much so that they're happy to have their own account. Right. I mean, I guess when you say it's like a price increase. So I guess, first of all, it must take the place of another pricing piece that your sort of organic price increase that you were going to do half -- I guess it gets pushed out, it takes the place of another price? That's -- I mean we -- look, this will be a big focus for us in '23. And in some places, it will be in place of another places, it will be in addition to just try to navigate it. It won't, theoretically, won't touch a lot of the same people. Right, right. That makes sense. And then is there any way for us to sort of measure or sort of forecast the churn you're going to see from this one. Obviously, it's going to -- to a certain extent, depending on how it's implemented, depending on the magnitude of price increase. But just... Again, back to engagement revenue and profit, is it revenue growth? Is it profit? Does it increase profits? That's what I think is the best way to focus on it. And getting back to just like a price increase, that don't make anyone that happy. But they see tremendous value. And we've always forward invested in value before we went to a per price increase. And I think in this case, you're talking about forward investing in value for this addressable base. These are folks who are enjoying Netflix literally for phrase today. So if they're getting a lot of value out of it, I think they'll be happy to have their own account. This is a personal question. How do you sort of prevent disruption from a sort of a hypothetical user who has two kids in college, who -- they use the service. So here's, interesting -- back, like I said, we kind of ignored doing the advertising market for too long, probably. This is another one. I think when we look back at it is we created a product that was not very easy for you and your kids, too, if you wanted to, to pay. So unfortunately, I think that this is addressing some of that, too, which is to say, my kid's going off to college, and now he's going to -- he may have his own account, when they go to college. So I just think it's -- again, it's -- if you look at the hours of engagement on Netflix, and the unbelievably low cost of a Netflix subscription, right? It's probably the cheapest thing you can do for your kids is get him a Netflix subscription. We're going to purchase the ad tier for sure, the ad tiers for them. And maybe with the time left, we have just the strategy as it relates to video games. And you talked about crawl, walk, run on the ad space. And I think you've said you've used sort of similar wording in terms of video games. Which developed faster? Does the ad tier sort of start to have an impact faster than the video game market? Or is -- what you're doing in video games? Well, they're both pretty long-term initiatives. So we're in the early stages of both as well. We're a little probably or longer into the games by much. And the core is I think the way you think about video games is I think in 10 years from today, consumers are going to spend a lot of time and money watching movies, watching TV shows and playing games. I'm not exactly sure what the proportion will be, and it will probably be very different for each consumer. And today, we're barely in the game part. We just got into the game business. And I think it will be important, I think, for the next decade of to be part of that entertainment package. And can we better monetize gaming through the subscription model, the way that we did for TV and film. So we're in the early, earliest days of that investment. This again was Greg Peters, our COO, who's been phenomenally engaged in some light M&A, building that team, a great leader in that group called -- named, Mike Verdu, who is super accomplished in the gaming industry and being able to kind of integrate these game publishers and game developers into Netflix has been really fast in anything. And they'll move fast, and we'll do both. So the key is like we're doing these at the same time, the same way we kind of added film to television and international to domestic and made those migrations. You have to be able to walk into them at the same time. And are there more -- like you said you bought a couple of smaller publishers or there's a lot of these guys out there. A lot of them are having -- spent on the mobile side having problems with IDFA things like that. I mean, it seems like that would be a good opportunity to... It's an amazing opportunity to be able to reach a lot of people and made in an incredible way that mobile gaming -- or in the early days and as it evolves, how to reach these big audiences and have big cultural impact. It's been pretty hit and miss, I think, for the game industry. And I think for us, like you'll see coming up for us, we have new games coming out in the Stranger Things world across a bunch of our IP, even our Nailed It baking competition again based in there. So the ability to expand our IP universes in games will be incredible. But just as incredible will be developing games that will become movies and television shows, too. Makes sense. And then lastly for me. M&A, we were just talking about M&A in the video game space. I mean you haven't done any sort of large-scale acquisitions. I mean especially with what we're seeing in the media ecosystem and all the fallouts I'd say over the last two days seems to maybe be a little bit worse than what we thought. I mean, there may be some opportunities for you guys to buy some assets that could sort of add to your franchise. I mean what's your overall philosophy on M&A? I mean -- and do you see that as a way to sort of improve the product and sort of achieve some of the goals coming? So we've historically been builders, not buyers. I think that's been true of everything that we've moved ourselves into. In the last couple of years, though, we did some acquisition around Scanline, a great VFX company, Animal Logic, a great animation company, companies like Night School in the game space. So we've done some light M&A over the last couple of years, and it's gone well for us in terms of integration. Those have been -- the things that are most exciting for me is that we ever looked at something on the road. We mostly think about it as in the IP, things that are attractive in the IP space. But like we did the Dahl Story Company a couple of years ago. But I think right today is we're historically we're builders versus buyers. So I think we'll probably lean on that for a while.
EarningCall_1957	Hello. Thank you for standing by. Welcome to the Brown-Forman Corporation Second Quarter and First Half of Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that todayâs conference may be recorded. I would now like to hand the conference over to your speaker today, Sue Perram, Vice President Investor Relations. Please go ahead. Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Formanâs second quarter and first half of fiscal 2023 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer; and Leanne Cunningham, Senior Vice President and Chief Financial Officer. This morningâs conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the companyâs ability to control or predict. You should not place undue reliance on any forward-looking statements, and except as required by law, the company undertakes no obligation to update any of these statements, whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the second quarter and first half of fiscal 2023, in addition to posting presentation materials that Lawson and Leanne will walk through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events & Presentations. In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the companyâs financial conditions and results of operations are contained in the press release and investor presentation. Well, thank you, Sue, and good morning, everyone. Iâm pleased to share our results with you today as we had a strong first half for fiscal â23. We delivered double-digit top line growth on both the reported and organic basis. This performance was led by the strength of our portfolio brands, which continued to benefit from strong consumer demand. We also benefited from the rebuilding of distributor inventories, which continued to recover as supply chain disruptions and constraints eased, particularly for glass. The recovery though has added additional costs as overall supply chain logistics and transportation continue to be constrained, and we proactively took actions to satisfy the demand from our distributors and retailers ahead of the important holiday season. These costs, along with inflationary increases and the negative effect of foreign exchange more than offset the positive impact gained from favorable price mix and the removal of the EU and UK tariffs on American whiskey. The result was gross margin contraction though during the first half. Now, let me provide a few additional details on the first half. Our reported top line growth increased 11% with organic growth increasing 17% after adjusting for foreign exchange headwinds. Organic net sales growth in the first half was driven by continued strong growth for Jack Danielâs Tennessee Whiskey across all geographic clusters in the travel retail channel, Woodford Reserve in the U.S., Jack Danielâs RTDs in Australia and Germany, along with New Mix in Mexico, and Jack Danielâs Tennessee Honey and Jack Danielâs Tennessee Fire in the United States. Jack Danielâs Tennessee Whiskey was the largest driver of our top line performance, delivering double-digit growth with an organic net sales increase of 18%. The growth was driven by strong consumer demand, higher pricing and favorable channel mix. Our super-premium American whiskey portfolio also increased organic net sales by double digits. Woodford Reserve and Old Forester grew organic net sales 40% and 39%, respectively. Despite supply chain â supply constraints in the prior year, consumer demand for Woodford Reserve remained strong, and we were better able to meet this demand as glass supply challenges eased, and we increased our bottling capacity. The consumer trends of convenience and flavors continued to fuel double-digit growth of our RTDs, which were the third largest contributor to overall company growth. Jack Danielâs RTDs grew organic net sales 15% and New Mix delivered 46% organic net sales growth. Jack Danielâs Tennessee Honey and Jack Danielâs Tennessee Fire also benefited from these same consumer trends as well as improved glass supply. Both brands grew organic net sales double digits, 12% and 28%, respectively. I also wanted to mention our full-strength tequila portfolio. As we shared last quarter, Herradura experienced significant challenges during the first three months of fiscal â23 due to supply chain disruption, mainly related to glass. Fortunately, glass supply increased through the end of the first half enabling us to better meet demand and deliver a 9% increase in organic net sales for Herradura. Organic net sales for el Jimador increased 18%, driven by higher volumes in the United States. So now, turning to gross profit. In the first half of fiscal â23, our reported gross profit increased 8% or 17% on an organic basis. We continue to focus on an overall strategy to increase prices more consistently year after year and benefited from 240 basis points of favorable price mix in the first half. Based on Nielsen data, Brown-Forman remains one of the pricing leaders in the U.S. with nearly 3% pricing growth outpacing total distilled spirits growth of just over 2%. This continued emphasis on identifying pricing opportunities, not just in the U.S., but also internationally, is a key part of our focus on revenue growth management. These efforts span across multiple spectrums, including mix such as channel, pack and customer, promotional strategy and efficiency, trade terms and distributor margins, and, of course, pricing. However, gross margin headwinds more than offset these pricing actions, resulting in 130 basis points of gross margin contraction. Supply chain transportation and logistics costs and constraints remain challenging, and we took proactive steps to ensure our products would be on the shelf ahead of the important holiday season. We believe these decisions supported our top line growth, ensured we met the strong consumer demand for our brands, and allowed us to continue to implement our long-term pricing strategy. With our long-term perspective, we have the opportunity to continue to invest in the momentum of our brands and ensure weâre developing and driving the next generation of growth. Over the last two decades, weâve transformed our portfolio to focus on premium and super premium brands. Weâve sold our consumer durables business, the majority of our wines, as well as standard brands in slower-growth categories. We acquired much more premium brands like Casa Herradura, our 3 Single Malt Scotches, Slane Irish Whiskey and Fords Gin. We continued efforts to premiumize our portfolio through the first half of fiscal â23 with several new acquisitions and new strategic relationships. First, weâre very excited to welcome Gin Mare, a fast-growing ultra-premium gin and its recent line extension, Gin Mare Capri. Gin Mare is the worldâs number one ultra-premium gin according to the most recent IWSR data and is sold in more than 70 countries. With the majority of sales in Europe, Gin Mare is the largest â Gin Mareâs largest market is Italy, followed by Germany, Spain and the travel retail channel. The brand will be a strong addition to our emerging brands portfolio, particularly in Europe, where its scale will be beneficial as we continue to build and expand a focused emerging brand sales group. We believe Gin Mare at over 200,000 9-liter cases has strong positioning and is complementary to Fords Gin and our broader super premium portfolio, and weâre delighted is now part of the Brown-Forman family. Weâre also looking forward to entering the rum category with DiplomÃ¡tico Rum. Based on IWSR 2021 data, the super-premium plus rum category has grown at an annual rate of 17% over the last five years, and DiplomÃ¡tico was the number one super-premium and ultra-premium rum. DiplomÃ¡tico has a strong brand heritage, has reached significant scale in attractive geographies, is growing quickly and has a strong margin profile. Similar to Gin Mare, the brand has a strong European presence, aligning well with our investment in owned distribution in markets such as France and Germany, which are DiplomÃ¡ticoâs top two markets. It, too, will be part of our emerging brands portfolio in Europe, as well as in the United States, which is the brandâs third largest market. When considering the expansion of our portfolio, we look for acquisitions and partnerships that enhance our ability to deliver meaningful growth, improve key financial metrics and increase shareholder returns. We believe Gin Mare and DiplomÃ¡tico Rum are well positioned to accomplish all three of these objectives. And with the addition of these two brands, Brown-Forman now owns one of the top five super-premium plus brands globally in four strong growth categories, U.S. whiskey, tequila, gin, and rum. In addition to these acquisitions, weâre developing significant relationships that we believe can propel our growth. Our recently announced global agreement with The Coca-Cola Company to deliver the iconic Jack & Coke cocktail as a branded ready-to-drink adult beverage is an exciting play in an attractive category. The opportunity for the Jack Danielâs and Coca-Cola RTD is significant, and we believe this will meaningfully expand the growth of both of our businesses. With the successful launch of the Jack Danielâs and Coca-Cola RTD in November in Mexico, I want to thank the teams of Brown-Forman and Coca-Cola who worked to make the product launch a reality. I would also like to take a moment to share a bit more about the significant opportunities we see within the RTD category. Based on IWSR 2021, the RTD category is a $39 billion business globally and is projected to grow in the high single digits with the cocktail and long drink segment projected to grow even faster, delivering double-digit growth over the next five years. We believe RTD cocktails address a distinct consumer occasion. And based on our results, weâve not seen the growth of our RTD cocktails result in a decrease in our full strength products. In fact, weâve experienced growth of both of our full strength in RTD products side by side, proving to be a net benefit. Jack Danielâs existing RTD products hold approximately share a 2.5% share of the global RTDs business and approximately 9% share of the cocktails and long drink segment. We believe there are numerous opportunities for geographic expansion and to gain share. Based on IWSR 2021, our current Jack Danielâs RTDs products have approximately 25% of the global â and cola business concentrated largely in two markets, Australia and Germany. Thatâs a lot of runway for us to expand geographically. And of course, Coca-Cola is a wonderful company to work with because of the global reach of their bottling network and the strength of the iconic brands standing together beside ours. We look forward to expanding in a number of key markets around the world in the first half of calendar 2023, including the large RTD markets of the U.S. and UK, as well as additional selected European, Asian and Latin American markets, and I look forward to sharing more as these markets launch in the upcoming quarters. In addition to our relationship with Coca-Cola, in September, we announced a new multi-year global partnership making Jack Danielâs an official global sponsor of McLaren Racing, taking our iconic Tennessee Whiskey brand to the fastest-growing sport in the world, Formula One. Our partnership begins officially on January 1st for the 2023 racing season. Appeal for Formula One continues to grow at the fastest rate of any major global sport with more than 1 billion fans and viewership that regularly exceeds that of the National Basketball Association, the NFL, the Premier League and the Champions League. The majority of the sports growth comes from the next generation of fans, providing a powerful opportunity to reach new consumers of legal drinking age and expand Jack Danielâs relevance in pop culture. Identifying the right partner in this space was of paramount importance, and we believe we have found that in McLaren Racing. Our globally iconic brands share common values and commitments to responsibility and sustainability. This partnership is an important and high-profile global platform to promote responsible consumption and directly combat drunk driving. Jack Danielâs has a long track record of promoting responsible consumption of our products, and our responsibility message appears in all of our communications and promotional materials. We believe the new partnership with McLaren Racing and Formula One creates an exciting opportunity for Jack Danielâs to live boldly at every turn, engaging a truly global fan base with races on most continents around the world. In summary, we had a strong first half of fiscal â23 and continue to invest boldly behind our brands, our people and our long-term growth. The global macroeconomic and geopolitical environment remains volatile and uncertain yet we remain optimistic and confident as we look ahead. At the heart is our performance ambition that is there will be nothing better in the market than Brown-Forman. This promise was on the very first bottles of Old Forester signed by George Garvin Brown, and it remains our pledge today across all aspects of our business. We often describe this ambition, not as a goal or a destination, but a way of thinking a way of working and a way of making decisions. We have faced numerous economic, political and environmental challenges over the past 15 decades and it thrives because we have the agility and resilience to adapt and seize opportunities. Weâre 152-year-old company with a focused, yet agile strategy and a clear ambition, nothing better in the market. With that, Iâll turn the call over to Leanne, and sheâll provide more details on our second quarter and first half results. Thank you, Lawson, and good morning, everyone. As Lawson reviewed our headlines for the first half of fiscal 2023, I will provide additional details on our business results and our outlook for the full year. First, I will share our top line results by geography for the first six months of fiscal 2023. The strong results were broad-based with each geographic cluster achieving double-digit organic net sales growth compared to the same period a year ago. The U.S. business accelerated through the first half, delivering organic net sales growth of 11%. This performance was driven by an estimated net increase in distributor inventories, price increases across the portfolio of brands, continued premiumization along with positive size and channel mix, as well as innovation. Woodford Reserve was the largest contributor to organic net sales growth in the first half, with the positive impact from higher pricing and higher volumes as glass supply and capacity constraints eased, supporting our ability to better meet the strong consumer demand. The Jack Danielâs family of brands also contributed to the increase, led by volume growth from Jack Danielâs Tennessee Whiskey. In addition, Jack Danielâs Tennessee Fire, Jack Danielâs Tennessee Honey and Gentleman Jack experienced volumetric gains as they benefited from an improved supply chain environment. The newest members of the Jack Danielâs family, Jack Danielâs Bonded Tennessee Whiskey and Jack Danielâs Triple Mash Whiskey are the first two permanent super-premium expressions in almost a quarter of a century. These brands are off to a strong start as they continue to gain distribution and have been awarded multiple gold medals for taste in global spirits competition. Korbel California Champagne partially offset the growth of the rest of the portfolio. The sparkling wine category experienced significant growth during the pandemic and the trends are beginning to normalize. The brand is benefiting from higher pricing, but that 7-premise takeaway trends continue to be impacted by the shift to the on-premise as consumers have made the gradual return to restaurants and bars, though trends are beginning to normalize. We see this in consumer mobility data, which has continued to hover around pre-pandemic levels. This channel shift along with account mix and supply chain impact are the main drivers of the difference between takeaway data and our actual results. As we have mentioned, we continue to work to rebuild finished goods inventory levels across the three-tiered system, though we still believe distributor inventory levels remain below their pre-pandemic levels as consumer demand remains strong and transportation and logistics constraints persist. Collectively, our emerging international markets continued to deliver very strong double-digit organic net sales growth, increasing 27% driven by Jack Danielâs Tennessee Whiskey, particularly in Turkey, Brazil, Sub-Sahara Africa and Poland, and RTDs, which had a strong performance with Jack Danielâs RTDs and New Mix growing strong double digits in Mexico, where we are gaining share in a growing category. This growth was partially offset by year-over-year declines in Russia due to the suspension of our commercial operations beginning in March of 2022. Developed international markets collectively delivered strong organic net sales growth, up double digits for the first half of the fiscal year, building on the double-digit growth in the same prior year period. While the inflationary environment is impacting consumer confidence, we have not observed signs of down trading and have been able to continue to increase price through our revenue growth management strategies. Jack Danielâs Tennessee Whiskey was the largest contributor to growth driven by Germany, where Jack Danielâs is gaining share within total spirits and the whiskey category; Spain, which is benefiting from the return of tourism; and Korea as consumers shift to international whiskey brands. Momentum continued for Jack Danielâs RTDs with double-digit organic net sales growth led by Australia and Germany. Consumersâ desire for convenience continues to propel interest in the RTD category in these markets, and we gained share. el Jimador, Woodford Reserve and GlenDronach, each delivered very strong double-digit organic net sales growth, driven by our emerging brands model, which supports our strategic priority and increasing focus on our premium and super-premium portfolio. Route-to-market models play an important role, not only for our super premium portfolio, but also our core portfolio. Owned distribution can fuel share growth, strengthen our position, unlock future potential and enable us to capture more of the value chain just to name a few of the impacts. Since transitioning to own distribution at the beginning of this calendar year, Belgium has more than doubled its organic net sales, compared to the same period last year. Finally, the travel retail channel continuing its strong rebound, growing organic net sales 67% led by higher volumes across much of our portfolio as travel continued to rebound with the return of international airline travel and the cruise industry. Our business in this channel is quickly recovering and is close to returning to pre-COVID levels. As Lawson shared the details of our gross margin for the first half, I will now turn to our operating expenses. Organic advertising expenses in the first half compared to the same prior year period grew at a higher rate than our top line growth, largely due to the timing of our increased marketing investment in the United States to support Jack Danielâs Tennessee Whiskey, Herradura, the launch of the Jack Danielâs Bonded series and Woodford Reserve. Our organic SG&A investment increased double digits, driven primarily by higher compensation-related expenses and the investment behind our people as we are gradually returning to in-person events and activities in support of our collaborative culture and relationship-based industry. In total, reported and organic operating income grew 8% and 19%, respectively, in the first half of fiscal 2023. These results, combined with a decrease in our effective tax rate resulted in an 11% diluted earnings per share increase to $0.99 per share. And finally, to our updated fiscal 2023 outlook. We had a strong first half of fiscal 2023, with double-digit reported and organic net sales growth, driven by strong consumer demand and the rebuilding of distributor inventories as supply constraints eased. We remain confident in the collective growth of our U.S., developed and emerging international markets, along with the travel retail channel, as we have now cycled against the more volatile periods of the pandemic and believe we are seeing trends begin to normalize. We do remain cautious given the current volatility and uncertainty of the global macroeconomic and geopolitical environment, as well as the potential impact of inflation and rising energy prices on consumer spending. We believe the strength of our portfolio of brands, innovation, increased pricing and our strategic investments will enable continued growth through the reminder of the fiscal year, and therefore, we are raising our full year fiscal 2023 organic net sales growth guidance from the mid-single-digit range to the high-single-digit range. As we have shared with you in previous quarters, I would like to reiterate that the seasonality of our fiscal 2023 results will be impacted by the abnormal seasonality of the fiscal 2022 shipments due to supply chain disruptions. In the first half of fiscal 2022, distributor inventories did not increase ahead of the important holiday season, as is typical. And we experienced stronger shipments in the second half of fiscal 2022 as supply chain challenges began to ease. And as expected, in the first half of fiscal 2023, distributor inventories continued to return to more normalized levels, which benefited our growth rate by 5 points. Our second half results will lap the increase in the net change in distributor inventory related to the rebuilding of our inventory position in the prior year period. As it relates to our fiscal 2023 cost, the inflationary environment continues to increase input costs ahead of our expectations and supply chain disruptions, particularly transportation, logistics and freight remain challenging. As Lawson mentioned, we have taken proactive steps in the first half of the fiscal year to ensure our products would be on shelf ahead of the important holiday season to meet the strong consumer demand for our brands. We believe these investments support our top line growth, both in the short term and the long term. Additionally, we have noted the impact of foreign exchange on our reported first half results. The U.S. dollar has strengthened against many major currencies. Most notably, we are seeing the negative effect of the appreciation of the U.S. dollar against the euro, Turkish lira, and pound sterling. While we are actively working to navigate these challenges and their impact, we believe the headwinds of inflation, supply chain disruption costs and foreign exchange will persist for the full year. Partially offsetting these headwinds, we continue to expect pricing and the removal of the EU and UK tariffs on American whiskey to remain tailwinds for the full year. Based on the stronger-than-expected headwinds, we are updating our reported gross margin for the full year. We now project the reported gross margin for the full year to be consistent with the first half of fiscal 2023, primarily due to combined effects of higher input costs, negative foreign exchange and mitigation costs associated with supply chain challenges. For the last components of our outlook, the outlook for operating expenses remains the same. In addition to our philosophy of growing the investment behind our brands at a rate similar to our top line growth, we are reinvesting a portion of the EU and UK tariff relief back behind our brands. And we will also invest behind our people and expect a continued rebound of discretionary spend to support our business needs in a more normalized environment. We firmly believe that investing in our brands and our people is the right approach to driving strong top and bottom line growth. Based on these expectations, we are also raising our full year fiscal 2023 organic operating income growth guidance from the mid-single-digit range to the high single-digit range. Our fiscal 2023 effective tax rate guidance remains in the range of approximately 22% to 23%, and our capital expenditures are still planned to be in the range of $190 million to $210 million. Before I conclude my remarks, I wanted to briefly highlight our longstanding capital allocation philosophy and how it has guided our actions against all four principles over the last 12 months. The first principle is to fully invest behind our business. In the last year, we increased capital investments to expand capacities to support the strong long-term demand of our brands, specifically in our Kentucky distilleries, tequila operations, as well as our GlenDronach distillery. The second principle is to pay increasing regular dividends. As we announced on November 17th, the Brown-Forman Board of Directors approved a 9% increase in the regular quarterly cash dividend. We are proud to be a member of the prestigious S&P 500 Dividend Aristocrat Index, having paid regular quarterly cash dividends for 79 consecutive years and increase the regular dividend for 39 consecutive years. The third principle is to opportunistically look for acquisitions that we believe create long-term value. While the Gin Mare and DiplomÃ¡tico Rum acquisition announcements came in quick succession, there has been no change to this guiding principle as timing is reliant on when an owner decides to make a brand available for sale. And finally, the fourth principle is to seek opportunities to return cash to shareholders in excess of regular dividends. As you will recall, last year, Brown-Formanâs Board of Directors declared a special cash dividend of $1 per share or approximately $480 million on our Class A and Class B common stock. These are few examples of our guiding principles and actions. Our capital allocation philosophy has allowed us to maintain a healthy balance sheet and has produced superior returns over the long-term. We firmly believe our capital allocation philosophy coupled with our strategic priorities will continue to deliver strong results for our investors. In summary, and as Lawson stated, the first half of fiscal 2023 was strong as we delivered double-digit top and bottom line organic growth. Despite near-term challenges and uncertainties, we continue to be agile as we identify ways to mitigate supply chain disruptions to satisfy consumer demand. We are confident if we use our strategy as our guide, stay true to our values, and remain focused on delivering nothing better in the market, we will continue to navigate the ever changing market dynamics. I hate to get granular, but itâs a thing Iâm getting kind of questions on most this morning is just around the guidance and trying to understand how the pieces fit together because we donât have visibility into currency. So, I guess, first, gross margin outlook is worse, but raised the operating profit guidance. So, can you just help us bridge those two dynamics? How we should be thinking about operating expenses and how we should think about FX and the impact on those metrics? Good morning, Lauren. So, Iâll start at kind of the highest level and walk all the way through our kind of our gross margin component for the full-year. And we still expect favorable tailwinds from stronger price positioning, the innovation, which weâve launched with the Jack series and Herradura Legend at that higher margin products, and of course, the removal of the EU and UK tariffs. Now, the headwinds that we have been talking about remain the same, but they â some of them have strengthened. Firstly, Iâll start with inflation on our input cost. For F â23, we did plan for our inflation on our input cost to be above historic norms. But the current levels on our commodities are beyond what we had expected. And the theme really is the key drivers of energy and fuel, itâs everything it takes to make and move both, our inputs and our finished goods. So, just to give you a little bit of detail around that because Iâm sure itâs on everybodyâs mind. As it relates to our key components, our glass pricing continues to increase because of the commodities that it takes to produce it, which would be natural gas, diesel and fuel and labor. Freight, itâs really the cost of fuel that continues to be very volatile and the diesel prices are at all-time highs. We do see the continued imbalance of the equipment from the global freight and transportation system, and we expect that to continue throughout the full year. Natural gas, the prices are â they remain elevated even though they did moderate as we got towards the end of our second quarter. And as it relates to grain, again, similar, elevated above what our expectation was and the freight cost to transport our grains to our facilities has increased. So, moving â we are using many mitigation efforts as we look at these global logistics and transportation challenges. We, in this year â and when we think about how we planned it, we had planned that that imbalance of the equipment wouldnât be as significant as it was in the prior year. And we have found that it continues to be. So, weâve had to continue to use things such as airfreight and chartered vessels, working to try to get back to our normal shipping lanes as quickly as possible. But with the constraints that were in the environment and trying to get our products on the shelf for the important selling season, we made the decision to invest in those costs to make sure those products were there. And then to our FX rate. Generally speaking, as you look at Brown-Forman over a long period of time, FX generally isnât a factor or a significant driver in our results. As a U.S.-based company this year, it is. So, as we think about the remainder of this fiscal year as it relates to our foreign exchange, we see a similar impact in the second half as we have in our first half, therefore, leading us to a full year outlook that our gross â reported gross margin for the full year will be consistent with the rate that we have at the end of this first half. Now, going to your second part of the question, with our strong top growth, Lawson, will talk about that. But weâre continuing to invest from an operating expense perspective in line with our philosophies that we talked about in our prepared remarks. So, Lawson? Stronger top line growth. So, I mean thatâs what â I think, look, the top line organic numbers are very, very strong, and they have remained very strong. A lot of that is I do think the consumer is still pretty healthy. I mean, for all indications of our own business, we are not seeing any kind of trade down. In fact, weâve actually seen stronger performance even at the higher end of our portfolio. So, even â and I think to everyone â I know itâs always interested in the U.S. If you look at the TDS figures in the U.S., youâre still seeing premiumization as strong â I donât know as strong as ever because â but itâs certainly continuing where the product, the $20, $30 and $40 and above are performing better than the lower value. So, youâre not seeing the trade down that so many people have suspected would be coming through. I would say thatâs â I donât know if itâs global, but itâs certainly more than just the U.S. Weâre just not seeing the weakened consumer yet. And the last thing I would add is we just continue to be really fortunate in an environment with the inflation on our commodities that weâre seeing is that we have a very strong portfolio of premium and super premium brands that are better able to handle these pressures that weâre seeing from the macro world. Great. Thank you very much. Wondering if you could talk a little bit more about tequila. I think we all understand some of the supply issues. But itâs had extraordinary growth. Is it moderating at all just in terms of what you think underlying demand is? And in your view, is rum potentially kind of the next tequila a few years out? Thank you. Letâs hope so on that last one. So look, tequila, and now predominantly talking about the United States here. I mean, we have had some comparisons that have been really, really difficult. And I think thatâs true across the category and some of the other brands that have had these extraordinary growth rates over the last few years. So, that has something to do with it. But, we have â Herradura, probably more than any other brand so far year-to-date has been constrained by glass. Itâs gotten better over the last months, but it was really rough in the first quarter. And so, we are expecting to see improvement as we move throughout the year. The demand for the brand itself has been so strong in the last few years that I donât really think itâs so much a weakening in the category or a weakening of consumer demand. I do think itâs mostly comps and then in our case, at least glass. So, I still believe itâs going to be one of the fastest-growing categories over the next several years, and itâs still â we still feel like we have some of the best brands in the business, so. And then, rum, weâll see. Super premium rum is growing very nicely now. It is growing really quickly in Europe. So, this is one of those acquisitions that really is much bigger in Europe than it is in the United States, which is kind of different than most of the acquisitions weâve done over the last, say, 10 years. Thereâs a lot of rum, particularly in Southern Europe, but really across Europe. So, itâs a big category. Weâve got one of the best brands, if not the best brands, at these higher price points. And it will be interesting to see what happens in the U.S. business. And does that become a tequila-like growth rate? Itâs hard to predict those things, but weâre making a bet that we can grow and grow that brand into something pretty sizable in the U.S. So just â Leanne, maybe a clarification, just a follow-up on Laurenâs question, one clarification and then had another kind of question around just the FX piece. Just â if weâre looking at the â you gave the impact where you said in the back half of the year, the impact of foreign exchange I guess, for the full year will be equal to what itâs been for the first half on gross profits. Is that same â does that flow through the P&L as well? So, will the FX impact on operating income for the full year be similar to what itâs been in the first half? Okay. And then just the gap, the fact that itâs a much bigger impact on gross â on operating income. Can you just kind of give us a little bit â just why that gap is so much â why the FX impact is so much greater on OI versus gross profit? So Iâll start at the top where our strip net sales, as weâve reported, is negatively impacted by 6%. Thatâs largely a translational impact, as we said, driven by the appreciation of the dollar against the ones â the currencies that are specific to us, which are the euro, the Turkish lira and the pound sterling. Gross margin weâve already talked about was 140 basis points. Thatâs a bit different than our top line impact because the majority of our products are produced inside of the United States. And then just flowing down through the rest of the P&L, it has an outsized â a magnified impact as you move down just because itâs on a smaller base. But there continues to be, as we have said before, no meaningful remeasurement or translational impacts. And we just â it continues to be â it hasnât been a factor for Brown-Forman for a period of time, a key driver. And hopefully, itâs one that reverses, and we were not talking about that at some point in the future. Yes. Bryan, let me add on to it a little bit, too. The â if you guys â I would encourage everyone to look at page 7 in our â on the accompanying slide deck. I think it â I mean, it lays it out pretty clearly. You can see in there that our price mix and tariffs offset the input costs. As bad as they were, we were calling away with price actions around the world, and then we knew about the tariff money. The killer on the gross margin has been the foreign exchange. So, how that plays out the rest of the year, I mean, we will see. But â yes. I mean this is an impact that obviously we didnât see coming. Yes. Lawson, thanks for that. Because that was â Iâve got that. I was looking at the slide and trying to figure out what that looks like for the back half of the year. And I guess, youâve kind of maybe answered this question. But just the fact that so much of this is FX is why you wouldnât contemplate maybe raising prices or taking other actions to try to offset the margin pressure because itâs really something you canât control. Is that the right way to think of it? That is a fair way to look at it. I mean, I think on the pricing question, because thatâs a good one. I mean, as weâve been talking about, I think, for the last 5 or 6 quarters, weâve been trying to change the Companyâs execution of pricing around the world. We â I know youâve been around long enough. I mean from 2000, the financial crisis was a really nice blend or balanced view, I guess, between volume and price. And then the financial crisis hit, and we went through 10 years in this industry with virtually no pricing. Weâre trying to change that dynamic inside the Company right now, which involves â weâve said low single digit, that 2% to 3% range, but doing it pretty much everywhere and for a year. And so that â and weâre executing against that and successfully executing against it. And itâs been something I think the groups are quite happy with. But that also means you donât turn around on a dime because of foreign exchange movement and try to do something significantly bigger or an input cost movement either. So, weâre going to continue that steady climb. And hopefully, over the long run, thatâs what delivers the most value. At this point, as weâve said, weâve not chased away consumers through these price increases, which is obviously very good news. And we think weâve kind of found the right level of what it takes to maximize, sort of consumer demand. So, I guess I just wanted to make sure Iâm understanding your response to both Bryan and Laurenâs question. So just to be quite specific, I think in the schedule, foreign exchange was a 14-point headwind to operating income in the first half of the year. So, if thatâs the same, does that more or less imply â like is our math right that reported operating income is going to be down kind of in this mid-single-digit range? A, is that right? And then, I guess just maybe â I would love to ask about the implied organic sales guidance for the back half of the year. Can you maybe just remind us what your expectation is for distributor inventories? I know it was 500 basis points tailwind in the first half, but just any color on what you expect for the second half or full year would be helpful. And just because, I guess, in that context, the implied organic revenue growth to go from high single digits up to 17% in the first half is a pretty meaningful slowdown. So, just any color on that would be really helpful. Thanks. Thank you, Peter. And then, Iâll start with kind of the reminder of the seasonality of our growth, which is for â our seasonality for fiscal â23 on the top line, it is going to be impacted by the abnormal seasonality of our 2022 shipments. And we all lived through that, which â the first half of 2022 with glass supply constraints, we didnât build our inventory ahead of the holiday season the way we typically do. And then when glass supply challenges began to ease in the second half of our fiscal year, we were able to increase the level of shipments out to the market. So, then as we lap that in fiscal â23, weâre continuing to work to rebuild our distributor inventories, as you noted. And you can see on Schedule D, our growth rate in the first half had a 5-point benefit on a year-over-year basis. And again, that second half of this year has to lap the very strong comparisons that we had last year related to our inventory rebuild. So, then going specifically to the rebuild efforts. Since weâve been working on this, and weâve said this last quarter, as weâve been rebuilding inventory, we have continued to experience a very strong consumer demand, and weâve launched new innovations. So, while our inventory position is improving, there is still some brands and sizes that have to be replenished. So, we do believe that inventory â distributor and retailer inventories are below â remain below pre-pandemic levels. Weâre making progress on that. And at this point, to the extent that we can look out, we believe our target as far as a return to normal levels would be in the early part of F â24, and weâll talk more about that as we get closer to that fiscal year. But we expect it to remain through this fiscal year. And then, to your other part of FX impact on OI, and we talked about how it flows down the outside. We continue to â for the second half, we only guide on an organic basis, which wouldnât have that FX impact in there. We are sharing that â in this report that our estimate would be is like â our assumption would be that the second half impact of foreign exchange would be similar to the impact of the first quarter â first half. Sorry. So, given your earlier commentary on gross margin headwinds for this year, I think that was very clear. Iâd like to step back and actually focus on the long-term story. So, how should we think about your gross margin development, given todayâs news, over the next 1, 2, 3 years? Is there a way that you can quantify what you think you can achieve in terms of expansion in that time period? And then, one question on the top line guidance. To what extent is there a downside risk on this stronger guidance from perhaps weaker volumes or mix if a recession were to come and the consumer were to weaken? Thank you. Nadine, as weâve talked about before, on gross margin expansion, we have the entire company actively working on all elements of revenue growth management from pricing to effective promotions to all of the elements of pack size, distributor margins, and we are working significantly on our costs. As we look out, we continue to hope that the imbalance of the freight equipment will subside in this next kind of 1- to 3-year period so we can return to normal shipping lanes, which will have significantly less cost associated with that. Weâve been two years now with that higher air freight to get our products to market to continue to support consumer momentum. FX, again, when we look back over our recent past, it hasnât been a key driver. We canât predict whatâs going to happen in that space, but we would say as we look over history, it generally isnât a key driver. And then, inflation, that â weâre working to do everything we can to mitigate those costs. But if â theyâre being driven by the macroeconomic environment in which weâre operating. And then, I think you were... Let me add a little bit of color to the freight and logistics line, just so sort of every understands it. I mean, if you â if we back up six months, we were in the throes of some serious glass shortages. We still have some problems now, but itâs certainly better. But back in the summertime, we were looking out at really European and international holiday season, we could see that we were not going to be able to get our product to market in the normal way that we do it. And so, we were kind of stuck in a corner and said, all right, weâre either going to take on these literally tens of millions of dollars in freight expenses so that we can actually get our products on the shelf or just not sell it. And we chose the former, which I still think ultimately is the right long-term decision. But, back to your gross margin expectations going forward, we will not have â I mean, gosh, I would hope we donât have those coming over the next â really â once we get through this holiday season, we hope to return to normal. It does feel like conditions are moving back towards a normal state again, and then â so that will be a boost to the margin. The question was on the top line guidance that you guys have taken up today. To what extent is there downside risk to that if the consumer were to weaken in a recessionary environment? Or did you guys build that into your assumptions when putting out this new guidance? To the extent that we could build in all of the assumptions that we were aware of with the trends and the information we have, it would have been built into the raising of our guidance. I mean, I think Iâd still argue, we still feel pretty good about the consumer takeaway. While normalizing, if you look at any of the â I mean, this is a U.S. comment, but the Nielsenâs and NABCA trends. But we â as weâve been saying all along here, we havenât seen the trade down. We havenât seen a weakness in consumer demand yet. I just donât â I tend to believe that not only Brown-Forman, but this category of super premium spirits is an affordable luxury that is, one people donât like to give up. And I think the combination of that with strong â wages remain strong and employment, all the other macro things that are working well. I think itâs a relatively low risk. Lawson, I wanted to take a step back and ask about your ready-to-drink strategy. Just strategically, youâve had a lot of success so far. And it seems like itâs going to increasingly become a bigger part of your portfolio as well as your peers. How do you think about it within the portfolio? How do you think about margin implications relative to the base portfolio? It certainly would be negative from a mix perspective. But â just broader thoughts on how this is going to evolve within the portfolio? How do attempt to limit cannibalization and maybe some updated thoughts on the Jack & Coke RTD? Yes. So, I mean thatâs obviously the â the story right now is the Jack and Cola RTD, which just launched in Mexico a few weeks ago, so obviously, only in the first few days of launch, but moving. Yes, we remain very excited and very optimistic on what we can do in this category. RTDs, obviously, if you look at the U.S. trends, RTD â spirit-based RTDs are flying, driven by a few very big brands. And we hope to join those ranks over the next year. Weâll be launching in the first half of 2023 in the U.S., in the UK, and then a handful of different European and Asian markets. Now just to make sure everyone â I donât know how much of this weâve given out. In the U.S., in Germany and Australia, Brown-Forman will be doing the sales, and that is a bit margin dilutive if RTDs were to get massive. Now Germany and Australia are already really big businesses. And so, moving forward, we donât expect a lot of dilution from those markets. But, when you get to the rest of the world, itâs different. Coca-Cola is doing the sales, and weâre selling bulk. And so that is not a dilutive margin. So itâs mixed as to how thatâs going to look going forward. But at the end of the day, these are brands that we really believe are the â Jack and Cola brand is something that we very much believe in as a long-term play with really nice â with a really nice growth look at it. And then, what I would add to that is â and I know youâre aware of this, but I mean, weâve had â weâve been in business for 30-plus years. We have had over 20 million cases of that volume in our sales mix. And itâs going to depend on market-by-market basis, but we donât see a significant impact to our long-term company margin over a period of time because, again, in a way, weâll be transitioning some of this business from the Jack and Cola business we have, which again, we do â this is an attractive opportunity for us to continue to increase our geographic reach and to gain share and to potentially even premiumize the product. And again, we believe it has a halo effect on our full strength brand. And that halo effect will now be extended into geographies where we havenât had the opportunity to kind of get our product there before. Yes. Thatâs a reference a lot of it is to the emerging markets around the world where weâre just small. So, take on Africa, just to pick one big continent that has a hard time affording a full bottle of Jack Danielâs. Well, this is a totally different offering and something that think can be scaled up and be a pretty big opportunity, but then, as Leanne said, becomes a sort of a halo effect on the rest of the brand. It just â it develops a lot more awareness because youâve got that can in a hand in a market that we think can be very, very big. Lawson, I was hoping maybe you could just provide an update on where the glass situation stands? Because it seems like not just spirits companies, but companies outside of spirits, like the fragrance companies are having a big challenge right now with glass availability and supply. And Iâm just curious kind of do you think it might get worse? Will it impinge your ability to rebuild inventories the way youâre expecting? And if not, how are you securing this glass when I know a lot of your competitors are still struggling? So, Iâll start with that one from a glass supply perspective. I think you heard us say multiple times throughout our prepared remarks is that sour glass supply constraints are easing. So maybe we were just early in the cycle of constraints, but we have done and had the opportunity to really actively work with our current suppliers, and weâve increased our capacity. Theyâve improved their yields. And weâve also worked closely with them for prioritization of our products on their lines. Weâve also taken the opportunity, like youâve heard us say, is to broaden our supplier base. Weâve been able to do that both inside of the United States as well as internationally. And that â so largely for us, itâs easing. We do have some spaces where we are still facing constraints, and as Lawson talked about that that would be Herradura in Mexico. And we have plan in action for increased supply that weâre bringing on line in this fiscal year. So, all-in-all, for us, we believe we are kind of moving beyond â weâre still living with and moving beyond glass supply constraints. And you can see in the growth of Woodford Reserve and Gentleman Jack, how they have responded to that easing of that constraint and returning back to very strong growth, and then now moving more into the global logistic challenges of the world. Thank you. Our time for questions has ended. I would now like to turn the call back over to Sue Perram for any closing remarks. Well, thank you. And thank you, Lawson and Leanne. And thank you to everyone for joining us today for Brown-Formanâs second quarter and first half of fiscal 2023 earnings call. If you have any additional questions, please contact us. To wrap up todayâs call, we would like to offer you a toast. To the spirit of the season and a vibrant New Year, cheers to everyone. With that, this concludes our call.
EarningCall_1958	Good afternoon to the earnings call that you all have been waiting for. We're going to go ahead and kick this earnings call off very shortly. So, just stay tuned while we get everyone necessary into the Space and we will begin momentarily. While we wait, I want to give a little bit of a shout out to Dean there from RCI. We have Josh Brooks as well. We also have in the audience Gary over there, official money raccoon that is always an individual who asked great questions. We're going to kick this off in about 30 seconds once we've had a few more people join. While we're sitting here waiting would love if everyone could retweet this Space so that we can get as many people in here as possible coming off of the big economic data that came out. We got a lot of Spaces going and this is going to be the most important one that there is. We have Adam Wyden out there just joined, David [Indiscernible]. Let's go ahead and kick this off. Greetings, and welcome to RCI Hospitality Holdings Fourth Quarter and Fiscal 2022 Earnings Call. You can find RCI's presentation on the company's website, click Company and Investor Information under the RCI logo, that will take you to the company and investor information page, scroll down, and you'll find all the necessary links. Additionally, it will be available in the tweet that will be pinned to the top of this Space. Please turn with me to slide two of our presentation. I'm Mark Moran, CEO of Equity Animal, I'll be the host of our call today. I'm here with Eric Langan, President and CEO of RCI Hospitality as well as Bradley Chhay, CFO of the company. Please turn with me to slide three. If you aren't doing so already, it's easy to participate in the call on Twitter Spaces. On Twitter, go to @RicksCEO handle and select the space titled $RICK FY22 Earnings Call. To ask a question, you'll need to join the Twitter Space with a mobile device. To listen-only, you can join the Twitter Space on a personal computer. RCI is also making this call available for listen-only through traditional landline and webcasting. At this time, all participants are in a listen-only mode. A question-and-answer session will follow. This conference is being recorded. Now, please turn with me to slide four. I want to remind everyone our Safe Harbor statement. It reminds you that you may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. Now, please turn with me to slide five. I direct you to the explanation of non-GAAP measurements that we use. I'd also like to invite everyone listening in the Tristate Greater New York City area to join Eric, Bradley, and me tonight, 7 o'clock to meet management at Rick's Cabaret, New York, one of RCI's top revenue-generating clubs. Rick's is located at 50 West 33rd Street between Fifth Ave and Broadway, a little in from Herald Square. If you have an RSVP, ask for Eric, me or bullish intern at the door. All right. Thank you, Mark. Thanks for joining us today. Please turn to page six on the slides for today's news. We had a great fiscal -- actually we got a great fiscal 2022 and look forward to a strong fiscal 2023. A big thanks goes out to our team members for making this possible. We couldn't have done it without you. Year-over-year for the fourth quarter and fiscal 2022, our key metrics continue to increase on a double-digit percentage basis. This resulted in strong growth of free cash flow, adjusted EBITDA. This is helping drive future growth. We are a much larger company now, so we have been working on much larger agenda of growth initiatives. In fiscal 2023, our Nightclub business should see a benefit -- full year benefit of the 15 clubs acquired and the two re-openings for fiscal 2022. The addition of this year's Heartbreaker acquisition, the pending acquisition of Baby Dolls and Chicas Locas chains and other possible acquisitions under consideration. We'll also be developing our exciting new Rick'sâ Cabaret Steakhouse and Casino in Colorado. As for Bombshells, we have six company-owned or franchise locations in development. This should start coming -- that these should are coming online over the course of fiscal 2024. I'll be back to tell you more and answer questions later. Thanks Eric and good afternoon everybody. There's a lot of numbers on this slide, so I'm going to focus on a few big ones. Total revenues were $71.4 million for the quarter, up 29.9%. For the year, revenues were $267.6 million, up 37.1%. Free cash flow was $14.5 million for the quarter, up 71.6%. For the year, free cash flow was $58.9 million, up 63.3%. Adjusted EBITDA was $24.2 million for the quarter, up 37.8%. For the year, it was $86.7 million, up 44%. Non-GAAP EPS for the quarter was $1.45. That's down 8.2% year-over-year, primarily due to the fact that our effective tax rate was 23.4% this year versus 11.7% last year and also because we had 2.8% more weighted average shares outstanding due to the Lowrie acquisition. For the year, non-GAAP EPS was $5.38, up nearly 32%. Please turn to page seven. With our fiscal 2022 performance, we continued our strong track record since implementing our capital allocation strategy to the benefit of our long-term shareholders. We thank you again. We initiated the strategy at the end of our fiscal 2015. Free cash flow has grown at a CAGR rate of 22%, while we reduced weighted average shares outstanding 1.5% on a compound annual basis. Our free cash flow conversion rate increased from 11% to 22% of revenues since 2015. We also survived our toughest challenge -- COVID in fiscal years 2020 and 2021. Please turn to page eight to review our fourth quarter in more detail. The Nightclub segment had another excellent quarter. Revenues totaled $56.6 million. This was our second sequential quarter, not affected by COVID. Operating margin was 39.7%, 41.6% non-GAAP. Operating income was $22.5 million GAAP and $23.6 million non-GAAP. Our new acquisitions added $14.9 million in sales. Same-store sales were up, reflecting strong growth in New York, Illinois, and Florida and high-margin service revenues increased 53.6%. Please turn to page nine. The Bombshells segment also held its own during the fourth quarter. Revenues totaled $14 million. Operating margin was 15.5%. Operating income was $2.2 million. Same-store sales were down for the quarter, but total sales improved sequentially through the period and were up 7.4% year-over-year in September. Bombshells Arlington, which opened in December of 2021, added $1.4 million in sales. The San Antonio franchise added more than $100,000 in royalties since its opening in June 27th. It also incurred $300,000 in start-up expenses as part of our franchising agreements. Now, excluding those expenses, operating margin would have been about 18%, which is in line with our target range and operating profit would have been about $2.5 million. Please turn to page 10 to review our consolidated statement of operations. All comps are as a percentage of revenues as compared to a year ago fourth quarter, unless otherwise noted. Cost of goods sold declined to12.9%. This reflected the increased mix of higher-margin service revenues of 36.5%. Our salaries and wages were approximately level at 25.3%. Now, SG&A was 31.3%. This reflected newly acquired and reopened locations and around $2.4 million of non-cash stock-based compensation. This relates to previously announced $100 per share options granted to a limited number of top executives and management team members. Excluding those stock-based compensation, SG&A would have been approximately 28%, about the same as a year ago quarter. Depreciation and amortization were 6.7%, reflecting non-cash amortization of intangible assets on newly acquired lease locations. Other charges reflected a $1.7 million gain on the sale of businesses and assets in the Nightclub segment compared to $11.9 million impairment in the segment last year. Operating margin was 25.2%, 30% non-GAAP. Interest expense was 4.8% versus 5.3%. This was a function of higher sales in the fourth quarter, partially offset by higher debt from Club and Bombshells site acquisitions over the course of the fiscal year. Please turn to page 11. We ended the year with cash and cash equivalents of $36 million, a little higher than a year ago. Free cash flow was 20% of revenues for the fourth quarter and 22% of revenues for the year. Adjusted EBITDA was 34% of revenues for the quarter and 32% for the year. Both of these metrics exceed our target performance of 20% of revenues for free cash flow and 30% for adjusted EBITDA. Now, if you will, please turn to page 12 to review our debt and related metrics. Net of loan cost, debt was approximately $202.5 million at year-end. That's an increase of $14.5 million from June 30th. The increase primarily reflected seller financing used in the July 2022 Cheetah's acquisition. Our weighted average interest rate for the fourth quarter was 6.35%. This compares to 5.64% a year ago, and 6.73% five years ago. Our amortization continues in the $9 million to $10 million annual range, which is very manageable with our cash flow. Now, to pay off our balloons, our periodic refinancing enables us to convert higher rate seller financing and other unsecured financing into lower rate commercial real estate bank debt. We continue to have multiple unencumbered properties in our portfolio that we can borrow again, if need be. And occupancy costs were 7.3% of revenues. This continued to be well within our 6% to 9% range we've averaged when sales weren't dramatically affected by COVID. Please turn to page 13 and to look at our September 30th debt pie chart. Our debt now consists of 59.8% secured by real estate, 26.7% secured by seller finance debt secured by the respective clubs, and/or real-estate to which it applies to. 5.1% of our debt is secured by other assets and 8.4% is unsecured debt. Please turn to page 14. We continue to talk to new investors, so I'd like to take time to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share 10% or 15% on a compound annual basis. Our strategy is similar to those outlined in the book, The Outsiders by William Thorndike. We have been applying these strategies since fiscal 2016 with three different actions subject to whether there is other strategic rationale to do otherwise. One is M&A, specifically buying the right clubs in the right markets. We like to buy solid cash flowing night clubs at three to five times adjusted EBITDA, use seller financing and acquired the real estate at market value. In fiscal year 2022, we deployed $141.8 million in capital to acquire 15 clubs in new and existing markets. Another strategy is grown organically, specifically expanding Bombshells to develop critical mass, market awareness, and sell franchises. In fiscal 2022, we deployed $10 million in capital to open up our 11th location and buy property at five more locations. We also signed a second franchisee. Our goal in both M&A and organic growth is to generate cash-on-cash annual returns of at least 25% to 33%. Now, the third action is buying back shares when the yield on our free cash flow per share is more than 10%. In fiscal year 2022, we deployed $15.1 million in cash to buy back 268,185 shares. Thank you, Bradley. Yesterday, we announced the signing of definitive agreements to acquire two Baby Doll and three Chicas Locas, adult night clubs and their real estate in the Dallas Fort Worth and Houston markets. Closing is expected in January. This will be our second largest acquisition after 11 clubs we bought in October of 2021. The price of $66.5 million, consisting of $25 million in cash, $25.5 million in 10-year 7% seller financing, and 200,000 restricted shares of common stock valued upon closing at $80 per share. We expect to generate $11 million of EBITDA in the first year before locations are open with the fifth being remodeled, and RCI anticipates expanding operations of two of the locations. Once modeling expansions are complete, EBITDA is expected to grow to $14 million to $16 million annually. This is a group of well-established, well-run classic Texas Gentleman's clubs that are proven cash generators. We look forward to bringing them as part of our family and our portfolio and welcome their management teams to the RCI family. They are some of the best in the industry and will enable us to continue to grow at an increased rate from 2023 and beyond. Please turn to 16. During fiscal 2023, we'll be working on the Rick's Cabaret Steakhouse Casino. This is a great opportunity and a great market. We bought a four-story 30,000 square foot building in downtown Central City for $2.4 million in available cash. Central City is one of the only three Colorado towns with legalized gambling. Last year, $1 billion was wagered in slot machines in Central City, generating more than $80 million in adjusted gross proceeds. We see this Rick's as a club with a casino component. Our plan is to feature Classic Rick's Cabaret entertainment, fine dining as well as casino and sports betting. We've applied for a license to operate 175 slot machines and seven tables. We already have approved gaming license for machines in clubs in Illinois and Louisiana. Please turn to 17. Fiscal 2023 will also benefit from the 15 club acquisitions and three clubs and club-related restaurant openings we made last year and the first quarter acquisition of Heartbreakers. We are also reformatting a club in San Antonio that should be opening December 28th, and we are continuing to look at other potential acquisitions. Please turn to 18. We received a building permit for our Stafford location and construction has started. Stafford is in the Greater Houston market. We own land for three other locations in Texas, one in Rowlett, Texas; Lubbock, Texas; and Austin. We're in the process of getting building permits and expect to start construction soon. Bombshells is also coming to Colorado. We have purchased land in Aurora, Colorado, which is in the Greater Denver market. We will begin the permitting process in January. We are also targeting three more locations in the Denver after the first of the year. We want to continue to expand the brand in that market. Nearly a quarter of diverse population of millennials making it one of the best cities for this demographic in the country and it's also become another tech hub with a new nickname of Silicon Mountain. We expect our franchise in Huntsville, Alabama to receive their building permits very soon. All of these locations will be ready to open starting nine to 12 months from now. Please turn to slide 19. In the fourth quarter of 2022, our regional revenue breakdown was Texas 38%, including Bombshells, Florida 25%, New York 8%, and Illinois and Colorado, each at 7% each with the other eight states combined for 14%. This demonstrates our geographic diversification, our exposure to growth state by Texas, Florida, and Colorado, and how we develop business clusters in key areas. For example, with our five clubs in Denver, our Bombshells Aurora and our Rick's Cabaret Steakhouse Casino in Central City, the Greater Denver area will become a major and new cluster for the company. Thank you very much, Eric and Bradley. I'd like to take a moment to encourage everyone to retweet this Space before we get into our most anticipated section, the Q&A section. [Operator Instructions] To start things off, we'd like to take questions from Rick's analysts, and then we're going to move into some of our larger shareholders and hopefully be able to answer all questions from everyone in the audience. Hi, good afternoon guys. Thank you for taking my question. Eric, first, can you remind us where your comfort level is around leverage. I'm trying to judge what the capacity is for additional transactions in calendar 2023 beyond yesterday's announcement. Yes. Typically, [Technical Difficulty] is my comfort zone. Some analysis shows that because of so much of our real estate is owned, we could actually push closer to four times, but historically kept us around three. I think the highest we've ever been is about 3.14 times EBITDA. So, we're right now, I would guess, in the two and 2.25 range. So, we still be in pretty good shape at this point. Great, that's helpful. And then what's the time line on Rick's Steakhouse Casino opening. And what's the scope of kind of renovation required there and then there's a timeline on regulatory approval? Yes, sure. So, the total investment will include probably around $1.5 million to $2 million worth of remodeling and updating like security systems and stuff like that. An additional about $5 million for the actual slot machines. We'll probably own the majority of our machines instead of doing profit sharing or leases as well as the table games. And then I figure it may be another $1 million or so. So, about $10 million total overall type investment is what I think we'll be at some point. The licensing process in Colorado can take between nine and 18 months typically. Right now, we believe they 'rerunning about 12 months. So, we're hoping to be open by this time next year. And we'll start doing some of that build-out and remodeling as soon as the state -- the first step is the background check. Those are supposed to take about 90 days. So, we turned our license in on November 28th. I'm guessing with holidays; we may lose a week or two. So, hopefully, sometime in April, especially if the weather starts warming back up out there because it gets very cold at -- in the mountain area out there at about 8,900 feet of altitude. So, most of our construction and set up, I think, will start in April, May, June quarter and then hopefully finish everything out to get it all pre-set-up by the end of September once we can get a temporary license allows us to buy the game, put it in set everything up, get the inspections done. And then all we wait for is the final license to be approved to basically flip on the switch and be open. Fantastic. Next up we're going to be bringing the star of the 2022 Gentleman Club Owners Expo. Rob McGuire of Granite Research. Rob, you're up. Thank you, Mark. Eric, can you just look at Central City in terms of -- do you have goals in terms of revenue and EBITDA, how long that might take to ramp from day one after you open the facility? Yes, I mean I think we're going to open -- I think it's going to be more like a typical Bombshell-like opening where we do very, very well in the first three to six months. And then we'll kind of settle into a little group type deal settled down a little bit as we're not the new kid on the block anymore, and then we'll re-ramp back up. That's all. I see it happening. To give you an idea, the average machine -- slot machine in Central City is doing about approximately $150 in revenue. So, they have 1,700 machines that took in a little over $1 billion. If you take that and say we're 10%of that, I think we could come up with -- say we do $100 million in -- I'm sorry, about 175 machines, yes. So, basically 10% of $1 billion will be about $100 million in total wagers. And you take 8% of that, which put about $8 million in slot revenue. Add in the table game revenue and then, of course, the nightclub and bar and the Steakhouse. I mean I think we could start out somewhere in the range of $10 million to $14 million in revenue to start. Hopefully, the margins are typically 30% to 40%. And the reality is if we can do some of the casinos in Black Hawk, which is basically the town right next door, they're really kind of connected and one is like the old downtown, one's like the new area. The casino -- some of the casinos over there reporting as high as $400 per machine daily and wagers. So, I figure somewhere in between this. So, we can do anywhere from $12 million to $14 million to maybe as high as $35 million to $45 million in total revenue. You just don't have enough -- it's too new. We have to get in there and see how it goes. See if we can keep the people in there during the late hours. Right now, there's almost no entertainment in that market. So, we're going to be like some of the first entertainment in that market, which I think is going to be a fantastic advantage for us. We've got a great location. Right as you come up the casino parkway, you're coming down the hill, you're looking right at our building. It's just an unbelievable location. So, I think that the -- those kind of the ranges and we just won't know until we get in there and get going. Very little risk with a total investment of about $10 million. If we only do $10 million and we do 30% margin, we're still looking at $3 million in EBITDA a year, which puts us well within our hurdle range. So, -- and it could really exceed all of our expectations as well. Thank you. I've got one more question, and then I'll circle back in the queue with more. But what do you think the extent of entertainment will be in Central City? Well, we're going to start out -- the adult entertainment license not passed by City Council yet. We did get it through the planning commission or the zoning commission, whatever they call it, was approved through them on a 4:1 vote. It has not gone through City Council. So, I don't know if we'll have top with entertainment there or not. But if not, we'll do more like circa in Las Vegas, where the entertainers will dance in bikini or latex where -- stuff like that. The main thing I think is just having entertainment period in a city that basically has almost no entertainment, it's hard to find a place to eat after 11 o'clock at night out there. On the weekends, maybe you can keep some of the snack bars open until 1 o'clock. The weekends, Thursday, Friday, Saturday, Sunday, are very, very busy out there. Sunday, Monday, Tuesday are much slower in that market, you get hotel rooms very, very cheap during the week, and they get very expensive on the weekends. So, I think it will be more weekend-driven business, especially in the beginning. But I think over time, as we become known, we'll get more business. We'll also cater to the other casino employees when they get off work, they have to wait for buses and stuff to get home. So, maybe we can get them to come over for a little while and hang out and eat and drink in our place is we're going to see -- we're going to stay open late, probably 24 hours a day with everything. So, that's our current plan. Thanks so much, Rob. And before I bring up Anthony of Sidoti & Co., I'd like to encourage Lynn of Water Tower Research to accept the request to come up as a speaker to be able to ask any questions that you may have. Next up, Anthony, please take it away. Yes, good afternoon and thank you for taking the question. So, Eric, I would love to get your take as to what you're seeing thus far in this current quarter, given that you're only a couple of weeks away from closing the first quarter. Can you just give us an update as to what you're seeing in terms of traffic or same-store sales, both for the clubs and Bombshells? Yes, I mean it's definitely a tough market right now. What we're seeing is a kind of a small drop off of what I would call the blue collar customer, basically our lower-margin customers but most of that is being made up by our high-margin customers and VIP spend at this time. So, the numbers have been very steady as far as revenue-wise with the previous quarter. I was kind of hoping we'd get an increase. We'll kind of see how the next couple of weeks so we've got a lot of Christmas parties that happen between now and the 24th or 23rd really. So, we'll see how those Christmas parties go, how much business they bring in and what that looks like. But so far, I think we're going to be pretty close on revenue-wise with analyst expectations. And I think that because of the higher in spend, hopefully, our margins will stay steady as well. Okay. Yes. Thanks for that. And then in terms of Bombshells' operating margins, even excluding some of those non-recurring items. I mean, they were in the mid-teens, I would say. I think in the past; you've talked about the operating margins for Bombshells. You wanted them to be in the 20% range. So, how should we think about segment profitability going forward for Bombshells? Yes, sure. I mean, I've always said 18% to 22% was our target. And I think that's what they'll basically come in it when -- as they mature, we'll be in that 18% to 22%. We're kind of on the bottom end, but that is our worst quarter, that quarter. Fourth quarter is always our weakest quarter if you look historically. And so we'll see how they look in this October, November, December quarter. We have been talking, we are working on some changes, doing some more drink specials, some higher-margin appetizer specials where we can discount stuff without hitting the margins or profitability as much. And so that is starting -- we're starting to do some of that in some of our blue collar clubs around the country as well, where we're going to start driving more traffic. The one thing about Bombshells is we really don't spend any money on marketing. It's basically social media marketing, stuff like that. So, we are looking at some possible marketing partnerships and some other things with Bombshells that would help drive traffic as well. And I think I say we're going into a little bit of a different economy that we've had in the past. And so we're going to have to be creative and do the things we do. And -- but I think even the worst case, we're going to stay in this 18% to 22% range. It's nice when we can have some big months and big events that drive that up into the 20%, 24%, 25%, 26%. But I do think overall that the average is going to be in the 18% to 22% range. All right. That's very helpful color. And then I guess my last question before I jump back in the queue. So, you will be spending certain money on the Central City and some other initiatives. Can you give us a sense as to how much you look at the spend for CapEx and if you have a maintenance CapEx number for fiscal 2023, that would be very helpful? I don't really have a CapEx number. I know that we want to invest $200 million a year for the next three years. So, our goal will be to try to get close to the $200 million. I think last year was $141-something million, I think we got invested. CapEx is around $6 million -- $5 million, $6 million a year, I think. Maintenance CapEx, I'm sorry, maintenance CapEx, yes. I don't think that's going to change a whole lot for this year over last year. Should be the same. Thanks so much for the question. Next up, we are going to bring Lynne from Water Tower Research. Lynne, please take it away. I mean there's other stuff we've looked at. Obviously, we're not a casino company. So, we would have to have some type of entertainment, restaurant-type component that would be the driving force for the business and the gaming would be just something to create extra revenue of up. We want to have a business as a standalone that has gaming added to it versus just a straight-out casino. But yes, we're definitely looking at other things out there. I think that what people don't realize, I think, in Colorado is the -- they used to have $5 limits, those limits were removed in September of 2021. And because of COVID, I think that some of your casino operators have just been behind the ball on that. I know Tilman Fertitta of Golden Nugget just recently bought a casino in Cripple Creek which is one of the other three towns out there that have some great opportunities for about $43 million for the casino he just purchased out there. And I'm sure based on the license applications, there's several other applications, mainly smaller casinos in Central City or applications are being applied for. So, I think it's coming. I think we're just -- we got kind of got lucky and got ahead of the curve with the changes and just happen to be out there because of the acquisition we did, the five clubs in Denver really gave us the opportunity to get out there early and get ahead of things. So, we're looking at other opportunities out there to bring more entertainment to that market and hopefully make Central City, the entertainment capital along with gaming and then with the main gaming casinos where the big boys are out over in Black Hawk, let them bring the people out and then we'll entertain them and send them back to Black Hawk. That's kind of the thought process right now. That sounds great. I have just one more question about Bombshells in Colorado. Will you have to change the prototype less patio. Is there -- are there any adjustments to be made for Bombshells when you go into a colder weather market? Absolutely. What we'll do with the patio, we'll still have the patio but it will be more covered. Right now, we only cover about 60%. We'll cover 100% of the patio. And we'll put in basically their glass folding walls. I don't know if you've kind of seeing some of the -- excuse me, the big stadiums like in Minnesota, where they have the walls, the whole wall just holds up and you got 40-foot of wall that basically folds up into about a two and a half-foot column. We'll be using stuff like that type of design of glass work in that. It raises the cost about $300,000, but still well within the ROI that we need to build the location. I just have one more question. Can you talk about the demographic draw of the two new night clubs that you just bought? Sure. Obviously, Chicas Locas is a very Hispanic-based. It's crazy girls, it's the translation. And so it's very Hispanic-based. Those three clubs are in really nice markets for that. And then the Baby Dolls is very traditional. It's hard to explain without actually seeing it. So, it's a very -- I call it -- if anything would be a middle class strip club. That's how -- that's kind of Gentlemen's Club, very Texas based. So, there's country music, there's a lot of more classical rock 90s, 80s, 90s, early 2000s music played there. And it's very -- I think the Baby Dolls and Dallas is a very large building, super high ceilings and just a great fun atmosphere. The easiest way to explain it. Fantastic. Thank you so much, Lynne. And Eric, as you were saying, I'm a big fan of Baby Dolls, so I was very happy to see that acquisition. Now, I want to take a moment to do two things. First off, I would like to encourage everyone to retweet this Space for us to be able to get as many people here as possible and to follow the example of 90s random consultant who had a nice retweet of this space recently. I would now like to open the floor to everyone who would like to ask a question, and we would encourage you to do so by raising your hand so that we can be made aware and we'll bring you up. First off, we're going to bring the largest shareholder of RCI, Adam Wyden from ADW Capital. Adam take it away. Hey, Adam, you're on mute. Okay, great. Wow, it's been a harrowing three years. I remember in March of 2020, driving my [Indiscernible] and seen the lines out the door and my bonehead analysts telling me that the company was going to go bankrupt and I should sell the stock. Well, I'm happy he doesn't work with me anymore, and I'm still a shareholder. So, look, it's been an amazing run and you guys have continued to sort of raise the bar. I thought Lowrie was sort of special and now you've got Baby Doll and you did Cheetah and Playmates. And look, anyone who knows me knows that I'm also trying to raise the bar. So, I sort of point the question back, which is you sort of had this sort of side with Lowrie. You wanted the business a long time ago. He took a private, you sort of got that. You'd integrated. Lowrie's making money. Now, you got this other guy. I mean what's the next thing? I mean, I know you got the casino, but like are there groups that are doing 30, 40, 50 of EBITDA. We know about [Indiscernible] with a very, very big business. What's the sort of the next thing? I mean, you obviously have invested so much time and energy to build this platform and get the scale. Now, you're sort of getting affirmation by the marketplace, the sellers are taking paper. You've now got this cash flow to make down payments on businesses. You used to save three years and have M&A this unsecured money. And now with $120 million of EBITDA and $9, $10 a share, $9, $10, whatever a share of free cash flow. I mean, you can fund the cash component of these M&As from internally generated free cash flow. I mean --where are we in terms of sort of getting to that next level of club group size and sort of building that sort of corporation? I mean there's a lot of acquisitions out there. We're talking with a lot of owners. Some are small, some are large. It's really about the seller being ready to sell. I've been doing this for a long time. I meet with a lot of owners. Some say they want to sell, but after meeting with or a while, I can tell that they're just not ready to let go. Some of these guys have been running these clubs for 30 years and their babies. So, it's difficult for them to make that final decision to go ahead and sell, but they're coming around. And part of it is the it's more convincing that you're joining the RCI family versus selling your club and retiring. Those some of them are, but of course, they're concerned with the people that have worked with them and been with them for 20 and 30 years. They want to make sure they have opportunities. And I think it's convincing as they see the deal we do with [ Lowrie and now this studio and some of the other deals that we've done in the past where they see the employees and the staff have done very well with RCI and moved up and moved up in our ranks and become better for themselves, even better for those people. The opportunities are there for them. I think that's starting to have some effect. It definitely did in the Baby Dolls. I know they're very worried about their management team because they have a great management team there. And we don't -- we want to bring that management team and we don't want to lose that management team. We want that management team to stay with us because we need those types of people to continue to grow, especially as we've accelerated our growth rate. Typically, our goal is 10% to 15% but we're actually pushing to grow at 30%-plus for at least a three-year period here, and then we'll revamp and see where we're at. I think 2023's growth is pretty much in the bag. We've been working very hard on 2024 with new stuff, with the new Bombshells, with the new Rick's Cabaret Steakhouse Casino. But we're also still lining up acquisitions. We're talking with the operators of all sizes from $1 million EBITDA deals to $30 million EBITDA deals that we're talking with guys on right now and there's a lot of guys in between. A lot of smaller $3 million, $5 million, $6 million, $8 million, $10 million, $12 million guys that are out there. And so we're trying to reach out to some of them. Some of them are reaching out to us, and we'll find the right deals as we need them and continue to grow so. Yes, I mean, look, on our model, absent any incremental M&A from here, I mean, you guys will be compounding cash earnings per share at about 40%. I mean I don't know very many companies that are trading under a 10% -- or saying over a 10% free cash flow yield growing 40%. So, it sort of brings me to my next question, which is I know you're not buying back stock because the returns are very good. I don't think people really understand how good they are, obviously, buying this business at four times EBITDA, is incredible and the way you finance it. But I mean, we've sort of done some of our back of the envelope math on the casino. And based on sort of participation rates and size and stuff, I mean, you're talking about a $10 million, I think you said roughly $10 million of investment. There's online concessions in some states. If you guys -- if you think about a casino, you don't just have slot machines. You have table games, you have liquor. I mean -- or back to the envelope map is this thing could be as much as $20 million, $30 million of EBITDA and probably on the low end, probably high single-digits. Can you sort of sharpen your pencil a little bit on it? I know you're new to the casino industry, so you don't want to sort of create high expectations for folks. But I mean, the returns, if you guys have some success here, the returns can be really, really meaningful. I mean can you give people a little bit more color around what the casino could look like and the range of outcomes? I know you're new and it's early, but I mean it's -- can you give us a little bit more color on this casino? Yes, I mean as I was telling, Scott, we've kind of got the range of $10 million if we -- $10 million to $14 million of revenue, up to as much as $40 million in revenue. And it really depends on what our average slot play is that's going to really adjust that to most. And the rest of it is just impossible for me to really see it this time -- is I just don't have enough -- I mean, the club side, I think -- the reality is for the club side. The liquor will be cheaper because there's gaming. We're not going to give away free liquor, but we'll have discounted liquor. So, the liquor prices will be cheaper than a typical club would be because really, we're trying to not only entice you to come in and see the girls, were come in and gamble as well. So, there will be components of that, that we've got to get -- I got to fill out and learn and figure out, but we'll be spending some time on that. We're bringing in some casino experts. We've got a great firm that we're in negotiations with the consult with us on not only the casino setup, but all of our system setups and those types of things. But the beauty is it's not a -- it's not a new industry, right? There's plenty of experts and plenty of people out there that know how to do it very, very well. And we'll put together a team and that will do it well and do it our way and complement our business model. There's a lot of excitement around it right now that -- with what we have planned out there and I think there's other opportunities at some point out there as well. So, I don't know where that's going to go. It's a small part, it's a small investment for us. $10 million is not a huge investment anymore and the risk well outweighs the potential rewards. And so I think we have to --have always said, look, acquisitions are difficult because you don't know -- we can't time them, right? It's hard to time them. And so we're always looking for opportunities to expand and grow in areas where we can time the closing. So, if we can't get an acquisition done, we know well, we can open this business and we can open this business, and therefore, we can keep our growth consistent and never let our growth dip below our10% to 15% planned rates. And then if we are successful and we can land acquisitions like maybe to like Lowrie's acquisition, now we can see 40% growth. We can see 30% growth or maybe even higher depending on size and frequency of the acquisitions, combined with the openings. I mean, I'm very excited about 2024. Basically, we have our growth built in with new -- six new Bombshells, The Steakhouse Casino. Our growth is kind of built in, right? So, any acquisition we do is really going to boost growth in 2024. I think 2023, we've got some great growth factors in that. The 15 locations that we bought, especially the 11 that we bought from Lowrie had just come out of COVID openings. I mean they didn't even -- some of them didn't even open until September of 2021. They only been up less than two months when we bought them. And so we had a huge step-up in revenues, and we're seeing that. In the first five months, we had a very difficult time because you have the job market, you had COVID stuff still hitting and bothering different markets and -- so it was very difficult for those first five or six months, we actually picked up in March and then we had the unbelievable month with Lowrie's clubs in May. So, we've got some pretty easy comps on those clubs as they move into same-store sales in January, February, March. And I think we're going to see really nice growth year-over-year growth with those 15 locations as well as now the new acquisition coming in. So, basically, our 2023 growth is there, 2024 growth could just be off the charts depending on how acquisitions go in 2024. And I think by the end of 2023, we'll be focusing on 2025 growth. So, I said, I think we got three years here of really solid growth. We can take on probably another $100 million plus of debt. We've got about $5 million of debt that's going to be -- they'll probably be paid off in the next quarter too, as we sell some -- we've got some raw land assets that we're selling, and an airplane that we'll be selling in the next quarter that we'll get rid of some debt there. So, our debt level is probably about $5 million less, we'll drop about $5 million just from not counting the normal amortization. So, our debt is still very manageable. Even if you say -- I know you try to say $120 million EBITDA, but I'm saying even if we're only at $100 million in run rate EBITDA right now, we're at $200 million of debt that's only 2x EBITDA debt ratio. So, we've got at least another $100 million in debt we can take on. We're generating well over $1 million a week in cash flow right now. So, we take that and put that back to work. And then any equity component of these big acquisitions just give us even more buying power for these deals. No, of course, now I don't -- once we do this deal at 80, I don't think I would do another deal at $80 million because with all the new EBITDA coming on line, I think the stock is going to be worth more than that. And so we probably wouldn't use it and an immediate -- another deal at that price, but maybe the next deal is at $90 million, maybe the next deal or $100 million, $110 million, $120 million. I guess that's up to the market to price that in for us. And if they gives -- we get to the multiples we need and we can buy the deals at the right price, we could use an equity component in them as well. But if we just have to use debt and cash. As I just showed you, there's plenty of runway, at least for the next year to two years to use this debt and cash that we're generating to make plenty of acquisitions with. Yes, I mean you mentioned something about that you were -- I mean, part of what attracted us to this investment early on is that you are spending a lot of time with getting the SEC reporting right and sort of getting the IT and broadly and the infrastructure. I mean most of the sort of the public company costs and IT stuff is behind you. So, your legacy free cash flow growth rate of 10% to 15% was really also concurrent with the fact that you were also boosting your sort of corporate G&A function, IT, and this and that. I mean so for all intents and purposes, for the same amount of revenue, right, you're going to have really high disproportionate margin growth because you're not adding those incremental costs to the same degree, right? So, part of the increase in free cash flow, I think this year? And I guess, last year was you were adding revenue without the concurrent sort of corporate nonrevenue-generating G&A. I mean -- so I mean, look, we're super excited about it. And look, the casino to us is very interesting only because it provides another avenue for you to monetize your brand. And you had Scarlett in Florida, you were able to bring Scarlett to Colorado. And to the extent that you can sort of monetize Rick's as a casino and continue to sort of monetize your brand at high returns on invested capital, that's super interesting. And obviously, any opportunity [Technical Difficulty] Thanks so much for that, Adam. And next, we're going to bring up [Indiscernible] to ask a question. [Indiscernible] please take it away. Great. So, I noticed just from some searching on Twitter that there's some dancers that you find who are saying that they noticed that the recession is here from the sharp reduction in customer spend, they're seeing in the clubs that they work at. Obviously, it's very kind of anecdotal and is only based on a few examples. But I did find a few people saying that. Maybe these are people -- girls working in clubs in locations that you would avoid as part of your screening process. But could you speak a little bit to what extent that matches with anything you're seeing at any of your locations and if there are any patterns and kind of how, I don't know, your behavior might change if that such evidence became gradually more pronounced, how it would influence your decisions on capital allocation? I have one follow-up if you have time, but I'm also happy to pass on. No, let me answer that for you. So, basically, I have been watching our blue collar -- some of the blue collar clubs have had some minor issues. And it's very sporadic. It's two weeks here, then we have two good weeks and then we have an off week and then two good weeks. Our VIP clubs or higher-end clubs have been doing very, very well. New York, for example, Chicago, Tootsie's in Miami, their sales are still growing and doing very well. I ran a three-month deal on basically credit card spend, right? I can see what the credit card spend is on the money that goes to entertainers. And I did that, and then we compare that to the prior three months and we're seeing increases. So, I feel for the girls that are out there that are having -- they're struggling here and there. I would say, maybe we need to try some other clubs. Maybe I don't know the region you're in, the reasons these girls are in or where they are. I mean certain regions are definitely being affected different than other regions. I think a lot of them are in California. I think California has had some talking to some girls that come from Las Vegas and come from California to some of our clubs. They have complained a little bit that this customer spend in those markets isn't what it used to be. And it makes sense that Vegas on the weekends, especially is very California-driven and so maybe there's some issues in those markets from what I'm hearing. And like I said, in our markets, I'm seeing some off-spend, slowdown in spend and basically customer visits [Indiscernible]. Somebody got me echo there. Sorry. And so that's basically what I've seen so far. Yes, yes. Thank you so much, Eric. And so I guess my other question is around some of your new projects. The -- I gather that -- I'm sure they're not like moving the needle and to be focused on too much yet. But I gather you have an NFT project, another project called Miami, which I believe is trying to create a sort of full circle between being able to interact with some of the entertainers both in real life and kind of through social media. Do you think that either of those projects could introduce kind of elements of risk that could damage a reputation, I don't know, like in -- for example, in the case of the NFT thing, if there was some kind of hack or security problem? And in the case of Miami, I guess it occurred to me that it could potentially threaten an entertainer's safety if they were sort of interact -- I don't know if it was making them more easily contactable by customers. I mean, basically, the -- there we go. Okay. Sorry. Sorry, the echo was just too much. Basically, it's not any more risk than any other business or any other deal out there. The entertainers are basically other than telling them what club they work at. Their information is still private. They're not getting private information. As far as the hacking -- I mean, we have that risk on credit cards. We have that risk on employee data. We have that risk, you carry insurance for it and you follow the guidelines, and you do everything you can do to keep the information safe. But I don't think there's any other risk on those products than any other product that we have. There's very small investments, not a lot of money invested in those -- either of those projects. We did have some issues with, of course, the Ukraine war with our programmers being based in Ukraine became an issue. Weave switched to a different group. And hopefully, we'll get the final bugs and everything worked out. It's actually the site dysfunctioning, -- you can actually use the site. It's just it's not at the point we're ready to market and really push and spend the marketing dollars. We're going to need to spend to get the site until we get everything working exactly the way we want it and have the page layout and features on the site that we want to add. But to answer your question, I mean, I don't think there's any liability there that isn't any place else. Thanks. That's really helpful. And sorry to ask two kind of negative questions, but it's just interesting to focus on some of the things that could be risk factors. But generally, congratulations on all your achievements. It seems to be going great, and I wish you the best of luck. Thanks so much [Indiscernible]. We appreciate the questions. I want to give a special shout out to Dr. Parik Patel who is in the audience. We have no idea what that doctorate is in, but we love it. I'd like to encourage everyone to retweet this space. And additionally, I wanted to mention one thing for Dr. Parik Patel. We're going to be sending you a custom Rick hoodie that was designed by Bradley Chhay, who took a few years of graphic design lessons, and we're going to be giving some of these limited addition items out at the reception tonight as well. Beautiful. All right. So, nice to -- you got an awesome quarter again. Nice so you guys kind of talk about this one more time. I'm going to ask you a couple of questions if I can, about the big deal, the Baby Dolls, Chicas Locas, just I know you have one location under -- it's currently being re-modeled, I believe. And then you've got two expansion plans. Can you give me an idea just very roughly, however rough you want to be about it? Just kind of what are we looking at, like how many square foot speed are you looking to add, kind of roughly what kind of CapEx budget are we looking at kind of roughly is this like an end of 2023 thing? And in the 2024 thing, like when do you expect that to all kind of be as you envision it? I'm sorry, I forgot I'm on mute. Basically, the club is actually open as being remodeled. It just isn't really contributing to EBITDA at this time. So -- but it is ready to -- the remodel is done, they're going to basically reopen in a full capacity. They're opened at a very limited capacity at the moment. So, open full capacity, probably right after closing. As far as the -- so there will be very little CapEx or no CapEx on that location, the two expansions are to expand -- they actually had the extra space open at one of the clubs pre-COVID and did not reopen the extra space post-COVID because it needs to be remodeled. They did a partial club remodel, but not the entire building. We're going to finish that remodel. And then the other club would be actually adding -- they have some empty warehouse space that we would basically expand and do a new concept. So, we'd have two concepts in the same building. And so that space would be more expensive. I think total CapEx expenditure to do all this is probably between $2 million and $3 million max. Not a lot, but -- and I think that between the two, we would add probably $4 million in EBITDA, so you get the club that's limited capacity open and get it back up to a run rate of about $2 million add that to the $11 million you're at $13 million. And I say $4 million, maybe it's $3 million. So, I gave myself a $1 million. When I say $14 million to $16 million range, I gave myself a $1 million range. I mean, so I think $14 million to $16 million is pretty easy to do. I mean I think we can do all of it within the first 12 months of operations. Probably the remodel on the one club that's pretty much existing. I would get back to 90-day to 120-day remodel and the actual build, that's probably almost nine months, 12 months to build out. So, I hope that answered your question. Yes, that's beautiful. And I can see why you didn't go in depth on it. I mean those are very small items compared to the acquisition. So, that's cool. The 66.5 is that including land? Or is that kind of exclusive of the lay like so think of is a separate deal? No, that includes everything. That includes the land. That's the land, the clubs, the ATMs sector company is the ATM company, and it's all the intellectual property. Fantastic. Thanks so much for that question. And in the same vein of real estate, we're going to bring up to Jesse [Indiscernible] next. And Jesse writes number one REIT newsletter on Seeking Alpha with 56,000 followers. I would encourage you to check out his profile. You've had some great threads on Rick. So, Jesse take it away. Thank you very much, Mark. I appreciate it. Congrats on the great quarter. Johnny asked the question that I had in mind, but I'll ask about the buyback you said. Eric, you've previously talked about this $65 figure as a threshold for your buybacks, but your cash flow has grown quite considerably since then, have you thought of updating it? I haven't -- we haven't because right now, we have such great opportunities, as you can see, of buying and building things well above the 10% free cash flow yield. It is something we're going to have to look at again soon, probably wait until after the 15th of January or so. Let's get this acquisition close, kind of get a feel for where we're at. Let's see if this recession is going to get any deeper or just a slowdown. And I don't even know what it is. I don't like to call a recession because I'm not really seeing a recession. I'm seeing some certain demographic -- economic demographic affected by high gas prices and food inflation and those types of things and maybe getting a little more less frivolous with their cash or their disposable income. And so they're tightening a little bit, maybe we're getting a little bit of West Club visit or a little less spend when they're in at the blue collar level. But I just don't know what to -- I don't know what it is yet. And then it could end tomorrow, maybe they're just maybe school started and Christmas is coming up. And so that's pending. But maybe by February, March, things go back to normal. I just -- or maybe they get worse. We just don't know, I think is the problem with that demographic and the current economy and situation. The Fed raced 0.5 today, which was expected. So, obviously, they believe the economy has slowed down a little bit, hopefully, inflation peaked and we'll see the inflation numbers come back down a little bit. And we can get back to a more normalized economy where we don't have free money, but it's not -- doesn't get so expensive that people can't do anything either. And I think that remains to be seen. But like I said, it's not affecting our high-end customer at all at this point, our high-end spend at least in our high-end clubs. So we just have to kind of watch. We'll make some shifts and maybe discount maybe bring those people, give them a reason to come back in and make a little less expensive for them to visit, but keep our revenues and margins in line at the same time. That's the plan. Got it. Thank you. On the club acquisition front, would you say that all this uncertainty, the talks of a recession, the high inflation, the rising interest rates? Could it be that this is one of the driving forces why you have so many club acquisition opportunities right now? Do you think that it's pushing a lot of the owners to try to sell right now before perhaps we go into a recession and their clubs suffer some declining growth from that? Sure it is. I mean that's what I would do if I was them, and I was in that situation. I think the risk is higher when you have small operations versus a large company like ours and the geographic diversity that we have. But we've also -- as you'll see, we're moving these things to about a four times multiple. So, we're giving ourselves basically a 20% cushion anyway. So, it's working out well for us. And I think that as we continue to push through this and figure these things out at the end, it doesn't really matter because we're a long-term company. I think in the next three years; we're going to have tremendous growth. And then it's the economic cycle turns, and then we'll just reread those words even better in the future. We're doing this with taking as minimal risk as we can. We've gotten, I think, very good at that part of the acquisitions through seller financing through using cash and now equity in these last two deals, which has, I think, been fantastic for the company, and it will be great for our ROI. Fantastic. Thank you so much, Jesse. And as we head into our 69th minute of this call, I'm going to bring up Hunter SPX Thompson of DTT [ph] Long/Short Capital Advisors. Hunter, please take it away. Thanks, Mark. Hey Eric, congrats on the quarter. Love to hear that you're not seeing much regarding a recession and really appreciate the specific call-outs within your customer demographics. That said, kind of wondering if we can hear any more color around your view on the strength of the consumer? Do you see any qualitative shifts in spending habits to your clubs? And then just a quick follow-up on that. Regarding linearity in the quarter, do you see this trend grading 4Q? Thanks. We have -- what we are seeing right now, like I said, is a little bit of a slowdown and it's inconsistent. It's not a consistent slowdown. I mean 1 we will be off a little bit. 10% the next week will be up 4%. So, it's kind of a mixed bag of nuts right now. And in the high-end customer base, we're not seeing much slowdown at all, if any. People are still party and there are certain demographics, certain groups are not changing their habits at all. Others have changed a little bit. But like I said, with our geographic diversity, it's a non-issue for us. What I look at right now, I think is most important is not the year-over-year numbers because there was so much free money last year. There were so many factors that affected things last year. And so I'm more of a sequential guy, what are we doing on a weekly basis sequentially from like the last six months, last 26 weeks. How have our numbers are? Our numbers declining on a sequential basis. And we're not seeing that. Like I said, we're seeing it in certain markets for a while and then maybe it changes. But we're adjusting -- our teams are adjusting. We see the numbers stripping. We step up marketing, we step up social media presence. We do the things we need to do to t bring the business into our businesses. And so that's why when the guy earlier saying there are certain entertainers are saying they're not making as much money and -- so I mean, I'm aware of those things. I'm watching those things closely to see if they will affect us. But I think right now, we just continue to figure out how to get our share of the market, better our share of the market if we're seeing any declines. And so that's how we've covered that. I don't. And in fact, December is actually increasing over November right now. And I expect the big parties that we have really starting yesterday starting yesterday and through the 23rd, we'll have to see how these parties, there's a lot of parties, and I think there's a lot of Christmas shoppers that go out and shop for a little while and then come by the club for a few drinks and stuff like that. So, I think we're seeing a lot of that, and we'll see how that goes over the next eight days, nine days. Hopefully, we'll have a really big week next week. This week has been great. And I think the only data set that's been off so far was Saturday, and it was off very minutely. And we are up so much on Friday that for the week we did we're not even going to notice it. Thanks so much Hunter. We appreciate the questions. Next up, we're going to bring Orchard [Indiscernible] Europe. You have to unmute. There we go. Hey guys, I just want to get a couple of things out of the way just to kind of understand things. There's about 2,200 clubs, 500 of which you guys think are candidates that you would be looking at. Can you ever see yourself like thinking about actually opening a new club from the ground up or that's just pretty much the world or the universe that you live in? I mean there's areas we might be able to do that. It's not really our forte right now, right? I mean our forte is buying existing cash flow, making that cash flow stronger through our unit economics, through our best practices, through our national buying power and that model works very, very well for us right now. We do have the Bombshells for ground-up builds. I'm not saying we wouldn't, but it's not something that we're definitely looking at. I mean we are doing a ground-up build in Lubbock, Texas, where our property was taken by the state of Texas to expand the highways, and we bought five acres on another down the highway or across town or whatever, I'm not exactly sure how far away it is, but from our club, but it's very close and we're building the ground-up building there, but I don't really consider that new we were able to do a licensing deal and move the license or type deal because of the intimate domain, gave us some opportunity to do things that we normally probably couldn't do. But as far as granted, it's just not something I'm really into on the club side at this time. But I could say, I never say never guy. We'll see what it develops over time. And somebody was to grant us with a great location that we thought was very economically viable and the risk was minimal to us. I think we might take that chance. But it just doesn't really fit our business model at the current time to build new quotes. Okay. So, I'm assuming at this point, I'm saying your buyback price is going to be $80 because that's what you did in the current deal and anything below that would basically make the overall rate of return cheaper. I'm looking forward to your update in February. The other thing is, what do you think is your new cash comfort level given the increased cash that you guys are going to be bringing in? I mean we've been keeping our cash under $40 million we've been trying to put it to work where we get closer to $40 million. I think we pay to $42 million or $44 million and we bought a couple of properties. And I think our minimum on the minimum side, we probably want between $15 million and $20 million. Obviously, we're going to put $25 million out of this deal. I think I have a check; I think we're around $40 million. We've got some other stuff we're looking at right now. We've got some CapEx expenditure. But we're taking in a little over $1 million a week. So, it builds really fast. And what we may look at the bank, we used to have a line of credit -- a $5 million line of credit. We may try to bring that $5 million line of credit back after the first of the year with this $25 million going out. So, we don't have to borrow any money do the deal. The only debt we want to as we do these new deals is we're trying to do all sell in finance debt, no unsecured high interest debt. Staying away from the 12% money we've had to borrow in the past. Even though it's not so bad with the bank rates at 8%, 12% what so bad today as it did when we bought it when bank rates were 4%, but still it's expensive money. Not really expensive for us because our returns are 33% or so, 25% out of the worst case. But -- so we're still making double the money on the spread. But I just think that -- from a market standpoint, we're trying to keep our debt manageable and keep our interest rates as low as possible. So, once we pay off that 12% debt, I think our weighted average will probably be back under 6%. So, we're not hurry to pay it back, but we could. Yes. And just one other thing. Can you give me an idea of like this five club deal that you just did, how long ago did the process really seriously begin? Typically, six months is what it's taken on these things. But from the time we start talking to the time we work these out amongst the principles and then get the lawyers involved and get the legal stuff done. Then you've got permitting. So, right now, we're at the permitting process, it was about 30 days. So we signed the deal on the 12, which 30 days from there would put us somewhere around January 12th, January 16th, something like that. I think that was probably the most likely closing dates at this point. But I mean like the seller basically was saying, look, sometime around May or June, hey, I'd like to sell my club, let's make this happen. Yes, I mean, yes, it's just -- like I said, it really varies. I mean if you look at the BCG deal, for example, I mean, we tried to buy them in 2010, we tried to buy them in 2015, and then finally got the deal done the third time's the charm. That deal, I would say, from a timing call to the time we got seriously done with less than 90 days. And then the rest was just, I mean, 11 states, lots of licensing. The other three months was, I mean look, if you've got a willing seller, we can do a deal and like, for example, the Heartbreakers transaction. That entire negotiation, the entire thing was less than 45 days from the time of first met of the time we owned the club was probably 45 days. So, this really varies and the complexity of the deal, the dollar amounts, those types of things. Well, I mean, my general consensus is with the way things are going right now, even if you have some sort of slowdown at all in same-store sales, it doesn't mean anything because you guys just keep buying and adding new clubs that would completely offset anything that any recession that happens. And at the same time, you guys are able to just buy clubs cheaper. Yes, I think I look at this downside risk, right? If you buy my stock today, what's your downside risk, right? That's always been kind of my thought process. And if I was an investor, well, I am an investor in other companies and other stocks. And my thesis is always what's my downside risk, right? And if my downside risk outweighs my upside risk and I'm not interested. But I think you have very limited downside risk with RCI right now. You got us buying back stock, the stock at certain levels. You've got unbelievable -- like you said, even if we have a 10% turndown in same-store sales, which should be very high for us, especially at the club level, the EBITDA drop would not be much more than that. We have -- we find ways to control costs, which we did during COVID, we know how to keep our cost in line, keep our margins up. We would do all those things, but we're going to grow right through it. We're going to still grow faster. So, the out of us earning less free cash flow six months from now than we did a year ago in that same period, is to slip, I just -- I don't see that happen. Thanks, Mark. Eric and team, congrats on the great quarter and also the recent club acquisitions. I mean I looked through it and chatted with you guys over Adam wins post yesterday. I think it makes a lot of sense to lay out some equity there. Looks like returns would be great. I have a question going back to the Lowrie's acquisitions. It's been maybe about a year, a little over a year since that deal closed. Obviously, it takes some time to get the management teams integrated and just training for the rest of the staff there. You guys see room for more efficiencies in the Lowrie's clubs or revenue growth there or how are the Lowrie's clubs operating today? Yes, I mean, give you a kind of a statistic I look at November was the first month that we had a full month of operations previous year and this year. So basically, it's -- we're going into our 14th month of operations with December. Typically, I think the worst location year-over-year was about to 2.89% increase. And the best location, those two locations that were over 60% year-over-year growth with the Lowrie's clubs. And I think the rest were all in the 20s to mid-20s. So, very good growth year-over-year what we've done. I think we're continuing to see certain of those clubs are still growing as we move forward. So, we'll get some nice growth out of that. And you'll see that the $88 million price seemed at the top end of our scale when we made the acquisitions. But I think you're going to see it more right in line. As we see the EBITDA from those clubs this year, I think you're going to see it's more right in line with our four, four and a half times including real estate that we normally come in on these deals. So, it's going to be a very nice acquisition for us over the long haul. Yes, great. I love how you mind things at five times and get the efficiencies in the business, then will be four times. So, that's great. Thanks for the color on Lowrie's. And then just one more question, I guess, on the Central City opportunity. obviously early to tell and probably about a year, 18 months out, like you said before fully operational with licensing and everything. Do you guys see that as a space you guys can expand into? I know mainly capital allocations on buybacks, buying of clubs and the Bombshells organic growth. But is that something you guys think you'd have an appetite if the results are good? The results are going, absolutely, right? I mean, at the end of the day, I've said this, I don't know, for several years now as I'm not in the strip club business. I'm not in the real estate business, I'm not in the restaurant business. I'm in the free cash flow business. And if I can create free cash flow or buy free cash flow in that market and we have -- it's within our wheelhouse of operations, I don't think slot machines are pretty easy to operate, right? You plug them in, they work. If they break, you call somebody, they fix them, then you plug them back in again. Seems pretty simple. The trick is getting people in there to play them. One thing we're very good at is through our entertainment and our marketing and of our clubs, we're very good at getting large amounts of people into our buildings. So, I think it's pretty -- right in our wheel house is very similar to the Bombshells where we have the waitress are part of the entertainment of the business. And then you had good food and drinks and good music and DJs and we trade a fun atmosphere where people want to come and hang out and drink and eat and have a goodtime. I think the casino business is -- the way we're going to do it is very similar in that regard is it's just we're going to take our entertainment factor, and we're just adding another component to it. So, I think we'll do very well, then I think we'll definitely look to expand that if we require success. I mean if we can find success with it and do it right. There's, I don't know, what, 38 states with some form of gaming now. So, they're small states with small casinos all over the place that we can go in and transform from a least traditionally, there's a big market with everybody is doing exactly the same thing, and we can come in and do something just a little bit different than everybody else and do very well with it. I think we definitely would look at that as going on a go-forward basis, provided we can be successful in Central City. That's great. It sounds like a great opportunity. I know some people at first were a little critical of you guys trying to get in an area that you don't have experience in yet, but I love it like your free cash flow business quote. Maybe we need to get that quote on a hoodie for next time, not to be able to make it to New York today, so I missed out on that, but when you guys grand open in Central City, I'll come on see you. Congrats again on the results and thanks for a chance to ask question. We'll make sure to bring a sweatshirt for you when we see you then. Now, before we bring up our next two and final question askers, I want to shout out VCs congratulating themselves, who's out in the audience. I think someone needs to make a deep value investors, congratulating themselves account to for those invested in Rick and speaking of investors in Rick, let's bring up Adam Wyden for a follow-up question. Hey. It just occurred to me, I was texting with somebody while the call was going on, and they said, you know, Rick is really interesting. Eric is such a talented capital allocator. He's really been at it a long time. It trades at a good yield. But he's in his early 50s, it's taken them 20 years to get from $1 million of EBITDA to $100 million. You obviously have done what are $120 million what other number is. I sort of, in my head, sort of had you at like $60 million pre-COVID. So, you can sort of say, over three years, you sort of doubled the annualized earnings power from sort of like $60 million to $120 million. How should we -- I think it would be helpful for investors as it relates to sort of establishing what your cost of capital is because you sort of said, well, what should we trade at? And you sort of put on Twitter. And I think it might be helpful in terms of sort of the more you grow the sort of the higher the multiple the company sort of trades at based on sort of the expectation of growth and sort of what you plan on doing. Maybe it would just be helpful for you to sort of explain to people that you obviously -- your minimum is 10% to 15%, but I mean maybe talk about sort of the scope and the quantum of what you're building here and if the next 10 years, does that look like $120 million to $1 billion? Does that look like $120 million to $600 million? Like how big are you trying to make this thing? And I think obviously, I have a front row seat to it, but it might be helpful for all the other investors to really understand what you're going for here and the 20 years is really backlog for the next, call it, five to 10? Well, I mean, when you talk about the first 20 years, I had no experience. I was a strip club operator like literally running the clubs. I was bartending, I was the security. I was the bartender. I was the front doorperson. I was the valet driver sometimes. And had to evolve into a public company, I went public in 1997 -- didn't like it, merged with Rick in 1998 thinking, all right. I'm back to running clubs. I went back to running club, moved Minnesota, written in the club for three months, turned that club from a $70,000 a month loss to a $40,000 gain in the first 30 days I was there. When I left, I think we were making about $60,000 a month after three months of me being there. Everything was great. The founder had gone on vacation to France. He comes back my team -- my team took over the Houston clubs. We took -- his original team sent down to New Orleans. They turned to New Orleans club, did a great job there. Houston was not making money. So, when he left, we were basically, we had seven clubs that were net losing about $15,000 a month and when he came back, we had clubs that were making over $300,000 a month. And it's first thing when he comes to the club is the door girl tries to charge him cover charge. He says, no I am the owner. He says, yes, we're a public company. Everybody is an owner. It's still going to cost you $15 to get in the door. And he says, no, I'm really the owner I'm Robert, she goes, okay, hold on let me call somebody. She calls manager up. Manager says, how can I help you? and he says, well, I'm Robert, I'm the owner. He says, okay, we'll -- let me call Eric. And of course, that I think was a little bit of ego bruise so he decide to fire me and that didn't work out for him because while he was going, we had bought a bunch of stock in the company, the stock went from $5.30 and so we basically worked out, I ended up buying him out taking over a public company. And now here I was back to running a public company in 1999. Work through that, got through that. We had no capital, banks would loan us money, banks won't even talk to us. So, we could barely get checking accounts at banks, right? We got through all that process. We grew that company. We kept growing, kept growing a few years in 2017 -- 2016 we did [ph] our capital allocation strategy; 2017, we got our first big bank loan, a $90 million real estate consolidation loan, which really solidified financing for us. Then we got -- now we've got capital, we learned capital, so we couldn't use our stock for any deals because there's no way we're paying 20% capital like we were doing in 2008 using equity when the cap rate on our existing cash flow was 20%. So, we got past that. We got everything going. We built to where we are today and you say, what can we do? I mean look what we've done in the last five years with -- actually, since 2017 since we got bank financing. Now, the market is rewarding us. Market has given us a multiple on our stock that we can turn around and buy cheaper in the private market and bring it into the public company, get that arbitrage and we're able to buy great quality assets, great quality clubs, licensers and properties that we couldn't have even thought about buying before. And more of those opportunities, the more the stock has moved up, the more of those opportunities are coming up on line for us. If you look at the acquisitions we're making in Dallas, those are -- that's a great -- you can go to the Texas Alcoholic Beverage Commission and see that Baby Dolls is the adult club in the state of Texas has been-- Sorry to interrupt you. But I think Mark's getting tired. I think you guys need to get to Rick's to do your meet and greet. I think what I'm getting at here is it took you 20 years to get from $1 million to $100 million. Some of it was capital allocation somewhere it was operational. But like given the machine that you and Bradley and Dean and Ed and Josh and all these great -- Darcy, I don't -- but all of these guys, you built the machine now and you've got a machine and you're feeding the machine. I'm really hungry. I've lost 50 pounds. I'm really hungry. I know you're hungry too, because you spent 20 years building the machine, how much food can we put in the machine over the next five to seven years? How big -- how much bigger can we sort of make this machine now, like order of magnitude? I don't know what the total size is. I mean, we can -- my goal is world domination, right? I mean that everybody's goal in business. What we've done is we've gone from a linear growth and we're entering our accidental growth stages, right, because of our capital allocation strategy. If you look -- it's kind of -- if you look over the last five years, it's kind of been on a steady growth, but you're starting to see that curve, curve up. And it's because we're able to make these big acquisitions. We couldnât even dream of doing an $88 million acquisition in 2016, 2017. But last year, we did an $88 million acquisition. We're doing a $66.5 million acquisition. At the same time, we're doing those acquisitions, where also -- we bought six pieces of property to build Bombshells on. We bought a piece of property to build a steakhouse and casino in and we're looking at multiple other locations. We bought it -- we did a $9 million acquisition with a $5 million down payment. And by the time the time we started, right, 45 days from starting to finish, the $5 million payment was generated in that 45 days. So the day we started, we said we're going to have as much cash. So, that will drop our cash over this. But by the time we close the acquisition, 45 days later, we actually had more cash on our balance sheet, than we started 45 days earlier with after we spent $5 million in acquisitions. That's the kind of power that we have today that we just didn't have in the past and we're putting that to use. And the beauty is we have the formula and we have the knowledge of our capital allocation strategy to do the fifth grade math to make sure we make the right deals. So, how fast can we grow, as fast as we can find the deals, close deals and manage them. If you ask anything actually what our weakest link would be. And I think it's our strongest part of our company right now is our management teams, our people, stronger than it's ever been. But that's still, at the end of the day, going to -- money and capital used to be our weakest link. And now that -- our strongest part of our company is probably still our weakest link because you still have to manage these things as you buy them and those take time. We got to put systems in [Indiscernible]. But we're getting really good at it, we kept really fast. We've got a lot of guys that have now been involved in acquisitions and takeovers versus -- it started out with me and Ed and a couple of other guys were starting. And now we buy a club, and we can send a regional manager. We don't -- myself and Ed don't even have to go to the club. We have a regional manager now knows, okay, I know how to put the PR system in. I know how to -- we got to get our security system. We got to get at these. This is how we're going to operate it. This is the way the bar needs to be set up. This is the way these things have to go. So, we're getting much faster at it Adam, for sure. And I think we can see that exponential growth over the next three years. I mean I told you a year ago that I wanted to put $600 million to work over the next three years and we're well into that process. Maybe it took us 14 months to put the first $200 million to work, but hopefully, we put the next $200 million to work in 12 -- in the next 12 months and see how that goes, keep the growth going. There are a lot of companies that I'm sure people on this conference call have followed whether it's Watsco or PoolCorp or many, many great companies that have basically offered a very simple capital allocation strategy M&A and organic growth in sort of simple and mundane companies. So, if you can sort of join that group, you'll be in highest team and high company. Thank you again. All right. Thank you so much, Adam, for the phenomenal question. Adam's hungry. He's down 50 pounds. He's looking great and we're all ready to eat. Eric, Bradley, Ed, Dean, Josh, David, and the rest of the phenomenal Rick's team are leading the charge to world domination. And speaking of world domination, it starts tonight. For those of you who joined us late, you can meet management tonight at 7 o'clock at Rick's Cabaret New York, one of RCI's top revenue-generating clubs. Rick's is located at 50 West 33rd Street between Fifth Avenue and Broadway, a little in from Herald Square. If you have an RSVP'd, ask for Eric Langan or me at the door. I will be busy using my own capital allocation strategy after 9 P.M. On behalf of Eric, Bradley, and the company as well as our subsidiaries, thank you and good night. As always, please visit one of our clubs or Bombshells Restaurants to have fun.
EarningCall_1959	Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you, Desmond. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on the IR Web site at ir.jiguang.cn. On the call today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Shan-Nen Bong, Chief Financial Officer; and Mr. Guangyan Chen, General Manager. Following their prepared remarks, they will be available to answer your questions during the Q&A session that will follow. Before we begin, I'd like to remind you that this conference contains forward-looking statements within the meaning of Section 21E 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, which are difficult to predict and 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 and/or factors are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, [technical difficulty] otherwise, except as required under applicable law. Thanks, Rene. Good morning, and good evening, everyone. Welcome to Aurora Mobile's 2022 third quarter earnings call. Before I comment on our Q3 results, I would like to remind everyone that the quarterly earnings deck is available on our IR Web site, you may refer to the deck as we proceed with the call today. While we continued to navigate through macro-economic uncertainties, Q3 was a solid quarter for performance and financial measurements in most of our business lines. We are also actively expanding our footprint into overseas markets and prioritizing opportunities for future growth. I will expand into more details in the later section of my remarks. We continued our cost control initiatives in the third quarter and are very pleased with our progress. Here is a snapshot of some of the great key results that we want to share with you. Lowest operating expenses for the past 16 quarters since Q4 of 2018, at RMB80 million, down 23% year-over-year. Lowest net loss since Q3 of 2019, at RMB20.7 million, narrowed down by 42% year-over-year. Adjusted EBITDA at negative RMB6.7 million, significantly improved by 58% year-over-year. Deferred revenue balance is the highest in the history of the Company, at RMB139.1 million. Total customer number up 71% year-over-year to 4,665. AR turnover days significantly improved by 8 days from 46 days in Q2 2022 to 38 days despite the tough business environment. And I'm sure everyone in the call [indiscernible] about the massive layoff announced by one of the world's large -- largest social media tech company recently. Looking back our decision to start restructuring and cost cutting in the second half of 2021 could not have been wiser. [Indiscernible] we've been slow and on make such a decision now, we will be in a much worse financial situation. Back to these key financial highlights in this and past few quarters. I'm very proud that our team has stayed together and executed brilliantly to help the company become leaner and more efficient. I am confident that we will come out of these difficult times on a stronger. This quarter, we record another quarter with historically low operating expenses level of RMB80 million, down 23% year-over-year. Our net loss is also the lowest since Q3 of 2019 at RMB20.7 million, narrowed down by 42% year-over-year. One of our main goals going into Q4 and financial year 2023 is to ensure we continue to operate efficiently where we organically grow our revenue faster than expenses. Another encouraging sign is from the revenue perspective, as we saw sequential revenue growth in most of our business lines this quarter. While we are anticipating more recovery in growth, itâs still too earlier to call this a definite trend. However, the sequential growth in our business lines is a major positive sign for us. As the global and domestic economies are currently going through some major transitions in countries, we look at sequential revenue growth as more indicative of the health of our business and possible that [indiscernible] will change. With that said, we want to see the sequential trends continue for several more quarters before we are comfortable saying the business are back to normal. Now, let me go through the different revenue streams within the Group. Developer Services revenues increased by 3% quarter-over-quarter to RMB57 million, which was mainly due to the increase in Subscription Services. Year-over-year Developer Services decreased by 12% mainly due to the weakness in value-added services, offset by the growth in Subscription Services. Subscription Services revenues were RMB41.7 million, up 9% quarter-over-quarter and up 5% year-over-year. Subscription Services, our core business line, including JPUSH, Analytics, UMS and others, are products and services that help APP developers and enterprises to improve their operational efficiency. The increase in ARPU contributed to the growth in revenues, and we managed to grow our customer base, signing up several well-known and sizable customers including [indiscernible] just to name a few. Value-added Services revenue decreased quarter-over-quarter by 9% and year-over-year by 39% to RMB15.3 million. As we saw market demand further pressured and advertisers continuing to cutback budgets, this trend is quite visible and similar to those reported by larger advertisement pipelines. Direct customers contributed more than 75% of JG Alliance revenue stream, while the rest came from third-party AHS. Major customer of JG Alliance consisting of reputed customer and market leaders across many industry verticals, key customers include, Baidu, Alibaba Tencent, [indiscernible]. Although we believe that these factors are temporary, and the advertising market is expected to bounce back, we are taking actions and continue to prioritizing our resources on projects that will drive the most growth. With the launch of our AD Mediation Platform in Q2, over 3 million DAUs and over 40 APPs have joined our platform and we are anticipating more DAUs to join our platform in Q4. Services enabling traffic monetization for advertise -- ADs have become an important driver during the development of the mobile internet ecosystem. As the major mobile AD Mediation platform have spread overseas, in establishing -- established market, such as [indiscernible], we are also striving to have the developers to rapidly grow and improve monetization efficiency. While we put some emphasis on coping with the near-term uncertainties, we consistently stay focused on our long-term strategy of expanding our business overseas since we believe that going overseas is becoming a substantial growth strategy for Chinese companies. After several months of our teamâs effort, in mid-October we launched our overseas messaging service platform EngageLab, allowing developers to reach global users efficiently and effectively. This is a major milestone for us, since we can now help both the Chinese companies and overseas based companies to carry out refined and accurate user reach and engagement at low cost with high message delivery rates and conversion rates. I invite you to visit our Web site at www.Engagelab.com to see for yourselves. At present, EngageLab provides five major services including: AppPush, WebPush, Email Service, SMS Service, and WhatsApp Business API and is exploring additional messaging channels in overseas markets. Based on the current [indiscernible] and nature of inquiry from our -- from both Chinese companies going overseas and overseas based companies, we are very pleased with our progress. We believe we have a set of tools and services that meet the market demand and we are in the best possible position to tap into the growth in this segment of the market going forward. We will provide regular updates on this business in the future quarters when the numbers are material. With that, I will now pass the call over to Shan-Nen, who will share more information about our Vertical Applications and other aspects of our performance. Thanks, Chris. And now let me provide some colors on the Vertical Application business. In this quarter, we have seen such sequential growth in Vertical Application revenue, which is very encouraging. Vertical Applications mainly consists of financial risk management and market intelligence. Vertical applications revenues increased by 12% year -- quarter-over-quarter and decreased by 9% year-over-year. In the Financial Risk Management segment, revenue increased by 20% quarter-over-quarter to RMB14.4 million and decreased by 7% year-over-year. The Financial Risk Management quarter-over-quarter revenues growth was mainly due to the increase in customer numbers as demand has shown good growth over the quarters. While our Financial Risk Management team has pushed continuously to establish deeper connection with our key customers, it has also discovered more opportunities with our existing client base. Also, our ongoing improvement and additions to the product mix have helped our first signing up many more new clients and renew customer, including but not limited to [indiscernible]. Our Market Intelligence Services delivered strong revenue growth, up 23% quarter-over-quarter and up 24% year-over-year to RMB8.9 million. During this quarter, we have further cemented our strategy to retain key customers from both PRC and overseas markets, and we signed up numerous well-known customers including, but not limited to Morningstar, Tsinghua University [indiscernible]. I will now go through some of our key expenses and balance sheet items. Onto operating expenses. As Chris mentioned earlier, tightening expense control has been the theme over the past few quarters. And by doing so, we have achieved very solid results to tide us through these tough times. And we have had another record low quarter for operating expenses at RMB80 million, down 23% year-over-year. All three components within the operating expense category have recorded year-over-year reductions, in particular, R&D expenses decreased by 31% to RMB38.3 million, mainly due to lower headcount, reduced salary costs and associated share-based compensation and a decrease in cloud costs as a result of improvement and optimization of our cloud platform. Selling and marketing expenses decreased by 18% to RMB24.2 million, mainly due to the decrease in our headcount by 42, and marketing expenses and salary costs decrease accordingly this quarter. G&A expenses decreased by 7% to RMB17.6 million, mainly due to salary costs, which is the result of a reduction in headcount. Adjusted EBITDA improved by 58% year-over-year, and by 16% quarter-over-quarter, respectively to negative RMB6.7 million. Our company-wide effort to optimize headcount and operating expenses has continued to pay off and yielded good results for us. And below are the highlights I want to recap. In this quarter, we have had the lowest operating expenses for the past 16 quarters since Q4 of 2018 at RMB80 million, decreased 23% year-over-year. We had the lowest net loss since Q3 of 2019 and negative RMB20.4 million, narrowed down by 43% year-over-year. As mentioned, adjusted EBITDA at negative RMB6.7 million improved by 58% year-over-year. We had the lowest adjusted operating expenses, which represent the cash component of OpEx since Q1 of 2019 at RMB66.9 million, decreased by 24% year-over-year. And on to the balance sheet. I will again share two very key KPIs that we closely monitor. Firstly, the AR turnover days decreased from 46 days in Q2 2022 to 38 days in this quarter. Our disciplined accounting policy and cash collecting efforts ensure a timely collection of our accounts receivables. And this is very important to mitigate the exposure to bad and doubtful debts during these particularly challenging times. And secondly, one of the key financial KPIs for tracking the performance of SaaS companies that total deferred revenue, which represent cash collected in advance from customer for future contract performance, we recorded the highest balance in the history of the company at RMB139.1 million. Another angle on this matter, our deferred revenue balance has continually growing and exceeded RMB100 million at quarter end for the 10th consecutive quarter. And this demonstrates excellent health conditions of our financial KPI under the SaaS business. And next, total assets were RMB445 million as of September 30, 2022. And this includes cash and cash equivalent of RMB108 million. Accounts receivable of RMB32 million, prepayments and other current assets of RMB32 million; fixed assets of RMB42.9 million, long-term investment of RMB142.9 million; goodwill of RMB37.8 million and intangible assets of RMB25.2 million resulted from the SendCloud acquisition in March 2022. And total current liabilities were at RMB238.4 million as of September 30, 2022. This includes accounts payable of RMB17.5 million, deferred revenue of RMB132.7 million and accrued liabilities of RMB88.2 million. And lastly, before I conclude, I shall give a quick update on the share repurchase plan. In the quarter ended September 30, 2022, we repurchased 27,000 ADS and cumulatively we have repurchased a total of 948,000 ADS during -- since the start of our repurchase program. Hi, there. This is [indiscernible] on from Brian. Thanks for taking my questions. I just want to start with now that we're halfway through the fourth quarter, how is it looking so far compared to the third quarter? Should we be expecting similar results, or are you seeing any new trends that you could allude to? Hi. This is Shan-Nen. Thanks for the question. Yes, based on the trajectory that we have seen to date, Q4 will -- should be able to achieve a sequential growth again in this quarter. So things are start to pick up and we do see sign of recovery for most, if not all of our businesses. Thank you. Another question, you guys mentioned the abundance in deferred revenue. So which segments, if any, do you see unusual strength and which do you see unusual weakness, if any? And why do you think that is? Do you think this is affecting your growth in any way? A few of the layers in terms of the makeup of deferred revenue, they are mainly coming from the Subscription Business and Vertical Application, because [indiscernible] the value added services are mainly advertising base, so those customers are unlikely to prepay. So the main focus or the component of deferred revenues are coming from Subs and Vertical Application. So I don't -- we do not see any weakness in terms of where it's coming from. But I guess based on the balances that has been growing, we have no concern, and we do see [indiscernible] on this quarter-over-quarter. Thank you for the questions. [Operator Instructions] We have the line -- the question from the line of Kevin Wong [ph] from [indiscernible] Capital. Please proceed. Hi, management. Many thanks for taking my question. I would like to have three questions, if I may. The first one is related to the launch of EngageLab for overseas customers. Could you provide more insights on the EngageLab platform for us? That's the first question. And the second question, we have noticed that you have started cooperating with BYD for expenses in Euro. So we'd love to hear more about the details on that. So the second question is related to your cooperation with BYD. And finally more a financial related question. We noticed that you have done a good job in managing the OpEx. So appreciate if you could share with us how this OpEx is trending in the next few quarters. And also, if you can when -- could you also share with us when are we expecting the company to turn positive adjusted EBITDA? Thanks. Sure, Kevin. Let me recap your question. For the first one you're asking about the EngageLab for our overseas customer, right? Okay. So actually, this is part of our plan to facilitate this all our Chinese companies going overseas. And we have launched this EngageLab in short just to ensure that the Chinese companies can carry out the refined and accurate user reach overseas with our low cost and high efficiency rate that we can offer. If you look at our EngageLab, actually, we are committed to offering omni-channel messaging solution to global enterprise and developers. And as we have mentioned in our press release, at present EngageLab provides five major services, including AppPush, WebPush, Email Service, SMS Services, and WhatsApp, and we are at the moment exploring additional messaging channels in the overseas market as well. So besides the Chinese companies venturing overseas, we believe our EngageLab is also well suited to overseas based developers who have a niche to wish their customer in a more efficient and effective way. And hopefully, I can give you some colors in terms of where we are. And up until recently weâve sign up more than 15 overseas based customer with many more in the pipeline. So we believe that this strategy to put our resources in EngageLab for overseas customer or for Chinese companies going overseas is the right one and definitely deliver positive results in the near future. And I hope this answer your question. And if I look at my next -- okay, sure. And the second question you have is with regards to BYD in Europe, and that's one of the press release that we have made recently. I can give you some background in terms of the corporation. So this is in late -- I think it's late September, we've entered into this agreement with BYD for them to launch their services in Northern Europe, in particular in this -- in the country of Norway, where they have delivered more than 1,000 pure electric SUV in Norway. So leveraging on our messaging cloud solution, so we are able to help BYD effectively carry out the user reach in that particular market, and improve their messaging experience for their users. So, apart from the so-called messaging delivery system, we believe that Chinese company faced various security compliance requirement, especially in Europe, where GDPR is very stringent. So I believe our solution is well catered for Chinese company based -- Chinese based companies going overseas. And in particular, with our experiences in stable and quality messaging and data compliance competency. I think we believe we are the service provider of choice without any doubts. And I guess with this project with BYD, we think that it will open more doors for us in securing more similar contracts overseas, and do look out for our future press releases in this matter. And Kevin, and what was your third question? Okay, the third question again, two things. One is about the trend or the coming trend of your OpEx, because you've done a very good job in managing the OpEx over the past few quarters. So we'd like to hear from you about the trend of OpEx in the coming few quarters. And secondly, very straightforward, when are we going to express the EBITDA to turn -- adjusted EBITDA to turn positive? Sure. Sure. That's a tough question. I guess based on the financials that we have released for the past few quarters, you have seen we have proactively controlling our operating expenses over the past four to five quarters. And we have made really good progress. And as mentioned by Chris and myself, for the third quarter this year, we have the lowest operating expenses for the past 16 quarters. We have the record low net loss since Q3 of 2019. And our adjusted EBITDA continue to improve by 58% year-over-year. And my say that all this achievement are by no means easy, no straightforward. And it was all due to our team's effort to execute this cost reduction plan continuously quarter-over-quarter. And probably as you are aware, our cost control initiative is an ongoing process. And operating expenses perspective, we believe we are at a pretty optimized level now. But still, internally, we are challenging all departmental heads to keep the company's expenses at the lean and a more effective level. And having said that, I think there could be some unforeseen events in the -- at this moment that might be potentially to the scale and with the overall global macroeconomic uncertainty at this point, we do not give any specific timing as to when we will turn positive for our adjusted EBITDA. I guess so long as we keep our operating expenses at the optimal level, and we believe that when the economy recovers, and in turn revenue continue to grow and turning adjusted EBITDA positive is the only natural course of event. Back to -- that's my answer to your question, Kevin. Thank you for the questions. At this time, there are no further questions from the line. I would like to hand the call back to Rene for closing remarks. Thank you everyone for joining our call tonight. If you have any further questions or comments, please don't hesitate to reach out to the IR team. This concludes the call. Have a good night. Thank you.
EarningCall_1960	Thank you for standing by for Fanhua's Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent background noise. After the management's prepared remarks, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcasted live over the Internet. The webcast replay will be available within three hours after the conference is finished. Please visit Fanhua's IR Web site at ir.fanhuaholdings.com under the Events & Webcasts section. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, Fanhua's Investor Relations Manager. Good morning. Welcome to our third quarter 2022 earnings conference call. The earnings results were released earlier today and are available on our IR Web site as well as on Newswire. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. Such risks and uncertainties include but not limited to those outlined in our filings with the SEC, including our registration statement on Form 20-F. We do not undertake any obligation to update this forward-looking information, except as required under applicable law. Joining us today are our Chairman and Chief Executive Officer, Mr. Yinan Hu; Chief Financial Officer, Mr. Peng Ge; and Chief Operating Officer, Mr. Lichong Liu. Mr. Hu will provide a review of our financial and operational highlights in the third quarter of 2022. There will be a Q&A session after the prepared remarks. Good morning and good evening. Thank you for joining today's conference call. In the third quarter of 2022, challenges and opportunities coexist. On the one hand with multiple factors such as the macroeconomic uncertainties, restrained consumption, resurgences of COVID-19 cases and the regulatory requirements of nationwide double recording at play, the gross written premiums of China's life insurance industry merely recorded a low single digital growth of 1.3% year-over-year, representing a sharp decline in the growth rate compared with the second quarter of 2022. The decline in the number of insurance sales agents in the industry also continued, with substantial declines in sales force numbers reported by many large insurers. On the other hand, we are encouraged to see a steady growth momentum among insurance intermediaries as a whole, driven by significant growth in agent productivity, despite an overall decline in sales force. In addition, more and more insurers are engaging intermediary channels and showing a more open attitude towards the mode of cooperation with independent insurance intermediaries suggesting greater development opportunities awaiting intermediaries like us. Despite challenging external environment, Fanhua showed resilience with steady business growth during the third quarter of 2022. Our life insurance premiums grew by 6.2% year-over-year to RMB2.8 billion, of which regular life insurance first-year premiums reached RMB529.7 million, up by 9.1% year-over-year. Even with the continued investments in technology and training, our operating income beat expectation to achieve RMB32.2 million representing a growth of 14.2% year-over-year. The quality of our sales force continued to improve during the quarter. While total number of performing agents declined in accordance with our plan, the per capita productivity of performing agents grew by nearly 20% year-over-year. The contribution from high performing agents increased even further with the number of 100,000 premium agents growing by 46% year-over-year, contributing 48% of our total first-year premiums in the quarter, up from 39% for the corresponding period in 2021. Addressing the needs for high-quality senior care, wealth management and inheritance solutions by Chinese mass affluent and high-net-worth families, Fanhua has continued focus on magnifying our infrastructure platforms capability to empower agents to better serve clients. Fanhua has implemented the insurance-as-a-service model by pooling quality trust and health care service resources in the market on top of a wide spectrum of insurance products to match customers' evolving needs throughout their lifecycle and support agents to provide whole life services for their customers. For trust services, as of the end of third quarter of 2022, Fanhua facilitated setting up nearly 150 trust accounts with over RMB1.7 billion in trusted assets, covering over 270 new insurance policies contributing RMB85 million of total insurance premiums. In the third quarter alone, Fanhua facilitated setting up nearly 60 trust accounts with RMB510 million in trusted assets contributing RMB27 million in insurance premiums. For health care services in the third quarter of 2022, Fanhua continued to increase its efforts to expand health care service resources, covering customers' entire life journey, including introducing high-quality life care service resources in the industry. We have also set up 14 health care service experience centers across the country to showcase the health management and elderly care community resources linked by Fanhua across the country to improve customer experience and facilitate business conversion. Leveraging on the trust and health care service resources in Fanhua's insurance policy custody technology, we've established the FFF representing Family Office Consultants, Fanhua Retirement Planning and Family Policy Custodian training and certification system to help agents improve professional skills in a tiered approach. This is based on the RRR representing Accounts Responsibility, Solution Responsibility and Fulfillment Responsibility marketing model and service scenario marketing. We also established a closed loop of services from training to customer engagement activities, service resource facilitation, solution design and final transaction to support agents to engage with their customers and drive conversion more easily. Up to now, Fanhua has carried out nearly 200 FOC and FRP training and certification programs nationwide, with a cumulative total of more than 13,000 certified trainees who have become the major force to assist customers in setting up trust accounts and selling whole life and energy insurance products. In the third quarter of 2022, FOC and FRP certified trainees contributed about 66% of Fanhua's first-year life insurance premiums, and the per capita productivity was much higher than that of non-trainees. Building on the success of the FRP training programs in third quarter, we have accelerated our training with an additional 3,000 trainees completing our training course in October. By the end of the third quarter of 2022, Fanhua has largely finished the construction of its IT infrastructure to support digital operations. We continue rolling out various frontline digital tools for wider adoption among sales agents across the country and continuously optimizing the functionality and user experience. Specifically, our insurance policy custody system version 2.0 and insurance service [indiscernible] workstation, our proprietary customer engagement platform, were both rolled out in larger scale during the third quarter. Currently, we operate a full suite of digital tools to provide all the support that agents need to manage their book of business online from customer engagement, transaction, customer services to personal professional growth, enabling significant efficiency improvements. For the fourth quarter of 2022 in view of the ongoing resurgences of COVID-19 cases across the country, the growth prospect of Chinese insurance industry remains challenging. Against this backdrop, Fanhua will continue with our established development strategy in the fourth quarter to empower agents and create value for customers. The management expects our operating income to be no less than RMB30 million in the fourth quarter of 2022. I have three questions. And the first one is what's your current product mix, especially what's the proportion of your savings products? And in terms of the savings products, what type of insurers do you work with more often? And what is the current take rate for such products? And secondly, could you share some more color on your profile of the customers and especially what's the proportion of your high end customers? And the last question is about your sales force. Could you give us some more details on your strategy as to recruitment? Is it difficult to recruit high quality agents currently? Thanks. Let me get back to your first question first. In the third quarter, whole life insurance products, annuity and endowment, such savings products accounted for 87.5% of our total first-year premiums as compared to 83.6% in the same period last year. And in terms of first-year premiums, our major product suppliers [indiscernible], respectively, accounting for 27.3%, 24.8%, 11%, 5.5% and 4.6% of our first-year premiums, respectively. With the implementation of the [indiscernible] Phase 2, many life insurance companies actually is subject to greater restriction in terms of growing their business as the new accounting principles lowered the recognition of life insurance policies profit as capital which also is resulting in a lowered solvency ratio, therefore, subjecting them to greater gross pressure, capital pressure and this is also one of the reason that even though synergy [ph] remains to be our largest [indiscernible], the shares in terms of our first-year premiums has not yet contacted from last quarter. As we also mentioned earlier, more and more insurance companies have been engaging with insurance intermediary channels and adopted a more open attitude towards the cooperation with independent intermediaries. We expect that our product supply as well as our insurance company partners will become more diversified next year. Based on 10 years APE, annualized premium equivalent, the first-year commission rate of savings products is in the range of 90% to 98%. But in terms of 20 years APE, the first-year commission rate for savings products can be as high as 138% to 145%, varying from one insurance company to another. However, savings insurance products, the payment periods are generally much shorter, typically three years, five years or 10 years. So even though the first-year commission rate is higher, the renewal commissions are actually much lower than other type of products such as critical illness products. And on the other hand, critical illness products have much longer payment periods and the first-year commissions rate is lower than that of the savings products. But the total amount of revenues generated from newer commissions from critical illness products are pretty much higher which means that it has higher and better value for the company. This is also what we were trying to improve by encouraging the sales of more longer term products as well as by partner with insurance companies to design new products with high margin value to improve the overall value creation. As for the second question regarding our customer profile and the percentage of the mass affluent and high-net-worth customers, currently about 30% of our total customer groups are critical illness policyholders with per policy amount of approximately 4,800. And of the critical illness policyholders, 66% are female while 46% of them are in the age group of 30 to 40 years old with annual first-year premiums amounting to approximately 5,000. For the insurance policyholders for savings products, such as whole life insurance and annuity insurance, the female accounted for 76% and over 60% of them are in the age group of 40 to 59 years old with per policy premiums of 48,000. So this means that the age group in the range of 40 to 59 years old, this age group populations are more likely to purchase whole life and annuity insurance for themselves and their family members to cater to their needs for both elderly care, legacy management, as well as savings for children education. So this basically aligns with our current strategy to serve the mass affluent and high-net-worth customers. And currently, there are about 300 million high-net-worth individuals in China with the age between 40 to 50 years old. In 2021, the insurance policyholders who paid over 100,000 first-year premiums annually accounted for approximately 1% of our total insurance policyholders for the long-term life insurance products. However, this small percentage of customer groups actually contributed to over 30% of our total first-year premiums. I believe that the number as well as the percentage of those higher net worth customers are actually increasing significantly on a year-over-year basis. For 2022, we have shifted our agent recruitment focus towards a lead-based agent tool. We have increased the standards for agent recruitment. And confounding with the impact of COVID-19, we do see a slowdown of agent recruitment this year. However, we are encouraged to see that the contributions of the percentage of higher performing agents among new crews are actually increasing significantly. In the third quarter in particular, the percentage of the number of high performing agents, which are defined as those who contributed 25,000 during the quarter in terms of first-year premiums, accounted for -- actually increased from 26% in the same period last year to 43% this year. And the per capital productivity of our effective agents during the quarter also improved both year-on-year basis and on a quarter-over-quarter basis from 14,000 in the same period last year and 20,000 in the second quarter to 22,000 in the third quarter. Building on our advantages in insurance trust services as well as health care services resources as well as the empowering capacity of our platform and as well as leveraging on the trend of the rising demand amount, the mass affluent and high-net-worth individuals for health care and elderly care services, we will step up efforts to introduce more MDRT, Million Dollar Round Table members. Our target for this year is to increase the number of MDRT from 302 last year to 500 by the end of this year. In addition, we also put a lot of our focus to both recruit and to trend our ages with more agents that can contribute over 100,000 premiums annually. And our target is to increase the number from roughly 1,600 to 2,000. So that's representing a growth rate of 3% year-over-year. By the end of the third quarter, solely based on the performance of nine months -- in the first nine months of this year, there are already 300 agents reaching the standards of becoming MDRT. And about 1,200 of agents have reached the standards of contributing 100,000 first-year premiums annually. So with the upcoming fourth quarter results -- with the contribution of their fourth quarter performance, we believe that there is still high chance for us to achieve this target. Thank you. Thank you. [Operator Instructions]. I'm showing no further questions at this time. I'd like to turn the call back over to Ms. Oasis Qiu for closing remarks. Thank you. So if you have any further questions, please feel free to contact us. Thank you for joining on today's conference call. Thank you.
EarningCall_1961	Morning, everybody. My name is Gary Mobley. I'm one of the Semiconductor Analysts at Wells Fargo Securities. And with us today is our feature company, Qorvo. With us today, we have Bob Bruggeworth, CEO; and Philip Chesley, who's Head of the High Performance Analog Business group at Qorvo, which is one of the three new business groups and segments within the company. And before we get started into the questions, I'm going to turn it over to Bob, who has some opening comments. Thanks, Gary. I really appreciate you having us here. It's also great to see you in person. We've done a few of these I know via Teams Meetings, et cetera, but it's really great to be here. Also want to just remind all those in the audience here today and online that the Safe Harbor language that applies to our press releases applies to our comments here this morning as well. I think what I'd like to do is just remind everyone that we're now organized in three business segments; one being High-Performance Analog, which you mentioned, Philip heads up -- another is our High-Performance Analog is the one that Philip's here representing. The second one is Connectivity and Sensors business unit headed by Eric Creviston and our Cellular business unit -- Advanced Cellular business unit, headed up by Frank Stewart. So, we're separated -- now organized in three business segments. And just to kind of look back at the September quarter, high-performance analog had tremendous growth year-over-year, a lot of that was led by the strength that we saw in our Defense business, also in Infrastructure business and our Power business, that being in the sili-carbide area. So, we're real pleased with that business, how it's performing. Philip don't get a big head; I'll give you a tough time later. On the Connectivity and Sensors business, primarily the consumer side of that business, that being Wi-Fi, was really off year-over-year. Some of that is the Wi-Fi that goes into handsets, along with access points. And that business is recovering. We're under-shipping to the demand and that one as well as we adjust to the inventory that's in the channel. Now, in our Advanced Cellular business unit, we saw a large ramp with our largest customer. We were up year-over-year at our largest customer. And unfortunately, what we said is the Android ecosystem is really a large headwind for us. And I'll talk a little bit more about that. The Android Ecosystem today, only about 40% of that is 5G, where on the iOS, it's 100% 5G. So, when we look at the opportunities for growth, we see that as significant growth that we expect it to get to about 60% of the Android ecosystem to be 5G in a few years. So, that's a tremendous number of units of growth. And we get somewhere between $5 and $7 worth of opportunity for us in added content. So, that's a big growth driver for us. I know there's a lot of concerns about the Android ecosystem. And as we look at things out there, from a 5G perspective, we started the year thinking it was going to be over 700 million units, now we're closer to 600 million units. Okay. Clearly, what's impacting that is the shutdowns in China, Gary, I'm sure we're going to have questions about that as well, and the war in Ukraine has really also impacted Eastern and Western Europe, and consumer confidence is not anywhere near where it used to be. So, that's put a lot of pressure on it. But we view these as temporary, not a structural change in the outlook that we have and the opportunities. And you mentioned MediaTek, that's a great example where during this time, we're seeing tremendous opportunities to lock in future wins. Feel good about that. We also talked on the call about we want a low-band pad in a marquee phone at Samsung. That's a major milestone for us. We've never had that opportunity before. So, we're continuing to see great growth at Samsung. We also said we're going to do well at Honor, that's continuing to ramp. Google is another great opportunity for us along with the rest of the Vivo-OPPO-Xiaomi in China. So we feel good about where we're positioning the business there. So if I also step back and then look at the long-term growth drivers of our business, as I stated, 5G is clearly one. The migration from Wi-Fi 6, 6E to Wi-Fi 7 is added content for us as well, that looks great. The continuation of defense funding growing and supplementing a Philip's business. We're seeing the rollout of 5G infrastructure in India, which, again, Philip's business is positioned extremely well. I look at what's going on with ultra-wideband, the work we're doing there and matter. So we see a lot of opportunities for growth as we look forward. Thanks for those opening comments, Bob. I wanted to double-click on your brief comments in reference to MediaTek. I think that announcement that came out yesterday morning, perhaps if you can share with us the importance of that relationship. Is it new? And how deeply penetrated are you going with the various products? We've been partners with MediaTek since they really begin their baseband business. In fact, when they launched 2G, we were the only supplier that was on their list that could work with their baseband. And actually, several years ago, we were the first to have our own lab inside MediaTek offices in Taiwan. So we've got a long history with them. I personally meet with their CEO several times throughout the year. It's been virtual lately, although Taiwan is opening up. So I look forward to meeting them face-to-face. So we've had a long history with them. And if you look at the breadth of that announcement in cellular, in Wi-Fi, in automotive, all different types of parts for all different types of applications, it's really just the confirmation of a long-standing relationship and what we've been able to do with them. Sorry, if I could add one thing. The other thing I want to make sure people recognize is MediaTek is broader than just China. And they're continuing to grow their business outside of China. So I just want to make sure that's noted. It is noted and much appreciated. And so with respect to COVID in China, we see headlines on a daily basis about more stringent lockdowns in the impact this is having on production of smartphones, in particular, with your largest customer. So my question to you is, to what extent did you factor that into your outlook and under a backdrop where seemingly the China policymakers are unrelenting to their zero COVID stance, how does this affect the recovery or not in the Android system? Yes, I think two questions there and both Android, iOS and we'll just take it up a level to smartphones. When we gave our guidance, we said we will be down at our largest customer. We said, we'd be down in the Android ecosystem as well. So we factored in that this was most likely going to be a tough quarter for 5G handsets in general. And then we also added, we were under shipping to demand. Now what we'll have to find out is, what was the actual demand in the December quarter to be able to answer the question everybody wants to know is how far under demand are you shipping? Unfortunately, over the last few quarters, we've been bringing down our production, and our customers are bringing down their production. However, they've been overshooting demand. So we'll have to wait till the end of the quarter. Now we do have people there that are in country now today. I was reading some e-mails this morning. Shenzhen seems to be running fine. Yes, there's some challenges in certain areas with certain companies. But various areas are being played up maybe a little too much in the press for what's actually going on everywhere. But with all that said, it's still an important market to us. And it's just our belief like anything that we've talked about, all this is temporary and it's going to return. And we're working on is positioning the business so that we're going to be in a good position when it does return. Okay. Thanks, Bob. And long-term, your view on the Advanced Cellular Groupâs growth is what, roughly high single-digit percent growth? And many would argue that the market backdrop or for mobile handsets, smartphones in general is flattish. So, maybe you can just sort of deconstruct the algorithm for that high single-digit percent growth assumption? Sure. Number one, our assumption is, to your point, market is going to be flat, but the percentage of 5G phones is going to increase. And I talked about the Android ecosystem being 40% 5G, moving to 60% in just a couple of years. So that's a lot of units being added, and that's in that $5 to $7 opportunity of added content. Also, I talked about, our share, we're still gaining share at Samsung. And we've touched on that, we have not just talked about the big wins that we had in many different components in their next marquee phone launching in the first quarter â calendar quarter that is, Honor, very underrepresented there, because as most of you recall they were spun out of Huawei, who we were not allowed to sell to, and now they're coming back to our integrated modules. And I remind the Group here, we were recognized last year as their only RF strategic supplier, and I expect any day now, we'll be once again named one of their strategic suppliers, the only one in RF. So that's just beginning growth there as well. And then we talked about the added content that's still continue to go in there. We mentioned on this call that, our most recent call that we had a mid-high band pad that we integrated in what was the DRx, which was not part of the market we were chasing. So that adding to what is now our serviceable available market, and that's adding content. So that's another example. And then, if I look at our largest customer, we do very well in our tuner business there. Obviously, when they migrate to the new baseband, we'll do well with our envelope tracker, but there's opportunities there for us to grow. So what we've called our shots, if you look at what we've said is we will win Samsung, we will win Honor, and then we will continue to grow our share at our largest customer. So that's how we get to the mid- to upper-single digits growth for that business. Okay. And my next question really is about the debate, cyclical versus structural change in the mobile handset market. And it relates to your manufacturing footprint, clearly, your advanced cellular Group business is facing a tough period as you're under-shipping in demand. But when things normalize, do you see that you have the right manufacturing footprint, or does that need to be modified at all? As far as the manufacturing footprint, on assembly and test to remind the audience, we have two factories in China. They do extremely well, and they're much broader than just the advanced cellular. So, a lot of our WiFi products are in there, and some of Philips other products. So it's a fairly large operation for us, but we still outsource quite a bit. So it's probably more like that 70-30 range. So we outsource quite a bit there. So as we grow, we'll be able to continue to diversify our business there. Now, on what most people don't understand is, we still buy quite a bit of silicon for our tuner business, in our integrated modules, there's control chips, there's LNAs, things like that, that are also outsourced. So when you net all this together, I think we have the right factory footprint, because the filters, we continue to grow, but we continue to improve our productivity by reducing the die sizes, the number of die we can get on the wafer, we're still all the way to 8 inch. So I feel very good about our manufacturing footprint. Okay. I will get to Philips in a second. I just want to ask one last question. On the cellular side. So, you just hinted on this. I think Qualcomm is already conceded the idea that, they might not be in iPhone 16 and subsequent versions to that. And so you hinted that maybe you can take back the Envelope Tracker, which they currently supply as part of their cellular solution.. But what about some of the millimeter wave opportunity there, as they're designed out? Yes. I think, what's interesting is the market adoption and how long that's going to stay in handsets and really no one else has really significantly followed Apple in that juncture. But what I do feel good about is that, we have -- we've got feedback from several customers that the process technology, the designs we have, the millimeter wave are the best out there and can actually have about half to a quarter of the current consumption that's currently out there. So, all just have to wait and see what architectures are chosen by any of our customers. But I feel very good. The same thing happened in the cellular. When I joined the industry almost a long time ago, it was all silicon-based PAs, which then went to Compound Semi [ph] and Galway Marson [ph], HBT. And I think, same thing is going to happen in millimeter wave over time. It will go back to a compound semi. Got it. Thank you, Paul [ph]. I'm sorry. Thank you, Bob. I wanted to bring Phil into the discussion, if you could give us an overview of the high-performance analog business group, I believe, is what, roughly 20% of revenue, maybe sort of deconstruct what's within that? Absolutely. So, I'll start with the largest business in HPA, which is our defense and aerospace business. This is a market where we have a strong brand name. We've been in this business for a long period of time. And I think what's exciting about the DNA space is, there's really three growth drivers that, I don't know if we get a lot of attention in the industry of what's really driving the growth in that space. The first is what you see similar like in automotive, the electrification trend, you're seeing that same trend in the defense space. Existing systems getting upgraded. There's just a lot more semiconductor content being put into these assets. The second is the trend that I call the one-to-many, right? You're going from one satellite to mini satellite. You're going from one aircraft to many drones, right? And that is driving not just content gains, but that's also driving higher volume, if you will, for that business. Now, the challenge and then the opportunity for kind of the third growth driver for the DNA space, is really around, how do you put all of the stuff into a smaller area, right? And that's where our investment in our ship program that we have, where we do advanced packaging for the US government, onshore in Texas is such a real valuable asset for us and we see as a real exciting growth opportunity. And I do want to highlight one thing. A lot of that advanced packaging technology that we have with our ship program, leverages the technology that we had in our advanced cellular group, right? So there's this natural capability set that we're able to kind of extend to the US government that they value in a meaningful way. So that's the first business. The second business is, what we call the infrastructure business. There are two business groups, if you will, market segments to that. The first is our base station investment. And the second is, what we call broadband or cable access business that we have there. Maybe some color around our base station investment and what we're doing there and why we're excited about it. So, obviously, there's a lot of press in terms of the 5G deployment. And we still see a lot of opportunity for growth in the US and the Europe markets in particular. But India, in particular, is moving at a pretty fast speed. I think the model that they're trying to deploy is similar to how China rolled out the 5G spectrum and their base stations that they built out. So we see a real opportunity for our small signal business, both in the 32TR and the 64TR market, but also in our GaN PA technology that we have. And that's an area that we see a lot of growth opportunity for us, not just in the PA, but we also have a technology called PAMs, where we take the technology -- the module technology in our mobile business, and we move it over and we start doing the same thing. We integrate, right? And we have a lot of excitement around that. And -- so, we see a growth vector from that. Our broadband and cable access business doesn't get a lot of press, but it's actually a real nice business that we see, will continue to grow for the foreseeable future. Obviously, the cable business is fighting fiber and they're fighting fixed wireless access and all these other things. And so, they're constantly trying to come out with new standards that kind of maximize the bandwidth of the existing pipes that they have, the cable. So you see DOCSIS 3.1 today, moving to DOCSIS 4.0. We have solutions that we've just announced on the DOCSIS 4.0 side. So we see that as a solid business as well. And then last, I'll just kind of lump two business units into one, we call it our power management business. And that consists of our -- what we call, high power and -- which is our silicon carbide investment that we have with the United Silicon Carbide acquisition that was done a little over a year ago. And we're really excited about that piece of the business. Obviously, silicon carbide gets a lot of press and a lot of coverage. And Qorvo probably today isn't one of the top names that come to mind when they're talking about that technology. But for us, we see power management, not RF power, but DC to DC and AC to DC power as a natural extension, especially as compound semi technologies like silicon carbide and GaN are used more and more in that area. And our silicon carbide technology that we have, why we're so excited about it is, today, we actually have industry-leading RDS(on) performance. Okay? RDS(on) is the metric that everyone cares about. It's what drives battery life, right, or more miles you can drive on the charge. It's what drives how fast you charge a car, how much power you use in a data center. And our JFET architecture that we have in silicon carbide is unique. We actually can get 2x the number of die for a given RDS(on) and voltage level than you can out of a MOSFET out of a competing solution. So this drumbeat of you got to get to 8-inch, you got to do all these different things. We don't necessarily have that drumbeat necessarily. And we can leverage, what we see, as a lot of the supply base out there like the announcement that we made with SK Siltron and there's others that are in the works, so where we get this really nice capability without a huge CapEx. And then last but not least, we have our -- what I call, our low power business, which is our traditional PMIP [ph], and we have a motor control capability. Qorvo is not known as a power management company, obviously. You think of the TIs and you think of maybe the ADIs, the power integration companies like that. I've been in the power business, where I don't -- like, Bob, I don't really want to say how many years I've been doing this. What we have is actually a really solid set of intellectual property and capability. And our plan with that business is kind of what the mobile or the Advanced Accelerator [ph] Group did as they moved into envelope tracking and average power tracking. We're going to leverage that into the markets that we're strong in today, whether that's defense, whether that's in mobile, whether that's in some of our consumer IoT businesses. And so, we're really excited about that. We think we have a strong capability, and we see that as not only a diversification, but also a growth engine for us. I appreciate that overview Philip. And I just want to give a plug here for one second. We just started publishing our compound semiconductor quarterly research piece and we can verify your strong competitive position in things like GaN RF and your beachhead and silicon carbide in the power management area as well. And -- but I wanted to go back to your overview and sort of deconstruct your long-term view on the growth rate of the business, which I believe you guys peg it roughly a double-digit percent. What are the bigger contributors to that double-digit percent growth rate? So I think our fastest growing business will be the power management business, just given the opportunities that we see there, our design-in funnel, which is pretty significant. I think after that, I would move it over to really a tie between our DNA and our base station business. Again, DNA people think that they look at the budget right from the US government 2% growth is they don't see it as fast growing. But as you filter it down to kind of the trends that I talked about, we see that as a solid double-digit growing business for us. And we see that in the continuing in the future. I think our broadband business will probably be the slowest growing single-digit kind of growth, but growth nonetheless. So that's kind of the way to take the different pieces of the business. Got it. And if I'm not mistaken, most of your M&A activity is focused in your group, correct? And so to what extent does inorganic growth play into that? Actually, just to make a comment there, give you a chance to catch your breath -- you've done very well. The acquisitions that we've made have been actually in all three groups. The connectivity and Sensors group is primarily acquisitions, mostly except for the WiFi part. And the other one that we had is the Cavendish Kinetics, which is the RF MEMS for switches, that actually is in the advanced cellular. But the others, yes, Phil has done a good job on those as well. Got it. And the program mobile power management solution that you have. What is the key differentiator that you anticipate giving you a stronger market position from a relatively low starting point? So what the technology brings is what I would call fast time to market. So envision you're at a company and you have a new Board with a new digital ASIC or digital processor that comes out. And I can tell you from way too many years of experience, the bringing up of that system from a power management perspective. The only guarantee is there's changes. You're going to have to do something. You're going to have to change a rail, you're going to have to change timing on one of your -- how you bring up one of the different voltages. What we offer is an ability for our customers to get those changes done in the fastest possible way. And that is truly valuable, right, kind of money. And we see that benefit, in particular in some of the markets that we're in today with our PMIC technology. We also have another technology in motor control. And really, that's an efficiency story. We have a capability where between some of the algorithms and some of the digital control aspects that we have with that technology. We lead in efficiency. And obviously, in any kind of battery-powered tool market, things like that, efficiency battery-life right? So the customers really value that. Okay. And with respect to your RF GaN business, there's kind of a changing competitive landscape with a few companies who are here, notably NXP has been investing in their capacity. Sumitomo, I guess, is the juggernaut of the industry. And we have Wolfspeed, which has deferred its transition to 150 millimeters, which presumably will put them at a competitive disadvantage. So, how do you see that changing landscape benefiting you organically or inorganically? I think organically, we have, today, a factory footprint that can support two markets, which I think our customers value, right? We can do our defense GaN. We can do our non-defense GaN in the same factory. What -- we have found is that what our customers truly appreciate, because what's happening is it's not just about the GaN technology. It's about how do you integrate it. It's an integration story that I talked about. And our ability to do that, I think, is what will continue to set us apart. And a lot of that is this -- leveraging the scale that we have with our advanced cellular group, I can tell you I just got back from visiting multiple customers. And I hear that drumbeat from our customers all the time. You guys bring scale that we need in this business. And so I think those two things is really what's going to keep us on the forefront going forward. Well, that's true. And then the filter technology as well. I mean a good point, Bob. We have both in our defense segment as well as in some work that we're doing in our base station market; our filter capability will also really differentiate us. Because, again, remember, as you start integrating into modules, it's not just the PA, power management, by the way, which we're leveraging some of the technology that we have in our power business. It's filter technology, all of these things kind of come together. And there are very few competitors out there that have all those pieces together. And I think that's what's going to keep us in the forefront. Okay. I wanted to ask you about your manufacturing footprint in high-performance analog group. To what extent is -- I would imagine anything exotic like wideband semiconductor materials is internally sourced, maybe with the exception of your silicon carbide United SiC business. And so to what extent is this -- your supply chain supported by internal resources versus external? And how do you see that changing maybe over time? The easiest way to think about it, I think, is power external, everything else internal would be the way to kind of to view that. As I look going forward, I don't see that fundamental changing to be honest with you. I think one of the things we'll have to look at is our silicon carbide investment in terms of -- today, it's all external. And is there some options there? We don't know. Right now, we're committed to the foundry model. But outside of that, I don't see that split necessarily changing. Got it. And I wanted to wrap up our time with maybe a little bit of a controversial topic as it relates to capital allocation. I know you guys have been aggressively buying back your stock. It makes sense. Your stock is depressed. It's pretty low valuation multiple, and you obviously feel it's a good buy. But to what extent do you think you can enhance shareholder value by maybe favoring capital allocation and skewing it more towards M&A activity for the sake of diversification, do you think that would lead to a higher valuation multiple for your equity if you were able to diversify away the mobile handset market or away from a particularly large customer? Thanks for the question. I'm glad you waited till the end, so I could think about it. Number one, let's just step back in time. We have been aggressively buying stock since we formed the company. Actually, since we formed the company, we've actually bought over $5 billion worth of our stock. So we've reduced our share count from over $155 million to around $100 million. So we've done that in the past. You know, our Board was kind enough to authorize a $2 billion repurchase that we announced at last call. So lease signaling, we will continue to be buyers of our stock. Also I want to point out that since we formed the company, we spent over $1.8 billion in acquisitions and about all of those have been to diversify our business. And if you look at with how we've reorganized the company to three segments, the two segments are now being led by two very capable leaders to -- and we put them in growth businesses that will grow much faster than the handset necessarily [ph]. Advanced Cellular business -- that we said was at mid to high single-digits. And these businesses that fill up Qorvo, we expect to be running strong double-digit growth. So over time, the Advanced Cellular will become a lower and lower percentage of the business, while growing. So what we always say when we look at acquisitions, are there candidates out there that we are a better owner, where we can take one and scale it or in other cases, you know, significantly reduce their cost be able to drive it forward. So if I look at silicon carbide -- United Silicon Carbide acquisition, what they needed was someone who could bring that scale and balance sheet to be able to make investments and drive the growth and keep up with their business. So that's a great example. We were able to do that. The Active-Semi was just getting them access to the worldwide sales force that we had great engineering team, great technology, as Philip highlighted. So I'll use that as an example. And then another one that we acquired, which is really in its infancy, is the MEMS Sensor business that we have. Now that's really interesting to me because it's in automotive already. It's in touch pads. We talked about that. So I see that business growing nicely. And then the ultra-wideband, you know, we're in the Google Pixel, we're already in the Android ecosystem, and we continue to get that out. We're now in a key parts so that will drive. So I feel good about the acquisitions we've made. But in areas where we feel we're a better owner, we'll continue to make acquisitions. Great. I think, we're out of time. I have a lot more questions I'd like to ask, but for the sake of time, I'm going to get wrap it up. And so with that, I wanted to thank Bob and Philip for the time spend here today. Thank you, guys.
EarningCall_1962	Good day, and welcome to the American Woodmark Corporation Second Fiscal Quarter 2023 Conference Call. Today's call is being recorded, November 22, 2022. During this call, the company may discuss certain non-GAAP financial measures, including in our earnings release such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage and adjusted EPS per diluted share. The earnings release, which can be found on our website, americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. We also use our website to publish other information that may be important to investors, such as investor presentations. We will begin the call by reading the company's safe harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. I would now like to turn the call over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir. Good morning, ladies and gentlemen, and welcome to American Woodmark's second fiscal quarter conference call. Thank you for taking the time today to participate. Joining me is Scott Culbreth, President and CEO. Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions. Scott? Thank you, Paul, and thanks to everyone for joining us today for our second fiscal quarter earnings call. Our team delivered net sales of $561.5 million or growth of 23.9%. Our made-to-order frame backlog, represented by days of production, decreased in the quarter as production levels exceeded our incoming order rate and we still expect our backlog to normalize by the end of the calendar year. Our stock platform is stabilizing as overall demand returns to normal levels and our current staffing is able to fully support. Within new construction, our business grew 33.3% versus prior year. Order growth remains strong across our markets as builders work to complete homes in their backlog. We are monitoring recent trends with interest rates, home prices and declining single-family housing starts. We firmly believe the long-term fundamentals of the market are strong as the deficit of homes built fall short of household formations, but a slowdown will occur in calendar year '23. Our teams will continue to pursue opportunities to grow our share with new and existing customers. Looking at our remodel business, which includes our home center and independent deal and distributor businesses, revenue grew 17.5% versus the prior year. Within this, our home center business was up 10.3% versus the prior year. With regards to our dealer/distributor business, we were up 46.2% versus the prior year. Our adjusted EBITDA increased 120% to $67.6 million, or 12% for the quarter. Reported EPS was $1.73, and adjusted EPS was $2.24. The improvement in performance is due to pricing better matching inflationary impacts, mix and improved efficiencies in the manufacturing platforms. Our cash balance was $44.8 million at the end of the second fiscal quarter and the company has access to an additional $239.4 million under its revolving credit facility. Leverage was reduced to 2.23 times adjusted EBITDA. We committed to restore profitability and are delivering on that commitment. We are facing additional headwinds as consumer behavior shifts due to housing affordability and overall macroeconomic uncertainty. Rising interest rates are impacting single-family new construction starts and R&R demand is slowing. We are prepared to navigate short-term demand reductions and our product portfolio is positioned to win and attract customers in a more difficult economic environment. Our full year outlook now reflects a low double-digit growth rate in net sales with negative sales comps expected in fiscal Q4. Despite this revenue headwind, we are maintaining the expectation of low double-digit adjusted EBITDA margins for the fiscal year. Our team also continues to execute against our strategy that has three main pillars: growth, digital transformation and platform design. Growth from our most recent summer launch of four new finishes and several new door styles continues to perform well and exceed -- is exceeding internal targets. Digital transformation efforts over the last fiscal quarter include the planning efforts for the next implementation area of ERP and our manufacturing operations, and we entered the design build phase of our CRM project. Platform design work continues and after a comprehensive review of our platform, we identified the need for additional capacity in our stock kitchen and bath cabinetry product lines. We announced last month a $65 million expansion in Monterey, Mexico and Humboldt, North Carolina. By adding a fourth facility in Mexico and expanding our Humboldt location, we will strengthen our overall supply chain and allow for incremental capacity in both categories in the East Coast, which is one of the largest repair/remodel and new construction markets. In closing, I'm proud of what this team accomplished in the second fiscal quarter and look forward to their contributions during the second half of fiscal year '23. Thank you, Scott. Financial headlines for the quarter and year-to-date. Net sales for the second quarter of fiscal year 2023 were $561.5 million, representing an increase of 23.9% over the same period last year. And year-to-date, our net sales were $1.1 billion, representing an increase of $208.6 million, or 23.3%. Adjusted net income was $37.3 million or $2.24 per diluted share in the second quarter of fiscal year 2023 versus $10.4 million or $0.62 per diluted share last year. Adjusted net income for the second quarter of fiscal year 2023 increased $26.9 million due to higher sales, largely driven by price increases and partially offset by higher material and logistics costs. Year-to-date, our adjusted net income was $65.6 million compared to $22 million in the prior year, representing a $43.6 million increase or close to 200% improvement. Adjusted EBITDA for the second quarter of fiscal year 2023 was $67.6 million or 12% of net sales compared to $30.8 million or 6.8% of net sales for the same quarter of the prior fiscal year, representing a 520 basis point improvement year-over-year. Adjusted EBITDA year-to-date is $124.1 million compared to $62.9 million prior year-to-date, representing close to a 100% increase. Looking at our sales channels for the quarter. The combined home center and independent dealer/distributor channel net sales increased 17.5% for the second fiscal quarter, with home centers increasing 10.3% and dealer distributor increasing 46.2%. New construction net sales increased 33.3% for the second fiscal quarter compared to the prior year with growth in both Timberlake units and dollars. New construction sales channel outpaced market demand during the second quarter of fiscal year 2023. Recognizing a 60 to 90 day lag between start and cabinet installation, the overall market starts in single-family homes were down 15.8% for the fiscal second quarter. Looking at completions during our second fiscal quarter, we saw a 7% increase year-over-year. Given the decline in starts and the large separation between starts and completions, we are reducing our backlog, which is expected to return to normal levels this calendar year. The company's gross profit margin for the second quarter fiscal year 2023 was 17.6% of net sales versus 11.4% reported in the same quarter of last year. Representing a 620 basis point improvement. Year-to-date, our gross margin is 16.8% compared to 11.7% of net sales in the prior year. Gross margin in the second quarter of the current fiscal year and year-to-date was positively impacted by the pricing actions and operational improvements, offset by inflation and our input costs, which are starting to stabilize. Total operating expenses were 10.1% of net sales in the second quarter of fiscal year 2023 compared to 10.2% of net sales for the same period in fiscal year 2022. Selling and marketing expenses were 4.4% of net sales in the second quarter of fiscal year 2023 compared with 4.7% of net sales for the same period in fiscal year 2022. The ratio to net sales decreased 30 basis points resulting from controlled spending and leverage created from higher sales in the second quarter of fiscal year 2023. General and administrative expenses were 5.7% of net sales in the second quarter of fiscal year 2023 compared with 5.4% of net sales for the same period of fiscal year 2022. The increase in the ratio was primarily driven by increases in incentives and profit sharing, partially offset by the leverage created from higher sales. Free cash flow totaled a positive $44.4 million for the current fiscal year compared to a negative $37.3 million in the prior year. The $81.7 million increase in free cash flow was primarily due to the changes in our operating cash flows, specifically higher net income, higher accrued expenses and lower capital spending, which was partially offset by higher inventory positions. Net leverage was 2.23 times adjusted EBITDA at the end of the second fiscal quarter representing a 0.57 times improvement from the 2.80 adjusted EBITDA times at the end of the fiscal first quarter. The company's cash position and availability under our revolver as of October 31, 2022 was $284.2 million and we paid down $21.2 million of debt in the first-six months of fiscal year 2023. Shifting our focus to the remainder of fiscal year 2023, we expect low double-digit growth rate in our net sales versus fiscal year 2022. The growth rate is highly dependent upon overall industry, economic growth trends, material constraints, labor impact, interest rates and consumer behaviors. Our price increases are in effect for all of our sales channels. Our EBITDA margin expectation for fiscal year 2023 remains a low double-digit EBITDA percentage. We are holding our capital outlook for fiscal year 2023 and we'll continue our investment back into the business by increasing our capital investment rate to a range of 3.0% to 3.5% of net sales. As a reminder, these investments will range from the continuation of our ERP journey to get on the cloud, digital investments in our customer experience and reinvesting in our manufacturing facilities. Specifically, the expansion of our Humboldt, North Carolina facility, a new manufacturing plant in Monterrey, Mexico, along with automation efforts to help reduce labor dependencies, improve quality and increase capacity. We are choosing to make these additional investments into our core business, which help position the company for improved sales opportunities in our stock platform and enhance our margins in the future. It is great to see the commitment, hard work and efforts our employees invested in the past two years to show the returns in the financial results. Our employees' resilience and their ongoing contributions to the company's culture have set the stage for a strong start to our fiscal year. I'm grateful for what the teams have accomplished and I want to thank all of our team members at American Woodmark for their continued efforts. They are the ones that make it happen daily. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Adam Baumgarten from Zelman &Associates. Please go ahead. Hey. Good morning, everyone. Nice results. I guess maybe to kick-off just on the home center business. Can you maybe talk to what you're seeing or what you expect going forward from a promotions perspective? With regards to promos, we've not seen a significant change in cadence, Adam. It's been plateaued for probably the last three quarters, which was down versus the prior year. So no significant change there. I will pivot though and tell you that in the dealer space, we are starting to see a bit of an increase from a competitive standpoint with regards to promos, but we've not taken any specific actions yet there. Okay. Got it. Thanks. And then just a couple of others. One, just maybe on what you're seeing on raw material costs, if they're deflating at all, at least on a sequential basis. And then just to confirm, you're still expecting CapEx to be 3% to 3.5% of revenue for fiscal '23? Yeah. I'll take the inflation comment and then have Paul speak about CapEx. So on inflation, what we have seen is a bit of relief on some of the species of hardwood lumber. So the index has started to move down, but at the same time, we continue to see increases in the index specific to commodities such as plywood particleboard and other inputs. Paul, on capital? On capital Adam, really, we are maintaining that outlook for the 3% to 3.5%. And we're running up a little bit late in the first half of the year. But remember, we are doing those plant expansions for in Humboldt, North Carolina and Monterrey, Mexico, which will have somewhat of a capital-intensive position into the back half of the year. Hey. Maybe just to start, could you just kind of pop around your business a little bit and talk about what you're seeing from an order rate perspective by channel maybe, where you're seeing maybe some of the strongest activity and some of the weakest activity? And just maybe give us an idea what the order rate activity looks like relative to some of the shipments you're seeing right now? So Tim, in my earlier remarks, certainly on the MTO platform, we were seeing incoming order rates decline, and we were able to outproduce that, which is allowing us to bring down the backlog, which is something we want to accomplish. We're still on track to be able to do that by the end of the calendar year. When I think about the different channels, we continue to see strong performance in new construction dealer/distributor, I think the last quarter. I signaled we started to see some slowdown in incoming order rates in the home centers around our MTO platform. As I pivot over to our frameless business in PCS, that's continued to be strong. We continue to see strong unit shipments and strong order rates on that platform. And then on the stock business, specifically, that's starting to normalize. We've been chasing inventory restocking positions with our retailers. We're almost well against the specific goals that we've got with our retailers. So we'll get to a better position of matching POS as we go forward in that platform. Last comment I'll make is on the unit side, MTO and PCS units were up for us in the quarter. So it wasn't just purely price driving the sales result, but we did see units down on the stock platform. Okay. That's helpful. Thank a lot. And then I guess with the expectation to see a slower environment, I guess, in the fourth quarter, I mean, what levers could you pull internally to kind of offset the decremental margins? And I guess, what would you kind of help us with in terms of what a decremental margin on lower volumes would look like? So Tim, specific to the forecasting, we've held our EBITDA forecast for the year, even with the softer Q4, so we'll be able to still deliver on expectations there. What are the things that we'll do as we see volumes slow. The first thing we'll do is we'll right-size and adjust where we need to inside our factories. We're able to do that relatively easily through attrition at this stage. But that's the current thought process as we go forward. We'll continue to tightly manage and control our SG&A spending, which we've always historically done. So we'll throttle that as appropriate to ensure we can deliver the results we need to. I don't have an exact decremental number I want to quote for you at this particular point in time because I don't think it's a big story for Q4. I think that will matter more as we start thinking about '24. But we've not started our planning process for that yet. As you know, we'll kick that off in the January-February time frame. Okay. Good. That's helpful. And then just like a bigger picture question, just how is Woodmark investing or, I guess, positioning themselves in two areas. The first, I was thinking about it was e-commerce and if that could be kind of a growing channel for cabinets over time? And then the second, I guess, would just be alternative materials, maybe using things that are more composite relative to wood. I'm just kind of curious how you're thinking of those two types of opportunities and maybe the receptivity of those on the part of the consumer? Sure. I'll take the second one first. So with respect to alternate materials, we have introduced an all-MDF door in the marketplace. That's been very well received. We've been producing that for quite some time. It provides a nice substrate from a finish standpoint with regards to paint, types up some of the joint lines that we sometimes have quality concerns about. So we have done quite a bit of work in alternate materials and we've launched this in the marketplace, and they've been well received. Specific to e-commerce, we do engage in e-commerce today through our retail partners. So we do about 5% of our business now online through a retail partner. So our work in that space is continuing to drive asset rich content. So whether it would be 360 views or visualizer, et cetera, to be able to see what's inside the cabinet to really get folks excited about our purchase, it's also how do we continue to engage with consumers. Maybe they start off on our website, it can go to our retailer's website, get to a purchase. So how do we keep them engaged from the onset of inspiration all the way through to purchase. So yes, that's an active piece of our business. It's something we partner on with our retailers, and we're going to continue to drive more sales to that overall channel. Hey. Good morning. Thank you for taking my questions. So I appreciate the high-level commentary on volumes of product category, but can you quantify the price versus volume in the quarter? And just give us a little bit of guardrails on how you're thinking about the magnitude and cadence of declines in the back half of the year just to get to that down sales in the fourth quarter that you guided to? Yeah, Collin, I think we've probably hit this a couple of quarters now, but we're not breaking out the price versus quantity beyond what we've already disclosed. Okay. And then, I guess, just in terms of the capacity addition, can you just walk us through the rationale here for the additional capacity just given the weakened -- weakening macro backdrop? And just any color on the timing of the capacity coming online would be helpful. Yeah. So first, let me hit the timing when the capacity comes online. So what we're targeting is the March-April 2024 timeframe. So I think the fourth quarter of that fiscal year into the first quarter of fiscal year '25 is when we'll really be able to utilize that capacity to drive incremental sales growth. To the first part of your question, why do it and the why now? My first response would be that we're in this for the long game, not the short game. So short-term disruptions, macroeconomic uncertainty going into '23, that's a factor, but that doesn't affect our five year strategy and what we're looking to accomplish and achieve between now and fiscal year 28. So we believe we need this capacity to be able to meet the overall demand needs and sales growth goals that we've got as an organization. We're presenting our strategic plan to our Board next week. And then we plan to release within the quarter and updated Investor Relations deck, which will give you some perspective on what those five year goals would be from a revenue and profitability standpoint. But this project will be critical to allow us to achieve that. All right. That's really helpful color. And then just last one. You called out lumber prices -- hardwood lumber prices coming down certain species. I guess any way you could help us understand the magnitude of those declines? And then is that enough to offset the cost inflation that you're seeing in other areas or are you still expecting to see pressure from a cost perspective going forward? Thank you. So the decline in lumber is not significant enough to warrant a pricing reset with any of our accounts. So we still are, at a point in time, where we're balanced. So we're not seeing enough rollback to go engage in any of the channels with any kind of price reduction. So although hardwood lumbers come down, we're continuing to see increases again in many of the other categories such as plywood and particleboard. Good morning. I wanted to hear a little bit more on the share gain opportunities you mentioned for 2023, maybe talk about by channel and market and how it works to gain share in periods of slower demand? Yeah. So Steve, that specifically was tied to the new construction as we're thinking about it. So as we see a slowdown there, is there opportunity to go grab share? I can tell you, over the last year, 1.5 years, we've had accounts come to us looking for incremental volume capacity, we were tight and didn't have it. So we were having to say no. So now we're able to release our sales teams to reengage in those conversations and explore opportunities to either convert existing communities or establish new communities with our product. Okay. Helpful. And then a quick follow-on to that. Does the recent CapEx announcement, I assume this doesn't maybe help the near term, but does it help you gain share in new construction more than repair and remodel? Okay. Helpful. And then last one for me on the 2023 guidance following a very strong first half. How much for the second half does this reflect just purely lower volumes or is pricing coming through more slowly? Anything to add there? Yeah. Our outlook is really about volumes. It's not a pricing conversation. We don't anticipate any price rollbacks in fiscal year '23, but we do see the units slowing. Thanks. Hey. Good morning. So on that last question about the guidance. It sounds like the change to the revenue guide, no change to the price, but it implies somewhat sharper expected slowdown in 4Q volumes. Is that largely led by what you're hearing on the builder side and what you expect from new construction units or has there been a worsening in-demand trends on the MTO side relative to three months ago? Yeah. It was primarily a function of new construction as we've looked at the last 90 days to start data, which you see as well. It certainly implies that five to six months out from now is when we'll see some of those impacts roll through our business. So we're expecting a softer Q4 in new construction. Got it. Makes sense. And I guess, just if you could talk about inventory where you are with regards to normalizing the inventory levels and what you're targeting either from a stays on hand or an inventory turns basis? Yeah. Julio, with our inventory position, we're still elevated from where we want to be as an organization. Some of that still has, I'll call it, the leftover effects of cover of having just-in-case inventory. We are definitely shifting to more, what I'll call, just back in just in time as supply chains are starting to improve. We are going to target inventory reduction, obviously, tied to the lower sales that are there as well, but just even from a working capital perspective of the organization. As part of our kind of our investor presentation, we'll get a little bit more color of what that working capital will look like. But right now, we're not giving a target or guidance for the rest of the year. Good morning. You just mentioned not expecting price rollbacks. There was some commentary earlier in earnings season from larger builders about negotiating cost reductions on starts going forward. Just wondering if that's something that you've been hearing or seeing? And if not, maybe why your business or your category is not subject to that? We've not seen that specifically, Joe. We've had a couple of builders ask about some price reductions, but we go back to the indices. And again, the indices are not indicating that we're at a point in time where there be a reason for a price reduction. Okay. Great. What about the multi-family business on the new construction side? I know it's sort of limited regionally for you guys to the Southwest. But is there an opportunity for you to participate in that backlog given that now it's actually larger than the single-family backlog? Most of that shows up in our PCS business, which I mentioned earlier, that's a frameless application or a platform. And that's been strong for us. As you noted, it is regional. It's mostly a Southern California and a Phoenix or Southwest region play for us. It's been strong. The backlog is high. We've not made as much progress bringing that down. So that will continue to be something we'll be focused on in the back half as normalizing the production platform in PCS. Hi. This is Jeff Stevenson on for Garik. Thanks for taking my questions today. Just wanted to dive more into the home center business and the trends you're seeing there and expectations moving into your back half of your fiscal year? I guess nothing really incremental to add beyond the earlier remarks, Jeff. Again, our MTO business has softened. We referenced that last quarter. That's been maintained, and we project that going forward to be a similar incoming order rate pattern. And then on the stock side, we made progress in recovering inventory stocking efforts necessary in the retailer. So we're not going to have that extra inventory build that we need to accomplish. We'll be focused on -- I'm sorry, POS, TCS, but POS as we go forward. Okay. Great. And then regarding EBITDA margin, you've been kind of firmly in the low-teen margins range you guided to, but how should we think about the cadence moving into the back half of the year? I guess you're asking is there going to be disruption maybe quarter-to-quarter. I would just say that go back to our guidance, low double-digits, and my expectations will be in low double-digits in the back half. Ladies and gentlemen, this does conclude our question-and-answer session. I would like to turn the line back over to Mr. Joachimczyk for any closing comments. Please go ahead, sir.
EarningCall_1963	Thank you all for standing by. Welcome to the PropertyGuru Group Third Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. As a reminder, today's program will be recorded. If anyone objects, please disconnect now. We also request you to put in your full name and firm name so that we can identify you during the Q&A session. Good morning and good evening. Welcome to PropertyGuru Group's third quarter 2022 earnings conference call. On the call today are Hari Krishnan, CEO and Managing Director; and Joe Dische, CFO. Before we get started, a few reminders. Firstly, our results and additional management commentary are all available in the earnings release that can be found in the Investors section of our website. Secondly, today's webcast is being recorded. A replay of today's conference call along with the transcript will also be available in the Investors section of our website. Thirdly, we will be making forward-looking statements within the meaning of U.S. securities laws, including, but not limited to, statements regarding our future financial results and management's expectations for the business. Statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to vary materially. Please refer to our earnings release and SEC filings for more information regarding the risks factors that may affect our results. Forward-looking statements are based on current expectations and the company is not obliged to update or revise them, except as required by law. Fourthly, this call will also contain non-IFRS financial measures. For a reconciliation of each of these non-IFRS financial measures to the most directly comparable IFRS metric, please see our earnings press release. Lastly, all dollar references are to Singapore dollars unless otherwise stated. We are pleased with our results this quarter as we delivered solid growth in all our core markets. In October, we announced our brand repositioning guided by Guru. The new positioning reflects our vision to be a trusted adviser to help property seekers and sellers make confident property decisions. Our 47% year-over-year revenue growth this quarter was impressive but market conditions remain fluid. We understand that our customers are facing near term realities of rising inflation and higher interest rates. This new economic reality is challenging, but we believe in the underlying long term market fundamentals of Southeast Asia. As we often discuss, expanding middle classes, increasing digitalization and continued urbanization will help to grow and sustain our property markets over the next decade and beyond. As our customers reassess their investments, we are ensuring that our products and services not only deliver the most value today, but that our future innovation delivers that value in future time periods. In October, we completed the acquisition of Sendhelper in Singapore. Sendhelper is a home services technology startup that allows homeowners and tenants to search and book home services through a mobile app that connects them to verified service providers. Home services include housecleaning, air conditioner maintenance, handymen, and repair services. This quarter, we launched new products and enhancements aimed at delivering further improvements to user experience for our customers. In Singapore, we are currently able to uniquely target 85% of our property acquirers in our marketplace. This not only enhances the quality of inquiry data and improves personalization but also reduces the unqualified leads for our agent customers. We also launched a beta product, agent ratings and reviews that helps customers rate their experiences with agents and builds the credibility of our agent partners. We launched a new premium currency, Prime Credits that allows agents to purchase certain premium products. Our agent partners can use it in addition to the existing ad credits that are used for most products. In Malaysia, we launched a premium product [Featured Agent] that allows our agent partners to build their brand, labelling better visibility and more needs. In data services, we launched several new modules in Malaysia within the data sense intelligence platform to provide better insights into the supply and demand of properties, the timing of rental contract expiration and information on unsold new units. In our commitment to invest in data and software solutions for our business brands, we introduced a new enterprise brand, PropertyGuru for business. The new brand unifies PropertyGuru's B2B offerings and is designed to guide all enterprise slabs, property developers, agencies, banks, valuers and city planners to achieve their goals. In FinTech, as of the end of September, our mortgage business had broker over S$3 billion of home loans. Lastly, PropertyGuru was recently awarded the ISO 27001 certification, a leading international standard for information security management systems. This certification assures our customers and partners that we are committed to having the best safeguards to protect their data. I am proud of what our gurus accomplished this quarter putting us in a great position to succeed going forward. That said, we now intend to work even harder for our customers and further enhance the PropertyGuru value proposition. I would like to take a few minutes to touch upon current macroeconomic conditions and their impact on PropertyGuru. In the short term, government fiscal measures to help dampen demand and slow inflation can add to the property market flux. Singapore recently increased taxes and stamp duties, decreased the maximum LTV loan to value ratios on loans, and implemented a new 15 month wait period for private buyers of HDV flats. In Vietnam, credit for purchasing homes is now harder to access. In each of these cases, the effect of these actions can be to reduce real estate activity. For PropertyGuru, this has the potential to impact the wallets of our agent and developer partners, and therefore, the money they spend. However, we remain confident in the underlying strength of the Southeast Asian economies and believe the impact will not be long term in nature. It is important to point out that a more competitive property market can generate more marketplace activity in the short term as the pool of leads get small. With that in mind, we will continue to manage our business to maximize near term efficiency without sacrificing our long term growth goals. At this stage, I did want to briefly touch on each of our larger markets to share highlights from our proprietary property market reports, as well as relevant GDP data. The overall economy in Singapore remains strong with year-over-year GDP growth of 4.4% in the third quarter. In Singapore, although rising rates and government pulling measures can slow real estate sales activity, we are seeing continued resilience. Property prices were up in the quarter as new pricing highs were seen in both our HDV resale index and urban redevelopment property price index. Of note, younger Singaporeans have begun shifting away from purchasing homes, helping to increase rental price. The overall Vietnamese economy has seen accelerated growth in 2022 as the country moves past the impact of COVID-19 related lockdowns in 2021. GDP growth in the third quarter was almost 14%. In Vietnam, the government has signaled it will be proactive in combating inflation by further limiting available credit to homeowners and the real estate industry resulting in slowing transaction volumes. We remain positive on the Vietnam economy long term and believe that the near term impact of the government's actions may abate in early 2023 with more credit returning to the market. Finally, the Malaysian economy is showing continued strength with third quarter GDP up over 14% after single digit growth in the first half of the year. Elections this past weekend may have had the natural effect of reducing real estate activity in the lead up. Sales demand in the third quarter declined marginally as inflation and interest rates reduced affordability and general elections occupied the nation. However, pricing was resilient and increased slightly in the quarter. Now that the election's process is complete, we look forward to confidence gradually returning to the Malaysian market. PropertyGuru delivered another solid quarter with revenues in the third quarter of 2022 with S$35 million, up 47% from the third quarter of 2021 and an adjusted EBITDA of S$5.7 million. Our adjusted EBITDA margin in the quarter was 16.6% up from a loss last year as we benefit from both growth and prudent spending. Marketplaces revenues were S$33 million up 48% with 55% adjusted EBITDA margin. In Singapore, our largest market, we grew the number of agents to S$50,351 over 300 more than last quarter. Underscoring the strong value we are bringing our customers, our renewal rate was 87% up from an already high 82% in the second quarter while our average revenue per agent or ARPA was up 24% from last year. In summary, more agents are joining PropertyGuru and those that are with us are increasing their spend. For the quarter, Singapore adjusted EBITDA was S$13.6 million representing a 75% margin. For Vietnam, revenues were up 161% and the number of listings were up 165% as the corresponding quarter in 2021 was impacted by ongoing COVID lockdowns. Meanwhile, the average revenue per listing grew 2.5% and increased adoption of premium services. We remain excited about the long term opportunities that Vietnam has to offer even as the country may be impacted by near term market headwinds. Vietnam adjusted EBITDA of almost S$2 million in the quarter, reflected a margin of over 30%. In Malaysia, revenues were S$6.5 million as we continue to leverage our dual brand strategy. Our adjusted EBITDA was S$3.2 million for a margin of 49%. Finally, FinTech and data services combined revenue was up 28% year-over-year and their adjusted EBITDA was a loss of S$1.9 million. We continue to invest in these segments, which are core to our longer term growth strategy. Moving to the balance sheet. We ended the quarter with S$340 million in cash, up from S$70 million at the end of 2021, primarily reflecting the proceeds of the listing. This level of available cash gives us comfort of a time with significant change in the market and puts us in a position to take advantage of investment opportunities that can strengthen our business and drive future growth. As we mentioned in our press release, the result of the uncertainty, especially related to Vietnam and Malaysia, is to take a more cautious view of the market in the near term. Because of this, we revised our outlook for the remainder of 2022. We project full year 2022 will fall into range between S$134 million and S$138 million and adjusted EBITDA will be between S$8 million and S$12 million. I would just note our forecasted numbers for the remainder of 2022 do not include the impact of Sendhelper, our acquisition, although those numbers are expected not to be material. We report our fourth quarter earnings results in early March, and we'll provide our outlook for 2023. Lastly, even with the short term macro headwinds we discussed, we remain bullish on the long term prospects for PropertyGuru. The underlying financials of our core markets remain strong as we expect property markets to revert back to more positive longer term trends once inflationary and monetary policy related headwinds subside. Once this happens, the underlying economic tailwinds in middle class expansion, wealth creation, digitalization, urbanization will return to the forefront. In addition, we have begun to see valuations and acquisition opportunities increase as private market M&A activity begins to normalize following the events of the past year. With the capital from our listing fully available, we look to put more of it to work in 2023. While navigating the current environment, we've also remained laser-focused on continuing to invest in technology, automation and the PropertyGuru brand. We understand the importance of building a fiscally responsible and sustainable model that balances growth and expansion with expense management and prudent cost control. Our priorities are clear as we look to build upon our accomplishments to date and drive greater shareholder value. I would like to finish by thanking our customers for their ongoing support and our gurus for their hard work and commitment. This was another solid quarter of the PropertyGuru as we continue to grow and deliver improved adjusted EBITDA, another stepping stone to our long-term success. Thanks Joe. Now we're going to take your questions. [Operator Instructions] So our first question is going to come from Fawne Jiang of Benchmark. Not able to unmute Fawne. Here we go. Thanks Gary. Congrats on a very strong quarter. Just want to dig a little bit deep into your guidance. I understand some of your markets, regional markets may see some macro headwinds. Just wonder, by market, how should we look at the trajectory change of your growth, like in 4Q? And in terms of nature of these headwinds, how should we think about 2023? I understand it's a bit early, but any color you could provide in terms of forward, I think, in terms of the determined headwind, that would be helpful. Thank you. Thanks, Fawne, for your question. I think in terms of our outlook into Q4 for this year, I think as you've seen this year, some parts of our business are performing better than we hoped, better than our expectations. And in some, certainly, there's been some headwinds and there are some headwinds. We touched on these before, particularly, I think in Vietnam, the availability of credit. This is both for developers and also for consumers is pretty challenging at the moment. The government there controls credit in order to dampen demand in the market and reduce inflationary pressures. So these are -- is a short-term headwind and the policy will change in the future and revert back to normal. And I think the other one for us is the election in Malaysia. Traditionally when you have an election, there's a period of sort of caution comes into the market for both agents and particularly developers. So I think they're sort of holding off, waiting to see the outcome of that before they can get back to normal business. So those are the two of them. And I think overarching also, we do have inflation and interest rates, and these have been sort of shorter-term dampeners. I think we do intend to come back in March next year when we do our full year results, and at that point, we'll be able to take stock of all of the latest macro factors in our markets reflect other things such as ForEx and also impact of Sendhelper and any other acquisitions to better inform. But overarchingly, a lot of the factors we're seeing a relatively short to medium term in nature. We've always got these really strong macro tailwinds that we've touched on before, and we'll start to see those coming back to the floor, and then we can continue our sort of accelerated growth pathway. Understood. Thanks Joe. My second question is actually on the cost and margin side. You guys delivered very strong bottom line. Like in terms of your annual guidance on the adjusted EBITDA, what are the key drivers we should consider that may drive to the low end versus your high end? At the end of the day, what are the moving parts that could drive the spectrum of your profitability at the end of the year? Yes. Look, just to that, I think one of the characteristics of our business is we're very well managed on the cost side. We're very prudent, and I think here is a good example of where that comes to the 4%. We obviously have a few headwinds and revenue is a little lower than expectations, but we've managed to make up sort of a substantial amount of that in terms of efficiencies and cost savings, et cetera. I think in terms of our seasonality of our costs, Q4 was one big quarter. We have our rewards business, and that drives a fair amount of cost. We do have some seasonal marketing, particularly in relation to brand, et cetera, that is also happening. So that's driving, I guess, an additional cost side into Q4. Our cost forecasting is pretty accurate. It's more just around revenue and seeing quite how some of those factors that we've spoken about before will flow through and then affect the ultimate results. Obviously, a lot of our revenues are very high margin. So small movements in that can affect the bottom line EBITDA, hence the range. Understood. So notice that across the globe, with increasing the inflation pressure and the potential slowdown top line, a lot of these corporates have adopted cost savings, at least on the corporate level. Just wonder whether you guys tentatively have strategic shifts on cost saving going forward? How should we think about the balance of your top line versus profit growth? Sure. I mean just to revert back. We've been -- we're very well -- we set ourselves a very well-managed business. And we've been - we're prudent with our costs and we're very prudent with the people that we hire. So as a result, I think just refer back to the COVID period, obviously, one of the greatest shocks the business has seen in some time. We managed our cost very well during that time, but there were no job cuts. No one's laid off nothing like that. So, you know, I think we've whether that storm sort of very well. And I think it just shows the sort of the flexibility and resilience of our model. So we don't envisage things such as, you know, and anyone being laid off or anything like that. But we will continue to exercise a lot of prudence. We're very careful with our costs and we'll deploy them in order to sort of match the longer term sort of profitability profile of the business going forward. Hi, Hari and Joe. This is Nelson Cheung from Citi. And thanks for taking my questions and congratulations on the first strong quarter. So my first question is about your acquisition plan. And can management comment on the synergies with the acquisition of Sendhelper? And what will be the current progress of business integration so far? And should we expect a more meaningful financial contribution in future if the business, expand beyond Singapore? And are there any potential targets on home services that we are looking at it right now? Thank you. Thanks for your question, Nelson. Yes, we are very excited by Sendhelper. I mean, just to give you a sense, they're - an exciting start-up based here in Singapore. They are focus on the market here and really focused on providing more transparency, more, you know, quality guarantees, I guess, for tenants and for homeowners when it comes to home services, like moving air conditioning, maintenance a handyman services and such. We as - Joe noted, I think we don't expect material contribution from a revenue perspective within this fiscal year. For next year, I think right now what we are focused on is investing our - high quality technology into the entrepreneurs. The entrepreneurs have joined of Sendhelper have joined our business. And I think we're investing to that business for growth and focusing on building out what we've referred to as the trust platform for property, trying to make sure that all transactions and all engagements through the property sector are sort of founded on trusted interactions between stakeholders. So this is definitely an extension of that. It extends our value proposition. For years now, we've had, a number of people find their homes. And really, now it's around, okay, now that you are in your home - your home, how can we help you manage that? How can we extend that trust that you have in our brand to additional services? And I think that's the way we think about it. To be honest, when it comes to home, for now, we've got - our strength and our track record around acquisitions has been in successfully integrating these businesses. So we're very focused on integrating this business, making it successful in Singapore. We would look to see whether it makes sense to extend these offerings to other markets either by us, Sendhelper by offerings that already exist in some of those markets. These are different markets upfront, and we are experts have been in this region for 15 years now. But I think right now, we are pretty much laser focused on home services in Singapore and driving that. With regards to our M&A strategy, we've sort of talked about that in the past, the adjacencies around data solutions, software products for enterprise clients Fintech and home services. These are the four places we've mentioned in the past. Those remain the focus areas for our corporate development team and our strategy team. We are mapping the markets as Joe mentioned, valuations have corrected a bit. But in the end, we are much more focused on fundamental strategic fit, quality of team, quality of execution, et cetera. And I think we will continue to optimize for that and being integrated well. We're in no rush to deploy the capital or acquire businesses. Our core business that used to grow extremely well as, you've seen. So I think it's much more about being patient, finding the right opportunities, the right teams, finding a good culture fit, and then buying and integrating those businesses. Thank you, that's very helpful. And then my second question is about cost and margin since we have reported very solid performance in terms of adjusted EBITDA across major markets. Just wanted to understand more about the major cost driver in third quarter, this quarter? And what will be the margin trend going forward, especially for the Vietnam and Malaysia markets because we see a positive adjusted EBITDA this quarter? Thank you. Yes and just to - I mean, in terms of seasonality of costs, we do have sort of different drivers in different quarters. Q4 is a high revenue period for us, but also coincides with our awards business, the peak of that business and that is - that carries a fair amount of cost of actually sort of delivering those awards. So hence, there is a higher - it's a lower margin, but a higher sort of cost push into that - into Q4. And as mentioned earlier, we also have sort of like - we tend to advertise quite heavily into Q4 and we've had a lot of sort of brand activity that's also driving additional cost sort of into Q4. In terms of the profitability, I mean I think Vietnam is operating sort of pretty well. Obviously, we have - some challenge on the revenue side, but I think costs are under control and would look as revenue improves into next year margins increasing. I think for Malaysia, the merger has been between the two brands between keeping the two brands, by merging the back office has been really successful and probably sort of more successful than we'd hope from a cost perspective. So we've - very pleased with the level of profitability that we see and with the high level of market share, the really, really strong organic position and fantastic synergies on the people and technology side, we look forward to really strong margins in that business going forward. Yes, thanks, great, just a quick follow-up here. I just want to understand the potential dynamics if we're heading to somewhat like say, short, medium-term down cycle, in other markets, typically in a down cycle, you see agency are more conscious about their ROI. So basically, they tend to keep their budget on a top channel and cutting basically the budget on the less - lower ROI channels that tend to lead to potential consolidation of the market, at least for the top players? I just wonder for what you have observed now, whether you start to see that play out or do you expect that to play out in the Southeast Asian markets or you think either the market just like on such a strong macro tailwind that may or may not help you to consolidate market down the road? Thanks for that question, Fawne. I think you're absolutely right. I think in any sort of down cycle, people do consolidate their, spends that's not unique to the real estate sector. So I think your observation would be correct. For the last 15 years, we've been through multiple cycles in our region. And I think, in each of them, to Joe's point, we've continued to invest in technology, automation, superior products for our customers, and they have sort of rewarded us by increasing our market share at times like that. I think to be candid, when you look at our market share positions in these markets, we're not focused as much on market share as customer satisfaction and driving superior innovation and technology and quality of solutions, quality of trust, those kind, of parameters. So we're really focused on customer success and customer satisfaction, more - so than market share. The other thing I'd say is, as we mentioned in our three core markets, Singapore, despite the challenges of increasing interest rates and inflation, the real estate market remains resilient. In Vietnam, the demand remains very strong in our marketplace. And if anything, you see the cooling measures that the government put in is actually meant to make sure that there isn't an overhead in the market, people don't get to indented, real estate developers don't get know their heads. They have been tracking real estate markets across Asia and North America, larger markets where the real estate sector has overheated. And obviously, as an emerging economy, they're trying to make sure that prudent decisions are made by both real estate developers as well as consumers. But what they're also noting through these actions is that fundamentally, the market is hot, the real estate market, and they're not to make sure it doesn't overheat. So I think [indiscernible] lost upon us is despite the overall circumstances, global circumstances of interest rates and inflation, Singapore and Malaysia, Vietnam, all look strong real estate markets. Now the question on the short-term, there might be some impact of these cooling measures as we have noted. But you're absolutely right. I think that we remain bullish on the macro tailwinds and what they're going to do. But I do believe there's a lot of opportunity beyond the marketplace. Obviously, we are very bullish on our data and software solutions as well as our Fintech products. And I think for that, the market share position helps, but it's not sort of on the critical path to satisfy those plans. Hi, this is Nelson again. Just want to follow-up on your 2B business initiatives. Given recently repositioning and we brand our 2B business, wondering if there's any new growth opportunity coming up that will be exciting into next year. And yes, are we going to expect a quicker ramp of this business going into next quarter as well as next year as well? Thank you. So, just to clarify is the question around the brand repositioning and whether that creates opportunities. Is that your first question? Okay, got it, got it. Yes, thank you for your question. I think our property business was really is a brand we have rolled out for our B2B clients because we believe there was the opportunity to talk with a single voice to our customer. We have a variety of offerings now, our marketplace products events and awards, software product, data products, and we thought it's important when we're talking to real estate developers or banks, urban planners, et cetera. That we have some consistency of our solutions that the vast range of products and services we have are delivered in a consistent manner to our customers, making sure that we are sort of lowering with our customers, learning from our customers and developing our products consistent with that. So I think there is nothing new in terms of the product offerings - sorry, in terms of the business lines rather. But the business lines will be organized around marketplaces, data services and Fintech, as we mentioned in the past. And it's more around making sure that the brand positioning is consistent with that. As we also mentioned - as I mentioned rather in my opening remarks, the master brand itself has gone to this repositioning of guided by Guru. And so this aspect of this aspect of guidance that we want to be your trusted adviser and guiding you through decisions, whether you're a consumer or a B2B client is consistent with our brand. And I think that's more around the promise we're making to our customers. And now obviously, we need to deliver against that promise. [Operator Instructions] Okay. It looks like we're done with the Q&A. So Hari, we'll turn it back over to you for any final remarks. Now, I just want to thank everyone for joining us today. We look forward to speaking to all of you again next quarter. Thank you so much.
EarningCall_1964	Good afternoon, ladies and gentlemen. Thank you for joining DocuSign's Third Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakerâs presentation, there will be a question-and-answer session. As a reminder, this call is being recorded and will be available for replay from the Investor Relations section of the website following the call. [Operator Instructions] Thank you, operator. Good afternoon and welcome to the DocuSign Q3 2023 earnings call. I am Heather Harwood, DocuSignâs Head of Investor Relations. Joining me on the call today are DocuSignâs CEO, Allan Thygesen; and our CFO, Cynthia Gaylor. The press release announcing our third quarter results was issued earlier today and is posted on our Investor Relations website. Now, let me remind everyone that some of our statements on todayâs call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but they are subject to known and unknown risks and uncertainties that may cause our actual results or performance to be materially different. In particular, our expectations regarding the pace of digital transformation and factors affecting customer demand are based on our best estimates at this time and are therefore subject to change. Please read and consider the risk factors in our filings with the SEC, together with the content of this call. Any forward-looking statements are based on our assumptions and expectations to-date, and except as required by law, we assume no obligation to update these statements in light of future events or new information. During this call, we will present GAAP and non-GAAP financial measures. In addition, we provide non-GAAP weighted average share count and information regarding free cash flows and billings. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. For information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to todayâs earnings press release, which can be found on our website at investor.docusign.com. Thanks, Heather, and good afternoon, everyone. I'm happy to be here for my first earnings call as DocuSign's CEO. I'd like to begin by thanking Maggie Wilderotter for leading the team as Interim CEO. Maggie set the stage for a smooth and seamless transition, and we're grateful to her for her leadership and for her continued stewardship as our Board Chair. There are three main points I'd like you to take away from today's call. First, we delivered solid third quarter results, exceeding the key operating metrics we laid out last quarter despite the continued macro headwinds. Our results are a reflection, I think, of the continued signs of stabilization across the business. I'd like to commend our team for their unwavering commitment despite the considerable distraction. Second, as the global leader in the eSignature category, DocuSign is expanding across broader agreement related workflows. We have challenges to address, but we have an exceptionally strong foundation and meaningful competitive advantage, which leads me to my third point. I believe our future is bright. Along with the team, I'm personally energized by the opportunity and the work that lies ahead. I'm confident in our progress, and I believe we are unequivocally well-positioned for the long-term. Now before I move on to discuss the future of our business, I want to share what compelled me to join DocuSign. I followed the company for many years, and like our over 1 billion users, I find our value proposition distinctive and invaluable. We've built a powerful brand that's recognized by decision-makers well before we even engage with them. That combination of affinity that DocuSign has with customers and users, and our untapped market potential is very rare in the enterprise software space. DocuSign created and built the eSignature category, yet agreement process are still at the early stages of moving from pen to paper to more automated ways of working. In fact, I believe we're just at the beginning of revolutionizing how businesses initiate, negotiate and manage agreements, and we will leave that as we did for e-Signature. We provide solutions for customers of all sizes, industries and functions. During my almost 12 years at Google, I first led the global SMB and mid-market business, and then the enterprise business in the Americas, including managing our relationships with our largest global partners. I've experienced firsthand how exceptionally powerful a broad, diversified customer base can be, and I'm excited to bring that experience to DocuSign. For my first 60 days, I've focused on gaining a deeper understanding of our business, meeting with employees across the company as well as spending time with customers and partners. Through these conversations, I've started to identify some critical areas in which we can improve to strengthen our value proposition in addition to scaling the business by streamlining and creating efficiencies. I continue to see customers embrace and expand with our core eSignature offering. For example, this past quarter, one of the UK's largest health care providers expanded their use of e-Signature. They began the journey as a customer during the pandemic, and they've now migrated their entire patient onboarding process and adopted our products across their HR, legal, joint ventures and other departments. Key criteria in the recent competitive selection process, included privacy and security of their customer data, and the ability to utilize the advanced workflow features we offer. Notwithstanding our considerable strengths, I believe it's important to acknowledge where we have not executed as well. It's clear we did not pivot quickly enough and we were slow to make changes. As we experienced tremendous growth during the pandemic, we did not scale the team properly. We lost some innovation velocity. We didn't fully address the changing market dynamics nor mature our operations and systems sufficiently. We understand those gaps, and we're committed to moving forward with more transparency. I think the good news is that the future is in our own hands. So let me turn to our focus going forward. We are committed to broadening the category. That starts with a more clearly defined product road map that leverages our core eSignature strength and our ambition of delivering easier, smarter, trusted agreements. We see opportunities beyond the replacement of paper signatures to deliver innovative new experiences and integrate more deeply with partner applications. If you think about it, many use cases don't require editing or completion of the static, unstructured, highly formatted traditional agreement. Instead, I think data capture for agreements should happen through digital forms on the web or in an app. The agreements themselves should be dynamically generated, and the metadata should be automatically captured to enable personalization for future interactions. With our new web forms offering, which is currently in early beta, we're enabling our customers to transition from a PDF-centric experience to guided web-native experiences. We're also continuing to innovate on the CLM front, further solidifying our vision, customer validation and execution within the CLM space. Most recently, DocuSign was named the leader in the Gartner 2022 Magic Quadrant for CLM for the third consecutive year. We are placed highest of all vendors on the ability to execute access and second highest on the completeness of vision access. These products directly support each other. We're encouraged by how existing eSignature customers continue to embrace our CLM capabilities to enhance and speed their workflows. For example, this past quarter, we expanded our relationship with one of the largest ride-sharing organizations. Our team identified key areas of expansion using our Signature and CLM product to support their evolving business needs. They expanded their eSignature footprint and are now more streamlined in their internal processes, thanks to our CLM offering. Over the next few quarters, we'll expand our work here and augment the road map to broaden the power of managing workflows throughout the agreement life cycle. While we're not seeing dramatic shifts recently in the competitive landscape, it is important to recognize that today's market is more competitive, particularly for the basic sign use cases, which further highlights the importance of an innovative and differentiated product portfolio like DocuSign's. I want to touch on our plans to improve operations and sales productivity. While we are continuing to lead with innovation, we are staying hyper-focused on making the customer experience more seamless and integrated, particularly with our go-to-market motion. I think that starts with bolstering our self-service mill initiatives. I was deeply involved in enabling self-serving for every stage of the order cycle for customers at -- of all sizes at Google, and I know the power of a frictionless experience. I'm confident we can achieve both improved customer experiences and greater go-to-market efficiency as we move in this direction. We already have over 1 million customers who self-serve. The inbound traffic to our website continues to grow, and we have a highly recognized and trusted brand. So we have a lot to work with. We also want to create stronger efficiencies in our direct sales and field efforts and strengthen our partner ecosystem. So I'm pleased that sales attrition is continuing to moderate, and we're seeing stabilization in the field. Moving forward, we're focused on improving funnel conversion, consolidating and streamlining our teams, strengthening our focus on customer success and retention and implementing new incentive structures, all with the goal of driving efficiency and accountability. We're also leaning in on simplifying our pricing and packaging strategy, recently began rolling out new product bundles to enable customers to more easily access useful and differentiated productivity features, which in turn further the customer ROI and improve retention and being the customer a richer experience. We know that customers who use more than three features are more likely to expand their footprint with us, and that will be critical for more profitable growth at scale. We already have an industry-leading partner ecosystem. This represents a significant opportunity to expand customer value and distribution reach through our network of ISVs, resellers, system integrators and developers. By reimagining how we engage that ecosystem, we expect to create a platform that will see stronger revenue contribution from our partners and help unlock and fuel international expansion opportunities in particular. I personally visited customers and teams in four of our key European markets last week, which reaffirmed that one of our most significant growth opportunities, will come from international markets. During the trip, I had the pleasure to meet with one of the world's leading communications carriers. They've been a customer for seven years now. Our account team identified key areas to drive growth with expanded use cases, which accelerated adoption, which in turn led to an early renewal expansion. So we're excited to grow our footprint in their ecosystem as they continue to leverage our products to digitize their customer experience and reduce operating expenses while helping to create a more sustainable future. Lastly, internally, our operational focus has been on streamlining our processes, upgrading our internal systems and modernizing more of our own workflows to improve efficiency and scalability. As an example, we just closed our first quarter on our new ERP system, which has been a key dependency for automating more of our operations. In summary, I believe we're acting with urgency to recalibrate the business and leverage our strong foundation to adapt to the evolving business landscape and the changing and challenging macro environment. These efforts will take time, and they represent a continued evolution for DocuSign. However, I am fully confident that the opportunity is here for DocuSign and is within our reach with a clear strategy, focus and execution. Thank you for your time today. I'm thrilled to be leading DocuSign, and I'm committed to being transparent with all of you about our progress as we move forward. Excellent. Thanks, Allan, and good afternoon, everyone. We delivered solid Q3 results, delivering on the top and bottom line. We continue to expand our customer base and remain focused on progress against our key priorities as we execute against our long-term strategy. As the macro becomes more challenging, we are seeing softening demand trends materialize, including smaller deal sizes and expansion, with increased customer scrutiny on priorities and budgets in some cases. On the other hand, we are still seeing healthy results as customers recognize DocuSign offers high-ROI applications that are easy to use, efficient and cost-effective. Let me now review our Q3 results. Total revenue increased 18% year-over-year to $645 million, and subscription revenue grew 18% year-over-year to $624 million. The continued strengthening of the US dollar resulted in a couple-point headwind to total revenue growth in the quarter, in line with our previous expectations. The impact was not material to our results. Our international revenue grew 23% year-over-year to reach $157 million in the third quarter, representing 24% of our total revenue. Third quarter billings grew 17% year-over-year to $659 million as our installed base continued to expand. The strength in billings growth was partially driven by early renewals, particularly renewals from Q4. As a reminder, quarter-to-quarter billings can fluctuate due to the timing and completion of deals, including timing of renewals and expansions. Customer growth remained strong as we added approximately 42,000 new customers during the quarter, bringing our total installed base to 1.32 million customers worldwide at the end of Q3, a 19% increase compared to a year ago. This includes the addition of approximately 10,000 direct customers to reach a total direct customer base of $202,000, a 26% increase over last year. We also saw a 34% year-over-year increase in customers with an annualized contract value greater than $300,000, reaching a total of 1,052 customers. These results demonstrate progress against our key initiatives. However, we continue to see the effects of a more challenging macro environment. Real estate and financial service verticals continue to see headwind. So even within these sectors, we see pockets of expansion with customers for specific use cases. Expansion use cases underscore our product differentiation and value for our customers as we continue to invest in innovation around broader agreement workflows. As it relates to verticals, we are also encouraged by relative strength in our manufacturing, retail, business services and technology sectors, highlighting the important benefit of our diversified customer base. And while the global slowdown presented challenges more generally, we saw varying degrees of strength and weakness across all regions and segments. Dollar net retention was 108% for the quarter. We continue to see more muted buying patterns and slower expansion rates from customers in the current climate. We expect buying patterns to remain cautious in the near-term, resulting in dollar net retention continuing to trend downward for the remainder of the year. Total non-GAAP gross margin for the quarter was 83% compared to 82% last year. Q3 non-GAAP operating profit reached $147 million compared with $122 million last year. Non-GAAP operating margin was 23% from 22% last year. Non-GAAP net income for Q3 was $118 million compared with $121 million in the third quarter of last year. As noted on our Q1 call this year, we introduced a non-GAAP tax rate within our non-GAAP net income calculation as we reached consistent non-GAAP profits for the prior three years. We're using a non-GAAP tax rate of 20% for fiscal 2023. Q3 non-GAAP EPS was $0.57. In September, we announced a restructuring plan, which included a workforce reduction in response to the changing environment. This was not an easy decision, but was an important step for the health of the business. Our GAAP results include $28 million in Q3 restructuring-related expenses as we take a long-term view of the opportunity ahead, we will evaluate the best ways to reinvest capital into areas that accelerate initiatives and present the strongest return. We are committed to making progress in a sustainable way towards our long-term target margin. We ended Q3 with 7,522 employees compared to 7,056 last year. The restructuring process is well underway, and we expect to be substantially completed by the end of the fiscal year. The workforce reductions, coupled with more disciplined spending and cost containment throughout the company, drove strong Q3 non-GAAP operating margin. While we are pleased with the Q3 margin, we delayed some spend in the quarter, and we'll continue to evaluate the most critical areas for investment. Operating cash flow in the third quarter was $53 million, representing an 8% margin. Free cash flow was $36 million or a 6% margin. As we mentioned on our Q2 earnings call, during the third quarter, we implemented a new ERP, a foundational system for our company. The go-live was successful, with smooth implementation and no material disruptions to our core processes. As noted on our last call, the timing of cash collections and payments were impacted by the ERP transition as we anticipated, and some were pushed from Q3 to Q4. We also incurred one-time cash expenses in Q3 related to the restructuring. On a more normalized basis, excluding the impact from the restructuring and our ERP implementation, our operating cash flow margin would have been approximately 14%, and our free cash flow margin would have been approximately 12%. This compares with operating cash flow of $105 million or a 19% margin and free cash flow of $90 million or 17% margin for the same period last year. We expect lower restructuring cash payments to benefit fourth quarter cash flows relative to Q3. We exited Q3 with more than $1.1 billion in cash, cash equivalents, restricted cash and investments. Turning to our share repurchase program, we repurchased approximately 740,000 shares during the quarter for approximately $38 million, which demonstrates our confidence in the durability of our business and in the opportunities ahead. As of the end of Q3, we had approximately $137 million in remaining buyback capacity. We remain committed to opportunistically return capital to our shareholders. With that, let me turn to our Q4 and fiscal '23 guidance. For the fourth quarter and fiscal year '23, we anticipate total revenue of $637 million to $641 million in Q4 or a growth of 10% year-over-year and $2.493 billion to $2.497 billion for fiscal '23 or growth of 18% to 19% year-over-year. Of this, we expect subscription revenue of $624 million to $628 million in Q4 or growth of 11% year-over-year and $2.423 billion to $2.427 billion for fiscal '23 or growth of 19% year-over-year. For billings, we expect $705 million to $715 million in Q4 or growth of 5% to 7% year-over-year and $2.626 billion to $2.636 billion for fiscal '23 or growth of 11% to 12% year-over-year. We expect non-GAAP gross margin to be 82% to 83% for Q4 and 81% to 82% for fiscal '23. We expect non-GAAP operating margin to reach 20% to 22% for Q4 and 18% to 20% for fiscal '23. We expect to see a de minimis amount of interest and other income. We expect non-GAAP fully diluted weighted average shares outstanding of 205 million to 210 million for both Q4 and fiscal '23. Looking ahead, we are in the early stages of planning for next year and focused on executing across our critical priorities to finish the year strong. While we will not be formally providing guidance for next year, we would like to share a preliminary outlook for fiscal '24 informed by what we are seeing across the business and in the broader macro environment. We currently expect a slower start to the fiscal year. For total revenue, we would expect high single-digit growth during fiscal '24. For billings, we would expect low single-digit growth for next year. We're committed to maintaining our disciplined approach to expenses, carefully addressing and prioritizing strategic investments that will drive our sustainable growth at scale. As a result, we expect to operate at the lower end of our long-term target operating margin range of 20% to 25% in fiscal '24. In closing, we delivered a solid Q3 despite a challenging operating environment. To drive growth, we'll continue to invest thoughtfully and closely monitor the returns on our investments, pivot as needed and evaluate opportunities to drive growth, efficiency and profitability at scale. Our Q3 results are a meaningful indicator of the strength of our business and the customer value proposition we deliver, that allows us to delight our customers in a meaningful way. We are thrilled to welcome Allan to DocuSign and want to take a moment to also thank our team for their exceptional work and focus during this time of transition. While we know it will take time for our progress to be fully reflected in our financial results, we are committed to advancing the business and executing against our long-term strategy, while delivering sustainable growth at scale. We look forward to updating you on our progress. And at this time, we'll be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Tyler Radke with Citi. Please proceed with your question. Yes, thanks for taking the question and welcome aboard, Allan. I wanted to ask you, you made some comments just around broadening the category, integrating with partner applications. Maybe talk about where you see the most low-hanging fruit. And as you look at the business, I mean, clearly, this is a business that has gone from high-growth into more low-growth mode as you're looking at the outlook. But where do you kind of see the medium-term opportunity here in terms of where you can get back to if you accomplish all your strategic initiatives? And then I had a quick follow-up for Cynthia. Yes. Thanks for that. So the first thing I would say is if you think about all the steps in the agreement workflow, we did an excellent job nailing the specific use case of signing an agreement. But all of the other steps, I think, remain -- there remains plenty of opportunity to revamp that. And so as I alluded to in my prepared comments, we're excited about the opportunity, for example, to redefine what an agreement looks like. It doesn't have to be this highly formatted document. It's something you can enter on a web page. We already have clients who do this with us. Mobile carriers have people sign up through DocuSign, but it looks like a web interface. And a variety of health organizations use our new functionality to do this for patients. So, once they've gone through it once, they can pre-fill the agreements and sign-ins for future. So, I think this functionality around helping people both create the agreement and in a sense negotiate and complete them online is a significant opportunity. Looking on the personalization side. You can imagine, we do this today with Salesforce and a variety of other platforms. Reps can send out documents that are personalized and tailored to the customer based on data that's already in the system, again, a way of integrating directly with third-party applications and leveraging the simplicity and power of DocuSign. Post-agreement, I think the CLM space hold tremendous promise for DocuSign both in terms of extracting more value, more business value from agreements as well as on the risk and compliance side. And I've had a number of meetings with large enterprises that are excited about both of those use cases. So, I feel like there's actually quite a bit of breadth there, and we're just at the early stages of delivering against that opportunity. Great. And Cynthia, you talked about some early renewals in the quarter. And I guess I'm wondering, since the Q4 guidance was kind of in line with the prior implied guide, was the early renewals kind of the -- driving most of that upside that you saw in the quarter? And if you could just unpack what you think drove those early renewals. Was it customers consuming ahead of contracts that they renegotiated down post pandemic? And if that's the case, do you still think there could be some more of that as you look out in the coming quarters? Thank you. Thank you. So we were super pleased with where the billings number came out. It did come out better than we were expecting, and it was driven primarily by early renewals. And when you look at the customer dynamic there, I would say a few things as we have dug into it. One is it's mainly -- we have a certain level of early renewals in every quarter. We had more early renewals coming in from Q4 into Q3 this quarter than we normally would have from a Q plus one. And it's really driven by where customers are in their usage of the product and capacity. And what we were seeing was there were more customers at capacity who were looking to expand or increase their usage with add-on products. And so that was leading to early renewals because they were at capacity on their subscription. And so those were brought in a quarter earlier than the renewal would have come due. And so I think to commend our sales team, taking deals off the table as they come due in the quarter is great. And we feel good about where we are for Q4. We're not anticipating that dynamic. We will have early renewals as we always do. But that level is baked into the guide now for Q4. Great. Congrats on a really strong quarter and welcome, Allan. Wanted to ask you about a comment you made around increasing competition for the core signature use cases. Was wondering how much of your business would you say fits in that category? And then more broadly, as you've been digging in on the space, just wondering for your take or your view on the competitive landscape and DocuSign's positioning? Thanks. Yeah. So first of all, I think at the highest level from a category perspective, we feel good that fundamentally helping businesses close agreements electronically, it's both a cost and productivity saving and a better customer experience. And so we think that's relatively resilient from a macro perspective. In terms of the competitive landscape, we do see some competition at the low end. I would see generic eSignature without much of the value-add that I think we excel at. And so we've got to become a little bit more engaged competitively in that space without damaging our value and premium positioning. And so we're looking at ways to do that. But the vast majority of our products -- of our revenue come from customers who appreciate the value that DocuSign delivers. I'll just give you a couple of examples. We know from a variety of surveys that customers see that when they send agreements with DocuSign, people tend to sign faster. They're more likely to sign, they're more satisfied. There's a more positive brand halo. All of that feeds into a premium positioning. In addition to that, we tend to do very well on helping with the internal workflows in the companies that adopt DocuSign, which creates cost savings and efficiencies. So I feel pretty bullish that we can maintain our position. But it's absolutely true at the low end. It's super high-volume commodity eSignature, there's more competition. And we need to be more agile in responding to that, and we're working on that as we speak. Hey. Great. This is Austin Williams on for Michael Turrin. I just wanted to go back to the expansion rate. It looked like the expansion ticked down a touch here. Is there anything you would call out as it relates to those expansions and how we should think about that settling in from here? Yeah. Yeah. So on last quarter's call, we talked about kind of that trend line. And as I said in my prepared remarks, we would continue to expect the trend line to push downward in Q4. I think what's embedded in that number is mainly expansion rates are moderating, and so the growth and expansion is declining. As a reminder, that's a â it's a dollar net retention number. So it's based on our book of business. The book of business is quite large. So it takes larger dollars and larger rate of expansion to move the number up. And just given some of the dynamics we've been talking about the last few quarters around expansion rates and deal sizes contracting, we would expect to see continued pressure on that particular metric for Q4. Wonderful. Thanks for taking my questions, and welcome, Allan. I wanted to ask a question on Agreement Cloud. As the company starts to transition over the longer term, I understand towards a more workflow-oriented business. Today, we think of eSignature as transactional. Do you think there's a different go-to-market that's required here to really materially move the needle and gain some traction there? You talked about some SI efforts there, global SIs, et cetera. I assume they would play a role there. But any thoughts on that? Thank you. Yes. So a couple of points there, I think from a customer segment perspective, we have a very nicely balanced book of business now across SMB, mid-market and enterprise. A lot of our enterprise adoption has been departmental level historic, but we're negotiating more enterprise-level agreements. I think we need to continue to evolve our sophistication and readiness there. We've brought in some leaders with great experience there, but I think we're still coming up the curve in terms of being fully ready to being a broad enter platform supplier, if you will. So that would be my â the main point I'd make on that. In terms of the other parts of the business, I think the CLM business is already very much an enterprise play. And as we've rolled that out, we've seen a lot of our larger deals have a significant CLM element. So we're pushing hard on that. I think that is still a relatively early-stage market opportunity. As you noted, there's â it's so complicated and there's so much customization on a vertical or company-specific basis that inevitably, there's a strong service element to that. While we will have a base level of services, we absolutely need third-party partners like the big SIs and others. And they're very eager. In fact, we have a lot of inbound interest to partner with DocuSign in creating combined solutions to address those needs. So, I'm bullish on that, but I want to maintain DocuSign's focus as a SaaS software company with necessary customer success and professional services elements and then augment that with the ecosystem of ISVs and SIs and others to present solutions to enterprises that have more complicated needs. Great to hear. Thanks Allan. And then one for you, Cynthia, if I may, please. Just on the guidance for next year, low single-digit billings growth. This quarter, you saw, it looks like 19%. Obviously, you had some deals pulled into Q3, but good results in comparison to kind of the guide. So, just what are you factoring in for next year? Is it a worsening macro? You talked about some elongating sales cycles and perhaps deal size compression. Are you just assuming that, that environment sustains here? Any color on just what's factored into that next year outlook? Thank you. Yes. Sure. So, we're not technically guiding to next year. We're kind of giving you our best view of what we're seeing. And again, in the spirit of being transparent, we did want to provide some direction to what we're seeing as we look into Q4 and next year. The embedded assumption there, I guess, when you look at Q3, it was 17%. Q4 is, I think, 6%. And so we're certainly seeing kind of a more challenging macro environment and some softening trends materialize, right? And I talked about kind of smaller deal sizes, smaller expansions and expansions at a slower rate. So, I think those things in particular between the macro and then what we're just seeing with customer behavior on the softening trends of expansions. Customers are still expanding, but they're just expanding at a lower rate, and that puts pressure on the growth rate. I'd also say in the macro, there's just more scrutiny by customers on spend and budgets. So, we're not modeling material degradation there or material improvement. So, we're kind of assuming just kind of a softening macro environment that we're currently seeing. Yes, thank you very much and I'll add my congrats. Allan, I'm interested in how commonly do you sense that some of your customers might have overprovisioned themselves with DocuSign capacity during the pandemic. And maybe now they've been drawing down some of that eSignature inventory in a manner that maybe it could position them to run out of the excess capacity. It sounded like you actually might have seen a little bit of that here in Q3 and where they might be able to reengage on new purchases. Maybe it's in the back half of next year or somewhere out beyond that. I do think that we're on the tail end of that part of the cycle as we've -- significantly lapping COVID as a broad phenomenon and the stance the companies took at that time. At the same time, of course, some of our customers saw very inflated volumes during COVID and during a very low interest rate environment. You're familiar with the government loan scenario. I think the mortgage and real estate volumes, which just simply lower now even if they have completely exhausted their pre-bought envelope allotments. So, I think I'd like to be cautiously optimistic along the lines that you note. But I think there's that counteracting factor of some of the things that were the most volatile, whether it was the most pre-buying, are probably also people who are now in a different demand environment, if that makes sense. Okay. Yeah, understood. And just as a quick follow-up, how are you viewing the partnership between DocuSign and Microsoft? How that might evolve over time? Because I think there's a viewpoint out there that Microsoft is conspicuously absent from this market in some ways in that perhaps they could end up offering eSignature as part of Office 365. And I'm just wondering if you see any opportunity to be involved there or perhaps if you see some other angles to that relationship. Yeah. I mean there's a lot of pieces to that. First, I'd just say, look, we're really excited about our evolving partnership with Microsoft. As you know, we entered into a large strategic partnership deal with them earlier this year. They are -- and we've delivered a number of really, I think, exciting new integrations with Microsoft, with Teams, with SharePoint, Builder and others. So I'm -- and we have -- I think we're still just scratching the surface of what we're capable of in terms of integration with a variety of Microsoft platforms. So look, I expect that Microsoft and Google will have some basic eSignature capability embedded in their office suite. But I don't really think that that's the core value that we provide. We provide a lot of richness and workflow around signature that goes well beyond what I think the core office suites will supply. And I don't feel that that is the biggest competitive risk that we face. I think we're very pleased with the progress of the partnership with Microsoft and with the other software suppliers. I think most of them view us as the best-of-breed partner for them, and we want to capitalize on that. And, of course, they're a huge partner for us with our amalgamation to Azure. So that's a whole separate topic. Hey thanks for taking my questions, and congrats on the great quarter. So given signature usage from existing customers and the incremental new logo next year may be impacted as a result of the macro, how do you expect your expansion motion? So thinking about CLM, notary or premium pricing insurer capabilities like ID verification to perform next year. Well, I think -- on the one hand, I think you will see us expand the number of products that we have that we can offer across the entire agreement workflow, as I outlined earlier. And at the same time, I think if we make it too complicated and itemize to buy too much, we make it harder to buy and we don't necessarily include some of the features that truly differentiate us from low-end competitors. And so one of the big pushes this quarter that I initiated was a better bundling mechanism to bring together some of these features so that we make -- as well as an initial onboarding for new clients to make sure they get off to the right start and that they are using not just the core eSignature capability, but some of the other features you alluded to. And the early signs of that are promising. So we are, at the same time, I think packaging more of the features that directly relate to eSignature and making sure that we're fully selling that bundle of features and expanding our footprint to other aspects of agreement workflow that we recharge for separately. Great. Thanks. And then, Cynthia, if you could just add any commentary on the linearity of demand trends month-to-month throughout the quarter and into November. Did anything change over the last months leading into Q4 as it relates to demand or usage of your products? Yes, I would say there hasn't been material changes from exiting Q3 into Q4, and that kind of informed some of our macro comments. I would say and just maybe reiterate what we said on last quarter's call, we have been seeing a little bit of shift in linearity in the quarter itself between the months. And so I would say that continued in Q3 in month three. We saw softer linearity leaving the quarter than entering the quarter than we had historically -- than we have historically seen in the kind of those quarter linearity trends -- intra-quarter. Wonderful. Thanks so much for taking my questions. Allan, welcome aboard and very much looking forward to working with you. Two questions, if I may, just on the kind of preliminary outlook or framework or whatever we want to call it for next year. Really appreciate the color, a helpful way of thinking about things. I guess, just for starters, if we think about low single-digit billings growth for next year, I'm sure there's some sort of cadence there in terms of maybe lower in the first half, higher in the second half, just given the macro picture. When we think about that, I mean, that kind of implies that calendar year 2024, FY 2025 will be mid-single-digits growth. And I know it's way too early to start talking guidance for that. But maybe more importantly, what would need to be done to bridge that gap from that baseline that you're talking about based on the billings guidance to a growth rate that you'd be happy with? Because I can't imagine you'd be happy with -- given the market opportunity and everything, with mid to high single-digits growth. So, maybe can you walk through what from an execution and market opportunity standpoint needs to happen to get that growth rate to where you'd want it to be? And then I've got a follow-up. Yes, I think, first of all, we set aside macro, which obviously weighed heavily on us as we looked out to 2024. And you don't want to presume that the economy is necessarily going to get better. So, that is embedded in our forecast. But looking beyond that, I think the key levers for us are we got to get our digital motion to work much better, and that's a huge focus and investment area for us now. We think we can capture more business that way. But until we can really prove that to ourselves, we're certainly not going to put it in our guidance. And similarly, I think we have a series of product initiatives that will roll out over the next two, three quarters that I think will dramatically broaden our footprint. But again, until we have a little bit more solidity there, it would be imprudent to include that in even a preliminary outlook. So, I think we have -- our international opportunity is another one where we'll be doing some significant investing in 2024. That market is at a much earlier stage of evolution, and we have significant headroom there. So, I think there's a number of areas where we hope to see significant upside. Obviously, I didn't join to run a low or mid-single-digit revenue company. So, I'm pushing very hard to get us to a different place, and we're -- we hope to have a lot of news to report on that over the next few quarters. Yes. Sorry, I might just add to that. The -- our fiscal 2024 is calendar 2023, right? So, that's -- it's an outlook. It's not a guide; 90 days from now we'll give a more specific guide, so we'll be able to give you more detail there. Understand what you're talking about in terms of calendar 2023 into calendar 2024. As we said, we would expect the first half of next year to be kind of get off to a slower start, and that's partly macro and it's partly the initiatives that Allan was talking about. We are going to take some time to gain traction. And so the scenario where, I guess, calendar 2024 could be better would mean that macro has probably gotten better and then some of the initiatives are starting to take off. And you start seeing that in the back half of next year, because that can spill into the following year. I would just say, though, our -- when we give guidance and we give outlook, and you all have been following the company for quite some time, there are opportunities and there are risks. And we've, I think, balanced those things in what we're telling you in the spirit of the 2024 is really to provide transparency to what we're currently seeing, but it's still balancing those opportunities and risks. So I just want to make sure that you all understand that. Yeah. I mean, I think what I would just add to that, Cynthia is exactly right. What we're giving you now is an extrapolation of our current trends. We have a lot of levers that we're pulling, and we hope to be able to update you on those over the course of the next several calls. We're bullish on long-term prospects. We think we have a lot of headroom and are very well-positioned. All right. Fantastic. Really helpful, both of you. Thank you. And then just a quick follow-up. If we think about the margin, not guidance, for next year, you're talking about the low end to about 20%. I guess given that you also have all these cost savings that you've been working at generating over the past quarter, two quarters, a 9% rip. I imagine that a lot of the upside that you're getting from those cost savings, you're reinvesting in the area. So maybe can you walk us through why would margins not be higher. And if it is, in fact, you're just reinvesting in other areas, what are those top investment priorities that's getting that margin to 20%, again, in spite of the cost cutting focus and the 9% rip? Thank you. Sure. I'll talk about the margin and then Allan can talk about some of the investments. So on the margin, our long-term target margin has been 20% to 25%. So we're expecting to be at the lower end of that into next year would be what we'd expect. So we would get some uplift from the restructuring that we've done and are in the process of completing. But we -- as you said, we would be reinvesting in the business. And it's -- a lot of it is around things like international, the go-to-market initiatives and R&D in particular. And those pieces, I think, are going to be really important. Yeah. Just to add to what Cynthia was saying, look, I think our go-to-market motion needs to become more efficient. We need to grow into -- we've made some adjustments. We need to grow into the infrastructure that we have and do a lot more on the digital side, as I've alluded to. So that's an area where I would hope to see our metrics continue to improve. I feel differently about our R&D investment. We are, frankly, below many of our SaaS peers in terms of our divestment relative revenue. And I think we have a lot of ideas, a lot of opportunity here. And I think we -- to the extent that we invest beyond baseline, that will probably where the bulk of it goes. Hi, there. Thanks very much. Allan, maybe following on to your last comment on the go-to-market. Have most of those changes been put in place, I guess, to date? Obviously, some of those it's difficult to do that as you're trying to close up a fiscal year. Or are you waiting to sort of instrument some changes, perhaps on the direct side, as we get into the beginning of next year? I was just trying to get a sense on if there's still some -- I assume there's always going to be some tweaking, but have some of the more fundamental changes been established, or is that something that you're still waiting on doing once you close out this fiscal year? No, we're not planning any broad efforts risk type of structures along the lines of what we did for the whole company last quarter. We're going to continue to tweak. I mean, I think the market environment is dynamic. We're going to continue to move resources around, as I alluded to. And individual functions and departments in the go-to-market function elsewhere, I think we'll see some prioritization or de-prioritization. But I'm not looking to do anything at the macro company-wide level. I do expect that we will get significantly more productive and efficient in our go-to-market motion and that's a hugely for us. In addition to the digital side, we've had an all-hands-on-deck effort to remove friction internally and to just realign and combine functions. We were overly segmented, I believe. And so there was just a lot of work to get our field operation organization in a better state. I think Steve Shute, our President of Fuels has done a very nice job pulling that together, bringing in senior leaders. And I think we're much better poised to grow with the resources that we have today than we were six months ago. And some of those initiatives that I alluded to on the self-serve side will obviously bear more fruit in the next few quarters. That's really helpful. And then, Cynthia, really quickly, you brought up, obviously, in the cash flow discussion the ERP implementation. Are there any other big systems that need to be sort of upgraded given you guys have scaled so quickly, or is that sort of the biggest one that was outstanding? Just trying to get a sense if that's another area of potential spend for you all next year. Yes, I mean we need to continue to invest in our systems and more automation. But I would say ERP has been a multiyear endeavor that started before I even joined the company. So, it's a big milestone for the company that will enable a lot of other automation to happen. So, we'll continue to invest there, but I wouldn't expect another project as large as that project and cross-functional in the near-term. Yes, I agree with that. Just to add to that, I think -- I don't think there's anything huge to talk about from an investment perspective. But just for color, this company feels like it has one of every SaaS product that's been backed by the venture industry in the last 10 years, certainly. So, we need to dramatically clean that up and get to a much smaller number of anchor tools. In addition to our ERP system, the other big focus this year has been on our sales force implementation, which obviously is a core platform. I think we're in much better shape now than we were at the beginning of the year. And there's a couple of other areas where I think we have opportunity to dramatically simplify and consolidate and that will help everyone become more productive. But it's not going to have not going to be able a magnitude that Cynthia went through with the ERP project. And we have reached the end of the question-and-answer session. I'll now turn the call back over to Allan Thygesen for closing remarks. Thank you. Well, thank you all for joining to hear more about where we're headed. I'm excited to be on this call with all of you and to be leading this incredible iconic company. In closing, we believe we delivered a solid Q3, and we're focused on delivering an exciting product roadmap and improving the efficiency of our go-to-market to drive growth and profitability. My first two months have affirmed DocuSign's tremendous headroom, strong customer relationships and world-class talent. I'd like to thank our employees, our customers and our partners for their warm welcome and the insights dedication they've shared. I look forward to updating all of you as we make progress. Thank you for joining.
EarningCall_1965	All participants are at present in listen-only mode. Following managementâs formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the companyâs press release that is available in the News section of the companyâs website, www.elbitsystems.com. I would now like to hand over the call to Mr. Rami Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead. Thank you Michal. Good day everyone and welcome to our third quarter 2022 earnings call. On the call with me today are Butzi Machlis, our President and CEO; Kobi Kagan, our CFO, and Yossi Gaspar, Senior EVP, Business Management. Before we begin, I would like to point out that the Safe Harbor statement regarding the press release issued earlier today also refers to the contents of this conference call. As we do every quarter, we will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliations in todayâs press release. Kobi will begin by providing a discussion of the financial results followed by Butzi, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a question and answer session. The third quarter results reflect the strong demand for our solutions and the investments we are making to realize the growing potential presented by increased geopolitical tensions and growing defense budgets. Third quarter revenues were similar to 2021 as growth in Europe offset lower Asia Pacific revenues. Our revenues by geography tend to fluctuate on a quarterly basis based on specific programs and project performance, as well as milestones reached in a particular quarter. We believe the longer term revenue trends supported by the growth in the order backlog are more representative, as we have discussed with you in the past. I would note the sale of Ashot Ashkelon Industries to FIMI was completed at the end of the second quarter of 2022 and our results in the third quarter of 2022 do not include a contribution from Ashot. The current operational environment is challenging due to supply chain disruptions and labor cost inflation. Profitability in the third quarter includes expenses related to [indiscernible] stock price-linked compensation plan. This plan helps align employee compensation with share price performance, incentivizing our employees to generate long term value for all of Elbit Systems stakeholders. Our GAAP and non-GAAP results have always included these expenses, but this year they are higher than in recent years following the share price appreciation. Our conservative balance sheet management policies have enabled us to increase inventories and partially offset the supply chain disruptions to maintain deliveries to our customers on schedule. Our budget and longer term planning assume that the global economic trends of supply chain and wage inflation headwinds will gradually subside from the second half of 2023. We continue to invest in R&D to enhance our portfolio and maintain our competitive edge. We invest in sales and marketing to expand our customer base and also continue to invest in CapEx to improve and expand our manufacturing footprint. The rollout of the new ERP system and the construction of the new facility in the south of Israel are progressing, and we expect these and other efforts to support and improve the operational performance. Third quarter revenues were $1,349,000,000 compared to $1,364,000,000 in the third quarter of 2021. In terms of revenue breakdown across our relevant areas of operations, C4ISR at 30% of revenues increased year-over-year mainly due to UAS and command control system sales. Land systems was 26% of total revenues and increased year-over-year due to artillery system sales. Airborne systems accounted for 32% and declined year-over-year due to lower airborne precision guided munitions sales. Electro-optics accounted for 10%, and other sales accounted for 2% of revenues, similar to third quarter of 2021. The geographic revenue breakdown in the third quarter reflects our diverse geographic revenue base. In the third quarter, North America contributed 29%, Europe 26%, and Asia Pacific and Israel each contributed 19% of revenues. European revenues increased due to growth in training and simulation sales. Asia Pacific revenues declined mainly to lower precision guided munitions sales. North American revenues were lower due to a decline in medical device sales. The non-GAAP gross margin for the third quarter was 25% compared to third quarter of 2021 at 27.2%. GAAP gross margin in third quarter was 24.2% of revenues compared to 26.6% in the third quarter of 2021. Gross margin in the third quarter reflects a combination of unfavorable program mix, wage inflation, and supply disruptions. GAAP and non-GAAP gross profit in the third quarter includes approximately $30 million of expenses related to stock price-linked compensation plans. Third quarter non-GAAP operating income was $84.3 million or 6.3% of revenues compared with $123 million or 9% of revenues last year. GAAP operating income for the third quarter was $73.4 million versus $110.3 million in the third quarter of 2021. Operating profit in the third quarter includes expenses of approximately $22 million related to the stock price-linked compensation plans. The operating expense breakdown in the third quarter was as follows: net R&D expenses were 8.4% of revenues versus 7.4% of revenues in 2021; marketing and selling expenses were 5.1% of revenue, down from 6.2% of revenues last year; and G&A expenses were 5.9% of revenues compared to 4.9% of revenues last year due to stock price-linked compensation expenses. Other operating income of $9.4 million included the capital gain related to the sale of the building in Israel which was included in our GAAP and non-GAAP results. Financial expenses were $16.4 million in the third quarter compared to $13.5 million in 2021. Other income of $4.8 million included approximately $4.6 million which related to the re-measurement of an affiliate following an investment [indiscernible]. We recorded a tax expense of $7.9 million in the third quarter compared to $8.3 million in 2021. The effective tax rate in the second quarter was 12.8% compared to 8.6% in 2021. The non-GAAP diluted EPS was $1.40 in the third quarter compared with $2.33 last year. The GAAP diluted EPS was $1.26 compared with $2.08 last year. The stock price-linked compensation expenses in the quarter were equivalent to approximately $0.45 on an EPS basis. Our backlog of orders as of September 30, 2022 was $14.7 billion, approximately $1.1 billion higher than the backlog at the end of September 2021. Approximately 40% of the current backlog is scheduled to be performed during â22 and 2023, and the rest is scheduled for 2024 and beyond. Operating cash flow for the third quarter was a $178 million inflow compared to no inflow in the same quarter last year. The cash outflow also included an inventory build related to our efforts to mitigate supply chain challenges as we have leveraged our solid balance sheet to support deliveries to our customers. Cash flow from investing activities includes the higher CapEx related to the new facilities in the south of Israel, Charleston, South Carolina, as well as the rollout of the new ERP system. Thank you Kobi. Firstly, I would like to thank the investors on the call and all our shareholders for their continued support. In a volatile world, we, Elbitâs management team have to make hard choices and decisions as we strive to create value for all our stakeholders and ensure we find the right balance between long term value creation and short term performance. We are fortunate that Elbit System shareholders understand the strategy, the potential, and the long term investment horizon that has supported the growth and the success of the company for decades. We are also aware that you expect a better operational performance, including higher profitability than what we delivered in the third quarter. We are working to improve the short term performance while maintaining the balance with the long term success of Elbit Systems by investing in our people, our portfolio and our customers. This year, we increased investment in our people. Elbitâs employees are the most critical contributor to our long term success. We invested to retain talent in a competitive labor market in Israel and around the world, including stock price-linked compensation plans that had a material impact on the profitability in 2022. I would like to remind you that our executives and employees come to work at Elbit for more than just a salary. They joined Elbit because we are an attractive employer that provides them with an opportunity to work on some of the worldâs most advanced technologies and to support those responsible for the protection of our loved ones and our countries. Our business is growing and we continue to recruit around the world to deliver our record backlog and support our customers. We continue to invest in R&D to develop leading solutions that provide our customers with valuable competitive edge leveraging the operational experience of our employees and the proximity and short feedback loop with our customers. We are investing in new facilities. Elbit is building new advanced facilities in Israel, the U.K., Germany and the U.S., and we continue to gradually upgrade existing facilities. These facilities will include the latest manufacturing technologies and processes that should support operational improvements. We are also investing in creating value for our customers by providing them with advanced capabilities, investing in our multiple subsidiaries around the world and by utilizing our balance sheet to build inventories and maintain deliveries on schedule. We know that our customers appreciate our efforts and we expect these investments to deliver good returns in the future. Elbit Systemsâ long term growth has been driven by a health combination of both organic growth and acquisitions. These include Elbit night vision in 2019 and Sparton in 2021 that enhanced our technology portfolio and strengthened our position in the U.S. Sparton and Elbit Night Vision reported significant milestones in recent months. In October, Sparton was one of three suppliers awarded a joint five-year, US $5.1 billion ID/IQ contract to supply sonobuoys to the U.S. Navy. This follows selection of Sparton as a qualified vendor for the multiple award delivery order contract, or MADOC in July. The ID/IQ is significantly larger than the previous five-year ID/IQ. This illustrates the importance of anti-submarine warfare as [indiscernible] tensions escalate and the growing demand for next-generation sonobuoys. U.S. naval forceâs Central Command is currently conducting a three-week digital horizon exercise in the Middle East focused on employing and integrating unmanned and artificial intelligence systems. Elbit Systems of America together with our Israeli based maritime business unit are showcasing Elbit Systemsâ Seagull unmanned surface vessel as part of this exercise. This event validates the investment Elbit has made to build its maritime capabilities and the growing importance of the maritime domain. In October, Elbit Night Vision received a US $107 million order to supply night vision systems to the U.S. Army as part of the OTA contract received in 2020. In September, Elbit Night Vision received a contract to develop an advanced night vision sensor for the U.S. Armyâs IVAS system. Militaries around the world continue to invest to equip their soldiers with capabilities that enable operations at night or in dark environments. Recent conflicts have highlighted the importance of these capabilities. Elbit is a leading provider of night vision capabilities for soldiers thanks to the acquisition of Elbit Night Vision and our legacy solution. We are working to realize the synergies between our Night Vision capabilities and additional technologies in Elbitâs portfolio, like the integration of our command and control systems that can project information on the night vision display. At the second quarter results conference call, we discussed five capability areas that we identified should benefit from increased defense spending over the coming years following the lessons learned from the Russian invasion of Ukraine. These are platform protections, command and control systems, electronic warfare, unmanned systems, and network precision munitions. We believe that each one has the potential to generate significant revenue over the medium term. During the third quarter, we announced additional contracts across these five [indiscernible] areas. Starting with platform protection, in November we announced a US $200 million contract for a military helicopter self-protection suite for an Asia Pacific customer. The conflict in Ukraine has highlighted that only ground forces equipped with tanks and [indiscernible] can maneuver and execute large-scale operations. The conflict has also demonstrated the vulnerability of platforms across all domains and the critical need to protect both platforms and their occupants. This highlights the importance of active protection systems to protect maneuvering ground platforms. The Iron Fist active protection system development is on track for platforms in Israel, the Netherlands, Australia and the U.S. I believe there is significant potential for this unique solution that can protect armed personnel carriers and a range of military platforms. Helicopters provide physical support to maneuvering ground forces, and our DIRCM system protects helicopters and fixed [indiscernible] from a range of threats. Another area of priority spend is autonomous and unmanned systems in the air, on the ground and at sea. The effectiveness of [indiscernible] munitions on an armed UAV is limited when operated as a single platform. Armed forces require a comprehensive solution that generates targets and [indiscernible] a sensor to shoot the load quickly and efficiently. Elbit can supply our customers with a multi-layered solution of autonomous aerial intelligence capabilities and [indiscernible] UAVs. We can connect these platforms with our command and control solutions and equip them with a range of electro-optical [indiscernible] sensors and payloads, all developed in house at Elbit. The vertical integration of our internal supply chain enhances our ability to tailor unmanned and autonomous solutions to customer requirements, increasing effectiveness by maximizing the performance of each part of the solution and reducing costs. In September, we were awarded a $120 million contract to supply Hermes 900 maritime UAS to the Royal Thai Navy. This UAS will configurate for maritime missions and will be equipped with maritime radar, satellite communication, droppable inflatable life rafts, and other capabilities. In November, we received a $72 million contract to supply Hermes 900 UAS to an international customer. The Hermes 900 UAS has been selected by more than 16 customers around the world. The third area of priority spend are advanced radios and command and control systems. To maneuver efficiently and effectively and combine multi-domain operations, modern armies have to be equipped with advanced [indiscernible]. In October, we were awarded a $65 million contract to supply the first fully networked maintenance solution to an army in Latin America. This solution includes armed vehicles equipped with software-defined radios, a battle management system, and mini unmanned aerial systems. In October, we received a $25 million contract from the Finnish Ministry of Defense to supply radio communication systems to the Finnish Army. Our military radio communication system has been selected by several northern European and NATO countries, including Sweden, Germany, the Netherlands, Switzerland, Spain and others. Guys, I had a question about the airborne systems unit. Revenue was down quite a bit this quarter - I think, Kobi, you mentioned it was on airborne precision guided munitions. It was also down a little bit in the second quarter. Iâm just wondering if there was maybe one large program thatâs ending thatâs driving that weakness and that maybe as we get into the fourth quarter or first quarter, weâll see easier comps there and a return to growth. You are right - it is a large program that we announced early last year that we had concluded in the previous quarter, and in this quarter we donât have any sales from this large program. We announced a new airborne precision munitions sale that we got this year, so we expect that next quarter, we will continue to sell on this issue. Then I just wanted to switch now to maybe underlying gross margin issues, in particular pricing. Iâm just wondering--you know, as weâve heard the U.S. defense contractors, worked our way through the third quarter, they are also experiencing, of course, higher labor rates and thereâs sort of a delay effect in terms of not being able to pass on the higher labor rates through updated pricing until they start new contracts, essentially, and so youâve got this mix of current contracts with higher labor rates but pricing that reflects labor rates from maybe a year or two ago. Iâm just wondering, have you--has Elbit had success in terms of the ability to pass on the cost of higher labor rates through pricing on new contracts, and so maybe ignoring for you stock-linked compensation but just in terms of base labor rates, are you getting better pricing on new contracts as opposed to the contracts that maybe were awarded a year ago when labor rates were a bit lower? Hi Pete, this is Yossi. I would address it in the following way. First of all, the extraordinary costs related with our stock option plan, that is something kind of one-time and it goes away, and itâs not something of the baseline of cost of the company, so that should be neutralized. It does impact present year, but that is not something that weâre continuing to witness. On the baseline cost, I would say the following. Some of our contracts with customers do have economic price adjustments and therefore we are getting compensation because of the growth in the cost of the labor, and also to some extent growth in the cost of basic materials which is also price adjusted according to what happens in the market. However, we donât have that in all of our contracts and therefore we are suffering to some extent because of that. We definitely take all these changes into consideration when we bid for new contracts, and I would say that even in the recent growth of backlog that we have experienced, that already include backlog that takes into account these economic adjustments and we hopefully will--these contracts will result in improved profitability in the future. Iâll just ask one last one and then get out of the queue there. On the backlog growth - thatâs a good transition, Yossi, it was very strong this quarter, year-to-date backlog growth has been strong. Iâm just wondering, can you bifurcate it a little bit by region for us? Is there any one region thatâs been very, very strong and maybe some laggards? Iâm sure a lot of people are wondering if Europe, and even Eastern Europe is driving that growth, or if youâre seeing strength kind of across the board. Appreciate any color on that topic. Yes, first of all, I would say the following about that. We have kind of steady state business flow which we were exposed to years ago, and we continue to have these, what we call the medium sized contracts of tens of millions of dollars each, and that continues and we will increase. Then we have on top of that some significant number of what we call three-digit contracts, that are in the hundreds of millions of dollars per contract, that we have seen in recent two years an increase of number of those contracts, and definitely the high level dollar value contracts have the potential to improve future definitely revenues, but also the bottom line. Regarding the areas, geographic areas, you can look at our press releases of the various major contracts that we have announced, and if you analyze those, I would say that the contracts in the U.S. are more or less in the steady state growth that we have seen in past years. Contracts in Europe and Asia Pacific are higher in the growth than what we have seen in the past, especially related with some of these [indiscernible] contracts that I mentioned earlier. The contracts in Israel, of course, are more or less at the level that we have seen in the past, maybe with some middle, single digit growth from what we have seen in the past. In total year over year, our backlog has increased by $1.1 billion, which is a significant number, and the spread, the global spread, as I said, the more higher level growth is in Asia Pacific, Europe, and all the others are the normal level. Hi guys, thanks for the questions. Just to start, looking at both from a cash and margin perspective, how would you describe supply chain disruptions today relative to where they were in Q2? Are things improving at all, both from an ability to source materials and also from an inflation perspective? Hi Ellen, this is Butzi. With regards to supply chain, we see an improvement in shipments. Shipment costs are going down, not yet at their historical levels but they are going down, and we see also prices going down in metal parts and materials going down, once again not yet at historical levels prior to COVID but going down. We donât yet see it in electronic components - there, we still see a shortage. The main challenge we face right now is mainly around the electronic components. Thatâs also the reason why our stock went up and inventories. We--from what we understand and from what we estimate, we believe that improvement there will happen during the second half of next year, and we are taking all the required measures in order to overcome some of these challenges. Helpful. Just looking at land systems, it was very strong in this quarter, and I believe thatâs where Ashot came out. Am l--is that accurate, and how do we think about growth going forward as [indiscernible]? Yes, we had--hi Ellen, this is Kobi. We had stronger artillery sales this quarter, and remember that the Ashot Ashkelon part was nearly $20 million, so it is not so significant, but we had stronger artillery and ammunition sales due to the situation mainly in Europe, so we had a stronger quarter in the land system business. [Indiscernible] is one of your strategic moves into the next year, and also you have this conversion of product and technologies from here and from them into the sea. Could you give us some milestones of when and how much this will be felt over the next year? Hi Ella. As you remember, we acquired Sparton in the U.S. around two years ago, and we are--we continue to be an important supplier to the Navy of sonobuoys, and as was mentioned, the $5.1 billion ID/IQ contract which should come, which is split into three suppliers, will also--will be also a good indication that our revenues in Sparton will continue to grow in the future. We also made another acquisition a few years ago in Canada, a company by the name of GTI - they do sonar, and they are very successful and the company is growing as well, and they have already several international sales and we see a growing potential for them also. A year and a half ago, we won a very important EW naval contract with the U.K. It was a very difficult competition against local providers, and still we won it because of the superior technology we have here in Israel, and this technology is similar to the technologies that we are deploying these days in the [indiscernible] of the Israeli Navy, so based on our EW capabilities here and based on our capabilities in the U.S. and in Canada, Iâm happy to say that we have position in the U.S., we have position in Canada, we have positions in the U.K. and Israel, and we--and this is--and we also have here a nice, very advanced autonomous solution by the name of Seagull which can--which the importance of a naval autonomous vessel was demonstrated just recently in the Gulf, as well as in the conflict between Ukraine and Russia. We have several elements. We are combining them together to deliver integrated solutions to our customers - we see a growing potential for that, and our long term focus is to have activity which will enable customers, which should be around $1 billion of [indiscernible]. Okay, thank you. I have a follow-up question, unsurprisingly, on the bottlenecks in the industry also [indiscernible] about. The question is if you could give us a bit more color and a bit more specifics about where--I mean, they are in the chips, but is it mostly Asia or itâs all over, and also because there is such a ramp-up in the industry, especially in the U.S., is there competition between companies and you have sometimes just to stand aside and wait for a more rational price? How is it impacting you, because the others, the American companies, they were ahead of you in the supply chain disruptions and you were much better off all this time, and now itâs reached you as well, so I would like to see how is it happening in the industry. Hi Ella, this is Yossi. I would say the following. We all, the whole industry, and not only aerospace and defense, were significantly affected by whatâs going on in the supply chain; however, as Butzi explained before, we already see some improvement in areas like the mechanical parts, like transportation and deliveries, and so on and so forth. However, the electronic parts are still with us and impacted. The good thing that we did two years ago is that we have anticipated this thing thatâs going to happen, and we have increased our inventories significantly, which did hurt our working capital. You have seen that in our reports. By the end of--and we continued to work along those lines during the last year and a half to two years, however initially we thought that this would be--that this will be over or significantly over by this time, and this has not happened. This explains why we were quite well organized for the initial year, year and a half, and it did not affect us as much as it was done by the U.S. companies. However, by the end of the day, we are part of the full global supply chain, and now it does affect us more. We do anticipate by the second half of 2023 this will decline, and what has happened in the mechanical parts and in the transportation and other areas, that will improve also in the electronic parts, and we will be back on track somewhere towards the second half of 2023. That we give out as a market estimate right now, and we are in daily contact with all the suppliers to understand exactly when can we get the missing parts, to understand. In some cases, we have the entire product ready and we are just missing one transistor or one piece of electronic, you know, thatâs delivered to a customer and they can do it, so we are on a daily--we are on a daily contact with the relevant suppliers. We start to see some improvement, but the estimation right now in the market is that it will be solved, or most of it will be behind us during the second half of next year. Okay, and last question about the hedge. I know that you have now a new hedge policy and itâs less sporadic than it used to be, but this recent month presented quite an opportunity for hedge, so did you stick to this structured hedging or did you take also some opportunities in this sense? Hi Ella, this is Kobi. We are sticking to our policy, which is we are not prophets and we cannot anticipate what happens with exchange rates - for instance, nobody anticipated the sharp decline in the British pound, so we are trying--we are sticking to the policy. Next year, of course, we have some stronger hedges due to the improvements in the energy rates, and we sometimes take picks and when we identify picks, we actually take the opportunity and increase our hedges. But this is--everything is around [indiscernible], so we maintain this policy which gives us--we want to work on steady platform of exchange rates, and sometimes itâs [indiscernible] to understand what is the neighborhood of the exchange rates which we are working, again with taking advantage on spikes that we have identified. Yes, this is right, because we are--we think that the steady platform for the company is very advantageous forward, and of course we have a significant improvement for next year in terms of the platform of exchange rates that we are going to work with. Thank you for taking my questions. Most of my questions were answered, but I want to ask you whatâs your opinion about the [indiscernible] will eventually lead to a lower growth in the defense budget and how itâs going to influence the company. The second question, with the impressive growth in the backlog, do you have a range or guidance when weâre going to see the growth in the revenue and whatâs your guidance for the next two years? Hello. With regards to the first question, we do not see any signs of recession in defense spending; on the contrary, we see growth. We see growth in Europe, we see growth in Asia Pacific, and we see also expect growth in our positions in the U.S. and North America, and also here in Israel. After the election, we hope to see stability which will enable a long term program to be executed, so we anticipate growth in defense spending. We see growing potential for the company, we see more opportunities, we deliver more offers, and the funnel of new positions is increasing, so thatâs with regards to the first question. I think that the best indicator for the future growth in revenues is the backlog. If you look at our press release, we always give the breakdown of the backlog for the rest of the year plus the following year, and the backlog to be sold after the following year. By the end of the third quarter, we had a backlog of $14.7 billion. If you--and we also said that 40% of that backlog is going to be performed during the fourth quarter of â22 and â23. Just by making a simple calculation, that gives you about $4.7 billion of revenues that are going to happen in 2023. We usually have a coverage of backlog for approximately 80% for the following year, so just making a simple mathematics, you can find out that weâll have very nice growth for the top line for next year. Yes, thanks guys. I wanted to ask on the cash flow statement, the contract liabilities line, which I think relates to customer advances, advances were a little soft in the first half of the year but they were very strong here in the third quarter and historically theyâve been very strong in the fourth quarter, so I just wanted to see if maybe some advances were pulled forward from the fourth quarter into the third, or do you expect the fourth quarter to be another good quarter for advances, because typically a good advances quarter for Elbit means a good free cash flow quarter as well. Just wanted to get a sense of that. Thanks. Hi Pete, itâs Butzi. The answer is no, we didnât change anything. What you see right now is a reflection of the third quarter only. There is a lot of--we put a lot of emphasis on cash flow in the company these days, and this is also for advances. Thatâs why you see growth in advances in the company, and we expect it to continue. If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. Before I ask Mr. Machlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5900, and internationally please call 9723-925-5900. A replay of the call will also be available at the companyâs website, www.elbitsystems.com. Thank you. I would like to thank all of our employees for their continued hard work and contributions to Elbit Systemsâ success. To everyone on the call, thank you for joining us today and for your continued support and interest in our company. Have a good day, and goodbye. Thank you. This concludes the Elbit Systems Limited third quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
EarningCall_1966	Hello, and thank you for standing by for JD.com's Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Sean Zhang. Please go ahead. Thank you, Russell. Good evening, and good day, everyone. Welcome to JD.com's Third Quarter 2022 Earnings Conference Call. For today's call, CEO of JD.com, Mr. Lei Xu, will kick off with opening remarks. Our CFO, Ms. Sandy Xu, will discuss the financial results. After that, we'll open the call to questions from analysts. I'd like to remind you that during this call, our comments and responses to your questions reflect management's views as of today only, and will include forward-looking statements. Please refer to our related safe harbor statements in the earnings press release on our IR website, which applies to this call. We will discuss certain non-GAAP financial measures. Please also refer to the reconciliation of non-GAAP measures to the comparable GAAP measures in the earnings press release. Also, please note that, unless otherwise stated, all figures mentioned in this call are in RMB. Hello, everyone. This is Xu Lei. Thank you for joining JD.com's third quarter earnings call. 2022 has been a year full of challenges, a year both momentous and extraordinary. We have withstood nationwide COVID resurgences, challenging macro conditions, flattish consumption demand as well as supply chain disruptions. Facing the complex dynamics, JD has been making full use of our supply chain capability and a resilient business model, which we built over the years as we strived to provide best possible service to customers, raise operating certainty for real economy participants, while at the same time, delivering steady business growth of our own. Moreover, we are delighted to see substantial improvement in our growth quality this year. Given the evolving economic and industry environment, since the beginning of the year, JD made preemptive decisions to focus on our core businesses while reinforcing quality, operations and management and attaching greater importance to business health. We believe this is the best way to maintain operating stability in times of external stress and ensure rapid regeneration while the economy recovers. As a result, along with our steady business growth, we have also experienced better operating quality, stability and profitability. This validates what we have communicated with investors many times before about the potential for margin improvement in our unique business model. It also builds a solid foundation for our sustainable development throughout different economic cycles. We welcome and support the government's recent move to further optimize COVID control measures with a more science-based and targeted approach. We believe that this is important to contain virus threats and maintain the stability of economic and social development. They are also supporting policies for companies like JD that play an indispensable part in supporting the industrial belt and people's livelihood. We will fully cooperate with and implement the authorities' relevant decisions and arrangements. It is true that COVID conditions will continue to pose challenges to the economy and consumption in the near term. That said, we remain confident in the continuous refinement of the COVID control measures, the resilience of the Chinese economy and the long-term prospects of the consumption market here. We also see growth opportunities amidst all the challenges. As we made proactive adjustments and focused on our operating quality, we always put the essence of the retail business at the center of our core competencies and business model, namely customer experience, cost optimization and operational efficiency. With this long-held business philosophy in mind, we continue to achieve great progress in increasing customers' mind share and supply chain efficiencies. In Q3, JD's annual active user base reached 588 million, mainly driven by the net addition of over 10 million active users from our core retail business. Our DAU also recorded a double-digit year-on-year growth. In addition to user base expansion, we also saw better user structure and user quality. In particular, both the number of old users and PLUS members delivered higher growth rates than other groups of users and made up a larger proportion of total users. This helped to drive increases in overall average shopping frequency and ARPU. For PLUS members, along with the scale expansion, we also saw that each of them on average spent over 8x as much as a non-PLUS member, demonstrating their high degree of loyalty engagement and purchasing power. During the latest Singles' Day Grand Promotion, JD highlighted the dual theme of cost-effectiveness and value for money, which helped us to onboard an increasing number of high-quality merchants and products. The promotion achieved a solid growth with a meaningful increase in the number of shopping users and a record number of participating brands, merchants and offline stores. In addition, the promotion [Indiscernible] growth for many agricultural households and areas with nearly 10,000 SKUs of agricultural products sold over RMB 100,000. JD is committed to promoting the virtuous cycle of rural revitalization from direct sourcing of high-quality agricultural products to consumption upgrades to increased income performance. During the promotion, we were also proud to see that over 500 million users clicked the best price guaranteed program in the app and aftersales service that JD has provided for many years. This reflects JD's supply chain capabilities and showcases our commitment to providing the best possible user experience, helping users to feel reassured at all times when they shop on our platform. This service has become a hallmark of JD's premium user experience and also pushes the boundaries of what the industry can do to advance user experience. The continuous improvement of operating quality also makes a solid foundation for us to make further progress in our long-term strategies, namely our online marketplace ecosystem, omnichannel businesses and supply chain capabilities, to empower the real economy. Our online marketplace ecosystem made solid progress in Q3 with the number of third-party merchants recording over 20% year-on-year growth for the seventh quarter in a row. Fashion, home group, sports and outdoor categories all outperformed the industry. Notably, with the onboarding of the Italian fashion brand, Fendi, JD has become the first platform to establish an all-around partnership with the nine luxury brands under the LVMH Group. A collection of fashion, cosmetics and sportswear brands also joined JD in Q3, such as Christian Louboutin, La Prairie and lululemon, further expanding our brand base. In addition, our supermarket business, JD Super, continued to roll out its National Pavillions program, providing consumers high-quality specialty products worldwide. In addition to the 70 National Pavillions already in operation, we welcomed nearly 20 countries to open their National Pavillions on JD.com during the latest Singles' Day Grand Promotion. Overall, JD is dedicated to build an online marketplace ecosystem, where merchants can thrive with lower entry barriers and operating costs, better traffic allocation and marketplace rules as well as higher operating efficiency driven by the best of JD's supply chain, logistics and the technical capabilities. All these efforts have contributed to a sustainable growth of merchants and SMEs in times of uncertainty. During the latest promotion, merchants on our platform reported stellar performance with higher sales contribution, both on a year-on-year basis and compared to this year's 618 Grand Promotion. JD's omnichannel intra-city business maintained a strong growth momentum in Q3. In particular, Shop Now, our 1-hour delivery service, recorded a triple-digit year-on-year GMV growth with the services covering the vast majority of supermarket chains in China. Shop Now has forged close collaborations with brands and offline stores and generated incremental growth through omnichannels for brick-and-mortar partners. During the latest promotion, as the only on-demand retail platform selected by Apple for the presales of new iPhone 14 series, JDDJ worked together with Shop Now and sold hundreds of thousands of new iPhone models, making a record for new iPhone sales using on-demand retail model. In addition, JDDJ and Shop Now also partnered with over 200,000 offline stores during the latest promotion, covering a wide range of categories, such as supermarkets, mobile phones and electronics, cosmetics, home goods, baby and maternal and pets, and provided hourly delivery services in over 1,800 cities and counties. Despite the challenging environment, JD Logistics continued to provide up- and downstream industry partnering with reliable integrated supply chain solutions, supporting enterprise customers to mitigate risks, respond to rapid external challenges and optimize cost and efficiency. In Q3, JDL also expanded the depth and breadth of collaborations with a variety of leading players in FMCG, home appliance, furniture, apparel, 3C, automobile and fresh produce industries. As a result, JDL maintained a resilient revenue growth in this quarter. Notably, both the number of JDL's external customers and external revenue delivered double-digit year-on-year growth with the latter contributing nearly 70% of its total revenue in Q3. Moreover, JDL continued to expand its logistics infrastructure around the world. As of the end of Q3, JDL operated over 1,500 warehouses with an aggregate gross floor area of over 30 million square meters. It is also worth highlighting that JD Logistics Airlines, an affiliate of JD Logistics, commenced operation in Q3. In the future, JD Logistics Airlines will strengthen JDL's integrated supply chain services and help drive lower cost and higher efficiencies along the supply chain. To conclude, amid the evolving external environment this year, JD had the foresight to double down on operating quality and the core business. This has enabled us to comfortably deliver high-quality growth, generate healthy margins and cash flow and accumulate strength for long-term development down the road. As I mentioned last quarter, as we navigate through the cyclical economic adjustments and the short-term challenges, we expect to see the momentum [indiscernible] and the tremendous growth opportunities ahead of us. As a company that is rooted in and services the real economy, JD supports the expansion of the demand side and the structural reform of the supply side in China, helping the real economy to achieve better quality and sustainable growth. Looking ahead, our well-established supply chain infrastructure, technical capabilities and the social responsibilities we are committed to will enable us to play a more important role in China's new development phase. We believe that only through [indiscernible], determination and perseverance can we live up through the times. Thank you, Lei, and hello, everyone. As many of you can see here on the ground, the COVID situation is still evolving and may add complexities to consumer sentiment and the operational environment from time-to-time. Nevertheless, in the third quarter, we recorded a set of improving metrics and encouraging milestones across our financial and business operations. Our solid results in the quarter demonstrated our ability to cope with difficult external dynamics while improving our core competencies to support a more sustainable growth trajectory going forward. In the third quarter, our net revenues grew by 11% year-on-year to RMB 244 billion, returning to a healthy growth track. We navigated through a challenging time, impacted by COVID resurgence and macro uncertainties. Our annual active user base also returned to growth and reached 588 million in total, representing a net addition of 7.5 million customers sequentially despite a partial drag due to our Jingxi business adjustment. More encouragingly, we saw more customers staying with us for a longer time. And average spending per customer has been consistently increasing as well. All of these improving metrics demonstrated deeper user engagement and enhanced customer trust. Breaking down the revenue mix. Product revenues were up 6% year-on-year, a recovery compared to 3% year-on-year growth in Q2. Service revenues grew by 42% year-on-year to RMB 46.5 billion, achieving a historic high of 19% of total net revenue. Logistics and other services revenues grew by 73% year-on-year in Q3. Excluding the consolidation effect of Deppon, it still delivered a year-on-year growth rate of 36%, continuing the momentum from Q2. I will elaborate more on the underlying drivers later. Marketplace and marketing revenue grew by 13% year-on-year, up from 9% year-on-year growth in Q2. In order to drive recovery, we saw merchants becoming more active again and invested additional advertising budget on our platform, which helped to accelerate our advertising revenue growth. Also, thanks to our relentless focus in improving the 3P ecosystem, we successfully onboarded an increasing number of merchants onto our platform, including a few notable wins in the apparel category. This brought our merchant base to a new height, laying a solid foundation for our open ecosystem. Now let's turn to our segment performance. JD Retail maintained solid top line growth with a healthier business mix and a continued margin improvement on a year-on-year basis. JD Retail's revenues reached RMB 212 billion in Q3, growing at a solid 7% year-on-year. Electronics and home appliance categories returned to an impressive 8% year-on-year growth, up from flat growth in Q2. During the quarter, as a result of our supply chain capabilities and strong consumer mind share, we swiftly matched the demand spike for air-conditioners due to the unusual weather pattern, driving double-digit revenue growth in the home appliance category. Meanwhile, the launch of the latest mobile phone models in September helped to lift consumer demand and sales. General merchandise revenues were up 3% year-on-year in Q3. COVID situation and a hard macro continued to dampen spending in consumer discretionary products, such as cosmetics, beverages, and partially contributed to the soft growth of general merchandise. Meanwhile, we started to proactively optimize our product mix, particularly in the supermarket category, to improve operating efficiency and profitability, which we expect to impact its growth rate for transitionary period. However, we believe it is important for us to stay focused on our core categories and capabilities in order to establish a healthier and more sustainable growth trajectory for the long term. That said, for the emerging categories, such as health care, home goods, pets and sports and outdoor, we continue to experience double-digit top line growth in the quarter, demonstrating our expanding user mind share across a wide range of categories. We are seeing the results of our business optimization. JD Retail's fulfilled gross margin was up 80 basis points compared to the same quarter last year, mainly driven by our optimization efforts and the improving economies of scale. Also, as we continued to expand gross margin for most categories and remained disciplined in OpEx, JD Retail's operating margin was up 115 basis points on a year-over-year basis to 5.2% in Q3, above the 5% mark for the first time since the founding of the company. JD Logistics, or JDL, maintained a solid top line growth in Q3 and has achieved breakeven for 2 quarters in a row. JD Logistics Q3 revenue grew by 39% year-on-year to RMB 36 billion, partially because JDL acquired a majority stake in Deppon, which was consolidated since the end of July. Excluding the impact from the consolidation of Deppon, JDL's revenues were up 16% year-on-year, mainly driven by the resilient growth in revenues from external customers, which also saw acceleration on a sequential basis. As a result, revenues from external customers once again achieved a record-high revenue contribution of nearly 70%. More encouragingly, as JDL relentlessly focused on improving customer mix, optimizing operations and realizing the economies of scale, its operating margin was up 350 basis points from a year ago to 0.7% in a seasonally low quarter. These results demonstrate JDL's ability to maintain a resilient growth, even in a challenging environment, will remain well on track of improving its profitability. Dada reported revenues of RMB 2.4 billion and its operating loss narrowed sequentially to RMB 300 million. Dada continues to work closely with both internal and external business partners. Notably, JD Super, our supermarket business within JD Retail, has been collaborating with Dada to broaden product portfolio that offers intra-city on-demand retail services. The Shop Now service to consumers achieved a triple-digit GMV growth in Q3. This initiative also contributed positively to the margin of supermarket category. Dada also established a collaboration with a variety of external brands. For example, Dada Now has been expanding instant delivery services to the coffee and the beverage category, which is now available in over 2,000 cities and counties nationwide. As you can see, with a broader spectrum of use cases offered by Dada, JD is in a much better position to serve our customers anytime, anywhere. Finally, as I shared in the last quarter, we continued to pursue rational development across our New businesses segment. It reported revenue of RMB 5 billion and operating profit of RMB 280 million with a positive operating margin in the quarter. This was mainly due to the gain from the first tranche closing of JD Property's third properties Core Fund in Q3 and the narrowing loss from Jingxi business. As JD Property has a well-proven business model with total transferred AUM surpassing RMB 27 billion, we remain committed to further expanding this business in line with our prudent investment philosophy. In the face of the complex macro conditions, both domestically and internationally, we have also been pursuing strategic alignment in other non-core business, such as the Jingxi business. These measures resulted in a more moderate revenue growth but continued to narrow the operating loss sequentially even after excluding the gain from JD Property. Moving to the consolidated bottom line. As we proactively adopted measures to focus on our core businesses and improve operating efficiency, our bottom line reached a new milestone in Q3. Non-GAAP net income attributable to ordinary shareholders surpassed the RMB 10 billion mark for a single quarter for the first time in history. Non-GAAP net margin was 4.1%, representing an impressive year-on-year improvement of 180 basis points and reaching a historic high. On a GAAP basis, net income attributable to ordinary shareholders also improved to RMB 6 billion with GAAP net margin of 2.4%. Our free cash flow for the trailing 12 months this quarter was RMB 25.8 billion. This was mainly driven by our improving operating cash flow while partially offset by an increased CapEx in our infrastructure expansion that would position us well for the future growth. By the end of Q3, cash and cash equivalents, restricted cash and short-term investments added up to a total of RMB 218 billion, up from RMB 207 billion last quarter. To close my remarks, the solid set of Q3 results demonstrated JD's business resilience in the face of rapidly evolving macro conditions. There may be no better time than now to rebuild the progress across our business initiatives and make positive changes where needed. We believe it's vital, especially in a time of uncertainty, to stay focused on delivering better operating efficiency, lower cost and best-in-class user experience, which represents the essence of the retail business and the bedrock of JD's long-term success. Our focus on building resilient business means that we are well positioned to help our users and business partners to cope with external challenges and make meaningful contributions to the society. All of these factors will make sure we are well prepared to benefit the next phase of great growth opportunities, which we believe won't be too far ahead. And congratulations on the strong third quarter results. I want to ask about the investment phase and mix growth drivers as we can see from the third quarter that Logistics, Dada and New businesses are no longer dragging the group earnings. So where are we thinking on mix, investments and growth areas? And then within JD Logistics, I've seen that the general merchandise, supermarket growth had moderated while margin level for JD Retail reached a new high. So heading into next year, how are we thinking about balancing growth, price advantage and stable margins? This is Xu Lei. Let me start the question by sharing with you our long-term health and philosophy to do business. This has remained unchanged for the 19 years of JD.com. We will always put great importance to the users' experience and the cost and efficiency. No matter what kind of growth and new business we do, we will stick to these three points. And in terms of our two customer businesses, we'll attach great importance to the quality of our product and prices -- and good prices and premier services. So many of our investors know this is very difficult to always speak to these philosophies and concepts through the 19 years of JD's development. And in terms of some changes this year, I would say that we'll make more concentration and focus on our core businesses. This is based on our analysis early this year. And we have made some proactive measures according to our early analysis, which to date, we think it's very timely adjustments we have made and also taking the leading actions among this industry. And we are certain that even though many enterprises are facing challenges, we do see a brighter future. And there's some obvious signs on the economic recovery. Even though the sign is very clear, but we are still not very clear about how fast the speed of the recovery. So from the management's perspective, what we want to do is that we stick to our current strategies, and we should have a very clear view on the future in terms of which directions and what will be changing in this industry, in this market and how strong is this momentum so as to make our resources investment in a more clear pace. And in terms of the strategies for JD Retail, we will continue to stick to the big four strategies, which are the building of the supply chain capability and expansion into the lower-tier markets and being open ecosystem and the intra-city retail. We will stick to these four. And in terms of the supermarket business, indeed, mainly affected by the COVID resurgence, and its growth is going in the down way. However, we saw many progresses made in these categories, including its healthiness, its profitability and its ability to manage categories. So overall, for the JD Super users, had accounted for over -- or account for 50% of the overall JD.com platform. And we are confident for the future growth of this category. And we also made some new experiments in this category for our intra-city and lower-tier market expansion this quarter. And congratulations on a very solid set of results. My first question is about the logistics disruption due to the pandemic recently. How should we think about impact to consumer sentiment, user experience? And on that one, how should we think about the short-term impact to GMV and revenue growth momentum? And my second question is about the latest product category trend, of course, smartphones, consumer electronics, FMCG and apparels. And indeed, as you pointed out that the logistic fulfillment has been severely impacted by the COVID situation actually in the past 2 years. This year, it's the most heavily affected. I want to share with you actually data here that in September to present in terms of our logistic fulfillment, 17% of our customer home addresses have been affected by these COVID control measures. And this doesn't mean that it affects the order amount and the sales on JD. But indeed, this is the worst year in terms of fulfillment. And indeed, this situation -- difficult situation will affect our sales and fulfillment. But also, I'm proud to share with you, according to China's Post Bureau service recently, in terms of the service experiences, JD Logistics stands number one among this industry, which once again validated our efforts made in our supply chain capability building to help us to stand out and gain consumers' trust in this difficult time. And just also based on our data from the Singles'â Day Grand Promotion, we do see a higher rate of order cancellations. It's a higher cancellation rate than the past years because of the fulfillment difficulties and the longer waiting times. However, I want to emphasize here that people come to JD.com for more brand shopping. So we believe the cancellation rate for these platforms with more impulsive shopping or shopping based on their interest, the cancellation rate should be higher. And another group of people has attached great importance on our brand partners and merchants. And based on JD's shopping features with more brand shopping and premier shopping experiences, this can translate to the better operating cost and the profitability for merchants and brands and make us stand out among all the other e-commerce platforms. And in terms of the faster-growing categories, in Q3, we've seen that home appliances, fresh goods, health, sports and pets are doing a good job, also including our Shop Now services for the intra- retail and our offline business, Five Star Appliance stores. And for these less ideal-performing categories include cosmetics and mobile phones and -- but also, we see that since September, some new phone model releases, the situation is getting better. And this will continue in the lead-up to Q4. And for this [indiscernible] category, it's affected by the limited shopping scenarios due to the COVID. And also, the baby and the mother category is affected due to the reduced newborns. And there are many [indiscernible] categories on JD.com. And we are regularly reviewing those loss-making categories and make dynamic adjustments to maintain the healthiness across all categories. And we have seen improvements on the performance of all categories and better satisfaction among brands and merchants. And despite of [indiscernible], we see their market share all continue to increase. This is Sandy. I can add more color on the short-term trends. So as Xu Lei just mentioned, we are still facing some short-term challenges due to the COVID control measures. And also, we view the 20 new rules guiding COVID control policies to be very positive and constructive for the recovery of domestic supply chain and consumer confidence. But it will take some time to actually see the positive impact on consumption data, given the current situation. So in the short term, we recommend analysts to be more conservative in modeling the top line performance. But we are more confident in the long-term strategies and the growth next year. Specifically for JD Retail, yes, we see that the recircling of the COVID situation affects more regions in the country at this time. And also, there are disruptions to logistics and fulfillment, resulting a decrease in the successful procurement rate as Xu Lei just mentioned as well as an increase in the order cancel or return rate compared to prior years. So the consumers also become more conservative or rational under the current macro environment. And in fact, the demand was good during the major promotions but softer before and after the promotion. So in Q4, we see that different categories performed differently. But in general, the essentials, daily necessity products performed stronger than the discretionary products. In particular, for apparels and other discretionary products remained relatively soft. So we are -- the management team is paying more attention to operating quality this year, taking proactive initiatives, including making some structural adjustments to the SKUs or subcategories with heavy investments. So we still have some negative impact on the short-term top line growth. But we believe it will build very good foundation for our long-term top line performance. So with all these factors considered, the category trend will continue in Q4 but may slow down a bit moderately from Q3. And then for JD Logistics, its organic top line growth will be similar in Q3 -- to Q3 and the internal revenue will again be affected by the decrease of the orders of Jingxi business. And JD Logistics' external revenue growth will significantly outpace that of the internal revenue again in the fourth quarter. Deppon was consolidated at the end of July. And it will contribute more to external revenue in Q4. On the New businesses segment side, so the revenue growth of Jingxi Pinpin will still be negative, will be adjusted for our overall revenue performance. And international business strategy has also been adjusted and put in plan to improve the operating efficiency, and while our JD Property maintains a relatively high growth momentum. My question is that we have already witnessed a part of signal in terms of the COVID policy relaxation as well as the potential reopening in early next year. So I just want to hear your view that, assuming that this reopening will gradually to happen in next year, what kind of preparation or strategy changed in our -- based on our current strategy in this year? And the follow-up question is that we have seen very strong margin improvement in terms of the JD Retail business and the other business. So if assuming that there will be a very strong recovery in terms of consumption next year, are we able to achieve both strong margin improvement together with the top line reacceleration? Or it will be a balance between the margin improvement with -- and the top line growth? And let me answer the first question. And firstly, I want to make a bit of correction. There are certainties and uncertainties. By the certainties I mean that we do see there are some new signals, and we are getting ready for the good things to come. I believe that the worst time has been passed, and we do receive some signals and some good information and factors for a brighter future. However, for the rebound, the question is when and how strong? So these are the uncertainties. We are not quite sure how strong and what's the time the recovery will come. So for JD.com, we are such a large company that covering the whole country from the first- to fifth-tier cities. And we believe the recovery will come in different formats and different times on different groups of people in different regions. And since our -- based on our communications with our brand partners, they all expressed to -- their strategy to focus on profit this year, and this also coupled with their concerns on the supply chain impact made by the Ukraine war. So whether or not next year, they will focus more on profitability or on the growth, it's really hard to tell at this moment. So we will also make our dynamic evaluations and to make the investment decisions at the right time next year. Hope this answers your question. And on the profit, I want to make a further explanation here. For JD's growth throughout the years, there are two main drivers. One is for the product structure changes. With a higher percentage of certain products, their gross margins will improve steadily and also the increase in revenue from the services we provide. So throughout the years, you can hear that all the companies are talking about lower the cost and improve efficiency. And for JD.com, this year, we focus more on lower the cost and to improve stability for the internal management. And I believe in next year and the year -- in the next 2 years, we will focus more on the improvement of the efficiency. I can see there's many areas we can continue to improve efficiency. That's what I want to add. And this is Sandy. I want to advertise that our long-term margin target hasn't changed, which is based on the industry-level margin and the operating efficiency we can generate through technology and the scale of our business operation. If the consumer confidence is largely recovered, we will add more investments to drive growth in users and the market share. However, at the same time, we will also gain additional operating efficiency, as Xu Lei just mentioned, due to spillover benefit, due to technology and due to the increased contribution of our service income. So this is the beauty of retail business. Although we achieved a very important milestone for net income this quarter at the group level, but on an annual basis, our margin is still below the industry level for almost all business segments. So we always -- so there's still room for us to continue to improve our bottom line performance. JD always pursue sustainable growth. And we will try to deliver stable margin with steady improvement year-over-year until our long-term margin target is met. Of course, during that journey, we will make dynamic adjustments based on the market situation. This is Lingyi Zhao from SWS Research. I would like to congratulate the management team on the great results. My first question is about on-demand retail. What is the long-term vision we see in on-demand retail market? And after Dada's integration, what adjustments have been made? And which fields will be summarized? We all see the article by in People's Daily, which talks about promoting the deep integration of digital and real sectors of the economy. My next question is could you please introduce JD's measures in these big trends? Thank you for the question. And I have shared a lot about the intra-city retail before. And now I want to give you some update on our thoughts and observations. So first, I want to say that for JD.com to enter into the intra-city retail business, it's purely based on the need drive of the users, if not some opportunity, business opportunities, we jump in. It's based on the users' demand. And we're looking at this business. And our understanding is based on the perspective of supply chain -- I don't want to like think in other people's brain about how they think about intra-city retail. This is where we start from. And in terms of the entry point, different companies adopt different dimensions. For JD.com, we entered this market by building a relation with the big supermarket chains as our . And in terms of the categories, we start with our 3C and supermarket category. And for other players, they might start with some SME stores. So we are entering in different directions. And our resources and relationships with brand partners is one of the key strengths for us in this intra-city business. And this has been based on our long-time collaboration with our already existed B2C models. We have been collaborating with our partners in many directions, in many dimensions on the supply chain cooperation, on marketing and sales, the release of new products, et cetera. And altogether, we are forging three-party winning situations among JD, brand partners and the offline supermarkets. Let me make one example about the intra-city retail cooperation with Apple. As you know that in the September, Apple released its iPhone 14. And a lot of companies are taking this opportunity to do marketing. And according to the data we collected on this market during the same period of time, JD.com and our intra-city retailing business topped in terms of the sales. And we are 7 to 9x higher in terms of sales of iPhone 14 series as opposed to the second place, the runner-up retailer platform. However, we did not want to brag about it. Because our starting point to do this collaboration is to provide more convenience for consumers to buy the new series of iPhone. And we believe the value to collaborate with the official brands and to improve efficiency for this new phone release. And as opposed to traditional B2C model, this intra-city retail is a new type of supply chain we are building. There's still a big improvement room for us to improve, such as on users' experience, the synergies we formed with our brand partners, the LBS-based services and then optimize the fulfillment and the transportation power improvement. So for now, we will focus on several indicators for this business, including user experience, their repurchase rate, improvement -- the number of orders, et cetera. So still, we focus on the efficiency and experience to develop this business. And in terms of the integration with the real economy, I want to share that JD is building a responsible supply chain. And this does not only provide more stabilities and reliabilities for our own supply chain, we also opened ourselves with this capability to support our partners upstream and downstream to help in their digital transformation and improve cost and efficiency and to promote a high-quality real economy development. And for JD's supply chain services, we are now serving over 8 million active enterprise customers. This includes over 90% of Global 500 companies who operate in China and nearly 70% of the so-called specialized and sophisticated SMEs. And we also provide some specialized supply chain services to the manufacturing and energy fields. At the same time, JD's supply chain has been connected with millions of small and medium/small stores across China in over 300 cities. There are many forms, I won't just elaborate. And we are not only providing the last-mile solutions on their sales and services but also helping them on the first mile of the supply chain in upstream. This has been a very effective support for them to drive more traffic and lower their cost and improve their business efficiency. And here, I just want to add that JD.com generates rational profits. And we're running based on the low cost. And we fully understand the difficulties for the SMEs. They work -- they do their business in the offline scenarios. So while we are doing the supply chain support for them, we don't want to eat their profits. We want to form synergies with them. And together, we build rational profit. So this will not make us as some other companies who are entering the entering this offline market and generate also profit. This is not something I think rational. And lastly, I want to mention that in 2020, JD has launched our rural revitalization initiatives named -- called March to Rich Plan. And this plan has driven tens of billions of industrial output in the rural areas and helping millions of farmers to increase their income. And we feel confident that -- we set a goal to achieve CNY 1 trillion of industrial output under this program in rural areas within 3 years' time. And we can accomplish this ahead of the schedule. And so all of these are our understanding as a new type, real economy company. However, we know we are not doing enough. We are still improving ourselves, improving our capabilities. However, this is the goal we set, and we will stick to it. Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD.com and Sean Zhang for any closing remarks. Thank you for joining us on the call today and for your questions. If you have further questions, please contact me and our team. We appreciate your interest in JD.com as always, and looking forward to talking to you next time again. Thank you.
EarningCall_1967	Okay. Thanks very much, and hi, everyone. Again, itâs Brett Simpson here. Itâs my pleasure to welcome Ian Buck, who you all know runs the data center division at NVIDIA, one of the key growth engines of the business. I think this is a particularly interesting time to connect with Ian and Simona as we are heading into a new product cycle with Hopper. We were looking back at when NVIDIA launched Ampere, I think, it was back in early 2020 and the business was doing about $1 billion of quarterly revenue back then and looking at it today, itâs almost $4 billion in quarterly revenue. So itâs been a really strong period for the business and well done. Now many of you know Ianâs, the inventor of CUDA and we are going to try to touch on some of the sort of software opportunities that NVIDIA sees ahead during this presentation. We also have Simona Jankowski on the line, who you all know is VP of IR at NVIDIA. So, I am going to pass you over to Simona to read out the Safe Harbor. So Simona over to you. Thank you, Brett, for hosting us. As a quick reminder, our comments today may contain forward-looking statements and investors are advised to read our reports filed with the SEC for information related to the risks and uncertainties facing our business. Back to you. Thanks, Simona. And maybe just to start, Ian, can we maybe just recap the 2022 period and what stood out for you the most looking at the division and the market opportunity you see ahead? And maybe touch on some of the sort of customer reactions to the new products and what you think is happening at the bleeding edge of AI and how you see this all evolving into 2023? Yeah. I mean itâs been a war win. It probably hit us back in, obviously, 2020 and thatâs when we launched Ampere, which feels like a lifetime ago, but it was only back in 2020. We -- throughout COVID launched Ampere. The following year we announced our Grace CPU work and then this year, of course, we have announced a Hopper. NVIDIA is on a new clip with the investment and the importance of computing across the industry, so are the innovations that allow us to continue to invent new GPUs, new architectures, new algorithms and serve the growing market of AI and competing in the day center in general with a biannual clip at this point. We are making new GP architectures every two years. We have committed to a new CPU architecture also every two years and it was very exciting to launch Hopper this year. Hopper is a GPU that was specifically designed to advance AI, as well as HPC. It was -- has specialization for the transformer-based models, which is the foundational model for used today in large language models and generative AI and being applied to pretty much every domain where computers want to see [Audio Gap], listen, learn andâ¦ â¦ generate back. So we are very excited about Hoppers introduction. Itâs in production now. The PCIe systems are coming available from the OEMs and the cloud hyperscalers, all have Hopper and are bringing it to market. Great. And maybe just given the environment run at the moment, I think, a lot of investors are trying to understand whether the environment we are in right now, has it made you think any different about the opportunity you see ahead? When you look at the next sort of six months to 12 months and you have got a lot of product rollouts to do, et cetera, but as the enterprise engagement is still the same is the demand signal still as strong as you were thinking six months or 12 months ago? Yeah. The foundations of who and how we engage have only grown over the last two years and they have remained consistent, but increasing in activity and motions. It starts certainly with some of the big hyperscalers doing their own work, some of the best work. Microsoft partnering with OpenEye, Meta and Google even and others, taking advantage of our GPUs and the software solutions that we are layering on top in order to develop that next-generation AI technology capability, Moonshot or foundational model. A lot of the work is in software, not just hardware. In fact, NVIDIA has more software developers than hardware developers, for example. A lot of work on frameworks like PyTorch and TensorFlow. We also develop our own large language models ourselves with our own supercomputers and share that with the rest of the world to help move the ball forward and to give us the experience to continuously improve the -- our platform along with taking the input from every other major hyperscalers, as well as our own experiences. We build our own supercomputers to try that to test that and to advance the state of the art. Thatâs certainly on the big hyperscale side. Activations in the cloud have continued to grow. Certainly, every enterprise has a cloud-first strategy of some kind and they are bringing their technology, their workflows or their way of doing business to the cloud, and as a result, the public cloud activations of our platforms has certainly grown. We saw that with A100 and you will continue to grow with H100. In the enterprise side, it has been -- it is certainly on an upward trend. The challenge on the enterprise side was meeting the enterprise developer where they are. They donât have the talent pool necessary that Google or Amazon or Meta may have. But they have -- they see the opportunity for AI and how it could be changing and advancing their businesses. So our role in that has been to help move that forward to provide an enterprise supported platform thatâs a big part of our NVIDIA AI enterprise platforms to help provide a stable supported platform that enterprises can rely on for getting their best -- not only the best performance, but the support they need directly from NVIDIA, working down our channelâ¦ â¦and cloud partners and then also helping activate the right kind of software that they can take advantage of, not just natively the AI frameworks, but targeted services and support. That comes from working with -- thereâs lots of great activity happening, of course, in the start of community, by providing cloud-based services, where enterprises can share their data and get the results back within to build the software from scratch themselves. For -- we are seeing also, of course, the cloud providers themselves providing those services, a lot of them developed or deployed on NVIDIA GPUs along with the growing out of a startup into the broader ISV category as well. Even traditional ISVs may be doing in the areas of numerical simulations are trying to deploy AI as a surrogate model for some of the first principles physics simulations are doing for product development and other sorts of things. And finally, the NVIDIA ourselves are trying to move the ball forward as well. So in areas where we see an opportunity to move the market forward, we will invest ourselvesâ¦ â¦ and we have done that, particularly in the healthcare space with our Clara platform, applying AI to things like medical imaging or proteomics. We are also doing it in speech AI. We sort of provided some foundational supporting our Riva platform to help enterprises take advantage of end-to-end speech AI, which offers really cool abilities to do customization and train new models, new voices and like that. Recently, in our last GDC we announced our NeMo Large Language Model Serviceâ¦ â¦ to build a service where enterprises can customize a very large model and we provide -- itâs open. So we do GPT like models, a variety of different GPT sizes. We have done our own 530 billion parameter model called Megatron and we make it available as a service. So enterprises can take our existing train model, a model is super smart and then tune it -- fine-tune it basically with the technical prompting. â¦the model learns how to answer the question the way that customer is looking to be answered. You are not asking a question of the broader Internet to do your customer support, you have already given a few hundred examples of what customer support calls and answers look like. So for the enterprise side, we are at the beginning -- we are still at the beginning of AI adoption. We are seeing a lot of interest. And from an NVIDIA standpoint, companies can engage with at all different levels, certainly consuming our sort of first-party offerings that we decidedâ¦ â¦ to invest in, but also through the ISVs and startups, as well as, of course, the platform holistically. And thatâsâ¦ I want to come back to the services model around Megatron and GPT more broadly a little bit later. But I wanted to -- I mean, I guess, if you go back to some of the GPT-3 models, you were coming out with A100 around that time and it was very much an NLP centric upgrade cycle that we could see playing out for NVIDIA the last couple of years. Can we talk a little bit about where we are today? Whatâs Bleeding-Edge? Whatâs being worked on in the labs that you see? And I mean, when you were on our conference a year ago, Ian, you talked about model sizes are growing like 10x a year. Is that still happening, I mean, we must be well into the trillions of parameters. The model sizes are in the trillions, I guess, of parameters. Where does this go over the next couple of years during the Hopper cycle and what type of workload is Hopper ideally positioned to deliver? Yeah. Certainly, the natural -- the NLP or large language model, LLM, community hasnât slowed down 1 bit and you can see that. So many -- both major players, as well as now startups and are taking advantage of what these models can do. They are large. They tend to be, well, previous models may focus on things like computer visionâ¦ â¦ understanding what is this a picture of or where in this picture is the stop sign. Thatâs a capability that -- if you think about it from a first principle sort of understanding perspective, itâs fairly straightforward. In fact, in nature, we see animals and bugs and other things, have basic vision capability that identify the objects, where is it and call it out. Language is different. Language is unique. It encompasses to understand language you not only need to know the words that I am saying right now, but what they mean in order to make context and doing anything useful with them. And that means we have to sort of -- these models have to encompass or understand the corpus of human understanding. As a result, they are trained on the entire Internet, literally, these data sets are basically big scrapes of the Internet that are then cleaned upâ¦ â¦ and tuned and trained, so they tend to be obviously much bigger and we -- thereâs the 530 billion parameter model, which I have talked about already. And certainly, new work -- new models are coming out that will be or are already in the trillion of parameters. We are still short of like brain scale and thereâs a question about what -- which is 150 trillion parameters, we only get 50 trillion [ph] right now. Yeah. We will get there, Mooreâs Law. So as the models -- as the capabilities are growing so will the models. So basic under the large language models today, obviously, can provide very convincing chat dialogue back and forth. They can be used for sentiment analysis. They can all sorts of things, because they understand human knowledge. The next step, obviously, is what we are seeing right now. That remains true. The models are large. Certainly you donât train them on a single GPU or even a single server. You tend to train them across a pod or collection. We trained our Megatron model in about 4,000 GPUs and the final training runs took about a month or little over a month. Of course, thereâs aâ¦ â¦ lot of R&D to get to that point to develop the model. Once you have it, by the way, it isâ¦ But at some point, people are developing new foundational models that can be then used for those different use cases, and thatâs where a lot of the very interesting research and development by the biggest players that have that infrastructure. One of the goals with Hopper was to bring down the cost of large language model training to make it moreâ¦ â¦ applicable and we have done that. The Hopper runs check and train [ph] 6 times to 9 times faster than Ampere, requiring 6 times o 9 times less infrastructure depending on the model. And thatâs really because it was designed to do that transformer layer that we talked about. And take advantage of reduced precision and mixed precision up and down the stack to still maintain the accuracy. Itâs easy to offer a bit floating point, but itâs hard to make it work and work well. In fact we useâ¦ â¦ our saline supercomputer to train all the different heuristics to bake it into the software hardware of Hopper to make it successful. The other part of Hopper that made NLPs more applicable is that we dramatically improved the inference performance. This is the performance that takes to run the model in production, not just trainâ¦ Hopper is 30 times more faster than Ampere was and that allows people to take these largest possible models and still run them with a reasonable amount of infrastructure and with a single DGX-like system to deliver reasonable real-time performance in running these models. That is going to dramatically broaden the applicability of NLP models. A lot of people run for more and more use cases then what we probably saw previously, which is bespoke offerings for some of these large models. And then, of course, the next step is what else can it generate? What else in these large language models produce other than question-and-answer kind of responses, chatbot responses or customer service responses and sentiments responses and you are starting to see that hit in the mixed modality space in generative AI. The work being done in stable diffusion by folks like stability about AI or mid-journey, runway and others are showing how can take large language models and connect them to image generation to the output a picture rather than just than text. And thatâs super exciting as an example of another placeâ¦ â¦ where these large language models and the underlying generative portion of AI, where you are understanding now the corpus of all images and what they mean, so we canâ¦ â¦is another great example. If I project farther out in the future, you can imagine AIs generating all sorts of things, generating potential chemical compounds for the next-generation therapeutics, material properties for next-generation manufacturing and material science. I just came back from the Supercomputing Conference in Dallas, Texasâ¦ â¦ where we talk in the town is we are building the foundational -- using supergears to build the foundational models for science and HPC for next-generation for all the use cases that we have across the science community. So all sorts of opportunities. The -- whatâs going to get us there is access to the platforms to the technologies to those researchers, those users, those companies can take advantage of it and deploy it for all those different use cases and thatâs what makes a part of my job fun is toâ¦ And maybe if we can focus a little bit on training, because I guess, what we have seen the last 12 months, I mean, Meta has been quite public they have built this massive cluster 16,000 A100s, I think, in their earnings report, you talked about Microsoft rolling out tens of thousands of GPUs. I think Oracle is also pretty active in that in building these large training classes, large exaflop supercomputers. Are we heading into a phase where the amount of people that can keep up and building these massive training clusters is going to consolidate down to a handful of players or do you see hundreds of potential training clusters like that getting developed? I am just trying to get a sense of how that you see trading evolving? And I guess part of that also, I want to come back to the services opportunity where you can license a pre-trained model. Is that going to be where a lot of enterprises get involved in AI rather than train everything from the ground up, they will license something thatâs been pre-trained and they will pay a services fee for that rather than necessarily buying a big hardware cluster? Well, one of the things you can sort of bet on is that AI still hasnât -- we havenât tapped out on the differentâ¦ â¦ applications of AI, because fundamentally, AI is just a statistical trick, if you will, an algorithm to take data and right code. In the case of backstopâ¦ But those applications of AI seem to be down less, because we have every -- everything we are doing in computing in the enterprise revolves around the data that we collect from customers, the data that our business generates, operates and teaches us and the communications that we have with customers and the flow of business is also generates massive amounts of data that can be interpreted and understood and taking advantage of by AI to improve and make better. So that has been -- that has continued to grow. And as a result, access to infrastructure for developing those AI, either as a -- from a first principles foundational level or taking existing foundational models and applying are both growing. So that is -- so thereâs definitely both interest from start-ups and others, major ISVs and big companies to explore both, explore building new foundational capabilities, for that you do need infrastructure. And whatâs interesting now is that the clouds are starting to provide that infrastructure before building an AI super computer was just that a bespoke supercomputer. Now, certainly, Microsoft led the way there with their announcements providing their independent and interconnected GPU clusters in the cloud so people can rent that kind of infrastructure. We are seeing it now with Oracle and many others and companies like Meta, building out that infrastructure. They are one of many that are either going to build it themselves on-prem or be able to consume it rented from the cloud. So thatâs why we are seeing the growth of AI infrastructure and particularly scale out infrastructure available in the cloud. Itâs important to note that you donât have to rent all of it. They are designed to be fractionalized all the way down to just one or a few notes. But before everything was single was focused around the single node capability of how many GPs can we fit in a single server, which usually is maxing out about eight or 16. Now the infrastructure in the cloud is being scalable thinking about data burning entire data centers or rose or pods or just a collection or a half rack to do the various work for developing those foundational models that are going to serve those different industries and itâs broad. Itâs not just the -- itâs not just the largest of largest models, those are the ones that tend to get all the excitement and impressâ¦ â¦certain capability, but designing models, new kinds of models that can do different kinds of workload foundation level that requires some level of infrastructure at some scale. Then the second part, of course, is the applying the -- taking these foundation models and applying to different use cases. We certainly see that in things like speech AI where you have a foundational model thatâs trained on English, but I want to do it with a certain accident or for a certain voice. Those things donât need to be retained from scratch. They can take those foundational models and deploy it. And just thereâs just more and more businesses that are figuring out how to take advantage of that or their services from either -- from all sorts of different providers that can then go and consume it. So thatâs causing the growth of GPUs across the cloud and still on-prem. I think thereâs an ebb and flow in terms of the on cloud versus enterprise. We donât -- we are a platform of choice. We try to activate all channels. So thatâs where itâs coming from. So I donât think itâs -- AI is not squireling away into a corner where only so if you can afford to do it. The -- thereâs certainly more interest in exploring the outer limits of what AI can do with the largeâ¦ â¦ infrastructure and that will continue to be so. But I believe what we are seeing is that the diversification of different use cases for developing foundational models, all sorts of different scales by all different kinds of players, the ability now to consume it and get it from the cloud, as well as just on-prem. And then, finally, the breadth of different services, like you mentioned, to take advantage of these -- of whatâs been trained, whatâs been learnedâ¦ Yeah. Interesting. Interesting. And just thinking about the, I mean, you mentioned, we are still at the early phases of building out the workloads and the compute requirements that go with that. But I guess when we look at some of the hyperscalers that are at the Bleeding-Edge today and making big investments for public cloud and serving instances to thousands of enterprises. I guess, when we break it all down today, we can see that some of these guys are maybe spending multiple billions a year with NVIDIA. If you just break down your overall revenues, you can see that we are at that sort of stage and these are large investments that are now being made by the hyperscalers, how do you see this scaling? Are we looking at -- itâs inevitable that hyperscalers will be spending $10 billion plus at some point soon? How do we think about Fortune 500s, sizing that investment opportunity, do you see Fortune 500 companies spending $1 billion on infrastructure to really differentiate in AI? How do you think about this from years out and the development opportunity for NVIDIA specifically? Yeah. I mean, I think, you are still at the early stages. If you think about the -- itâs difficult for me to project the dollars and when. Obviously, itâs been exciting and will continue to be excited and we definitely see the growth moving forward. One way to look at it is, thereâs a logical case to me that every server inside of a hyperscale data center should be accelerated at some level, becauseâ¦ â¦ they are all operating on the data either flowing in or out of the data center or East/West within the data center. And each -- every bit of that data logically should be interpreted, understood by an AI to make an insight and to improve the function and operation of that data center and what itâs trying to do and impact the outcome results today. Today probably less than -- around less than 10% of the hyperscale data center is accelerated. And whatâs preventing that -- what causes that growth is just more people identifying the capability of how AI could impact or improve that part of the workflow, that part of the user story, that part of the capability of that part of the data center. And particularly at a time now when data spender space is precious, we have certainly seen a growth in data centers and they donât pop up overnight. They take years to plan and years to build. So the -- that is -- accelerated computing offers a great way of them optimizing the data center space they have. By moving stuff from CPU-based services, which can consume a lot to using AI to reduce the amount of infrastructure they have or preserve the pace they have and to do more to the norm to grow a data center space is an important metric, perhaps, a foundation for them to do more and to growâ¦ Likewise, with power and energy efficiency, we can opt -- do these operations at scale at a much lower total energy cost than a CPU infrastructureâ¦ â¦maybe able to do. So thereâs a lot of interest in identifying those workloads and shifting them to an accelerated portion of the data center in order to do all those things, optimize the center usage, improve the throughput of a workflow with consuming less data center space and be more efficient with powerâ¦ â¦ in order for them to naturally grow. So I think the -- that will be the application. Now of course, some of it may -- will happen inside the data center and itâs difficult for folks outside to see it. The first people to do it are the hyperscales themselves and you are seeing that with some of the services they are building themselves, some of them also net services publicly visible and you can do your own projections on how they get translated to inside and operational lines inside their business. On the enterprise side, itâs the activations by the different enterprise ISVs and major enterprise service companies and we are seeing that. We are seeing it in and you can go and look at some of the success stories that we talked about or that Jensen talked about in our GTC keynotes. You can look at the -- or the Oracle world where he joined on stage with software and talked about how the enterprises are adopting. So itâs a question of -- itâs still a fairly small percentage of the total enterprise software stack that can be able to manage your AI and thereâs lots of valid reasons for that, but itâs something thatâs going to be changing fairly quickly. Now itâs becoming a point where in order to be competitive in the enterprise software world. You need to be deploying these -- offering these capabilities and provide -- giving the CIOs or CFOs of the consumers of ISV software, the Fortune 500s, they need our strategy. So as you can imagine, they are asking all their ISVs. How are you leveraging AI to make my business run betterâ¦ â¦ as a service or incorporated into the services they already have. So we have already at the stage where a lot of the baseline functionality capability, obviously, the operations of enterprises are served by the major enterprise ISVs. They are all trying -- right now some have or others are doing it now, activating AI in their foundationalâ¦ â¦ enterprise software stacks. And with that, we will grow the -- they will get faster, more efficient and you will see more adoption of across the cloud data centers, as well as theâ¦ â¦I think thatâs the interesting thing to track. I think itâs looking at the ISVs and where they are deploying for the major Fortune 500s, where they are playing it. The other place, I think, as you look at by sector as well, the interesting things happening in retail. We are now talking -- I think, Donald has publicly talked about doing pilots on for speech AI sort of talkâ¦ â¦and looking at different ways of providing different kinds of services. Those are obviously all AI-driven and very exciting to see the retail community take advantage of AI. So you can certainly look at it from a segment vertical by vertical segment and once one or two players go, they all see the opportunity they will turn around very excited to take advantage of it. So thereâs lots of investment and activity happening across the enterprise. Our role in that is, obviously, we are working with all those ISVs and provide that foundational layer so that companies -- these Fortune 500s owners that need to get the direct support from NVIDIA now that we have the back and thatâs kind of what our NVIDIA enterprise offerings is doing for the market. Yeah. Yeah. That makes sense. Maybe I wanted to just talk a little bit about, I mean, I guess, when we look at 2023, big architecture changes in compute generally, the DPU is going toâ¦ â¦ start to become more of a thing. I think, obviously, you are removed with Grace on the CPU side and Hopper is a big architecture change and all the interconnect that sits around it. How would you describe this transition that we are seeing now from a very much a CPU-centric approach, are we -- is the compute complex now becoming a platform sale for NVIDIA rather than just selling sort of discrete cards? And then what does that do for content, I guess, looking at your content today within the server, do you see dramatic increases because of your -- the ramp of BlueField and Grace and the switching infrastructure that you are developing? Yeah. I think a couple of things. One, obviously, our the existing business and people are very interested in getting access to great infrastructure for computing and we will continue -- and that is today is x86 with our GPUs, either sort of a standard server accelerator, which looks like a PCIe card. Itâs quite a quite a large one, but similar to what you may haveâ¦ â¦ seen in the GeForce products, they go into standard servers up to eight or 16 of them. They just donât have a gravis connector, they are optimized for computing. And then they also come in smaller sizes for inference use cases, they tend to be much smaller edge-like accelerators. So we go -- and then we go all the way down to the embedded space, which is measured in single-digit watts and thatâs being deployed for Edge kind of use cases even down to conference room or telco kind of applications of robotics and then you go all the way up to servers that are explicitly designed for doing computing at scaleâ¦ â¦ and we can see that in our HGX and DGX solutions. Moving forward, I think, the -- whatâs interesting is this just trend toward the data center as the unit of compute. And people are not just looking at servers or components or chips in order for the advancements in computing NAND happen, people are looking at the entire data center and how they can optimize the entire data center for compute. Many years ago before this, it was data centers at hyperscalers where basically map-reduced, kind of SQL like data centers driven by IO more than compute. So they would deliberately choose a smaller CPU than focus on interconnect at scaleâ¦ â¦ along with storage. Now with compute being king, you are looking at the entire data centers, how can improve the compute utility of this entire data center to optimize it as a total unit of computing. If you look at it that way, now we want to look at all capabilities of the data center. The accelerators, obviously, the CPUs, how they are connected, how the network is integrated and together and how far it can scale across the data center. And you can see NVIDIA investing in all three of those. We have done, obviously, we continued down the path of accelerators. We are now building DPUs. We just -- with both BlueField-2, we have announced BlueField-3. We have got a strong road map in there as well. Itâs going all to BlueField-4 for connecting the interconnect of the data center together and doing that intelligently. Both to allow to do things like in-network computing, so some of the operations should be done at the line speed on the network to provide the security and isolation and also the -- do more of the software defined networking that other people have demonstrated to be very efficient at providing those kinds of services particularly for cloud-based use cases, very important, and as well as needing to be performing. We are seeing cloud providers provide InfiniBand infrastructure now alongside with high-speed Ethernet, both are good in market depending on the different use cases and we are there to serve both. But certainly, demand for high-speed and high-performance Ethernet and InfiniBand is growing quite a bit, and they want to intelligently by plan DPU. So we -- thatâs rolling out across seeing more and more traction there than the CPU side. So one of the interesting things about CPUs is that traditionally they connected to the GPU via PCI Express standard bus, we continue to support that. We will support that for as long as we shall live basically. But there is an opportunity there, so can we -- is there another capability we can provide, perhaps, a bespoke capability by putting Grace next to the Hopper GPU and tightly integrate the two. And in factâ¦ â¦ we have done that with our Grace Hopper product, which was announced this year, where we put the two chips next to each other and we build that high speed interconnect the NVLink chip-to-chip interconnect, which offers 900 gigabytes a second of bandwidth between the two and itâs fully coherent. So thatâs a big uplift from what you get with PCIe, which is at most maybe 100 gigabytes a second between 50 and 100, we are getting 900 with Grace Hopper and itâs fully coherent. So this GPU can now operate on the entire data thatâs contained in the entire server, all of both the CPU and the high-speed GP members. What that really makes it allow us to do is work on those largest of models like we talked about. You basically have itâ¦ â¦ for operating at a different scale and we are seeing some interest in Grace Hopper for doing those large scale recommenders and deploying large scale NLPs. The rest of the market is going to, obviously, has been well optimized to run everything on the GPU. So that will continue to exist for quite some time. So we are seeing an interesting opportunity with Grace Hopper to sort of push the limits of where we can go and both training and inference, being able to deploy these very large models with minimal infrastructureâ¦ â¦ that provides sort of that real-time latency performance or before you may have to spread the model across multiple GPUs. Now you will be able to execute on a single GPU combined with the Grace and its memory to deliver a large language model in real-time. â¦ CPU and GPU really love ARM architecture and the ecosystem has come a long way in terms of arms. So we are very and you can see everyone investing in arm as well across theâ¦ â¦across all the different vertical. So excited to see that take shape and we will be bringing Grace to market next year. Great.. Very interesting. Well, I think, because we are -- I am conscious of time. I think this is a good segue perhaps to open up for Q&A. And I have got my colleague Jim [ph] on the line. So, Jim, can you really any questions you have picked up from investors so far? Yeah. Sure. So the first question we had in was, I think, quite straightforward. How quickly will it take for Hopper to be the majority of your data center shipments? Yeah. Every transition is a little -- we are not like a little different than what you see in the gaming side, which tends to be a bit more of a switch over. In data center, we are operating enterprise use cases. So people have qualified and deployed at scale, the Ampere A100 GPU is obviously quite successful and still quite difficult to get in the cloud if you try to ask for an instance, it still shows up and sold out in a lot of places. So I expect that to continue to trend and then usually, our transitions happen over a period of a few quarters or more as different as Hopper becomes available through different markets. First, we will come to market is company marketing now as PCIe products can get them from all the major OEMs and then the HGX MDLink connected baseboard products will be coming -- coming to market Q1 of next year and then from the cloud as well and each one we are going to transition differently and also by different region. Thatâs just the nature of how they do their work and the work -- the hard work it does to take to qualify not just a server but for hyperscale and entire hyperscale data center, because once they deploy at scale, itâs far and forget these data centers are massive and the way they execute it scales to make sure they have the best quality -- possible quality and test it out to work at scale. So that will happen all throughout 2023 and expecting to continue on to 2024 as well. But it will slowly blend over and we saw that before with A100, we will see it again. Of course, everything is influenced by economic and market conditions and trends in AI. Certainlyâ¦ â¦ a lot of the largest customers doing those large things, small things are very interested in getting their access to Hopper quickly. So I am looking forward to seeing those announcements. And just by reference there, Ian, how long did it take for A100 to cross over the 100? Any sense there just as a benchmark? â¦ worth of and we continue to -- Volta at this point has largely tailed off, but it was at least, I think, a six-quarter to eight-quarter transition. A lot goes into that, obviously, butâ¦ So we had maybe a longer-term question, which might be a good place to wrap up. So the question is this industry often looks at transitions in decade cycles. I think there are estimates out there of around 3% to 4% of service accelerated globally in 2022. How do you think about market TAM and adoption curves with regards to servers that will get accelerated as we go through the decade? Itâs certainly picking up. I mean and thatâs one of the reasons why we are investing in an accelerated roadmap ourselves by doing new GPUs every two years, new CPs every two years and DPUs every two years. It is simply because of the demand and interest for it. This isnât like the CPUs before where you wait for a process technology transition or a memory technology transition. We have dialed and tuned in our manufacturing processes, so that we can ship often our A1 silicon is our production product like it was with Ampere and that allows people to get access to our technology even sooner. So with that the opportunities for acceleration just become richer sooner and that is unlike, perhaps, before an era of Mooreâs Law, where you just waited for the next technology transition to get faster, now itâs people want to get faster, faster. So that is -- the main limiter -- I think, one of the main limiters will be the number of companies, ISVs and Fortune 500s that are, and yeah, building up the talent pool to figure out how to adopt the technology for their use case. NVIDIA, we can only -- we can provide those platforms, in some cases, the vertical platforms like we do with Claraâ¦ â¦ or in Merlin for recommender systems or Maxine for teleconference and telecommunications. Those again are not in product solutions all the way. They provide a foundational layer that allows the enterprise to meet that as gap. That -- as more and more players enter into that space and they can get access to our technology affordably, especially with Hopper reducing the cost of access to perform AI infrastructure or even more performant structure, I should say, that is the ramp driver for the broader adoption of our platform across the enterprises. So I am expecting that, like you said, we are still at the beginning of that little curve with 3% to 4%. I expect as more ISVs adopt, more companies invest more services get launched by everyone, that number will start continue to curve up even further. And certainly, in this era where compute is paramount and access to infrastructure is key and yet we are in a bit of a data center crunch perhaps, and the importance of running things more efficiently with greener capabilities, better usage of our -- the power that we do have access to. Itâs a compounding factor in driving up that growth. So, I think, itâs going to be exciting, it is exciting and this Hopper transition is just yet another turn of the crank the 2023 will bring even more and we will -- and again, 2024, happy to keep coming back to you guys and telling you what the next thing is as we. Yeah. We will definitely take you up on that, Ian. And if Hoppers anything as good as the results we saw from Ampere is going to be a very interesting couple of years. So good luck with the new product introductions into next year. And Simona, thanks very much for your time. Great discussion and we could have gone on. I have got couple of more pages of questions, but I guess, we will read that for another time. All right. Well, thanksâ¦
EarningCall_1968	Good afternoon, ladies and gentlemen. My name is Brent, and I will be your conference operator today. I would like to welcome everyone to the Gap, Inc. Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Good afternoon, everyone. Welcome to Gap, Inc.âs third quarter fiscal 2022 earnings conference call. Before we begin, Iâd like to remind you that the information made available on this webcast and conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward-looking statements, as well as the description and reconciliation of any financial measures not consistent with Generally Accepted Accounting Principles, please refer to the cautionary statements contained in our latest earnings release, the information included on page two of the slides shown on the Investors section of our website, gapinc.com, which supplement todayâs remarks, the risk factors described in the companyâs annual report on Form 10-K filed with the Securities and Exchange Commission on March 15th, 2022, and any subsequent filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, November 17th, 2022 and we assume no obligation to publicly update or revise our forward-looking statements. Thank you, Cammeron, and good afternoon, everyone. After four months as Interim President and CEO, I have even deeper conviction that we have a portfolio of iconic brands that our customers love, an increased confidence in our platform to drive leverage and economies of scale, and belief in this team's ability to deliver. We know where we've gotten things wrong and the team and I are at work to correct them. As I told you last quarter, we can and we should win in any environment and the management team and I continue to hold the company accountable to deliver on that. We've taken action to optimize profitability and cash flow, while rebalancing and reducing inventory to drive near and long-term improvements across our entire business. We've sharpened our focus on execution or bringing more rigor to our operations and are responding to what our customers are telling us with respect to trend. While our efforts drove sequential improvement during the quarter, our expectations are set on the consistency of execution quarter-after-quarter, year-after-year that we know is crucial to delivering the sustainable profitable growth and value that our people and shareholders expect. Let me provide an update on our progress during the quarter, starting with actions taken on cost. As I last shared, we are aggressively managing costs and have taken the state action in this quarter alone, resulting in roughly $250 million in estimated annualized savings. These actions include; the elimination of 500 existing and open roles in our corporate offices and a pause on hiring and contractor spend for the remainder of the year, resulting in $125 million in estimated annualized savings. Initially, the renegotiation of our advertising agency contracts, resulting in approximately $75 million in annualized savings; and a reduction in technology, operating costs and rationalized investments, resulting in estimated $50 million of annualized savings beginning in fiscal 2023. We are early in our work here and yet already these savings are expected to help offset higher incentive compensation and increasing labor costs in fiscal 2023. However, there is still work to be done to transform our cost structure and improve overall efficiency, so that we are fit for the future. Next, let me share more on our inventory actions and assortment rebalancing efforts. We continue to rely heavily on markdowns and discounting to sell-through reliable styles this quarter and have reduced receipts in Q4. These actions will allow us to enter fiscal 2023 in an improved inventory position, and beginning in Q1, our brands will benefit from our reinstated responsive capabilities to chase into product demand. We're seeing an improved balance in the assortment across the portfolio compared to the first half of the year. And each of our brands were better positioned in the categories that resonate with the base consumer preferences, and our customers rewarded us for that. We saw consistent category strength in dresses, sweaters, pants and woven tops across the portfolio, with active underperforming across the board, as consumers continue to shift away from the cozy at-home lifestyle. While Athleta isn't immune to the change in consumer preference, despite moderation of growth in the women's active market, the brand is showing strength in lifestyle categories like dresses and accessories that are demonstrating disproportionate growth in today's current environment. Now, let me take a moment and speak to each of our brands, starting with Old Navy. Old Navy delivered net sales growth of 2% over last year, showing early signs of improvement as the brand continues its efforts to right-size inventory, balance assortment, relevance and sizing across its channels. And the brand saw strength in its women's business in categories including pants, outerwear, sweaters and woven tops. All this was offset, however, by softness in active in kids and baby, as we lapped last year's strong demand, which we believe was driven in part by the US Child Tax credit and, of course, the heightened post-COVID back-to-school spending. Old Navy customers still have a propensity to buy. That being said, it continues to experience softness in spending and shopping frequency from its lowest income consumers. As we continue to attract a wide range of consumers, we still believe Old Navy is well positioned in the marketplace, particularly as consumers become more value-conscious. Next, Gap brand. Gap delivered net sales flat to last year and is seeing signs of strength in its core, with a significant shift in trend performance across its women's business. Iconic Gap store brands who were delivering in trend-right fabrics like faux leather and occasion-based categories like dresses, woven tops, sweaters and pants all drove comparable sales growth. Similar to Old Navy, Gap brand experienced softness in kids and baby and activewear overall. Over the last 18 months, Gap brand has successfully transitioned its France, Italy and UK businesses to franchise partners as part of our Partner to Amplify strategy. And last week, we signed agreement to transition the Gap Greater China business to Baozun Inc. who will operate our end market sites in stores under a franchise agreement, pending closing conditions and regulatory approval early next year. This strategy allows Gap brand to operate its businesses through a more asset-light, cost-effective model and to benefit from the local expertise of our partners. Moving to Banana Republic, we saw net sales growth of 8% compared to last year. September marked the one-year anniversary of their brand relaunch. Shifting from a highly promotional workwear brand catering to everybody, Banana Republic spent the last year reimagining every element of the customer journey, with a special focus on quality products, differentiated experiences, and relevant branding, positioning it as a premier lifestyle brand that enhances people's lives wherever they are. This accessible luxury differentiates Banana Republic from others at this price point and has brought in a more premium consumer. We hope that you'll take a look soon. During the quarter, Banana Republic experienced strong demand for suiting and its finer fabrics, including silk and cashmere. As post-pandemic consumer preferences began to balance from the current trend of occasion and workwear, it will be important that Banana Republic continues to use its unique customer proposition as a lifestyle brand to differentiate itself for years to come. Finally, on Athleta, Athleta delivered net sales growth of 6% compared to last year. While the women's activewear market has continued to be soft against the growth trajectory in the past few years, Athleta is holding share. As I mentioned last quarter, Athleta has made quick pivots to print and pattern as well as with their performance lifestyle product to better meet the customers' preferences. The new fall and holiday product is resonating well with the customer and Athleta saw growth in both bottoms and tops, the largest categories in the women's apparel market and key to the brand's long-term strategy. Before I pass it off to Katrina to share more details on our financials, let me end with how I began on the state of the business. I have no doubt, we have world-class brands that our customers love, and we drive value and scale through the synergy of our platform. But I'm also very clear that there is work to be done to right-size our cost structure, streamline inventory, and capitalize on our creative strengths to deliver the products and experience our customers deserve and employees and shareholders expect. Lastly, the Board remains active in its search for a permanent Chief Executive Officer. We're focused on a hands-on leader who can greatly increase our operating rigor, moving us past our deficiencies, while in parallel, enabling strong creative direction and brand architecture as they develop the vision for how our portfolio should evolve over time to create a sustainable business model. This is a great company with strong assets and one that demands a leader who can hold to its value and ensure it remains fit and capable of scaling its omni-platform and market leadership. Thank you, Bobby and thanks, everyone, for joining us this afternoon. Let me start with our third quarter results. Third quarter net sales of $4.04 billion increased 2% versus last year or 3% on a constant currency basis, driven by an improvement in trend relative to the first half of the year and in part due to the timing of franchise sales. Sales in the third quarter were 1% above pre-pandemic levels in 2019. Comparable sales were up 1% on top of negative 1% comp last year and a significant sequential improvement from the negative 10% comp last quarter, primarily as our assortment rebalancing efforts at Old Navy and Gap are starting to take hold and resonating with our customers as well as the benefit of an early holiday promotional event at Old Navy in October. Store sales increased 1% from the prior year. Year-to-date, we have closed a net total of 29 Gap and Banana Republic stores in North America and now anticipate closing approximately 30 additional stores this year, bringing us to close to 90% of our goal of closing 350 stores in North America by the end of fiscal 2023. As we look to the remainder of fiscal 2022, we remain on track to open a net 30 Athleta stores and now expect to open a net 10 Old Navy stores this year. Online sales increased 5% versus last year and represented 39% of total sales in the quarter. Compared to pre-pandemic levels in 2019, online sales increased 55%. Turning to sales by brand. Starting with Old Navy, sales in the third quarter of $2.1 billion were up 2% versus last year and increased 10% relative to pre-pandemic levels in 2019. Old Navy comparable sales were down 1%, representing a sequential improvement from the negative 15% comp last quarter, driven by improvements in category mix and a more balanced assortment that now includes more of the product that our customers have been looking for, as preferences have shifted from cozy casual to work occasion this year. However, we do believe that Old Navy did benefit from a slight pull-forward of sales from the fourth quarter into October, as a result of its efforts to get out earlier than typical with its first holiday promotional event. Gap brand global sales of $1.04 billion were flat versus last year, with global comparable sales up 4%, driven by improved category mix and a more balanced assortment, including more occasion-based and fast and driven categories, as well as comp growth in Asia as a result of lapping the outsized negative impact of COVID-related restrictions last year. North America comparable sales were flat, a sequential improvement from negative 10% last quarter. Banana Republic sales grew 8% from last year to $517 million, with comparable sales up 10%, as the brand continued to capitalize on the shift in consumer preference and the relaunch and elevated positioning of the brand last year. Athleta sales grew 6% to $340 million, or an increase of 57% compared to 2019 pre-pandemic levels. Comparable sales improved sequentially to a flat comp in the third quarter, compared to negative 8% comp last quarter and negative 7% in the first quarter. As we look to sales in the fourth quarter, we continue to take a prudent approach, given the uncertain macro and consumer environment, as well as the competitive promotional environment. Also, as stated earlier, third quarter net sales benefited in part by the timing of franchise sales as well as the October holiday event at Old Navy. In addition, Gap brands will be up against an approximate 1 point headwind as we anniversaried Yeezy Gap sales last year that will not be in the base this year. As a result of these factors and the continued uncertain environment, we anticipate that total company sales in the fourth quarter could be down mid-single digits year-over-year. Now, to gross margin. Gross margin in the third quarter was 37.4%, deleveraging 470 basis points versus last year, inclusive of 130 basis points of deleverage related to a $53 million Yeezy Gap impairment charge. On an adjusted basis, gross margin was 38.7%, deleveraging 320 basis points versus last year as we continue to experience higher levels of markdowns in order to better position our inventory. Excluding the impairment related to Yeezy Gap, merch margin deleveraged 370 basis points as a result of higher discounting due to the previously communicated assortment imbalances as well as more aggressive focus on better positioning and clearing excess inventory as we exit fiscal 2022. Airfreight contributed approximately 200 basis points of leverage as spend levels normalized during the quarter and we lapped the $70 million of incremental air freight expense last year. Equally offsetting this was approximately 200 basis points of deleverage due to inflationary and commodity cost-related headwinds. Turning to ROD. We continue to benefit from our fleet restructuring efforts through lower ROD costs, which were relatively in line with last year on a nominal basis. Excluding a Yeezy Gap impairment charge, ROD as a percentage of sales leveraged approximately 50 basis points. As we look to gross margin in the fourth quarter, we will lap last year's $245 million of incremental airfreight, which is expected to add approximately 540 basis points to gross margin versus last year. We continue to anticipate an approximate 200 basis point inflationary and commodity cost headwinds and that ROD will likely be about flat as a percentage of sales versus last year. As we communicated last quarter, while we are taking actions to right-size inventory in an increasingly promotional environment, we continue to expect significant variability in discount rate. As a reminder, gross margin in the second and third quarters were impacted by approximately 370 basis points of deleverage stemming from higher discounting. Turning to SG&A. Reported SG&A was $1.3 billion or 32.8% of sales, leveraging 540 basis points from the prior year and includes an $83 million net benefit from the sale of our UK DC now that our European partnership model transition is complete. In addition, we recorded an immaterial amount of severance related to the overhead reductions taken in the third quarter. Adjusted SG&A, excluding the UK DC benefit, decreased 5% versus last year to $1.4 billion. As a percentage of sales, adjusted SG&A leveraged 280 basis points from the prior year's adjusted rate, primarily as a result of higher sales volumes, lower bonus accrual, and lower marketing expense compared to last year. As Bobby discussed, we've begun to take actions to right-size our cost structure and improve profitability, focusing acutely on areas where we may have invested without commensurate returns in recent years as it relates to overhead, marketing, and technology. We've already acted on approximately $250 million in annualized savings stemming from the reduction of approximately 500 existing and open corporate roles in the quarter, the renegotiation of advertising agency contracts and the reduction of technology operating costs and rationalization of digital investments. These actions will not have a material impact on SG&A as we look to the fourth quarter as a result of timing and severance offsets, in addition to headwinds in the quarter related to higher seasonal labor costs relative to last year. However, these actions will provide a significant offset to the higher incentive compensation and wage inflation headwinds we anticipate in fiscal 2023. Reported operating income increased 22% to $186 million or 4.6% as a percentage of sales. Adjusted operating income decreased 8% from the prior year to $156 million. Adjusted operating margin of 3.9% was 40 basis points lower than last year's adjusted rate, reflecting the elevated promotional activity and higher inflationary costs, offset by the air freight leverage and the SG&A leverage relative to last year. Moving to interest and taxes. We recognized $18 million in net interest expense, a $25 million savings versus last year due to the refinancing of our long-term debt last fall. During the quarter, we recorded an income tax benefit of $114 million on pre-tax income of $168 million, which resulted in a negative effective tax rate of 68%. This income tax benefit was related to the cumulative impact of a change in the estimated annual tax rate as a result of quarterly earnings variability. This year-to-date tax benefit is expected to reverse and result in at least $200 million of tax expense in the fourth quarter, offsetting the tax benefit on a fiscal year basis. Reported EPS was $0.77. Adjusted EPS, which excludes an approximate $0.18 net benefit related to the UK DC sale and a $0.12 negative impact due to the Yeezy Gap impairment charge was $0.71. Adjusted EPS includes $0.33 related to the tax benefit in the quarter. Share count ended at 365 million. Turning to balance sheet and cash flow, starting with inventory. We are making initial progress on our plan to right-size inventories and move to levels below last year by the end of the fiscal year. Our more aggressive markdowns combined with moderated holiday receipts drove a sequential improvement in the inventory growth during the quarter. Total ending inventory was up 12% versus last year, a sequential improvement from 37% inventory growth in the second quarter. The 12% year-over-year growth in the third quarter includes a 13 percentage point benefit related to in-transit, as we lapped last year's supply chain challenges, 9 percentage points of growth related to pack and hold, and close to two-thirds of the remaining increase is attributable to elevated levels of slow-turning basics and the remainder seasonal products. Compared to pre-pandemic levels in the third quarter of 2019, ending inventory was up 12%. While an improvement in trend versus the first half as we expected, we are entering the fourth quarter with overall elevated inventory levels and some carryover of fall product, despite the increased markdown activity in the third quarter. Although, we did take action earlier this year to reduce holiday receipts, we continue to anticipate a competitive promotional environment, given the increased inventory levels industry-wide and plan to continue to take aggressive action to clear inventory in order to enter fiscal 2023 better positioned. As we look to fiscal 2023, we continue to moderate buys and expect to begin to lean into our responsive levers this spring, which will provide further flexibility to better align inventory levels with demand trends next year. In addition, we are releasing some of last year's holiday pack and hold inventory, and we'll continue to integrate our pack and hold inventory into future assortments. As you know, while pack and hold is the use of cash in the short term, we are able to optimize our margin in the near term and benefit working capital next year, as we buy lower receipts and sell through the pack and hold inventory. Quarter-end cash and equivalents were $679 million. Net cash from operating activities was an inflow of $95 million in the quarter, driven by a moderation in working capital usage as a result of our progress on improving inventory levels and composition coupled with our receipt cuts and leaner buys. As we stated last quarter, we anticipated beginning to see more normalized cash flow in the back half of the year and we are seeing that play out. We continue to focus on fortifying our balance sheet and cash position. As discussed last quarter, we've cut or deferred some capital spending and reduced the number of Old Navy stores slated for back half of the year and continue to expect CapEx of approximately $650 million for the year. We remain committed to delivering an attractive quarterly dividend as a core component of total shareholder returns. During the quarter, we paid a dividend of $0.15 per share, and on November 8th, our Board approved a $0.15 dividend for the fourth quarter of fiscal 2022. We repurchased 1.2 million shares early in the quarter. As discussed last quarter, we have completed our goal of offsetting dilution in fiscal 2022 and do not anticipate repurchasing additional shares this year. We continue to have $476 million available under our current share repurchase program authorization. Before closing, we understand that there has been increased focus on freight and commodity-related tailwinds in fiscal 2023 across the industry as we've all begun to see favorability in rates. As a reminder, we have experienced a more modest freight headwind throughout fiscal 2022 as compared to many other retailers as a result of our long-term ocean contracts, which were locked in at favorable rates. These negotiated rates remain below current ocean container rates. As a result, as ocean container rates come down, this will not represent a significant tailwind to our margin as it may for other retailers as we look to fiscal 2023. In addition, as it relates to cotton and commodity costs, we have already made purchases through the first half of fiscal 2023, and therefore will not begin to benefit from advantaged pricing until we enter the back half of next year. In closing, while we continue to navigate an uncertain consumer environment and promotionally competitive environment, we are confident in the actions we're taking and believe we are taking the right steps to position Gap Inc. back on its path towards sustainable, profitable growth and delivering value to our shareholders over the long-term. Thank you. Good afternoon. Katrina, thanks for the gross margin puts and takes. I just had a question about the promotional piece of that. You mentioned the 370 in the past two quarters. Just given where your inventories are, where your receipts are in the macro environment, would you expect the promotional pressure to be in line with that or better? Maybe if you could give us some guiderail there? Thank you. Yes. Sure, Lorraine, and thanks for the question. I think that's the real open part of the margin that we sort of left for you to model, giving you guys the known things, which are the airfreight benefit in the quarter for fourth quarter of 540 basis points, partially offset by the inflationary pressure of 200. We're prepared to keep promoting to get ourselves clean of both fall holiday inventories as we enter into next year. And so, there's a wide range of possibilities as to what that discount amount could be. I think, if you see Q2 at $370 million and Q3 at $370 million, it's rational to think that's a possibility, but we're not guiding to that number, given there's such a wide range of possible outcomes. So we'll let you guys take a look at what you think that will look like, knowing that we will be committed to getting our inventories cleaned up so that we don't continue to carry the excess inventory into next year. Thank you. And then related to that, as you look into the first half of next year, what proportion of your inventory will be -- will take advantage of some of the responsive capabilities? We haven't said and we'll certainly consider if we'll say more on a future call. But I think what's important to know about responsive, as we've said, is that it can take many different formats. So whether it's getting our basics loaded on to venture managed inventory, which allows us to take advantage of their replenishment capabilities or whether it's leaving overall inventory open to chase in history [ph] fees, or just give us an ability to range up or range down total inventory based on demand, it really is a capability that we're looking forward to having back. With the manufacturing disruption that we saw starting with India closing and then Vietnam closing and many of the other jurisdictions closing down during COVID, we really lost those capabilities, which caused us to have to lean too far forward into total inventory as well as category inventory. And so, having those levers back will give us so much more flexibility. But we haven't said it's different by brand, and certainly, we're happy to talk more about it as we get closer in, if appropriate. Hi. Good afternoon. I guess, the first question I have is on Old Navy. Can you maybe just talk to some of the operational improvements? And where do you think any of the early reads are on Old Navy under Haio, as he's taking over? And then, Bobby, I'm just curious if -- are you thinking of staying on as CEO, given the delay in naming a permanent CEO? Thanks. I'll go ahead and start with Old Navy. I think we're really pleased to see playing out at Old Navy what we have been talking about, which is, sequentially improving the BODEQUALITY inventory, which has finally been cleaned up and more rationalized in stores, back towards what is an appropriate level of inventory for that customer, still having that inventory fully available online to serve that customer, but really getting that markdown inventory out of stores. Then on top of that, being able to finally pivot the inventories towards the categories that are selling. And then on top of that, starting to really get back to pulling down inventory more in line with demand. And all of that sequentially has started to show real improvement. I know, Bobby, you also have a view on some of the executional work, so I'll let you talk to that. Yes. Look, I think looking at Haio, although he's only been in just a little over 100 days, he's taken decisive steps, particularly around the store inventory. If you get in our stores, right now, they're full. We brought a lot of that inventory forward but it's being merchandised well. And his focus has been very, very, very strong that we don't lose sight of good merchandising, so we've got good product. It is resonating with the customer and we should never get confused even in the excess of inventory to not merchandise that well. So that as a customer comes in, right now, we've really tightened up under his leadership, particularly in Old Navy, but it's across the other brands to really know when the customer is in. She knows that -- we know she's there from the time she comes in until she leaves. So, the engagement with the customers is really high. And being able to, again, capitalize on some of the current trends. Old Navy, clearly, even in the given assortment, we serve a wide range of customer. We commented on it during our opening remarks that even with the lower income customer, we're seeing some transition there, but that's just meaning that they're really moving to opening price point and denim a little bit more. But on the other side, we've got big strengths that are showing up in categories like back-to-office and even in just some of our basic fashion where she's really responding well. So, Haio's strengths right now through the team and I'd say that we're really pleased with what we're seeing happen is really getting the inventory right-sized, cleaned up. And operationally, we're executing to get the maximum conversion and then driving the UPT up, knowing as soon as we can get her committed to the checkout, we have a greater opportunity to see that additional transactions hit the basket and that's got the work of the work. And right now, we're pretty pleased with what we're seeing, and again, a lot more to come. I will address your second question and I'm flattered, I guess, that you would ask, but there's really only two messages that you really should hear. I mean, you've heard the really strong focus around operational improvements, getting things right, knowing where we've got it wrong and stepping up to those things. So, the message you really have to hang on to there is we're not in timeout. And it's very clear to me what the Board's asked me to do in terms of stepping in and assessing where we are, capitalizing on our strengths, improving, and responding quickly to make things move in the direction we want them to go. But the Board is very, very diligent around getting a CEO in place and so we're very active at that. But the Board's also very determined to make sure we take the time to get it right. And as I said in my closing remarks, not just casually. But this is a great company. My confidence has gone way up being inside, that the strength of these brands, they are iconic. We're seeing right now in our results, customers are responding, that when we get it right, they bring exactly on what they trust us for. And we will find the right leader and -- that can do the kind of job that I described relative to being strong operationally and getting us past some of the deficiencies, whether they're costs, other execution, right-sizing. But more than anything, also being able to double down on what you know and expect and we expect of ourselves, and that is returning ourselves to really, really strong, creative strengths, brand architecture because I believe in the portfolio strategy. And so I'm not sure exactly when we will finish there, but we will land the CEO for the future of this company. Great. Thanks so much for taking my question and congrats on a good quarter. I just wanted to drill down on the traffic or sales trends that you saw throughout the quarter. Did things -- how did things kind of develop by month? We have been hearing some October and November weakness at select retailers, just wondering if you saw a similar exit rate as they did. Thanks. Yes. Thanks, Alex. I think in line with others' commentary, we did see strong volume in October slow a bit in the end and a little bit of a slow start to November. But that trend is fully contemplated in the outlook that we described today and a little bit of why we remain prudent on the outlook for fourth quarter revenue. But that said, its early days and we know that some of that was weather and potentially some other disruption happening out there. So we'll see what plays out. But certainly, we did see a little bit of that similar trend. Great. That's helpful. Maybe I could also describe your outlook on holiday. I know last year, customers kind of had a call to action to shop earlier. It seems like maybe shopping could be later. And then, our surveys are also just saying that, customers could be waiting for deals. Maybe what are your thoughts on that, as we head into the holiday selling period? Yes. I mean, I've heard those various points of view as well. And so, we're just prepared to compete when the customer is ready to shop. And so, we know we have to get out ahead of ensuring that we're early enough, that we're promoting at a time when she's willing to buy, and we're not waiting too late to clear the merchandise. And on the flip side, if they're not going to shop until later, we don't want to be too far out ahead of it. So we're remaining vigilant in our view on what's happening competitively, as well as taking a prudent approach to understanding where our inventory movement is and where our customer is shopping. So, I guess, I'll have to say that, we've seen -- we've heard a lot of those dynamics. We're just watching it carefully day-to-day. Hey. Thanks, guys. Hi, there. You mentioned seeing commodity costs higher in the first half of 2023. Any quantification of that relative to what you've been seeing as a drag in the second half of 2022? And then also, you've pulled back this year a bit on store openings. Curious, how you're thinking about store growth for next year, obviously, specifically Athleta and Old Navy? Thanks. Sure. So Paul, we'll provide a lot more color on 2023 as we get closer to the year. What we wanted to make sure that you guys understood is, we do see the cotton movement happening. Of course, it takes a while for the raw materials to move through the full average unit cost of a garment. And so, more to come on when we get to see the timing of the benefit on cotton start to flow through our COGS. I think importantly, we've bought the first half, so any raw material movement won't be flowing through COGS materially in Q1 and Q2. But certainly, we'll be focused on figuring out how much of that we can get through our back half average unit cost. So more to come on that dynamic. We just wanted to sort of give early thoughts on it. And then -- sorry, your second question? Yes. So, Athleta, we're going to open about 30 stores and we feel good about that pace of growth. I think that's a reasonable pace of growth, and so you could likely expect that. For Old Navy, the 10 stores that we're opening this year was a pullback. That was partially based on, given the performance, really wanting to make sure we were staying prudent on those store openings. We did have some slip into next year, but likely, we'll have a more moderated pace on Old Navy store openings as we move forward. But again, more to come as we fully land that pipeline of stores. Good afternoon. Thanks for taking my question. So, just standing back on margin, EBIT margin, a lot of moving pieces this year, a lot of temporary factors as you kind of right-size inventory and prepare for some additional sort of clearance and promotions on the holiday. But as we look forward to next year and your path to clearance, you annualize some of these SG&A savings that you're seeing, is there a baseline level of EBIT margin that you think the business can achieve sort of regardless of kind of what the revenue backdrop might look like? Thank you. Yes, I mean, there are so many moving pieces, Mark, and I think that we haven't issued any forward-looking guidance on anything beyond sort of where we are now, so more to come on that. I think that overall, as we think about the future, what we have said is a little bit of what you've heard over the last couple of quarters, which is we feel good about the store closure activity that's really given us a lot of benefit in ROD leverage. We feel good about the work that the Gap team has been doing about transitioning many of our international markets to partners, which will help us maybe with lower revenue but fewer losses of operating income. And we are committed to really deeply staring at the operating costs that we've added into the business in the form of marketing overhead and technology. That said, we are in still a very inflationary environment, and so there's headwinds on labor costs and headwinds in other inflation that we're still working through. So, lots of moving pieces and we'll give you more of an outlook into that as we put 2023 together. But certainly, we're focused on the long-term goal of getting the company back to a better operating margin with profitable sales growth. Good afternoon and thank you so much for taking the question. I wanted to narrow in on Athleta, which had a nice comp improvement this quarter on both a sequential and a three-year stack. Can you reflect a little bit more on the drivers of the sequential improvement? And do you think that the three-year stock trend is sustainable from here on out? If that is the case, what is the segment profit margin that you expect for this brand ending the year? And how does that compare with your view of long-term segment profit operating margins for the business? Yes. Brooke, I mean, we were pleased to see Athleta return to the positive 6% growth flat comp, which was a meaningful improvement. NDD came out with the industry growth yesterday for the quarter and the women's active market is down negative 7%. And so Athleta's growth in the quarter does show that they are taking market share even as that active market is slowing a bit after a few years of significant growth. So we do feel like we're starting to see a little bit of rebound in some of the performance product as well as, as Bobby said in his prepared remarks, really winning on a lot of the lifestyle products that they've been able to compete well in, as they've been able to balance sort of performance and lifestyle as a lifestyle active brand. As far as the three-year stack going forward, I guess, we'll see, but certainly, our aspiration is to continue to be driving profitable sales growth at Athleta. We don't report on the operating margin segment, but certainly, I appreciate the question. And so, with that, we'll probably not comment on that at this point. Okay. Thank you. One more question, if I may. As you contemplate the mid-single-digit sales decline that you forecasted for 4Q, can you help us a little bit with any quantification that you might be able to share about the franchise impact and the holiday event pull-forward impact within that? Thank you. Yes, sure. We haven't quantified that, Brooke. And so, I think it's just fair to say that the dynamics are such that, we did say it was a slight impact from the October promotion in Old Navy. And then, the franchise sales timing is a modest impact. Gap had the Yeezy impact. It's a point to them. It's probably less -- more modest than that for Gap Inc., so sort of all those things together. And then on top of that, as we said, we're really just trying to remain prudent about the consumer and the environment heading into holiday, so that we do allow ourselves the ability to sell through the product as we need to as we enter into next year. So, hopefully, all those drivers are helpful, but I don't think it's any one single driver. It's really everything together that's adding up to that outlook. Hi, Katrina and Bobby. Thank you. Regarding the carryover fall product, what's the nature of the product that you're -- you still need to work through at this current time? And then as we zoom out a little bit on Old Navy, what's your hypothesis for a few things that need to be done strategically, just to drive more consistent comps and margins? You mentioned balancing the assortment as one, and I'm sure speed and agility and fabric platforming is an opportunity, too. Thanks. Yes. Sure, Oliver. I'll take the content and then maybe, Bobby, I don't know if you want to speak to the Old Navy piece. On the content side, it's different by brand. But fundamentally, as we think about summer inventory that carried into fall, that was a margin drain in the second quarter -- in the third quarter, and then we had fall inventory we were clearing that now is carrying into holiday. We do feel like with holiday buys being down, we will stop that from continuing, but we need to focus on the fall product that's carried over. It's really various things. There's nothing -- no pockets in particular. It's really more about the overall inventory being higher than the relative demand and our ability to actually clear through that, given sort of the customer dynamics. So we're focused on clearing through that now, though, and that is part of why we do believe the margins will be pressured in fourth quarter. And again, we have a lot less holidays, so we look to have that cycle stop as we head into first quarter of next year. So, I don't know, Bobby, do you want to comment on Old Navy? Well, I mean, I think you put your finger on those things that you would expect maybe is and challenging us, and we clearly let an assortment get broader than it really needs to be. And in some cases, again, we're missing a great deal of depth. So, the course correction there is really just getting back to the fundamentals and putting the right lens on inventory. So, there's a much, much, much greater focus looking at sell-through expectations, more of a life cycle mindset around the product so that we're continuing to keep the freshness and the newness there that referred to Haio one of the things that he has done through the team and again really happy right now with the things that are taking place is call us with mills and partners where we know that we've got an opportunity for greater collaboration. Same responsive capabilities that right now have been helping Gap brand, Old Navy will be able to leverage on. So, there's a lot more creative, I think, insight from the consumer and being able to deliver on it. I'll give you a good example that's even going on right now. In the brand that shows what happens when we do get it right. Back-to-office is that the brand hopes to really own. But even right now, we have a Pixie and a Stevie pant that's offered in a skinny leg player, wide leg, different fabrications and patterns, all very, very, very popular. That's the message that the consumer is telling us about the sensibility and fashion that she's looking for and, again, certainly staying really sharp on our basics. But in particular, being able to serve, again, a wide range of customer. I commented on denim and opening price point right now at lower end. But again, across the aisle, the men's customers turn from denim to a chino fabric that we've got out. And again, these are things I think that the brand is really going to look to try and capitalize on. So much more rationalization around the breadth of the assortment and really getting deep where we know -- looking for us and then again, keeping enough open that we can chase into it. And last point on that. It's not just being more responsive and having a better inventory balance. The more effective we are at that, those are big down payments and steps toward localizing more effectively as well in the inventory we carry and increasing sell-through. So, it's something, I think, that's a big, big, big opportunity to the brand and underlying why we feel so strong about the opportunity for Old Navy going forward. Hi everyone. This is Jesse Sobelson on for Ike. Thanks for taking our questions. I was just curious on this -- so first, the $53 million write-down of the Yeezy product. I just wanted to kind of confirm that, that was all of the product that you guys held and it's just fully written down. And then kind of looking at over the longer term with the real estate with your business. I was curious on your views of the ownership there. And we should expect any more sales in the future? Thanks, Jesse. So, yes, we did take the appropriate impairment on the Yeezy inventory as we are winding down that business and that $53 million is reflected as appropriate. As we think about -- you're talking about corporate-owned real estate, I'm assuming, based on your question? So, the way I think about the corporate-owned real estate is, we will always look to monetize underutilized assets. To the degree the assets are being fully utilized, we are proud of the assets we have and we feel good about them. So I'm not previewing anything else, other than to say, we do try to look and prudently evaluate how we're utilizing our assets to make sure that they're adding the value they need to add. But at this point, we feel good with where we are today. Great. Thanks. So, Katrina, a couple of things. Maybe one, could you help rank assortment changes that you made at Gap which drove sequential improvement this quarter? Two, at Old Navy, is there a way to think about maybe just a reasonable time line for optimal inventory balance that you think across categories at Old Navy? And then three, on the $250 million of annualized expense savings, I guess, what percent do you see flowing through to the bottom line next year, versus opportunities you see for reinvestment? So, in order, for Gap, are you talking about the specific -- like the specific assortments, what's working there? Is that what you're asking? Yes. I think -- it's funny, Bobby and I were talking about this. We're in the really proud of the way that the Gap team has come back with great current fashion, but really, it's current for the modern essentials. And so, whether it's the faux leather pants that have really driven a lot of interest in the normal five-pocket styles, or whether it's their great interpretation of the basics like a jean jacket with a pop sleeve, that just makes that product more current. I would say, overall, they've just done a really nice job of having trend-right fashion, but interpreted into modern essentials. And so I'll answer the other two, and if Bobby has anything more to add on Gap, I'll have him do that. As far as Old Navy, optimal inventory assortment, I think we're making progressive improvement through every quarter. And importantly, as we move into spring, we're just very excited to have that responsive inventory back, because that will start to give them the opportunity to be much closer to demand and be able to chase into the inventory trends. As an example, Gap has been able to chase back into the faux leather styles as well as that Gap -- that pop sleeve denim jacket, for instance, in a very short amount of time after they saw the fall product succeed, to get it back in time for holiday. And so, just an example of how once we get that responsive inventory back, I think Old Navy will similarly start to see the ability to really change the way they are able to serve their customers. And then on the $250 million of annualized expense savings, right now, our view is that, that's expected to just offset the reset in bonus for next year, since as you can imagine, we're not likely to pay bonuses this year based on performance, as well as some of the wage inflation that we're seeing. But as Bobby said, more to come. We're not stopping at the $250 million. I think we feel like that's a good start for where we need to be really bearing down on cost in the company. But, overall, we are working hard to think about how to think longer term about more expansive cost efforts that we think will right-size the company's expense structure to make it more fit for purpose. So, I don't know, Bobby, on Gap, if you'd add anything. No, I think I would just double underline on the cost. I mean, we said we're really early in this work. But I mean, this is work where -- I mean, we're taking a real comfortable position on questioning everything that we do. So, it's work that will, I say, going on well into 2023 so a lot more to come there. I would not miss a chance because I think Katrina did it nicely, but I think it's a meaningful deal that we've seen strong women's specialty business turn across wovens, bottoms. It's sweaters, it's everything. I mean, there's a great oversized turtleneck sweater that's really, really hot in there. They've gotten bold enough trend-right right now, knowing the customer is ready to get out. So, whether it's partywear right now, et cetera, and it's in the category, it's in the flannel shirts and so forth. So, seeing that business turn and the way the team, I think, has geared up to keep that going, it has my attention. I've seen spring and summer. So, I think that, hopefully, we're going to great interpretation of the find ourselves with some positive traction here. Hi, great. Thanks. Good afternoon and thanks for taking my question. So, I wanted to touch a little bit on the Gap. So I think 1 thing that's clear is that strategically, this business has been really focused on driving capital-efficient growth, whether it's franchising international, selling the China business or maybe even more recently, going on to launching on Amazon fashion. So, could you maybe just talk a little bit about the overarching strategy at the Gap brand and how that's progressing and how you see that playing out as we look to the fourth quarter and next year? Yes, Corey. It is very much consistent with what we've put out for Gap brand, which is that we have spent the last couple of years really right-sizing the business model to a more modern model for the Gap brand, closing North America specialty stores that we potentially had over-expanded back in the heyday, getting out of malls that are not as relevant anymore, pivoting to be much more digital, really focusing on ensuring that the international growth, which we think is important, it's our most global brand, is being done with other people's capital in a way that we can be in those important markets, but not be sustaining the operating losses that we were sustaining there. So, really focusing on a much healthier core. And then really, the focus on the creative health of the brand, the relevance that drives the North America core through product relevance and partnerships is the recipe for that brand. And I think that, that's what's playing out in the third quarter. It's what Bobby articulated about their sort of product early signs of improvement and what we remain committed to as we head into next year. Hi everybody. Congratulations on the progress. Katrina, I just wanted to flesh out the merchandise margin direction for the fourth quarter where it seems like you have some caution. And I appreciate the inventory breakdown, but you did a great job of bringing your inventories down. So I'm wondering, with this product -- better balanced product, not where you want it to be, but balanced, better balanced, is there some indication that the promotional levels will be that much more severe, even though the inventory levels appear to be in pretty good shape, or let's put it this way, much better shape than they were? And then on the SG&A, it seems like you saved a lot on marketing in the third quarter. That's my view. And I'm just wondering, will you start to uptick your marketing spend in the fourth quarter and going forward into 2023? Thank you. Yes, sure. So, I think, Janet, we are glad that we have started to see the inventory levels come down. When you adjust for the in-transit and the pack and hold and the basics that we're carrying, we do still have fashion heading into the fourth quarter. That is about the current revenue outlook, and that's what gives us the caution on the margin combined with the fact that we know others are working hard to get their inventory levels down. So we'll see where the margin lands, but we remain sort of prudent about what it might take in order to get through that. So we'll see where that lands. But again, trying to be helpful in articulating that we had to run discounts impacting the margin of about 370 basis points for Q2 and Q3 and while we certainly hope its better in Q4, it's certainly on our mind that it could be that, as we head into the quarter. So we'll let you decide. On SG&A, yes, we did save some in marketing in third quarter. I don't believe that we would be spending more in marketing in fourth quarter. We continue to try and find that right balance of marketing in the brand. But, overall, we're focused on marketing effectiveness, both in fourth quarter as well as we head into next year, as we look to make sure that we're being prudent in that marketing spend after a couple of years of heavily investing. So, I wouldn't expect the marketing to go up in fourth quarter.
EarningCall_1969	Good afternoon, ladies and gentlemen, and welcome to the Costco Wholesale Corporation Fiscal Q1 2023 Conference Call. At this time, all participants are in a listen-only mode. And please be advised that this call is being recorded. [Operator Instructions] Thank you, Bo, and good afternoon to, everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date that they are made, and the company does not undertake to update these statements, except as required by law. In today's press release, we reported operating results for the first quarter of fiscal '23, the 12 weeks ended this past November 20. Reported net income for the quarter was $1.364 billion or $3.07 per diluted share. That compared to $1.324 billion or $2.98 a share last year. This year's results included a charge of $93 million pre-tax or $0.15 per share, primarily related to downsizing our charter shipping activities and a tax benefit of $53 million or $0.12 per diluted share related to stock-based compensation. Last year's results included an asset write-off of $118 million pre-tax or $0.20 per diluted share and a tax benefit of $91 million or $0.21 a share related to stock-based compensation. Additionally, the strength of the U.S. dollar resulted in our foreign company earnings translating into fewer U.S. dollars. With 25% to 30% of our earnings generally -- generated outside of the United States, this negatively impacted earnings by about $0.12 per share. In terms of sales, net sales for the first quarter increased 8.1% or $53.44 billion versus $49.42 billion reported last year. On a comparable sales basis during the first quarter, reported U.S. sales increased over the 12 weeks 9.3%; and excluding gas inflation and FX, 6.5%; Canada, 2.4%; reported 8.3% increase, ex gas inflation and FX. Other International reported minus 3.1%; excluding gas inflation, FX, plus 9.1%. So you have all told, 6.6% reported for the company, and ex gas inflation and FX of 7.1%. E-commerce, by the way, was reported of minus 3.7% and a minus 2%, excluding FX. In terms of first quarter comp sales metrics, traffic or shopping frequency increased 3.9% worldwide and up 2.2% in the U.S. Our average transaction size was up 2.6% worldwide and 6.9% U.S. during the first quarter. And foreign currencies relative to the U.S. dollar negatively impacted sales by a little over 3%, while gasoline price inflation positively impacted sales by approximately 2.5%. Moving down the income statement. Membership fee income reported in the quarter, our membership fee income came in right at $1 billion. That's $54 million or 5.7% higher than last year's reported number of $946 million. Again, the relative weakness in foreign currencies relative to the U.S. dollar, excluding the impact of FX, we're assuming flat FX year-over-year, that $54 million number would have been increased by $32 million, and the membership on an adjusted basis would have been a little over 9% year-over-year on flat FX. In terms of renewal rates, at first quarter-end, our U.S. and Canada renewal rates were 92.5% compared to 92.4% a quarter ago. And worldwide rate came in both at this quarter-end and the previous quarter-end, the same level at 90.4%. We ended first quarter with 66.9 million paying household members and 120.9 million cardholders, both up 7% versus last year, and recognize we added about 22 units over the course of that last year. So that was about just under 3% of that increase. At Q1 end, paid executive memberships were right at 30 million, an increase of 904,000 during the 12 weeks or 75,000 a week during the first quarter. Executive members now represent 45% of our paid membership and just under 73% of worldwide sales. Moving down the income statement to gross margin. Our reported gross margin in the first quarter was lower year-over-year by 45 basis points and lower by 21 basis points, excluding gas inflation. And as I'll explain in a minute, the 93% pre-tax charge, excluding that 93% -- $93 million charge we took in the quarter, gross margin ex gas inflation would have been only down 3 basis points. As I always ask you, jot down the following numbers, two columns and six line items. The first column is reported during the first quarter, a year-over-year delta change in basis points, and the second column, excluding gas inflation. On a core merchandise basis, we reported in the first quarter, minus 52 basis points; and ex gas inflation, minus 31 basis points. Ancillary and other businesses, plus 23% on a reported basis and plus 30%; 2% reward, minus 2 and minus 5; LIFO plus 3 and plus 3; Other, that's the $93 million charge, minus 17 and minus 18. So all told, again, a reported basis was 45, ex gas inflation, 21. So starting with the core. Core merchandiseâs contribution to gross margin on a reported basis was lower by 52 basis points year-over-year and lower by 31 basis points ex gas inflation. In terms of the core margin on their own sales, in the first quarter, our core or core gross margin, if you will, was also lower by 31 basis points, with food and sundries being up a little bit, offset by non-foods and fresh foods being down. Fresh foods was down, as you know, for the last couple of years, it's been particularly strong, and it's come down a little bit. In addition, we are looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories. Ancillary and other business gross margins were higher by 23 and higher by 30 basis points ex gas inflation in the quarter, with gas, business centers and travel up year-over-year, offset in part by e-comm, food courts and optical. Our 2% reward, minus 2 basis points; reported, minus 5%, excluding gas inflation, implying higher sales penetration coming from our executive members. LIFO, plus 3 basis points. We had a very small LIFO charge this year, but lapped a $14 million charge in Q1 last year. You recall last year, during the four quarters, we had LIFO charges in excess of $400 million pre-tax with a small amount that $14 million in the first quarter over $100 million in Q3 and over $200 million in Q4. So we'll see what inflation does this year. Hopefully, it will continue to -- its current trends in the right direction. Other, the minus 17 and 18 basis points reported in ex gas inflation. This is the $93 million charge, as mentioned in the earnings release, mostly related to downsizing our charter shipping activities. Over a year after COVID began, you will recall that the supply chain challenges related to shortages of the containers and shipping delays greatly intensified with container, freight and shipping rate skyrocketing. It was in Q4 of 2021 on our earnings call that we mentioned our initial leasing of 3 ships and several thousand containers to help mitigate these challenges. Later, we added 4 additional vessels and additional needed containers with commitments made for up to three years. Our objectives at the time were twofold: first, to increase the ability for more timely shipping and arrival of overseas merchandise. This allowed us to better stay in stock and drive sales; and second, to reduce some of the skyrocketing shipping and associated container costs. We achieved those objectives for a period of time. Over the course of a year, 1.5 years, we controlled the shipping and delivery of nearly 50,000 containers, many that would have been greatly delayed and at an estimated savings as compared to the then current shipping container costs of somewhere between $1,000 and $2,000 per container. That, of course, fluctuated. Now with a dramatic improvement in shipping times and much lower shipping and container costs, it made sense to downsize our commitment and lower prices for our members Moving on to SG&A. Our reported SG&A in the first quarter was lower or better year-over-year by 35 basis points, coming in at a 920 compared to a year ago 955. And that plus 35 basis point improvement would be plus 13 basis point improvement, excluding gas inflation. Again, writing down six line items and two columns. First column being reported, second ex gas inflation. During the first quarter, our core operations was lower or better by 8 basis points, plus 8 then; without gas inflation, minus 9; central zero and minus 3; stock compensation, plus 3 and plus 1; preopening zero and zero; Other, plus 24 and plus 24; for a total first column reported year-over-year reported SG&A plus 35 or lower by 35 basis points and ex gas inflation lower by 13. Now going through those numbers, the core operations component of SG&A was again lower by 8 basis points reported, but higher by 9, excluding impact of gas inflation. These results include three sets of wage increases that were done in the past year plus as well as a little lower sales results in Q1 as compared to the prior quarter. Still increases, but a little lower than the prior quarter. Central was flat or zero and higher by 3, ex gas inflation. Stock comp, again, a little lower number in stock comp as a percent, so it came down, improved a little bit. Preopening, no impact. And the other, the 24 basis points you recall last year in Q1, this consisted of an asset write-off totaling $118 million pre-tax, which impacted the SG&A line last year. Below the operating income line, interest expense was $34 million this year, down $5 million or down from $39 million last year. And interest income and other for the quarter was higher by 11 year-over-year, $53 million versus $42 million a year ago. Interest income was higher year-over-year, offset by unfavorable FX. Overall, reported pre-tax income in the quarter was up 4%, coming in at $1.77 billion, compared to $1.696 billion a year ago. And excluding the charges described earlier in both years, pre-tax income was up around 3%. In terms of income taxes, our tax rate in Q1 was 23.0% compared to 20.7% Q1 last year, so a little higher this year. Both years' tax rates benefited from the tax treatment of stock-based compensation, as mentioned earlier. The fiscal '23 effective tax rate, excluding these discrete items -- this discrete item, is currently projected to be between 26% and 27%. A few other items of note. In terms of warehouse expansion, we plan to open a net of 24 units this year, 27 openings, including 3 relocations, so net of 24. In the first quarter, the net of that 24 included 7. We planned 3 more in Q2, 4 in Q3 and 10 in Q4. In the first quarter, we opened, as I mentioned, 7 net new warehouses, 4 were in the U.S. and one each was in Korea, our first in New Zealand and our first in Sweden. Additionally, last week, we opened another building in the U.S. And just yesterday, we opened our 14th location in Australia, our second on the country's West Coast in or near Perth. In fiscal '23, again, 27 total new openings, including 3 locations for a net of 24. Of the net 24, it's made up of 15 in the U.S. and 9 in Other International, including our third and fourth locations in China. Regarding CapEx. In the first quarter, CapEx was approximately $1.06 billion. And our estimate for the entire fiscal year is CapEx of somewhere in the $3.8 billion to $4.0 billion range. Moving to e-commerce. E-commerce, as we mentioned in the press release, on a reported basis was -- for the quarter, year-over-year sales were minus 3.7 and minus 2 ex FX. Including sales -- what we don't include in this number is our sales through like same-day delivery for fresh foods with our partners like Instacart, which we don't include those, and they are fulfilled in our warehouse. Our e-comm comps, ex FX, would have been if we included it in the positive low single digits. Stronger departments in terms of year-over-year percentage increases were tickets and gift cards, tires, candy and health and beauty aids. The largest e-comm merchandise department majors, which includes consumer electronics and appliances, which represents over 40 -- close to 40% to 50% of our -- over 40% of our e-com volume was down in the high single digits. Subsequent to quarter end, we did have our two biggest e-comm selling days in our company history, both on Black Friday and Cyber Monday. Now a few comments regarding inflation. Recall, we've seen some minor improvements in a few areas. Hopefully, continuing the comment I made last quarter's earnings call, a little light at the end of the tunnel, but it's still little. Recall last quarter in fourth quarter, we estimated that year-over-year price inflation was about 8%. In the first quarter, we estimate the equivalent year-over-year inflation number in the range of 6% to 7%. Food and sundries is still up more than non-foods, but overall, a little better level than a quarter ago for the company. And commodity costs are mostly coming down, whether it's corn flour, sugar and butter or even some things like steel. A few things are up, but overall, we're seeing a little bit of a trend, but we'll keep you posted. Switching over to inventory levels. Recall that our total inventory in both -- at the end of Q3 and at the end of Q4 on a year-over-year basis were up 26% year-over-year. I'm happy to report that good progress was made during the first quarter of this fiscal year. Our increase as of Q1 end dropped to a 10% year-over-year increase, largely driven by an estimated 6% to 7% inflation and about just under 2% year-over-year unit growth. So inventories, while we still have some pockets of a little over inventory, overall, we feel pretty good about it. As a reminder, in terms of upcoming releases, we will announce our December sales results for the 5 weeks ending Sunday, January 1 on Thursday, January 5, after the market closes. Richard, I want to start with the short-term question. November, the slowdown in the stacks. Is there anything tip of the iceberg there, macro merchandising? Is there something obvious? I mean you were living in pretty rarefied air, but curious if there's anything notable. No, I think the biggest thing, as I've said a couple of times in a quiet way, it rains on all of us during these tougher times, particularly with bigger ticket discretionary items. We're comparing against some huge increases a year ago, frankly, over the last two or three years, as you know. And that's where we've seen some of the slowdown. As I mentioned, e-comm consumer electronics and appliances, as I mentioned, was down high singles. I think in line was also down some amount. So that's where a big chunk of it is. When we look at food and sundries, that actually tends to be relatively strong for us. So overall, I think it's impacting us a little bit with what's going on out there. I think it is a combination of compared to very strong stuff a year ago as well as the fact that big ticket discretionary has a little bit of weakness. Okay. And maybe just a two-part follow-up. One is just related to that answer. Does those two couple of days, I don't know if you can judge enough from it, does it bring you back to some type of trend line? Or it sounds like your tone is there's still some pressure? And then the real follow-up is on gas gross profits. If you just think about the movement of the lap throughout this fiscal year, does it progressively get harder through the year in terms of the lap? And then can you highlight to us which quarter has the highest cents per gallon lap throughout the rest of the year? Yes. I have a couple of people in the room smiling. Of course, I can't tell you all that. But at the end of the day, first of all, if you look at our November reported numbers, the fact that those two dates -- those two high dates on e-com were in the last week. Keep in mind, e-comm is still a little under 10% of our total company, but that helped a little bit relative to e-comm in the last 4 weeks that we reported. But overall, look, we don't know what kind of trend it means. We feel pretty good about what we're doing in terms of driving sales. And as I mentioned, the food and sundries as we get past big-ticket discretionary purchases for the holidays, for Christmas and what have you, you'll have a higher penetration of some other things as well. As it relates to gas, for several quarters now, even beyond a year ago, we talked about the gas profitability for us and we believe our competitors -- other big chains of gas stations have made more in gas. And certainly, that's helped us use some of that to continue to hold prices where we can on some things. Who knows what the new normal is? What we know is that not only is gas more profitable than it has been in the past, and like I said the same thing a year ago, will that change at some point? Maybe. We don't know. So right now, it's good. And by the way, as we've mentioned a couple of times, we've seen strong gallon sales, and we're still taking market share. We -- when the U.S. gallon sales are generally close to flat, we're up in the 10% to 15% range in gallons. So we're driving people into the parking lot. And the fact that gallons of gas are profitable, that there's just a little bit more for us as well. So that's helped us. There's always things that are going to help us, and there's always going to be puts and takes. My question is on the LIFO charge. It looks like if it's a few basis points of a hit, that would back into about $30 million to $40 million. And I'm curious, I know you don't provide guidance, but knowing what you know now and if inflation holds at that, say, 6% level, would that be a good proxy for the charge, at least over the next couple of quarters? Well, I think, yes, LIFO was a slight pickup just because the dollar amount was less than the $14 million last year in the quarter. It's very slight. So if that continues, that would be good, and that would bode well. And you'd have -- I'm guessing you'd have a lot lower charge than $423 million, recognizing the big pickup was in Q3. The big hit was in Q3 and 4 when we saw the beginning of inflation rising. If inflation didn't go down, but it just stayed the same, in theory, you'd have no big charge. You have no additional charge. If it starts to go down from its peaks, that will have -- there'll be some LIFO income. Now mind you, some of that will be used for pricing as well. I mean, well, you know us. Yes. Okay. So what would you do to have the absolute dollar amount for the LIFO charge in the quarter for us? Less than $1 million. Okay, great. And then on the ancillary line, you've had real good success there in back-to-back quarters and you outlined gas profitability, e-comm, food court. Is there one that's been more outsized over the past couple of quarters and that maybe we could think about over the next few quarters because it's been a nice improvement? Well, look, gas is just the sheer size of our gasoline business. It's been the biggest piece of that line for a few years. We have a -- it's a $30-plus billion -- on our $220-whatever-billion last year, we did in sales, I think a little over $30 billion was gas. So that's the big kahuna among all that stuff. Richard, between the 31 basis point core-on-core gross margin discussion -- decrease for core on core gross margin, the discussion around giving up some shipping capacity to have a better price for your member, is the mindset of Costco right now as the economy enters a more difficult economic period, Costco is going to be stepping up price investments in order to gain market share? I think we continue just to remain competitive. You've known us long enough when asked who is our toughest competitor, we look in the mirror, and we say it's us. So I think that as we drive market share, part -- we believe that part of it at least is due to the fact that we've continued to be very competitive. And so I don't know if there's any change in that. We -- notwithstanding where our numbers come out, we're always trying to push more into lowering the prices or keeping the price increases going not as high as they could have been. I think fresh foods is a good example of that of late, where, again, we've held the price points on certain items despite inflated costs, mostly in the protein area and a little bit in the bakery area. And Richard, you've long talked about, the Costco model is driven, first and foremost, by sales, and the need to drive at least the mid-single-digit comp in order for the other parts of the P&L to work. So is the economy is entering a softer period where discretionary sales can be a little weaker and Costco's overall sales are going to be a little softer, should we be modelling and prognosticating just a lower overall earnings growth for Costco during this time as when we go to these factors? Well, good news is that's your job to model it. Look, at the end of the day, I think that the comment I made about big-ticket discretionary, while we sell big-ticket discretionary includes furniture, which we sell lawn and garden, patio, too, that's not right now at the holiday season necessarily. But that being said, there is a higher proportion of big ticket discretionary right now. And we're blessed in the sense that a big chunk of our business is fresh foods and food and sundries, which people have to eat. And as I mentioned, that has been strong throughout this. So I think overall, we'll probably still look at it in a positively relatively aggressive standpoint. Ultimately, when you talk about top line sales and if they're a little lower, what do we need? I think the question historically has always been asked, what do we need to have SG&A not go up as a percent of sales? And the view is -- and this is pre-inflation. The view is always you need something -- our best guess view is somewhere in the 4% to 5% comp range. If it falls below that, that will make SG&A a little bit of a challenge. That being said, we're pretty pragmatic, and we know how to use our margin as well. So I think overall, we'll continue to work entirely to drive top line sales and look at it for the long term. And we're not in any big way cutting back orders at this juncture, where we see some challenges with big-ticket discretionary? Does it come down a little? I think the keyword there is a little. And weâre feeling very good about some of our business now despite what's going on out there. We're blessed that we think, again, I think as evidenced by gas and any food and sundries business, we're blessed by taking market share still. I think that's evidenced in our memberships and... So just on the core-on-core decline of 31 basis points. I was hoping you provide more color just in terms of what's driving that decline in non-foods category? And then just related to the pressure on fresh foods. I know I think you've now lapped some of the last year, I think, fresh foods is also a headwind. So when do we lap some of the -- I guess, some of the efficiencies that you gained during the pandemic? Because I know you've given it back in recent quarters. So I'm trying to get a sense of when that pressure point could go away. I don't know exactly. I mean if we're three quarters of a year into it. I think if I recall, over the last two or three quarters, we've talked about like fresh being that way and probably exacerbated a little right now with the fact that we're trying to hold prices on some things that we think that, that's driving our sales. Oh, yes. I think that -- yes, fundamentally -- first of all, in terms of overall, it's fundamentally fresh and then some non- foods. Some of that has to do with some of the big ticket things. If you've been online and saw some things we did during not just the week of Thanksgiving and Cyber Monday, but we did some -- anywhere from $100 to $500 off on, I think, $500 cash card, if you bought $3,000 or more of these items. And so we're getting rid of some of the reason that 26% year-over-year inventory increase went to 10% was we got rid of some of the stuff that we -- some things that we had deep freeze and some things that we had delayed shipping during the supply chain challenge. So we did take some more markdowns than normal as you would expect, to help get rid of that. And hopefully, that's not a pressure point going forward. Certainly, I don't think it will be as much. And again, there are so many moving parts to this equation. I wish it was as easy as each basis point we could explain. We try to give you the rounded numbers. But overall, again, I get back to we feel good about how we're doing competitively. And we certainly understand that big ticket discretionary things have shown a little weakness, in part, because of our strength from a year ago, and in part, it's got to be part of the economy. And the good news is we have a big chunks of our business that are fresh foods, food and sundries, health and beauty aids, gas, all those types of things. And even other things like that's small, but travel has come back really strong from a really weak place a couple of years ago. Great. And then maybe just one additional question just on the membership fee hike. If we are in a weaker economic backdrop next year, does that at all impact how you guys are thinking about the timing of the membership fee hike? Well, it certainly goes into the thought process. We're still not even to the average of the last three increases in terms of timing between the last one and the next one. What we've said again, and I'll say again, is that our view is all the parameters, as it relates to member loyalty and value proposition that we've improved to our member we have no problem thinking about doing it and doing it ultimately. So it's a question of when, not if. But we feel that we're in a very strong competitive position right now. And if we have to wait a few months or several months, that's fine. And I'll be purposely coy on when that might be. It's Brandon Cheatham on for Paul. First one, I wanted to dig into the decision on holding the price on fresh. Are you seeing competitors do the same and that's why you reacted there? Or are you kind of trying to lead the charge there? And just curious like why make that decision since it seems like the consumer has been happy to take increased price, especially in fresh? The last thing you said there is exactly, I think, why we chose to do a little more there. We want to be the most competitive, and we can drive a lot of volume. And again, we're in it for the long term. And it's -- fresh is one of those unique areas where prices on many items do change almost weekly on some of those items. If not sooner, if not more quickly. And so our buyers are always looking at the, if you will, the supermarket ads as well as the other warehouse club ads, not literally ads, but what the pricing is, and we react to that. But we're also -- part of it is also consciously keeping the price on the chicken at $4.99, and keeping -- and those types of things, keeping the price on the hotdog. All those things go into that equation as well. But we know that, that can be a driver of business. Fresh, we got great stuff, and people do notice the price. In our view, people notice those prices differences. And just a quick follow-up. You have a large competitor that's been talking about increased members in the $100,000-plus income cohort. Obviously, it's not impacting your membership numbers, but I'm just wondering, do you see any impact on share of wallet or any thoughts there? Do you look at how many of your members might have additional memberships as well? Well, we don't -- what's that? No. Somebody in the room is telling me we were also up in terms of the average household incomes. So I think we're both seeing that. We know a lot of -- particularly of our executive -- our business members, in many cases, probably have both cards. They've always had both cards. And so no, we don't put our head in the sand as it relates to it, but we look at our numbers and how we're doing, and we've seen that the -- our penetration of higher income members has also benefited during this time. Before Oliver answers -- Oliver, before you ask a question, one other comment. One of the things that we have not done and don't plan to do is do a lot of promotional activities with our membership. And so that -- certainly, that will, in the short term, help drive membership, but we don't do a lot of that. Go ahead, Oliver. Regarding e-commerce and going forward, what are your thoughts? You're up against some tough compares, but as we model it on a longer-term basis, how should the growth rates evolve? And then as we think about non-food, you talked about it a lot, but do you expect the non-food percentage mix to change from the past? Or it will more normalize? And lastly, on the higher income consumer and gains there, would love for you to elaborate on what's happening? And if you're getting more luxury consumers in terms of higher income folks joining in the club? Sure. I wrote down non-food -- in terms of what's the new normal? Look, we don't know what the new normal is. I do know that we figure out how to drive total sales. I do know that over the last 2.5 years through COVID, people buying things for their home, whether it was indoor furniture, outdoor furniture, exercise equipment, electronics and appliances and it's even greater because of our acquisition in April of 2020 of the last mile, big and bulky delivery and installation arm from Sears, all that stuff has helped us dramatically. Look, a little bit is -- again, we don't know how much of it is just comparing against very strong numbers versus a little weakness. Our guess is a little above. We want to drive -- we always want to drive everything, but we want to drive more non-food things because you've got -- you don't need any extra space. If you're turning fresh foods at 50, 60 times a year or more, you're turning some non-food categories at 8 times a year. It's easy to go from 8 to 10 without any extra space in the building. So that's always been a goal of ours to drive both sides of the business, and we think we're pretty good at doing it. And this will be -- we'll find out what the answer is a year from now. Sure. Okay. On e-comm, again, that is even more dramatic if you look at what e-com did. We essentially doubled e-comm over a 12-month period from about worldwide from about 8 billion to 16 billion in that probably three or four months into COVID and then going fast forward a year. So the last half of fiscal '20 and the first half of fiscal '21, we had pretty good numbers over the last year. That, of course, dramatically impacted in a good way from our acquisition of Innovel. And doing, as I mentioned on the last earnings call, pre that acquisition in the U.S., we did about a little over 2 million drops, and a drop is anything from dropping off a sofa to dropping off and installing a washer dryer or a refrigerator freezer and taking the old one away. We've gone from a little over 2 million drops. In fiscal '22, we did a little over 4 million drops, 70% of which is on the site and this operation that we acquired. So we've had outsized growth on that. Helped also not only by the acquisition but COVID itself. So we're comparing against that now. We'll see where that goes. We think that e-commerce still long term. First of all, as you know, we still want you to get into the warehouse as well. That's what -- so long term, we still think right now, we want to grow the e-commerce. I would say our goal still is to grow it a little more than in line right now because so much of it has been benefited by big ticket items, which have shown some weakness that's impacting a little bit right now. So -- but long term, we want to still be even 9% or 10% of $240 billion or $250 billion business here is a big chunk of business. Yes. I think of Costco is a luxury company, too. So what are your thoughts on getting the higher income consumers? And anything you're seeing with your existing consumers in terms of behavior because everybody is under a little bit of pressure as well? Well, again, someone in the room here showed me that I think the data that somebody had asked me about where Walmart had indicated, we're all looking at that same data. We too saw the metrics of a little bit higher percentage of higher income people coming in, notwithstanding the fact that we start with a higher percentage to start with. That's -- we try to trade you up. And you know the quality of our merchandise, and we'd much rather sell you a bigger ticket item with all the bells and whistles. So I think that -- it's the way we merchandise, and we're not looking to change that at this juncture. Richard, I'd just like to talk about how -- traffic seems to be growing closer to 2% now in the U.S. Is there anything specific going on there? Or we just need to get used to it as recycling lower gas prices and tough out the slower traffic? Perhaps. I mean we still think anything that's even in the low single digits is great. And we benefited clearly from -- over the course of the last year, we benefited, as I've seen in our membership sign-ups, more people coming in and the gas business driving that a little bit as well. And just during COVID, we had a higher than previously average tick up and new member sign-ups. And so that's probably subsiding a little bit at this juncture. But again, we feel good -- very good about where our renewal rates are and then the loyalty that our members have. And we're pretty good at keep trying to figure out ways to get them in. We're doing -- we do online e-mails that are in-line directed for hot items to come in only available in store. And so those are the things that we continue to do. Got it. Could you update us on any private label extra gains that you're getting in this environment or trade down perhaps between proteins or anything like that worth calling out? We haven't seen -- last quarter, I mentioned a couple of things on the fresh side and the protein side that we actually saw strength in canned chicken and tuna, which was the comment that the buyers made saying that we're seeing -- to the extent that prices were skyrocketing and some fresh protein, we saw strength in canned protein. We don't see currently a lot of trade down on fresh. Prices have started to come down on some of those items as the underlying commodity costs have come down a little bit. KS penetration is up. Our critical senior is up. I don't have the exact number in front of me. I'm guessing it's about somewhere approaching 1 percentage point, but -- which is big when it's, I would say, over the last several years, it's probably been 0.5 percentage point. But -- so probably up a little more than normal, but -- and again, we had -- somebody asked us the question recently, are you seeing some trade down to private label? And we, of course, corrected them and said it's a trade up. You also mentioned it's a housekeeping item, but I want to make sure I got the charge right. So you're basically running a check to reduce the size of a contract that was at a higher price. So when -- what's the payback period on that check? Do we see it over four quarters, two quarters, six quarters? Yes. It's a moving target, honestly. It's based on rates, frankly, and rates right now have come down dramatically. So that would be a year, it could be a little longer than a year or a little less than a year, depending on what happens tomorrow. Hey, Richard. Just on new member sign-ups, you kind of mentioned it a little bit there in response to Greg's question. But just maybe talk about new member sign-up trends. Holistically, what you're seeing, anything U.S. versus maybe some of these international markets you've been entering. Just interested in your latest thoughts there. Well, I think the biggest thing continues to be we're better when study does sign up that they sign up in those countries where we offer executive membership, which is, I'm guessing, 85% of our company, more, maybe 90% of our company. It's just not in some of the smaller unit countries. And overall -- starting with the U.S., but overall in Canada, we do a better job of getting you to sign up as an executive member to start with. We also do a better job of getting you to sign up to auto renew with putting in your credit card. All those things help -- let's face it, all those things help, too. We know that an executive member buys more and shops more frequently in a year than a non-store member. We know that one of those members with a credit card, co-brand credit card shops even more frequently and spends more. And they do all 3, they're an executive member with a card versus being a regular member, that's the big kahuna here. And so I think that we've seen those trends go on over the last few years, frankly. And what's helped in the last year is the fact that, again, just our new member sign-ups has been higher than they had been historically over the last few years versus the last year -- last year or two. And I think we believe that's more because of COVID, and we were in a good place to shop. Sure. That makes sense. And as my last question, just an interest and -- interest income and other, obviously, has a few components to it. I'm curious if you can help us understand what the interest income was in the quarter. I think it was about $8 million last year. I'm sure that was up a lot this quarter. Just curious if you could give us a sense of what that number was in the first quarter? Is that in the Q? Okay. Yes, I can give it to you. Hold on a second. I didn't realize it's in the Q, which is not out yet. But what it is, is you've got a big increase in interest income and a big increase in FX downside. So of the 50 -- I think it was 53 is -- $54 million is interest income and the negative $1 million is other, which is a chunk of that's FX. And then this year, the $42 million -- I'm sorry, last year, it was $8 million of interest income and $34 million of other, the biggest piece of other being FX. So that added up to the $42 million. This year, the $53 million is $54 million of interest income and minus 1 of other. Richard, I just had one on elasticity and then another follow-up on the big ticket. But in terms of elasticity, any changes -- I'm not sure how you measure it or monitor it, but any changes in your members' response to your actions when you are taking some lower prices here? I think if you asked the buyers overall that there's a little less elasticity than there used to be on some of the things. Again, now that answer comes from the fact that my comments about big-ticket discretionary items. We've put more money behind it and that successfully cleaned up our inventory where we were over in some areas like furniture to some extent. But at the end of the day, I think in a year or two ago, we would have even guessed that could have been a little stronger. But then that gets back to the whole question is the economy -- the concerns in the economy impacting big-ticket discretionary items. So yes, I mean, there's clearly still elasticity. When we do temporary price discounts or even our MVM mailers, we still get good impact from it. Some things, the bigger the ticket, not as much as we used to get. That's helpful. And then just a follow-up again on the big ticket. What percent of your sales would you say are big ticket, maybe it ebbs and flows with the seasons, but just in general? And do you see that members are pretty broad-based in pulling back meaning across income levels, Executive, Gold Star, et cetera? Well, online, it's a little over 40. But online is only 9% of our sales. In store, I don't have it in front of me. 10 would be a good guess. And including that 10, furniture as well. So big -- and jewelry, big-ticket discretionary. So following up a little bit there. On the TV side, is it -- how much of it is a units down issue versus deflation? And is there any differentiation that you're seeing between larger and smaller screen size purchases? Yes. Units are actually up. And there's normal deflation in TV electronics anyway. And -- but there is perhaps a little bit of smaller sizes are coming down a little bit. Not everyone wants an 85-inch television but -- which is where we over-index to bigger ticket stuff to start with. But we are seeing actual unit sales up. Got it. And then a couple of sort of other bigger picture consumer questions. I guess, is there -- are you seeing maybe some mid- to low end, maybe not buying the 18 pack of Bounty? Like do you think you might be losing some category share as someone's trying to economize the ticket for your -- the lower half of your income perspective? And then can you also -- can you also talk about regionality? Obviously, there's some weakness in certain housing markets in certain cities, and then there's -- you have a big exposure to California. There's been more layoff news in the technology industry, and there's some population migration. So what are you seeing from a regionality perspective where you're seeing more weakness versus strength? Well, first of all, we're seeing strength in sundries as part of what we call food and sundries, which is everything. Food and food and sundries is everything from canned beverages to crackers and cereal, and sundries, of course, paper goods and cleaning supplies and the like. And we're seeing strength in those areas. Those are -- those are actually strong, offset by some of the weakness I talked about on the non-food side. As it relates to regional, I don't -- we don't really see any big differences. I mean every month, you're going to see a region stronger or weaker. It has more to do in our view right now of late with weather than anything else. I can't give you anything definitive on what's -- is the region -- it's pretty -- they're all pretty close. Got it. And then one cleanup question. Just on the inventory, you talked about pockets. It sounded like you cleaned up furniture and electronics, it sounds like. Is there any -- where are those pockets? How much is maybe holiday, decor or toys, other more at-risk categories in the month of December? The good news is our merchants are sitting here, holiday decor is fine. One example actually would be we have a small amount of air conditioners and fans, which was -- it was a hot summer, and we were very strong in it. There were delays some of the supply chain challenges, some of that stuff didn't come in until September. And needless to say, we're not going to put it out there and mark it down when nobody really is looking for an air conditioner unit in September. And so that's the example of a few things now. We still have some furniture. It's way down from where it had been. So very, very manageable. I think beyond that, there's nothing huge. And again, the big question right now would be the fact that from a standpoint of Christmas stuff, both the Christmas stuff as well as toys, we're in pretty good shape for that. We feel pretty good about that. I guess I have another gross margin question. And I guess it's -- look, if consumables continue to outpace discretionary goods based on what we're seeing in the economy, should we expect gross margins to compress a bit just from mix? Or do you have enough levers given existing price gaps across most of your categories to match the flattish gross margins? Just how should we think about the mix impact? We'll let you know next quarter. I mean we have a lot of levers, as you've mentioned, as you suggested, to pull and push. We're also aggressive on pricing when we want to be like in the fresh foods area that I just mentioned. And we're blessed right now with -- in some categories like gas that is a better margin. So all that stuff, again, there's a variety of puts and takes. We feel overall, there's nothing unusual about this quarter. And frankly, if inflation is not rising again, even if it doesn't go down, but it doesn't rise again from its current levels, we're in pretty good stead of greatly improving the component of margin that relates to a LIFO charge, particularly in Q3 and 4 when we had a $100-plus million number and a $200-plus million number. But that's to be seen, and we need to wait and see. So just as a follow-up on that, Richard, like fair to say that we're going to see lower freight rates starting to flow through the P&L and let's call it, less markdown pressure because the inventories are cleaned up a bit more than the last few quarters? That should help you a little bit. Sure. But as you might expect and one of the reasons we took this charge is we don't want to have to have the buyers worry about inputting higher costs into their -- if rates have come down and we contracted, we want to take some of that out. But that's still being worked through. That's not -- we have to continue to do that. Hope you all have happy holidays coming forward -- going forward. But I did want to clarify on two things. So in the past, when you have had slightly weakening traffic trends that has generally been a point to consider to actually push through higher membership rate increase. So I'm wondering, I know this is a very unusual time, but has that philosophy changed at all? Because obviously, your comps are changing or in -- or slowing? And then I would ask the same thing as it relates to the special dividend. We all know what your cash is and available cash is on the balance sheet in terms of timing with respect to announcing something like that along the lines of the fact that I think your Board meeting is mid-January? We have one every quarter. Look, we talked about both of those. In terms of the fee increase, I think over the last many years, we've probably done them at a time when things were particularly strong comp wise. The good news is during all times, renewal rates were strong and have gotten even stronger. We always look at ourselves in the mirror and feel that the value proposition has gotten better. That being said, we have done them -- I remember one time we were asked, it may have been back in '09, '10, during the Great Recession because I guess we did one probably in '11 or '12, which continued the Great Recession. And we'd be asked given the Great Recession, would you hold off on it? And our view was -- and comps were a little weaker back then, too, for at least a couple of quarters. And I think the comment I made was something to the effect, we'd probably do it anyway because we're going to use it to drive greater value in terms of pricing and everything in a big way. And so that really -- I think we've probably done it in times of lower comps or higher comps or good economy or tougher economy. And I think with the headline in the -- I probably mentioned in the last quarter call or even the quarter before that, with the headline being recession question mark and inflation exclamation point, there's no rush. And first of all, even if we follow the pattern of the last three -- over the last 16 or so years, they averaged 5 years and 7 months. And I know now that 5 years and 7 months from June of '17 is January of '23. I know on the last call, I said, that doesn't mean it's going to be January '23. It will be -- it's a question of when, not if. But at this juncture, we'll just have to wait and see. And I'm not trying to be cute about it, but there's not a whole lot more I can tell you. There's no analytical framework we use other than we feel very good about our member loyalty and our strength. And if we wanted to do it yesterday, we could. If we want to do it six months from now, we can. So we'll wait and see. As it relates to the special dividend, as you know, we've said before, it's certainly an arrow in our quiver that has boded well for us, we believe. We think that's done well. We've done 4 of them. The last one was a couple of years ago, and we certainly do have cash. Mind you, when you look at our cash, about half of it's U.S. and not cash equivalents. And so certainly, we have the ability to do it at some point. I think we wanted to wait and see how things are continuing here. I think that, too, is probably a question of when, not if. But again, you'll be the second to know, after us. It will be a real quick one, Richard. Can you just remind us, you're back to 15 net stores in the U.S., but what has to happen to go back to kind of the years where you would open kind of a net 25 a year in the U.S. and maybe relieve some of the pressure on the over-productive clubs in the U.S. right now? Yes. I think it's been a few years. I mean when we opened the net of 27 or 28, maybe low 20s or 22 or 23 were there. But we've been at maybe 16 or 17 out of 23-ish in the last few years. If you ask Craig, who's not in the room, but if you ask him, if we're opening a net of 24 this year, I think I said, what's the goal five and 10 years from now, probably to get it closer to 30 net. And probably by 5 years from now, it's 50-50 U.S. elsewhere -- versus elsewhere. That's the same answer I, by the way, said 5 years ago in terms of the split. But we'd like to see add 5 to that 24 in the next few years to go up a little bit higher. Certainly we have a lot of activity going on. Thank you, Richard. Ladies and gentlemen, that will conclude Costco's fiscal Q1 2023 Conference Call. Thank you all so much for joining us. I wish you all a great evening. Goodbye.
EarningCall_1970	No. I know, like, that's the thing. Like, I was thinking, like, how do I talk about the business. But then question is, like, I have got a whole of the hedge fund community, like, you need to ask the questions, it's, like, I know the answer. But, like, maybe we do it slightly differently. So, if you think about this year about Q2, Q3, like Q2 was kind of like, âOh, shoot,â and Q3 looked a lot more stable for you. Like, can you talk a little bit about, like, linearities in the quarter? What you did? What you saw there? Yes. Well, I think -- first of all, I think that we came off -- so, starting the year, we came off of such a strong 2021 and a really strong Q1. And by the way, in Q2, we had a really good linearity through April and May. And so, we really started to see a shift in our customers' behaviors starting in June. And so, what we did as we entered Q3 is when we realized that these deals were getting more scrutiny, and as our deal sizes are getting bigger and bigger, the scrutiny was incremental. And so, in Q3, we really focused on understanding what that approval process was going to be and helped our customers walk through that process, right? So, what do you need to get the deals over the line? How do we help you put together the value proposition in a way that might look different for a CFO versus a CIO, right? And so, how do we stay close to that process? And so, that's how we executed a bit differently in Q3. And I would say we pivoted pretty quickly, because the macro did shift rather quickly at least with our customer conversations. And so, feel really good about the execution of the sales teams throughout all of Q3. As we talk on December -- is it 8th today? Goodness. I can't actually believe that. What I'd say is that linearity is similar to what we expected so far, continue to stay really close with the customers. We have our top 100 deals have all deal champions at the executive level that make sure that we are really helping those customers get these deals over the line. And so, there's a lot to execute in the last three-plus weeks to go. Obviously, month three is always the biggest in any quarter. But we remain confident in our ability to continue to execute. What we're seeing is pipeline is not disappearing. Pipeline remains consistent and demand remains strong. And so, we are continuing to focus on just execution, first and foremost, and staying really laser focused and close with our customers on a day-to-day. As a management team, there's obviously also the things where you can work on in terms of pipeline coverage, kind of tracking deals, et cetera? Like, has that kind of -- has that scrutiny changed, or like, have you kind of changed kind of how you do things as you went through the year? Yes. What I would say is we've always been really disciplined on pipeline hygiene. Obviously, with macro shift that we've been seeing, we've become even more laser focused on that; our deal is stalling; why are they stalling; getting involved earlier. The great thing is that pipeline generation throughout the year has remained strong. So, we talked about at the end of Q3 that our Knowledge, our big Knowledge conference, the user conference in May generated 40% more pipeline in 2022 versus 2021. We also had active customers with large active pipeline at the event at a much broader scale than what we've been seeing. So, pipeline generation remains strong. As we went into Q4, we're having our world forum events, which are smaller Knowledge-type events in key markets internationally. So, seeing really good coverage with respect to active pipeline, as well as incremental pipeline gen coming out of that. So, early days. We don't have all of the insights yet, but the conversations I'm having with my teams coming out of those events over the last several weeks have been really positive as well. So, a lot of focus on pipeline hygiene. A lot of focus on making sure that coverage ratios are stronger than they have been in the past, right? And so, we feel really good about demand. The one thing I'll say about this macro environment. While certainly there's some bumpiness and some uncertainty in the short term, the ServiceNow platform delivering great and increased productivity and efficiency as well as cost savings resonates now more so than ever. And so, the mid- and long-term opportunity remains greater than ever, and that's where we're really focused on, making sure that we are continuing to invest behind growth, continuing to invest quota-bearing sales, innovation to ensure that we remain very well positioned, given what we see as just a continuing increasing opportunity for us. Yes. And what's -- a point that kind of probably with that is, and we saw yesterday, our leadership was here from Barclays, it's a bang on our IT side and then CIO side, and they talked about, like, how in these tough times you want to have good partners, and they mentioned ServiceNow is one of them there. Like, from that perspective, like, do you -- that relationship, like, do you see that in this -- that the conversation is changing as people are consolidating towards like fewer guys and you're delivering more value and people want you to deliver more value to them? Absolutely. I think, the platform consolidation that you're seeing, quick time to value trends all work in our favor at ServiceNow, right? The fact that we are the trusted platform of the IT organization as they're looking to potentially take out point solutions to drive cost savings, to drive efficiencies, positions us well. The fact that time to implementation for the most part is weeks and months and not years and years really helps in our favor. And so, I think these are trends that you'll continue to see the opportunities for us. And I'd certainly appreciate your CIO calling us out as the strategic partner, because that's absolutely been our focus across the board with our customers. And then -- I'm sorry, this the last one, I apologize. Linking it a little bit back to kind of the current environment, like, you also have this kind of as part of that Q4, you mentioned, like, this big renewal cohort. I mean, in a way that should help you to sleep at night better, because like, you were very strategic to your customer. They are not going to go away. Like -- so that kind of should help you if you think about like making a number, et cetera? Yes, I think that's right. So, with 98%, 99% renewal rates even in Q2 and Q3 of this year, clearly, we're mission critical to our customers, right? And so, that large renewal cohort is expected to renew. We also saw when we reported in Q3, we did see that part of our beat in Q3 was actually early renewals of some of that cohort. So, de-risking the plan, helping drive those early renewals, a big piece of it. And so, certainly that gives much more visibility into the pipe and into the closing. So, what ends up at risk is kind of that net new and that expansion, right? And so, what Iâd say when I talked about at the end of Q3, while we don't give expansion rates on a quarterly basis, we do give them on an annual basis. And at our scale last year, 2021, we saw 125% expansion rates. And what I said in Q3 is we saw continued strong expansion throughout the year, including in Q2 and Q3. And so -- and that's because we have visibility. They are -- these are longer cycles, so we understand the demand of the customers. That being said, there is some macro uncertainty out there. And so, staying close to the customer and understanding where they are in their buying cycle is something that we are laser focused on. Yes. Okay. And then, where are we, like, over the -- in 2021, with a lot of kind of catch-up hiring after 2020 in terms of sales capacity to kind of make sure you kind of have the sales capacity to kind of continue to grow, like, where are you on that sales capacity, but also in terms of, like, how they ramped up? Like, how far they end up ramped up? Yes. So, what I'd say is that we definitely saw higher attrition than we'd seen in 2020 and â21 in the beginning half of 2022. Itâs not uncommon, I'm sure youâve all heard that from most. It was lower than benchmark, but still significantly higher than what we'd seen. What we've done this year is even in the face of the macro headwinds, we have not stopped pace in hiring quota-bearing feet-on-the-street go-to-market sales. We've not stopped hiring our key -- fingers on keyboards, engineers driving innovation. What that means from a ramped rep perspective as we're entering into â23 is that the percentage increase in ramp reps going into â23 is significantly more than what we entered in 2022. So that positions us well as we go into the marketplace. We also are expecting lower attrition in Q1 and Q2 as a result of current market trends. So, all in all, we absolutely see a pretty direct linearity in top-line growth with increase in ramp reps. So, entering â23 strong. And as we think about headcount growth in â23, because it takes about nine months to ramp a rep, most of the hiring we do in â23 will be all about ensuring that we have good increase in ramp reps going into â24. So, it's why we talk about the fact that even with the current macro, we're not stopping in driving that quota-bearing ramp rep headcount, because it's going to position us well into the future. What we do see leveraging is in more of the supporting sales, right? Supporting sales and marketing, back-office, G&A, and that's where you'll continue to see us drive leverage on the bottom-line. Should it not also be like an argument to really pay attention now? Because, if you think like the VC-funded guys, whereas people would get rich overnight with kind of that sort of stuff, that's not going to happen. And so, there should be a lot more good talent on the market, and you with your strong position, et cetera, like, do you notice already like the number of people coming towards you, the quality of people coming towards you that that's changing? We absolutely have been very focused on grabbing great talent in the marketplace. And so, that will always be a strategy of ours, that will not change. And the talent brand that ServiceNow has today vis-a-vis a year and two years ago is pretty incredible. And so, we've been really excited about the great talent that we've been able to bring in. And certainly, given what I just talked about, about continuing to invest for growth, you'll continue to see us really go aggressively to get that great talent. Yes. Okay. Let's shift gears a little bit more on the product side. Like, for a long time, and it's normal in the life cycle of a software company, you were kind of selling one product. Then, we started to have, like, slightly more differentiation in terms of Lite, there was the Pros SKU, the Enterprise SKU. Can you talk a little bit about that evolution, and kind of where are we on adoption of that one? Yes. So, Pro SKU gives us incremental capabilities and differentiation. Think about incremental AI and machine learning, how can we automate more, allow the IT organization to deflect lower-tier issues, so they can focus on harder, more important stuff. We've seen Pro adoption well ahead of what we had originally anticipated. And we currently at about 35% penetration. We've talked about expectations for the Pro SKU to get upwards of 55%. So, there's still some significant tailwinds there and headroom there. From an Enterprise SKU perspective, again, expectations, we've told that we expect about 20% penetration, but we are in very early days. We haven't even given that number. So, as you think about continuing to drive significant increases in value for our customers, some real headway still in front of us, even within our core ITSM. Yes. Okay. And then the -- is the -- how do you see this going forward, more from a product evolution? It's like Pro and Enterprise, and you're done? Or like -- I mean, if I look at other vendors, obviously, they're kind of much bigger than you by now already. Like, there's a lot more, like, differentiation coming in. There's, like, industry. There's kind of, like, analytics coming in differently. Like, how do you see that evolving for you? Yes. I mean, I think the innovation that ServiceNow has been able to continue to drive has been pretty incredible. I talked about at the end of Q3 the fact that we have now 11 products that are greater than $200 million in ARR. Pretty incredible. All organically grown. And those are 11 products, [but not] (ph) 11 at $200 million. We have a couple over $1 billion. We have several over $500 million, And so, the innovation that we continue to drive has been pretty remarkable, from the product perspective. And then, as we continue to add capabilities to the platform, one of the reasons why we have such a great unit economics is that all of the innovation that we put in the platform goes across every product, right? And so, you'll continue to see us differentiate with capabilities in the platform, as well as industry solutions, as well as continued evolution of new products like our ERP workflows, for example. Yes. And the -- talk a little bit about the -- I remember when -- so when I did the IPO, it was like ITSM, then ITOM came, then HR, then customer, the platform, now ERP. Like where are we on that maturity curve for these kind of product segments? And how do you see the different sizes when they are kind of fully scaled out for these ones? Yes. I mean, if you think about where we are outside of ITSM, there's a lot of runway ahead. Like, penetration levels are early days still. If you think about the opportunity for customer workflows, that'll probably be our next billion-dollar workflow. Creator Workflows, we talked about it back in May, it being over $600 million. There's a lot of opportunity, and I got the question earlier today in some of my meetings. The need for application development outside of IT organizations just -- itâs getting greater and greater. And so, the traction for creator is pretty remarkable. We talked about at Analyst Day the fact that by 2024, we expect as a percentage of net new ACV, Creator Workflows to be at 20%, customer and employee together at 35%, right, and core IT at 45%. It doesn't mean that core IT is not growing really well, it's just that the growth in those other more early-stage are growing faster. And so, there's a ton of upside. And we've talked about also historically the fact that even with our current product portfolio and our current customer base, if you think about the total addressable market within those customers based on our current product portfolio, it's five times where we are today. So, there's a lot of white space penetration still to come, a lot of opportunity ahead. And I'm warning you, I'm just, like, trying to sneak the current environment back in now. Like, on those newer products, is there a differentiation in terms of the way you think? Like, because, like, some products work better in certain times of the cycle. Like, so, if you look like customer -- I'm looking at the Salesforce number at the moment and they're maybe not quite as good as some of the other players. Like, how do you see that playing out for you and the focus that you're putting on them? Yes. I think that we're seeing pretty strong resiliency across the board in our portfolio. And if you think about why, even with respect to customer, where we play really well is where we're able to orchestrate complex workflows across the enterprise, right? How do we tie a customer service ticket to the resolution, right? And it's a system of action, and it's making the customer service reps much more productive and efficient. That is something that resonates really well in a recessionary environment when many customers are focused on taking costs out, driving greater productivity and greater efficiency. If you think about employee workflows, well, while weâre in an uncertain macro environment, we're also in an environment where workers are more dispersed than ever, distributed than ever, right? So, driving employee productivity and efficiency, as well as employee experience for those employees that remain really important and still top of mind. And then, you see our core, of course. Again, driving more resiliency. If you think about, ITOM continues to do extremely well. Risk security, while smaller, growing really well in this environment. So, really good resiliency across the board, but obviously, we're staying super close. Yes, okay. And then the -- so all of those, kind of, products, kind of, in a way come out of the core ServiceNow platform that Fred Luddy worked on. Over the years, we always had a discussion about, like, adjacent kind of platforms. So, there then we have, like, at the moment, all the work that you do were on observability. Like, can you talk a little bit about, like, how that will -- kind of how that's playing out for you? Yes. So, super excited about the LightStep acquisition. Early days, but we're in the process of integrating that into ITOM. And if you think about observability combined with AI ops and workflow, it's a fulsome solution for the customers. So, that's fantastic. And then, we announced a smaller acquisition of Era Software, which adds logging to the metrics and tracing. So, we have unified telemetry across the board that we're very excited about. And if you think about where Lightstep plays really effectively, it's all in the cloud-native architectures. So, it allows us to be lower cost. And it allows us to -- it's not an âorâ, it's an âandâ with some of the legacy technologies. So, really excited about the opportunity there. It's certainly an area where we are continuing to invest. And it's a natural adjacency to kind of the core of what ServiceNow does. And, I mean, we had, like, a few of the observability guys here at the conference. Like, there's always that kind of notion of core petition, like, because like a lot of them feed into your ITSM platform, it's kind of really important to have that connectivity and work together. Like, how do you see Lightstep in that respect in terms of like, where you want to kind of own the whole kind of chain versus Light kind of sharing it out? Well, I think that many customers have both legacy as well as cloud native. And so, this is where I think the cloud native is where we play well. And so, this is the conversation that we have that we can absolutely continue to partner with the other players in that space while at the same time growing our capabilities in Lightstep. Yes. Okay. Perfect. And then the last few minutes, I wanted to talk a little bit about profitability. It's kind of much more in focus these days. So -- but you always have been a very disciplined organization. So, it's kind of I almost feel bad asking. But, like, what do you see at the moment? Like, this morning, I had, like, several CFOs here, and a lot of them like all made the same point of like, look, the interest rate is higher. That means my ROI for an investment is higher, which basically means that kind of explains where we kind of need to be more disciplined. I feel almost itâs slightly different for you. But, like, how are you sitting on that kind of notion? Yes. So, like I said earlier, we are really focused on continuing to invest for growth, right? And so, we absolutely see the very quick ROI on our sales hiring and our sales capacity. The ROI on our investment in innovation and R&D is pretty remarkable, because, again, all the innovation that we put into the platform goes across the product line. And so, ROI remains strong there. Where you'll continue to see us get leverage is on the operational efficiency. So, we are the first customer of all the innovation that comes out of ServiceNow. So, when I talk about the fact that we're driving efficiencies and productivity for our customers, well, we're doing that for us too, right? It's one of the reasons why we were able to offset more -- almost a 100 basis points of FX to our margin this year, while at the same time, continue to hire for go-to-market and innovation. So, you'll continue to see us find leverage there, as well as in the support related, as well as on kind of sales and marketing efficiency. Because so much of our sales come from existing customers, we're really able to get pretty strong efficiencies out of our sales and marketing machines. So, you'll continue to see us be discipline on both top-line and bottom-line with a keen focus on investing for growth first and foremost. And is there like -- it's -- I remember, like, ServiceNow years ago had like an -- a slide where they sound like, well, if growth is here, the margin is going be here. And if growth is slowing down, then the margin is going go down. Is there, like, how do you think about it? Is there, like -- there must be a handbook for a CFO that nobody shared with us, like in terms of how you need to think about growth versus margins, and what's good for an organization. Like, how do you kind of make that decision? Yes. I mean, I think that what you've come to see from ServiceNow different than some others is always a focus on top-line and bottom-line, right? And so, there's not a handbook to say if growth slows to this, the margin accretion needs to do that. That being said, we get what drive shareholder value and we're really focused on that. And so, again, really focused on the growth. We are committed to giving back margins at the one 100 bps that we talked about, even despite some of the pressures that we're seeing. And so, you'll continue to see us focus on that. But at the same time, we're not going to give up the opportunity to invest behind the growth that we see so clearly that opportunity is stronger than ever. And so, you'll continue to see us take a very disciplined approach to driving both top-line as well as the bottom-line. Yes. And then, how does that translate into cash and -- first, cash generation? I guess, it is a very kind of close relationship for you. And then I was thinking more about cash usage as well. Yes. So, listen, we've been pretty open about the fact that we were looking to give back about 100 bps on both operating margin and free cash and margin a year. At the same time, what worked really well for us in 2020 when customers needed some support on timings of cash flow, that really worked well in our favor to solidify those relationships. So, we want to be able to be mindful and not change payment terms, but allow for some flexibility in a macro that we're seeing. That being said, that's short-term timing. Long-term, mid-term guide, we'll be able to continue to accrete margins like we have committed to. And I use it like -- I talked with other vendors about that as well, and they were like it was kind of different in 2020, because back then, people were really like, oh my God, and if I don't have to pay you now, that would be great. And so, we are cash starved. Some of business had to shut down, so they really had to preserve cash. It doesn't feel it's -- we're in the same situation now. Like, what are you seeing there? Or do you getâ¦ Itâs a little bit different. So, in 2020, certainly early in the year, you got the, âOh my God. I got to preserve cash. Let's be smart about this.â But what also happened in that same year, especially for us where we are so enterprise focused is that T&E spend went to zero, right? Marketing events went to zero. So, by the end of the year, they were flushed with cash, right? So, they were like, let me pay more now. A little bit different this year where supply chain inventory levels, there's other pressures on balance sheet that I think will just create a different type of environment that customers are -- might be looking for a little bit of leeway. And I just want to be able to be mindful of that and work with them on that, especially if it's short term. Yes. Okay. Last couple of minutes. Like, on that note, like, cap -- you're very cash generative. You have a very strong cash position. M&A, like -- or maybe, like, usage of cash, M&A, like, how do you think about that? Yes. I'm not under duress of phone calls from bankers trying to [indiscernible] some M&A, right? What I'll say is, and I'll go back to the comment earlier, we organically built 11 businesses greater than $200 million in ARR. What that means is the bar is really high for us on acquisitions. And so, we wouldn't be doing our jobs if we're not looking and keeping our eye on the market and thinking about what beneficial and going to drive incremental value for our customers, if they're a better together story. That being said, the bar is really high, and it would have to not only drive significant customer value, but strong shareholder value as well. And so, we wouldn't be doing our jobs if we werenât looking at that, but it's certainly not the strategy of what we need to achieve the top-line goals that we've set forth.
EarningCall_1971	Hello. Good afternoon, everybody, and welcome to the Third Quarter of 2022 Earnings Conference Call. My name is Flavio Prieto, I'm the Head of Investor Relations, and I will be conducting the presentation, and I will be available at the end to take questions. Before we begin, I would like to inform you that this conference is being recorded. [Operator Instructions] Also it is important to highlight that the management's statements involve risks, uncertainties and may refer to future events. Any changes in macroeconomic policies or laws and other operating results may affect the company's performance. Now we can begin the presentation. Thank you. Let's go to the next slide where we are going to show you the highlights. In the third quarter we launched a development Sense in the City of NiterÃ³i in the neighborhood of IcaraÃ in the State of Rio de Janeiro. And we also had the pre-launch of Cidade Jockey in SÃ£o Paulo adding up to R$544 million in PSV and 204 have been launched, and the rest are in the pre-launch phase. We have been using these terms, and pre-launches means when we don't have the permits, all the permits. And in October, we obtained it, and we already have the stand in place and the sales force in place and all the marketing actions. In 2022, we have already launched R$1.07 billion. And that is essential for us to keep the same, the appropriate level where we are right now. And looking forward, you can see that we are finishing the works that we had in our portfolio. And year-to-date, we developed and delivered 266 units, and we delivered Belvedere Osasco with 266 units, with a PSV of R$610 million. Also we have obtained a performance that was very impressive with R$184.5 million, taking us close to R$1 billion in sales over the last 12 months. We also reached R$184.5 million in net sales with a 9% decrease quarter-on-quarter, an increase of 143% year-on-year. When it comes to the gross income, we reached R$41 million in the third quarter of 2022. We had some significant impact, for example, the PoC method and also the swaps, but the result is in line with the second quarter of 2022. But the results were lower year-on-year by 38%. Now the gross margin dropped a little bit to 11.7% in the third quarter in comparison with 16.4% in the second quarter, a drop of 473 points. And in this quarter we had some significant events, the main one being the acquisition of Bait. We acquired 100% of the Rio de Janeiro developer and it has been fully integrated within Gafisa. We already had an office in the City of Rio de Janeiro. We revamped the office, and we have about 80 people working for us in Rio de Janeiro, which is appropriate considering that Rio de Janeiro is the second largest market for us in the country. And on the picture, you can see the premium locations of Bait's developments, in the most desired neighborhoods of Rio de Janeiro. We had about R$180 million in this transaction. Half of that amount is being invested in cash and the other half is going to be paid in asset swaps. And here you can see some of the assets that were acquired. And you can see that Gafisa brought about R$500 million in free cash flow for the next two or three years. We can see in our balance sheet about R$215 million through the PoC method. You can see that, that is appropriated in our balance sheet, and the rest will be recognized over the course of the next quarters. So you can see the high quality of these assets, fully in line with Gafisa's inventory. Some of the developments include Canto in the neighborhood of Copacabana/Ipanema. It is located between those two neighborhoods. It has full views to the sea, to the ocean. And let's take a look at the numbers. We are talking about R$928 million in swaps PSV. We have already launched 530 and our land bank amounts to R$600 million. And these are developments that are really no-brainers in the City of Rio de Janeiro. Now let's talk about the operating results. As we said on other occasions, we launched R$730 million in the first nine months of 2022 with two launches in Rio de Janeiro, Stratos in the neighborhood of Botafogo, Sense in the neighborhood of IcaraÃ. We also have Stratos in Itaim in SÃ£o Paulo and Evolve Vila Mariana in the City of SÃ£o Paulo. We launched all of these developments. And our PSV excluding swaps is R$633 million. And we should remember that they are all in line with the strategy of having a presence in the high middle income and high income segments. On the next slide, you can see that we have already launched over R$1 billion in launches and pre-launches. As of today the pre-launches have already become launches. We launched the development two weeks ago, and it was very successful. We had over 128 portfolios. We are now confirming the sales information, and it was a great success. This is a very differentiated development. We are working with Gensler [ph], one of the biggest architecture firms in the world to help us develop this product, and we are very confident in it. It is incredible and the commercial response has been great. So year-to-date, we have launched over R$1 billion, and the net results for Gafisa is about R$1 billion, also R$986 million, which is important for us to keep the inventory level at the appropriate level so that we can perform well in our sales and also bring profit to the company. At the same time, as we launch new products, we strengthened our operating commitment with the developments that were already in our portfolio. And you can see that we have already delivered 1,064 units with a PSV equivalent to R$610 million. These awards have been completed with the occupational permits having been issued, which is very important for managing purposes. So it is important for us to reaffirm our commitment with the future of the company and also with the consumers who trusted Gafisa and bought our units. Belvedere, for example, was a great success in sales, and I'm sure that the consumers will enjoy it very much once they move in. Now let's talk about the net sales. We should remember that we are exceeding already R$930 million in accumulated sales. These are gross sales. It is a very significant result, reflecting the size of the company, the size that the company has today. From a growth standpoint, in this quarter year-on-year you can see that we have grown by 143%. We had an unusual event in 3Q '21 with a high cancellation level in the Parque Maia development with R$70 million in impact. But it has been sold almost entirely. So although the comparison -- the impact was great, the comparison is not really fair. But I think that now we should pay attention to the sales year-to-date. I think it's interesting to look at the year-to-date results, the first nine months of the year with a growth of 62%. It shows that we are at a good level where it really matters. And for us, what matters the most is to sell great products to consumers. We have been making efforts towards that goal and the quality of the products can be seen in the success of sales. We had a specific workforce dedicated to some specific developments that have been delivered, and we needed to sell those units, and we did that over the course of the last quarter. And we can see that the middle-high and high income products sell better, and they already account for 90% of the company's sales. We have a very appropriate balance between delivered units, concluded units and units under development. We have 19% of finished units by the way. Now let's talk about our inventory. We reached R$2.1 billion because of the acquisition of Bait. We brought R$200 million from Bait in terms of inventory, and 86% of our inventory is in the middle-high, high income segments. And this chart is very interesting because it shows the company's ramp-up over the course of the past quarters and our concern of putting the company at the appropriate level where it is right now in terms of sales. And that caused us to launch many units, and over the last 12 months, we can see already a reduction since we are keeping the company at an appropriate inventory level for the sales levels that we have right now and for the level of exposure that the company has from a financial standpoint. Now let's break down the inventory a little bit further. We have 86% of the inventory in medium high and high-end developments and 98% of the units are located in SÃ£o Paulo and Rio de Janeiro, which are the two main areas, the most attractive areas for us, where we have professionals and workforces and appropriate resources. So as I said, we had a slight increase. Actually, it was a significant increase basically because of the inclusion of Bait's inventory in our portfolio. Now let's talk about the financial results. In 3Q '22 we had net revenues that were very interesting, very significant, maybe the highest net revenue since 2019 with R$351 million recognized in the quarter because of the developments that we launched and the progress of the construction works and also the sales speed. So just to have an idea, if we compare this quarter with the previous one we had 111% growth because of this moment that the company is at right now. We had a significant ramp-up. We changed our product portfolio so that we could sell more and receive higher revenue levels, and at the end, improve our margins. In 3Q '22, 90% of the sales were in the high income segments and also the middle-high income segments. Out of the R$53 million in cancellations that we had, R$25 million were concentrated in two developments, and we have already resold those R$25 million. It was related to the timing of the development. So although cancellations went up a little bit in the quarter, we believe that this is not going to be recurring. Now still about inventories, you can see the positive impact of bringing Bait's inventory to our portfolio. Once we launched development, and here we are including only Sense -- we are not including Jockey here -- we went from 84% to 86% of the inventory in line with the current strategy. Now let's talk about revenues and results. We had a loss of R$49 million, and quarter-on-quarter we had a nominal increase in sales expenses. And in the last quarter, we had very low sales of about 3% of our revenues. And we also had an increase in COGS, but the main point was the recognition of swaps in two developments. And in terms of gross margins, we had a very significant recognition of swaps in Sense and Canto developments. Now when it comes to net profit, because of those issues and also some non-recurring actions, we had an impact of R$19 million quarter-on-quarter with a net result of minus R$49 million. Now when we look at our margins, we can see that our reference margin, between the receivables and the expenses, we are still above 35%, and that is last nine months view. And you can see that the adjusted gross margin decreased a little bit, below 30%, but it's still at an appropriate level. The margins this year suffered because of the financing costs that we have, and the net margin was about minus 9%. Of course, the backlog margin is an indicator of what we can expect for the next quarters. So we are focusing our attention on this, with some PoC recognitions in the beginning, which can cause some larger variations as happened this quarter. And we want to reach a backlog margin that is at the same level of the adjusted gross margin. We had a significant increase or impact on our net debt. We had R$315 million in development debt this quarter in comparison with the last quarter because we recognized about R$240 million in receivables. The developments were very advanced in terms of sales. For example, Canto Rio and Canto Mar have already sold very well. And we believe that once these developments progress in their construction works, we are going to have higher recognitions. And also, as we said in our earnings release, and we're going to talk more about that later, we expect to decrease our net debt in the future. Now moving on to the last slide in the presentation, and then we can start the Q&A session. I would like to talk about the action plan. And as we said, earlier, we are going through the 100-day plan internally. It is a plan in which we want to identify plenty of actions to be put in place. For example, we have already started our actions to decrease our G&A. We are reducing also the number of offices in the company, which can cause a reduction of R$400,000 per month. We have also reviewed all of the developments in the company. In the 100-day plan, we are reviewing the details and financials of all developments, and we are also reviewing and working in a slightly different way, in a more optimized way, in our sales marketing strategies. We are going to review our processes and trying to cut off red tape and inefficiencies. We have also been working on a strategy for Gafisa Properties and we also want to review the capital structure of the company, which has a high leverage level, and we now need to review it. Now let's talk about the quick wins. I mentioned two already, and there's another two here that should be mentioned. We need to take care of some legacy issues that are recurring at Gafisa. We have been working on them, but now we have one person dedicated to that specifically. And we are also redefining some non-strategic projects, for example, selling land bank or divesting in some development. There are about 10 projects that will undergo some changes so that we can optimize our operations over the next three months. Well, we have not hammered anything out yet. We have already mapped things out, and we know what we are going to move forward with, and what we are not, and we are trying to find the best way now for us to add the most value possible for shareholders. Well, the main point that was not in our radar was the recognition of swaps, which caused a big impact because of the PoC progress, and it was non-recurring. We also had increases in costs impacting our COGS. But I don't think that has impacted our backlog margin. And in some projects, we are going to focus more on cash, and we are going to generate more cash in the company to the detriment of potential margin increases. I think that I have already talked about the net debt. There was a question about it, but I think that I already gave some details about Bait's net debt. I think that I have already addressed that question. And of course, you can take a look at the balance sheet to see more details. To what do we owe the drop in gross margin, and to what do we owe the increase in cancellations in the last quarter and also the quarterly increase in sales expenses? Well, when it comes to margins, I think that I already gave you details about that. We had R$53 million in cancellations and R$20 million are recurring. So considering the R$225 million in sales, about half of that was nonrecurring. The R$25 million were nonrecurring and we have been already able to revert that situation. And those cancellations wouldn't have happened if we didn't have that timing issue. It is reflected in a snapshot view from September. So that's why we can see that level of cancellations. And our sales expenses, I believe the expenses in the second quarter were very low. So that's why the comparison is not so fair in 2Q, and it was only 2% to 3% of the revenues. Well, I think that we have proved to be a very resilient company and a competitive one as well. We have a good sales volume. We have a very good productive change. So we have everything in place and organized here in terms of production. From an operating standpoint, the company is fully functional right now with a very interesting workforce. Of course, we want to improve the processes. We want to improve the levels and indicators for sure, but we are launching, selling, producing and delivering. From a financial standpoint, we have a big challenge ahead of us. We've been around for 68 years, and our legacy is great. So we need to work hard now. And there are many actions under the new management, aiming at working as fast as possible. But from a financial standpoint, we are still working on our legacy. And over the coming quarters, we are going to bring you some tangible results for the shareholders. Do you have any plans, Igor is asking do you have any plans about potential capital increases after the reverse stock split? Well, we are in a silent period right now. We issued a material fact to answer B3's [ph] question about the stock movement. And due to the regulations, we had to issue that material fact. But I can't tell you anything right now about capital increases. The reverse stock split is important because of potential liquidity issues and there are many things that are important here and that can serve a positive impact from the reverse stock split. Yes. And that is a very good question. From a sales standpoint, since it is a KPI, we did not consider Bait's sales in the quarter. So we have higher sales potentials in the coming quarters. When it comes to revenues, we recognized the month of September, the sales that occurred in the month of September. So you can see that we have great potential ahead of us. Well, I can't give you a number but we are working on decreasing our leverage level. Since the new management took over not a long time ago, we don't have any signed contracts yet, but we have many initiatives and we want to negotiate, but we have not closed any negotiation yet. We know that the leverage is high and it should be clear to all of you that the company is focusing on decreasing our average level and to generate operational cash flow. That is our focus and target for the coming quarters. Well, I think that's it. I think that I have addressed all questions. All right. So thank you all very much. And you can see our contact info. If you have any more questions, please don't hesitate to contact us. See you next time. Bye-bye.
EarningCall_1972	Good day, ladies and gentlemen. Thank you for standing by and welcome to the Jiayin Group's Third Quarter 2022 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. Good day, everyone. Thank you all for joining us on today's conference call to discuss Jiayin Group's financial results for the third quarter of 2022. We released the results earlier today. The press release is available on the company's website, as well as from Newswire services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Fan Chun Lin, Chief Financial Officer; and Ms. Xu Yifang, Chief Risk Officer. 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 is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi. With that, let me now turn the call over to our CEO, Mr. Yan Dinggui. Mr. Yan will deliver his remarks in Chinese, and I will follow up with corresponding English translations. Please go ahead, Mr. Yan. We delivered another outstanding quarter with strong financial and operational results. Our loan origination volume grew by approximately 123.5% to RMB14.9 billion in the third quarter, making it the second consecutive quarter with over 100% year-over-year growth. Our net revenue increased by approximately 55% year-over-year in the third quarter to reach RMB894 million. Our margin profiles also continue to improve as we further refine our cost structure and optimize our operating efficiency resulting in consistent margin improvements. Our exemplary third quarter performance attached to our commitment towards strengthening our partnership network, refining our risk management strategies, strengthening our technology capabilities and accelerating our global business expansion. In the third quarter, expanding and strengthening partnerships with largest financial institutions remain our top business priority. Under the current macroeconomic conditions, we focus on reassessing the needs of financial institutions and building long term partnerships to safeguard our funding sources and optimize our funding structure. As of September 30, 2022, we have forged partnerships with 46 financial institutions and we are currently in discussion with another 60. Notably, national financial institutions in our partnership network still contributed to the majority of our total loan origination volume in the third quarter. In addition to strengthening partnerships, since earlier this year we began collaborating with partner financial institutions to provide them with technology enabled services for their in house operations. We offered them access to our intelligent platform and automated solutions under our new collaboration model for partner institutions. Currently, we have empowered three financial institutions to digitize their in-house business from fund management, risk management, intelligent marketing, customer services to other operation processes, we are now interfacing with another three financial institutions and actively negotiating with six more institutions to foster the development of this new collaboration model. On the borrower front, we continue to invest in online marketing programs to streamline our borrower acquisition efforts. Meanwhile, our focus remains on optimizing the structure of our borrower base as we expanded. We are categorizing our borrowers based on their credit profiles, risk assessment and borrowing behavior. The categorization enabled us to streamline our resource allocation towards premium borrowers and build a foundation for the future launch of more customized services and targeted borrower operation initiative. In the third quarter, our average borrowing amount per borrowing reached RMB10,158, increasing 58.1% year-over-year. Moreover, despite adding new borrowers in the quarter, our repeat borrowing rate still maintained at a healthy level above 60%. We also remain committed to strengthening our core technology capabilities in the quarter. We successfully launched our Tai Hao AI modeling platform and a Mingcha anti-fraud system as part of our ongoing efforts in proactively recalibrating risk control strategy and addressing the COVID induced asset quality pressure. Our 61 to 90 day delinquency rate remained relatively stable in the quarter, reflecting our outstanding risk control capabilities under the volatile macro environment. Moving on to our global expansion, we are increasing our investments in Indonesia to explore more business opportunities in the local market. We also substantially expanded the scale of our loan origination and revenue generation in Nigeria. Going forward, we will continue to focus on improving the profitability of our Nigerian operations, developing innovative partnership models as well as accelerating our product development and penetration in the local market. Finally, I want to mention our recent efforts in the corporate social responsibility. Last year, we established the Jiajing Charity Special Found with the Shanghai [indiscernible] Foundation to raise social awareness of youth mental health and provide mental health support to the younger generation. In the third quarter, our charging charity special fund organized the led children's small charity fund raising even on Jiajing Charity Special Found organized the [indiscernible] Children Small charity fund-raising event on [Tencent] (ph) charity platform where we help fund 10,000 mental care service packages for the use. Looking ahead, we are planning to invest in more charitable initiatives to better leverage our unique strengths and fulfill our social responsibility. In addition, the repeated COVID resurgence and the consequence control measures have had a negative impact on small business owners this quarter. As such, government agencies have unwilled a series of new regulations to help fulfill the pressing funding needs of small businesses. Following the government's call, we also continued our efforts in supporting small and micro businesses during the quarter by expanding our services for small and micro business owners who have long been underserved. By the end of September, our specialized loan program has served approximately [361.5000] (ph) small business owners in 31 provincial level regions across China. On a sequential basis, we have expanded the geographical coverage of this loan program will substantially boosted the number of small business owners we served. In summary, our efforts and accomplishments in the quarter have put us in a solid position to maximize our opportunities in the future. Despite the increasing uncertainties in the global economy, we believe that the underlying fundamentals of the fintech sector remains strong. We have proven our capabilities to develop leading financing service offerings, intelligent financial solutions and compelling value propositions, we are confident that we will continue to empower our partner financial institutions serve our broad borrower base and generate sustainable value for our shareholders in the long term. Thank you, Mr. Yan. And thank you, everyone for joining our call today. I will now review our financial highlights for the quarter. Unless stated otherwise, all numbers quoted are in RMB and the percentage changes refer to year-over-year comparisons. As Mr. Yan mentioned, we delivered another quarter of robust financial performance. Our loan origination volume grew by 123.5% to RMB14.9 billion as we expanded and strengthened our collaboration with institutional funding partners, our net revenue was RMB894.3 million, up 55% driven by a 47.7% increase in our revenue from loan facilitation services. Our revenue take rates decreased slightly in the quarter as we adapted to evolving market dynamics and the regulatory changes. Other revenue more than doubled to RMB101.4 million, mainly driven by incremental revenues from individual investor referral services. Moving on to costs. Origination and servicing expense was RMB148.4 million, up 68.1%, in line with our loan origination volume growth. Allowance for receivables and contract assets reduced moderately by 4.8% to RMB5.9 million, mainly as a result of the ongoing restructuring of our overseas business during the quarter. Sales and marketing expenses increased by 36.6% to RMB323.6 million, reflecting higher borrower acquisition expenses in the quarter as we continue to invest in our online marketing programs. G&A expenses were RMB51.4 million, up 13.5%, primarily driven by expenditures in compensation and related benefits in the quarter. R&D expenses were RMB56.4 million, up 52%. We recorded higher employee compensation and benefits as well as increased fees for professional services in the quarter. Our ability to carefully manage our expenses define our cost structures and improve operating efficiencies, while growing our business enabled us to further enhance our profit margins in the quarter. Our net income increased significantly by 98.8% to RMB248.1 million from RMB124.8 million in the same period of last year. Our net profit margin also expanded to 27.7% from 21.6% in the same period of last year. We ended this quarter with RMB217.5 million in cash and cash equivalents, up from RMB213.9 million as of June 30, 2022. As of September 30, 2022, we have deployed approximately $2.1 million to repurchase approximately 0.9 million American depositary shares under the share repurchase plan we initiated since June 13, 2022. Moving to our guidance. Given our better than expected performance in the first nine months of the year, we now further revised our full year 2022 loan origination volume outlook to RMB50 billion, which compares to the original RMB36 billion we provided in the first quarter and updated RMB43 billion we announced last quarter. With that, we can open the call for questions. Ms. Xu, our Chief Risk Officer, and I will answer questions. Operator, please go ahead. Thank you. [Operator Instructions] Thank you. We'll now take our first question, please stand by. Your first question is from the line of Sam Lee, an investor. Please go ahead. Good evening and thank you for taking my question. My first question is regarding the really strong growth, especially in the past few quarters. [indiscernible] some of the key drivers for the growth and how long do you expect to sustain a high double digit growth going forward? Thank you. Hi, Sam. This is Yifang. I'm going to take your question. So your question is about our key drivers for strong growth. In my opinion, they were primarily coming from three fronts. The first is coming from our laser focus on strengthening and expanding our partnership with the licensed financial institutions. As Mr. Yan mentioned early on, we have established over 46 financial institutions with a deepened and broader network, the demand for our loans has been driven up as a result. The second are coming from our [diversified] (ph) customer base. Since the start of the Jiayin Group, we have already served over 12 million customers in terms of their loan needs, and we continue to drive higher growth on our overall customer base. But the last, but the most important is really the technological capabilities and expertise built over the years, focusing on data driven credit strategy and operational strategies. With such capabilities that will allow us to deep into our customer base and to properly assess their customer needs and payable terms driving up our overall loan growth. So your question is about how long we'll be able to keep the growth. Of course, we like to see that as [indiscernible]. But as we all know, in terms of the absolute loan growth, we're really focusing on making sure the growth is healthy, sustainable and forward-looking, especially relative to overall economic outlook, legislation framework, as well as our market outlook. So that we're trying to balance both our growth and other risks as well. So, I hope that answers your question. Thank you. And we have no more questions at this time. I'll turn the call back to Shawn for closing remarks. Please go ahead. Thank you, operator. And thank you all for participating on today's call and thank you for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.
EarningCall_1973	Okay, great. Letâs continue on. I am really honored to have Microsoft with us today. We have got to Jared Spataro, the CVP of the whole Modern Work Group at Microsoft. Jared, thank you and thank you Tender and April for this morningâs breakfast and for encouraging to come. Yes. Jared, do you want to maybe to set the context describe what the Modern Work portfolio looks like? I think everybody would understand that it leans very heavily M365 Office Teams, but maybe you could describe that portfolio and it might sharpen our questions a little bit later in the session? While we were going into the pandemic, most people thought of the business that I run now essentially is Office 365 that was the main source of value for us during the pandemic, that changed in a pretty significant way. Not only did we see Teams emerge, I think we will talk a bit about that becoming a major force in commercial software. But we also saw customers coming to us and asking us for more help in different areas. So to say when you think about this business, you should think about everything that is used to deliver a productive work environment for employees that starts with the device and COS for us, Windows on top of the device, the management software on top of that, itâs all the apps that come as a part of Microsoft 365. But those would be the things you think of Office: Word, Excel, PowerPoint, Outlook and then itâs the services, the cloud services that work as well. And then over the course of pandemic, people have asked us to help them with their meeting rooms, help them with their office space. We have branched out even from just personal productivity into really corporate productivity now to it. You mentioned, Jared, the pandemic. So why donât we start there, actually, because Iâd love to understand a little bit better how the pandemic changed that part of the portfolio? I am sure it had some pressure points, but I can think of several areas where it sort of pulled it along. It obviously created a pretty incredible PC demand acceleration that would have helped Windows OEM. Probably off the seat growth has certainly breathed life into Teams. But maybe you could frame how the COVID crisis affected your portfolio? You bet. You have hit, Iâd say on a lot of the big themes, but let me expand on them for just a moment. So, letâs start first, with Teams, going into the pandemic we are about 20 million monthly active users. Our most recent public statement on Teams has been over 270 million monthly active users in Teams. We will talk a bit about how they use Teams and what they do with it. During the early part of the pandemic, what we really saw from our customers was just the need to react quickly. Everybody was sent home from this kind of what we would call information worker jobs. And so they came to us looking for help as to how to think about how to quickly move to Teams or quickly think about how to rewire their businesses, the way I talked about it, there was very, very healthy PC demand as I would say, we saw the resurgence of the big screen. And people up to that point, itâs hard to remember now, but at that point, all the momentum in my part of the business had been around smaller screens. And there have been so much talk of phones and tablets and what they would do to essentially kind of take over the world. Now I think during the pandemic, we have seen a moderation of that. We have seen kind of every device find its place. Phones certainly are very important. Tablets can be very helpful. But I also feel like we have seen PCs and that PC form factor become very important and people understanding how important it is. So those things have happened. Iâd also Carl mentioned one other thing we have seen a change in patterns, really of how people actually get their work done. About 6 months ago, we finally saw the number of minutes spent in chat in Teams surpassed the number of minutes that people spend an hour. I need you to pause there for a moment, because we have been trying to unseat the Outlook and e-mail is kind of the primary communication medium for decades now all of us have been, we have all predicted the death of e-mail. So itâs a very, very significant milestone to see people starting to tip towards a new way of communicating. Well, Jared, my team accuses me of being a bit of a luddite in terms of technology, but I am now actively chatting in Teams. So Iâm part of that trend finally. And Jared, you touched a little bit on it, but now that we are sort of 2.5 years past that pandemic catalyst, how is â how are things changing and potentially moderating. Is there any what I would loosely call post-pandemic growth normalization that your portfolio is seeing? I think the most pronounced one that you could point to was probably Amyâs guidance for the Windows OEM business, where thatâs clearly coming off of a little bit of a sugar rush. But are there any other changes, even subtle ones that are happening now that you would put in the category of incredible sort of two-year run and how growth might be moderating slightly? Well, I get to ask two questions by customers today. Question number one, how do I adapt to the new patterns and practices of work? They are just simply trying to figure out okay, now that this has happened, now that we threw the tools into the business, whatâs the future look like? And they come to us for a lot of advice there. And then the second thing thatâs happening is we determine how do I do more with less, so there certainly is a consolidation phase. Now, that consolidation phase, we felt coming anyway, because there was such an investment, people turn to all sorts of different we would call them point solutions and they want to rationalize those. But with the changing macroeconomic context, it really accelerated that consolidation base that we have seen. So whereas pre â probably about 6 to 9 months ago, I was trying to drive consolidation, I was in there saying, hey, did you know that with Teams, you donât need to have some of these other vendors? Today, those customers come to me. We very frequently have customers proactively come to me and say, hey, I am using Zoom, Iâm using Slack, but there is no reason for me to double pay, as I think about rationalizing my IT budget, what can you do for me? And thatâs music to our ears. Yes, maybe unpack that a little bit, because I think one of the bull cases on Microsoft is that in an economic downturn, Microsoft will probably be a wallet share gainer due to vendor consolidation. So, Jared, maybe Iâd love to ask you, it sounds like there is tangible evidence of that. So, maybe you could elaborate. And where is your share gaining? You just gave the example of perhaps in the videoconferencing side. Are there other parts of the Microsoft portfolio where the tech environment is motivating customers to knock out point solutions and consolidate more on Microsoft? So where are you seeing that? Well, I will start at least with my perception in the macroeconomic context when it comes to IT budgets. IT budgets continue to be very important, but they are under, make no mistake, they are under pressure, for sure. So, if I go up that stack that I enumerated, we see it on almost every area, we see it as people think about how they are managing devices states, you have hit that already, we see it as they think about as an example management. So for me Intune, Microsoft Intune is a huge part of the business, very important part of the value prop at Microsoft 365. We will get into that a little bit more, but we see a lot of consolidation there. Because remember the competitors are in a little bit of flux right now. VMware tends to be a competitor, but they are in flux, maybe the customers come to us and say, gosh, we canât tell where this is going, can you help us with our management strategy? Thatâs management of both devices. So mobile devices as well as PC-oriented devices, we certainly see it. To be very specific with Zoom and Slack, we see people coming to us and saying that videoconferencing and in chat that they are interested in consolidation. So up and down the portfolio, we really see a lot of people digging in and saying how can we help? Now for us and we will talk about Microsoft 365. Thatâs one of the things I really would love to talk with you about, we have got a great story, our story we have gone in and done work with our customers with Forrester Research, we say you could save more than 60% just on licensing costs alone, let alone streamlined IT processes, if you move to Microsoft 365 when compared to point solutions. That message at this moment is playing very, very well. The other place that Iâd say that you might not think that there is opportunity would be in our frontline worker. We will talk more about that. And SMB, so small and medium-sized businesses, itâs not to say these businesses arenât seeing opportunities in the market, itâs just that they need to get more efficient than they have ever been. Jared, I know the cybersecurity portfolio might not formally be part of your group, but obviously in E5, itâs a very important driver. Are you also seeing evidence of this vendor consolidation not just in the maybe opportunities to take out Cisco Webex and Zoom? Are you seeing it in the cybersecurity side, too? And do you mind elaborating on where specifically you might be seeing that? For sure. Yes. So think of what we are doing right now in security is essentially taking on a very fragmented space with a consolidation play. Thatâs been our play in security since the beginning. Not only do we secure our own software, so not only do we secure things like e-mail or Teams, but we go beyond that. And we have great offerings when it comes to identity, when it comes to apps, when it comes to devices and securing those devices, we take a zero trust approach to it. So our play is to come in. It is a part just to put it in context of how we sell it. Itâs part of Microsoft 365 E5 or ME5 as you will hear us refer to it. And it is the single biggest driver of ME5 growth is security and then compliance. And then after compliance, we have own system as well. So when you start to put together those value props, you get something very, very compelling for our customers. Okay. Letâs keep going on these macro changes. Thatâs probably the dominant subject these days, because the environment is so fluid and most software companiesâ growth rates are under a little bit of pressure. So within the Modern Work portfolio, Jared, could we pause a little bit and talk about where Microsoft might be seeing some pressure? I think Amy and the IR team have talked a lot about some SMB pressure, but could you elaborate where the pressure points are in your portfolio? Yes, you bet. So specifically in earnings, what we said was that we saw moderation in new deal volume outside of E5, so moderation in new deal volume outside of E5. Correct. So let me unpack that E3 component, because I think thatâs important. Just to give you a sense of what that SKU lineup, maybe you know it already, but it looks like we have [Technical Difficulty] very compelling from the E3 level up to E5. And the softening that we saw in that new deal volume ends up being at that E3 layer. Now from my perspective, you can imagine we dig into this when we start to see it. There really are two components to it. There certainly is macro. So when you think about people saying, gosh, all right. Am I ready to make this purchase that certainly is impacting what we are doing? And you mentioned SMB, but itâs not just SMB for us. For us, itâs moderately sized companies that we typically service not through our direct sales force, but through our partner sales force as this would be through our cloud solution provider channel is the way that we service these folks. And then there is a portion thatâs not macro, if I am totally honest with you. There is a portion thatâs execution for us. Sometimes we get a little bit high on the E5 train and we put everything we have got behind E5 and forget that we have got a two-stroke engine in this business. We have got an E3 component. Weâve got an E5 component. So as we went to look at what was going on, there was a macro issue that we saw. There also is an execution issue that we are working hard to address this quarter and going forward as well. Jared, one of the other macro-related issues we are all monitoring is the degree of layoffs across the global economy. Itâs been a little bit more acute, I think on the tech sector. Thankfully, you guys havenât been a big part of that, but of course, have. So maybe the question I am getting at is across Office and broadly M365, whatâs the sensitivity of this portfolio to headcount growth across the economy? Obviously, if it picks up, itâs not a good thing, but I presume that there is some measure of minimum seats that clients commit to, so it canât come under too much pressure. So maybe a little color on the sensitivity of layoffs, given that, thatâs a hot topic for those listening? We watch it very closely as everybody did. We watched that jobs report that just came out. We watch the industries that are growing and those that are shrinking right now. Let me just back up for a second before I talk sensitivity, just to remind you. This business, largely speaking is [Technical Difficulty] business, thatâs what it is. So it is a price times quantity business. When you think about quantity in the enterprise space, we are largely in a place where we are very well penetrated. And what we mean by that is you either have Office 365 or you are moving to Microsoft 365. In that enterprise space, the play for me more than anything else is twofold: number one, it is the price component. So we are trying to drive up ARPU. And itâs a brand-new queue in enterprise that is frontline worker, thatâs brand-new for us. It really has taken off. It was accelerated during the pandemic, and thatâs what you should understand is counterintuitive. In fact, three months in the pandemic, I paused everything related to frontline work. I think nobody is going to invest in that, given all the [indiscernible]. Thatâs not what happened. Weâre going to restart that thing up in the next 60 days after I told everybody to stop it because what we saw is digital transformation was accelerated so much for the first time ever across industries. People were putting devices and putting new cloud services into the hands of frontline workers and they needed help. And that provided a really interesting boost for us. So as you think about how sensitive are we? Well, we are sensitive to headcount. But as we see it in the enterprise, I donât feel like there is a big change there. The sensitivity comes in our ability to continue to get frontline workers and SMBs. SMB is typically where youâll see kind of that immediate impact of a macro crunch. But interestingly enough, we have not seen what Iâve been waiting for in terms of an SMB slowdown in those seats. If you look at our recent reporting for Q1, 14% year-over-year growth in [indiscernible] driven largely by [FLW and SMBs] [ph] that you would see an immediate so we are watching for that slowdown. Thatâs not what happened. So we keep an eye on it as well in the jobs report that we all just looked at from the U.S., it looked pretty good actually. Yes. Maybe thatâs a reminder not to over-index on the tech-specific headcount cuts weâre seeing, given the breadth of the Office suite. You really do have to think that at this point, given the breadth of this business, we are servicing the economy very, very broadly at this point. And that gives us the ability to have puts and takes as we see things go. Now again, we watch certain sectors like SMB. Iâll watch that and we should continue to watch that. But so far, we mixed signals macroeconomically. So if those macroeconomic signals turn worse, which I think a lot of investors assume that they might and the Q deteriorates, Iâm not asking you for a prognosis, but letâs say it does, then the key becomes a lot more important. So letâs talk about that actually because thatâs a big part of the story here. So maybe a couple of elements of that. Obviously, Microsoft announced a fairly material Office 365 price increase. Can you elaborate a little bit on how thatâs rolling in? You bet. Price increase, and Iâll talk a little bit about the value of ME5, too, but Iâll start with price increase just for a second. So the price increase became effective the 1st of March. It was the first price increase we had ever done, not just like in a long time. It was the first we had ever done since we had, had Office 365. We felt like we were waiting for the right time when we had enough value. We had introduced 25 new apps, introduced over 1,400 new capabilities. We had gone through the pandemic. We have done a lot of establish, we felt like a lot of goodwill continue with our enterprise customers. We issued a lot of free trials during that. I mean, there is a lot going on. And so we took the opportunity at that point to say we think weâre delivering value for what we have here, and we increased price. As you think about this price increase rolling out, however, itâs really important to kind of essentially look at the details of the business. First, there is a temporal aspect to this price increase. It does not become effective in any particular account until they renew post price increase, so post 1 March, their agreement with Microsoft. So weâve got a lot of timing to play out in how these agreements are renewing. Those agreements tend to be 3 years. Sometimes they are up to 5 years long. So there is a component of staggered pricing thatâs happening. There is also a component here of which views were included. If you were to look in the announcement that we published under my name, we are very specific. Iâll give some examples. We didnât increase price on ME5. We actually were driving people to ME5. We also didnât increase price on what we would call kind of our standard tier in the SMB space. We didnât increase price on our standalone. So there were some places we chose not to increase price. When we did that, you can rest assured we try to be very, very data-driven on what would drive people to the right places in the overall SKU line. And the last thing Iâll say, as you think about kind of that component, the SKU lineup component, is that there is a kind of a ratable revenue component here where youâre going to recognize the revenue over time as well. So when you take a SKU component, when you take the agreement renewal component, then you take a ratable revenue component, itâs going to play out over time. It will be a big driver for us. Thatâs why we could. But donât think that itâs something that will happen immediately. Jared, with the team, we spent many days disaggregating that blog post to try to back into what the blended Office 365 price increase was. I spent a lot of time on it. Letâs talk about another ARPU driver and you touched on it earlier, and thatâs the E5 mix shift. So beyond the straight-up price increase, youâve got an amazing ARPU growth catalyst in the form of the E5 SKU, which I think Microsoft announced was, I think, 12% of seats now. So where could that 12% go realistically? Itâs never going to be 100%, but whatâs the trajectory of that E5 mix, do you think even if you want to frame it qualitatively? We think weâre very early in the journey with ME5. So Iâll answer the question, and then Iâll back out and give you the picture for a second. So letâs pick up on that data point. 12% of the Office 365 installed base is ME5 today, 12%. Now I say it that way because we think that it can go very high. Let me tell you about the drivers of why I think that. The number one driver for E5 is security. We talked about this idea of consolidation of security. Security demand continues to increase for us, and security continues to be more and more complex for companies to administer. So we feel like, man, weâve got a real driver there that doesnât feel like itâs going to let up in the coming months. The second driver for us ends up being compliance. That also is a really interesting opportunity for us, particularly as we think about consolidation. The third driver of E5 is phone system. We havenât talked very much about that. But as people are moving their usage of communications on Teams, a very natural thing for them to do is then move their phone system from typically an on-prem version of the PBX to the Teams Phone system in the cloud. So qualitatively, without giving any forward-looking kind of specifics, I would just simply say, 12% is very early in the journey here. As we think about where that ME3 base could go to ME5, I couldnât see a reason why most customers wouldnât want that value, and we will continue to push it. It isnât something that I feel like only a proportion or a certain percentage of the base would need. So maybe we pivot a little bit to the M365 story. For you, youâve been leading it, living and breathing it. But for a lot of investors, weâve been delivered Office 365 metrics. And now you can not so subtly see Microsoft pivoting the conversation to M365. So it does feel like that M365 bundling story is not only a big success but is a bigger part of the messaging. So can you talk a little bit about that shift from O365 to M365 in terms of messaging not only to investors but to your customers? Itâs a very interesting one. Think of this for a moment. With Office, the word Office, the brand Office, we had what I consider to be one of the most successful brands in history of business. And yet, as you indicated, over the course of the last few months during this calendar year, what weâve opted to do is to shift away from one of the most successful brands in business towards this Microsoft 365 brand. And itâs â I think itâs very natural for people who are watching, Gosh, why in the world would you do that? Here is what we found over the years, and Iâve been working particularly in this business for almost 17 years, so I feel like Iâve got some history here. We have tried for years and years to convince people that we could put more value into Office. But what we found is the brand was so successful that we actually couldnât open peopleâs minds and expand the box, the space that they had. When we ask people about Office, you know what is Office 365? They say, Word, Excel PowerPoint. Sometimes enlightened folks would say, Outlook. But beyond that, I couldnât get them to say Teams. I certainly couldnât get them to say Security. I couldnât get them to say frontline worker. It was [indiscernible] who needed to use Excel essentially is what they thought. So a big part of what weâre doing here is expanding the box into which we can put value. And what happened during the pandemic is our customers came to us and say, we look at what you can do, we would like to partner with you to do more than just kind of information work on productivity. We want to think about the productivity of our entire enterprise, top to bottom, from the C-suite to the shop floor. Can you help us think about that? So itâs branding-wise is part of what weâve done. What that allows us to do now that we have M365 as a vehicle is to be very creative then about how we offer that value. We have an E3 SKU as we talked about. We call that our core SKU. We have an E5 SKU, thatâs our premium SKU. But we also have these SKUs, these frontline worker SKUs that allow us to go down and literally provide, for instance, the airlines and the airline crew at Delta Airlines with the ability to use a SKU that is having them use our value in a way I couldnât imagine 6 years ago. So it opens the playing field for us in terms of how we interact with our customers. It gives us a new vehicle and it really creates a new head space. Thatâs what weâre most excited about. And you mentioned earlier, with only 12% of the Office 365 base penetrated, we really are in the early innings of this growth. Jared, maybe 1 more on Office per se. You do have another competitor out there, where Google is your employee productivity software rival. On their most recent call, they talked about having 8 million paying customers. We donât know how many users they have. But is any of the guidance for 17% Office 365 growth coming at Googleâs expense? Is there any market share tailwinds that youâve got relative to Google? The answer to that is absolutely. Absolutely is how we think of it. Let me again break down the 17 percentage points of growth for us. So of that 17 percentage points of growth, we talked a lot about ARPU, but remember, this is a P&Q business. 14 points of that growth are actually new seats, are driven by the new seats. And where are those new seats coming from? Just again to remind you, from frontline workers and from SMB. And those are two places, SMB has been a place that we have really competed with Google over the years, and thatâs a place that weâre making really nice headway right now. And frontline workers is a place that we feel like in so many ways, we have them, I would say, outflanked right now. Now I have to pause here to say why in the world would you say you have the mouth flake? They donât have a Teams equivalent. For all the machinations over the course of the last couple of years that have happened, they have not been able to get their track together when it comes to communications. And itâs so important for you to understand how strategic the communications portion of the portfolio is. Communications creates a daily habit that people come back to whether youâre in frontline or youâre at a desk. And when we have that daily habit, we can do so much. So if you were a customer and I were pitching Teams to you today, Iâd say, Teams, our solution for meet, call, chat, collaborate and automate. And it turns out, you want to see how we drive things like Power Platform growth. Well, itâs through Teams. You want to see how we get really ensconced into peopleâs business processes? Well, itâs through Teams and the automation that weâre doing. So we just have an arsenal now that makes it asymmetric warfare. And this is an opportunity for us to take advantage of that. The other 3 percentage points, those points come from ARPU growth and lots to talk about there. We havenât hit on Rooms. We have â there is more to do. But itâs really important to recognize that weâve got this awesome opportunity with seats. So perfect segue. Letâs talk about teams. Letâs talk about that communications piece, enough on Office. You mentioned that Teams used to have MAUs of something like 20 million. Pandemic, 270 million. Thatâs over 10x. Where can we go from here? Is 270 million starting to get a little bit maxed out, Jared, and it will be a little bit more about adding new features to Teams? Or do you see the seat TAMs having potential? Iâd break it down by segment is a way to understand it. In the enterprise segment, man, weâre starting to get to the point that we have great penetration. We talked a little bit about the consolidation wins that we will see continue to blow for us. So we are seeing people, as an example, move off of Zoom, move off of Slack. We have got some great examples of that. And Unisys is a great example. I will just give you quickly say, I have a little bit of color with Unisys. They were Skype business pre-pandemic. During the pandemic, like many companies, they moved to Zoom very quickly. They are like, oh, we canât figure out Teams. But in February of this year, we won them back on to the Teams platform. They went through a three-month deployment and now they have shifted the entire company to Teams. And so we are excited about that. But thatâs the Enterprise segment. I mean itâs largely going to be winning lost ground and driving up ARPU, but the real opportunity past that 270 will be SMB and FLW. For us, those are the places that are uncharted territory. As I look to the future, without giving you any details, as I look to the future, you should think that my installed base will go from being an information worker-dominated installed base. So, over the coming years, we will become FLW SMB dominated. So, the nature of the business will change in really interesting exciting ways. I get excited about that because when we do the right thing for those folks, it actually accrues up nicely. We would say to the information workers, sometimes we can be overly complex for the information workers. But really great work happening there which seems one more thing I will say. In the enterprise space, I am really excited about the fact that we are teeing [ph] those users. I wonât comment on all the specifics with Zoom, but you definitely see a pandemic up and a post-pandemic down. We are really seeing retention of our users. But we are seeing the shift where meetings has been a dominant driving workload, I would call it. Meetings is shifting out of being the driving workload and chat is shifting to be number one. And thatâs what we predicted. We thought that real-time collaboration would be dominant during the pandemic, post-pandemic, what we would call something more like asynchronous collaboration would really be the driver, and we are seeing those usage patterns shift in pretty significant ways. And on the conference call, Satya reiterated, 20% increase in Teams users who are using more than four aspects of Teams, talked about over 60% growth in users who are now using third-party or homegrown solutions that are embedded into Teams. We are seeing over 50% growth in phone PSTN. So, just some really, really good opportunities for us as people continue to use Teams more deeply. Jared, you will be happy to know that in contrast to Unisys, UBS, at least in my department, was Skype for the longest time and we made the direct leap to Teams. We didnât go off ramp and then back. And I am very happy to be on Teams. Letâs talk about what you just said about Teams, how things are changing or meetings being a dominant use cases, more tabs and phones. And I am particularly interested in the phones side. And I think a lot of investors are too because there is a number of other companies out there that are Zoomâs pushing in a phone. We have got place like RingCentral, etcetera. Could you offer any color or stats, whatever would make the case most compelling about how the Teams Phones side is becoming a dominant use case? Phone, what an interesting space. Let me just talk about the phone market as it exists today, and then I will give you my sense of where trends are taking it in the future. So, phone today for many companies has been based on PSTN or these old ways of calling out through the telco companies to phone end points. And we see companies continuing to invest there. Whatâs happening right now is during the pandemic, they moved a bunch of communication, including meetings to other modalities. And as they have moved those to other modalities, and when you talk about this idea, it would be more or less a consolidation phase, phone is number one. It feels like, in the enterprise companies list of things to consolidate. There is cost savings there and there is end user benefits. So, essentially, what we see happening is companies coming to us and saying, âHey, we are a Teams user. We would now like to actually connect our phone system up to Teams so that we have Teams essentially representing our call control and allowing us to have â to open up new use cases with them.â So, itâs an excellent opportunity. Most of the time historically, what companies have done is they have assigned a phone number to every employee. At least every information worker employee and depending on the scenario we have frontline worker employee, frontline worker sometimes will get pooled numbers. One of the big trends that we are seeing though is companies starting to say well, hold-on a second. Do I really need to have a phone number for John, if all of a sudden we have moved everything to the cloud? So, going forward, we think that there are some really important trends in phone that will shift and blow in the direction of an offering like Teams. Number one, we think a lot of traffic is what we know. A lot of traffic is shifting from that PSTN network to Voice-over-IP network. That is already happening en masse within a company. Very, very rarely if you are using Teams or are you picking up a phone and using a PSTN to call your colleague, itâs not happening. Itâs Voice-over-IP. Increasingly, thatâs happening between companies because federation of Teams tenant deployments allow you to no longer have to go through the PSTN network, but again, do Voice-over-IP, so thatâs very exciting for us. So, there is a change happening there. But the other really big change that we see happening is companies now that they are starting to move into the cloud are realizing, wow, I can get pretty sophisticated about my phone usage, meaning, I can really rethink who I issue phone lines too. I can really rethink how we are using phones. And that is the future of phone, we think is that that melds together with these other, what we would call them other communication modalities. You open up really, really interesting things to do. So, I will just give you one example. Imagine being able to call a call center rep, start a call with that person to have he or she say to you, âYou know what, can you just like video me real quick and show me the problem with your product?â And moving up from that call, that was a voice call to video. Thatâs what Teams Phone allows you to do is to have that modality together and so lots of companies are very open interested in that. Jared, I asked you earlier about vendor consolidation trends. You mentioned you are certainly seeing it on the meeting side. You called out Webex and Zoom. Are you starting to see that vendor consolidation trend on the phone side too away from point solutions? Is that a thing thatâs really kicked in of late? It has. It has. We â it wasnât this past quarter, I think Andrew have to help me. But just recently, we talked about how many actual phone licenses we have out there activated from licenses we have. I am not going to say the number because I canât remember off the top of my head. But we have talked about that and we can give you a reference for that. It definitely consolidation of phone has started to happen for us. We think it will be more important. The easiest way for you to think about this, though is, we find the prime candidates are those who are high now â high monthly active users of Teams. They very quickly tip to phone. Thatâs our easiest route to move to. Got it. I have got a couple of more for Jared in our last six minutes, seven minutes. But if any of you in the audience have questions, you have got a QR code in front of you. Just scan it, submit your question, I will get it on my laptop, and I will ask it to Jared if we havenât covered it yet. So, while we are collecting those, maybe a couple of more for you. So, we had one of our team members in Seattle at the Ignite conference listening for some new announcements. And there were some cool stuff on Teams, where you talked a lot about Teams Premium, talked a lot about Microsoft Loop. So, when you think about Teams on the new product side, cool stuff that you and your team are excited about, what are the couple that you would encourage investors to watch carefully that could be big growth opportunities over the next 5 years? Let me just ground you in the ones that are in market right now or that we have just announced, and then I will talk about where we are headed. So, as you think about monetization of Teams, we have got these great sockets. How do you monetize those phone, Rooms, we havenât given much airspace to Rooms, but important to recognize if you are a Teams user, you are going to move to oftentimes to our Rooms systems. And then finally, something we call Teams Premium. This was an ability for us to add additional capabilities specifically related to meetings. So, how you do premium capabilities of meetings. Those are our three market growth opportunities. I simply start the answer of the question there because man, there is still a lot of runway with those three. Past that, what you are going to see us doing, what we really feel like is the big investment area is AI. I think 2023, you are going to hear so much hype about it and whatâs happening with open AI and the GPT-3 model, etcetera. But there really is value here as you think about taking that AI out of its kind of almost like every power position that it has right now and applying it directly into the scenarios where people get their work done. So, a lot of what you will see from us in Teams will be the application of AI to getting your work done. In essence, Teams Premium, a lot of what you would have heard was actually AI capabilities applied in this particular case to meetings. So, we hope to establish a new work pattern that we would call JOMO, the joy of missing out when it comes to meetings. We are going to create ways for you to record meetings and then have AI go in, and literally, have an assistant tell me if you should even bother with this meeting. Did they ever mention your name, was it anything that you care about, if it was, what portion should you go listen to. There is a lot of value there. So, we see AI augmenting human capability in that way. Got it. Jared, one more for me. The Azure story is so central to Microsoft. There are so many full things to talk about with you that I havenât even outed the word Azure yet, but maybe we could address that part of the Microsoft portfolio. And in particular, to what extent are all the things you have just talked about with me pulling along Azure consumption? Whatâs the Azure angle to the modern work portfolio? I have touched briefly on management. So, EMS, our management suite actually drives Azure revenue directly. And thatâs a part of Microsoft 365. So, we will start there just to show you some of the overlap. We also touched on security, and security is super important because our security offerings span the modern work portfolio and then over into the Azure portfolio the way we think about it. So, we typically donât see people just use my portion of security. They will also move over into things like Azure Sentinel when they move to Microsoft Security portfolio. So, thatâs the second one. And the third one is when we didnât get much of a chance to talk about, we are trying to revolutionize end user compute with an offering that we call Windows 365. And that also accrues up to the Azure numbers and is a big growth area for us. So, those three are the most concrete that I would say. And as everybody models the seat-based or EMS portion of Azure, Jared, as we look over the next couple of quarters, are there any variables that we should keep in mind as we think about the EMS growth, for instance? I think it has a fairly high correlation with the Office 365 go-to-market cadence. So, should we sort of be thoughtful about the O365 cadence and sort of make a direct correlation to how EMS might trend, or are there other variables that we should keep in mind? Structurally, I would do this. EMS is a portion of Microsoft 365 and E3. And we have two motions as we think about getting to E3. The first motion is what we would call dark to cloud or dark to Office 365. We have lots of opportunities still to move people off their on-prem installs, mostly down the market and in developing markets into the cloud. Sometimes we move them straight to ME3, but oftentimes, they will go to OE3. So, watch that. And then the second component is we will move them from O to M, and thatâs where the EMS numbers really come to pick up. So, thatâs the structurally, if you understand that, you can be watching our ability. And again, where is that opportunity, where is that coming from, well, itâs going to be down market, itâs going to be in developing nations. Perfect. Really helpful. Jared, one from the audience. How does LinkedIn, which we havenât talked about yet, fit into the modern work portfolio at Microsoft, your whole bundled sales strategy? Itâs â I would say we are at this point where we scrambled for a couple of years with Modern Work to get ourselves into a new place. Again, you have to think that customers thought that I was a purveyor of productivity tools and there was not much else. So, I have been working really hard to reposition myself. We talked about that repositioning. Now that we are here, we talked about customer consolidation, customer opportunity. We see a lot of opportunity within Microsoft. So, LinkedIn is the worldâs largest professional network, but I also think of it as the directory for professionals around the world. Thatâs how we connect and work with each other. There is so much opportunity as we think about that directory of peopleâs profiles, of their identities and what we can do with a communications tool like Teams. So, I donât have anything to announce, but we just think that there are great opportunities for us and now take a step back as we look to the future as well. And LinkedIn is a fantastic asset. Jared, we are out of time, but that was a really interesting conversation. You are â you have got ownership of some of the more exciting parts of the Microsoft portfolio. So, itâs been a fun year for you, I am sure to see this growth profile play out. Thanks for coming all the way to New York to be at our event and happy holidays to you and your family.
EarningCall_1974	Everyone, thanks for joining, busy day for everyone across software at Day 1 of Wells Fargo TMT Summit. Michael Turrin, Software Analyst. Very pleased to have Autodesk with us. Debbie Clifford, CFO of the company since 2021, longtime finance member of the team; and then Jeff Kinder, EVP of Product Development, Manufacturing Solutions, previously Chief Digital Officer, helped work on a few key initiatives, which weâll talk about here in a moment. But thank you both for joining today. I appreciate the time. Excellent. I think, I mean, it makes sense to start â obviously, thereâs a lot to â we can go into the gist with last week and the earnings results, I think, you had a lot of useful context in unpacking some of the drivers, some of the impacts that youâre seeing on multiple sides. So maybe you can just start with the highlights for those who arenât necessarily as familiar up to speed and then I can ask some follow-ons from there. Sure. So â yes, we reported our Q3 results last week. And overall, our Q3 results were strong. We then also talked a little bit about the macroeconomic backdrop thatâs impacting our business. The business is performing as we would expect in this kind of environment, solid overall results, but we did start to see some deceleration in our new business growth during Q3. Thatâs different than what we had seen in the previous four quarters. It was most notably in Europe and predominantly in manufacturing within Europe. And that had a nominal follow-on implication to our Q4 revenue guide, where we moved the midpoint at single-digit million midpoint adjustment. So not huge, but wanted to be transparent about the slight shift that we saw in the macroeconomic situation for us at Autodesk. But overall, the business continues to be resilient, itâs performing as we would expect in this kind of environment, and weâre bullish about the long-term growth opportunities for the company. Thatâs great to hear. I think maybe thatâs a bit of a contrast to what weâre hearing across technology, where there is a lot of commonality around sales elongation some things that almost feel more tech-centric than maybe what your customer base is seeing. But Autodesk I think is generally viewed as somewhat of a macro bellwether, someone that has unique insights into whatâs happening. So what do you attribute the resilience? You had some good renewal commentary on the call. To what do you ascribe that so far? And what informs your guidance in that context as well? Sure. So for those of you that may not be as close to our story, we embarked on a business model transition from perpetual software licenses to subscription. We completed that transition a couple of years ago, and there are many benefits to that transition. But being a 100% subscription model at this point gives us a resiliency that weâre really benefiting from now as the macroeconomic conditions evolve. We also benefit from very strong renewal rates. Weâve had consistently strong renewal rates, and itâs that renewals business thatâs fueling us through slightly choppier economic water. So that combined with the fact that our software is highly sticky, our customers need our software in order to get their jobs done, and thatâs evidenced by those renewal rates and some of the metrics that we talked about. The last thing I would say is that one of the other benefits of being in a subscription business model versus where we had been before in a perpetual license model and that perpetual license model, customers could purchase a perpetual license and continue to use the software even without paying us anything in a subscription business model, a customer needs to be paying us on an annual basis in order for us in order to be able to use their software, which, as I said, is software that they need in order to get their jobs done. So itâs that stickiness. Itâs that need to be using our software that shields us a bit more in this macroeconomic context versus what we might have seen back in the global financial crisis. Yes. And thatâs great. Jeff, correct me if Iâm wrong, but you were a key architect in this as Chief Digital Officer as well and transitioning some of the business model towards subscription. So just playing out as you would have expected? Maybe you can just provide some context around that transition and now the stress test that youâre seeing? Is it giving you confidence in the direction that youâve taken there? Sure. The â as Chief Digital Officer, I oversaw business models. So, one of the areas was our transition to subscription, which had begun before I even took on that role. So I got to carry that through it. It is playing out. Itâs playing out how we had expected and described it. And then we added in this notion of consumption, right? So what we think really gives our customers flexibility, which helps in any kind of macroeconomic downturn is flexibility. We want to align value with usage and the customer outcomes that they see. And that combination of the two is we think serving customers very well. I mean, youâre also a company that has the advantage of having seen cycles before. So does that give you confidence in the signals that youâre looking at? Can you just describe some of the inputs that you look at that inform your forecasting process and just historical context that maybe you have that is helpful in a time like this? Yes. So thereâs a number of leading indicators in our business that we monitor to give us insights into our future outlook. A number â if not, we talk about on our earnings calls on a regular basis. So the first is product usage worldwide. So the more users on our platform, the more that our products are being used the more likelihood that the economic situation is positive for us. And obviously, the inverse is true. To the extent we see product usage start to drop off, that can be indicative of less projects or less business activity on the part of our customers. So thatâs something that we monitor quite closely. Similar is our new business results. So we look at new business for us, thatâs both a volume and a price mix, partner compensation metric for us. So we define it as our annualized contract value and how much of that new business how much itâs growing. And so thatâs why when we were talking about it on this last earnings call, we saw a slight deceleration, as I mentioned before, but it was still growing. So overall, signs are good. They were just slightly less good than what we had seen in previous periods. In our Construction business, specifically, in preconstruction, we have an offering called BuildingConnected where we get insight into bidding activity with general contractors and their subs. And bidding activity is a good indicator for us of downstream construction volume when [indiscernible] will become shovel ready. And so we continue to see record high bidding activity on our BuildingConnected platform. Thatâs something that we that we continue to watch. So there is a number of things that give us insight. Obviously, nothing is as good as a crystal ball. We donât have a crystal ball, but we do monitor a lot of these indicators to give ourselves a sense of how we should be thinking about the overall outlook for the company. Very helpful. Jeff, Iâm going to give you a couple on the product side. Thereâs a lot that youâve been working on. Maybe we can start with Fusion and just the overall move towards cloud. What are just some of the key attributes youâd highlight for those that arenât as familiar benefits from a customer perspective? And then just any comments around adoption trends youâre seeing there currently? Sure. So Fusion, for those of you who may not be familiar, that is our industry cloud for manufacturing. And weâve been at Fusion for ten years. The vision that we had and have had for a long time, is this convergence of design and make. You think about manufacturing process, you design products and then you manufacture them. Historically, those have been point solutions, different software solutions along the way. We see a world where through the cloud, all of this comes together and the data flows seamlessly throughout the process. We think that unlocks efficiency, productivity, fewer errors in the overall production process. And so thatâs been our vision for Fusion and itâs somewhat flattering, we see some of our competition starting to mimic that as well. But design and make, convergence of design to make. That brings it up, automation, it allows for collaboration, so folks in different locations, remote locations as weâve all lived can collaborate more easily. All of that has to happen when this is connected through the cloud. So thatâs the premise behind Fusion. The other thing thatâs interesting is we priced Fusion in a way that is disruptive. And it serves customers who want to come in like SMB customers end-to-end conserve their end-to-end needs to design and make products. Weâve also set it up to where if you have more sophisticated needs as your needs become more sophisticated, and say, designing or machining, you can buy an extension. So we see greater monetization. And actually, thatâs been playing out. To your question on adoption, our growth rates have been fantastic in leading the industry in terms of adoption of the Fusion platform. What weâre also starting to see now as weâve rolled out extension is weâre increasing the monetization per user, and that has been part of the vision from the get-go. Weâve had a machining extension. We also just launched a signal integrity extension in partnership with Ansys for us to get into consumer electronics, you need to look at the interference thatâs in the PCB. And so this extension, anybody who is building consumer electronics with our software who wants to use that extension, ends up paying us for it. And can you just expand on the visibility you have into, you mentioned monetization and the different levers that you have in place, is the move towards Fusion and just a bigger focus on cloud giving more visibility into customer usage patterns? And does that help fuel just some of the monetization that you have in front of you? Yes, I mean we have greater visibility into kind of usage across the products. Thatâs something that folks in the cloud as opposed to on-premise perpetual license that we had before, we get much greater visibility into overall usage. It helps give us indications where we should be adding extensions, where customers will most demand. That also, by the way, sits alongside us talking to customers. So we look at segments that seem underserved, we talk to customers and we add capabilities in those areas. Yes. I think we all have intuition of what that means as from a software-centric viewpoint that â maybe you can talk more about the business model there and how that extends your reach and creates more customization potentially? Sure. I lobbied for calling an Autodesk web services, but somebody told me AWS was taken. Yes, so itâs Autodesk Platform Services, formerly known as Forge. And look, what we find is our customers and developers want to build on top of our software. And we love that because it just expands our ecosystem. And what they are doing is they are creating customizations or capabilities or integrations that wouldnât be scalable for us to do ourselves. So, what we do is we expose these robust APIs, data and capabilities to customers. And then they go build capabilities on top of that. I will give you a couple of examples. We had a partner in Europe that tapped into our cloud information model for manufacturing. They basically pulled manufacturing data out. They built an integration into SAP for the end customer and did it in record time. We also bought a company that does production planning on the shop floor, and they were able â something it would have taken months to do, within days they were able to take that tap into that same API for cloud integration model and then create a production plan for the shop floor. So that just makes it our products more sticky and more integrated into our customersâ workflow. We do think thereâll be opportunities around business model as non kind of direct users of the product start to tap in, but weâre really trying to help drive usage of the APIs and of the platform services at this time. No, it all makes sense. I guess, a question for you then is how this informs your growth algorithm with perspective on what youâre forecasting for the future? How much of it comes from some of the new product innovations that youâre working towards versus opportunity for price and retention? You have, I think, the true north of sustaining double-digit revenue growth even beyond the $5 billion run rate the business is currently operating at. So maybe you can just speak to the growth perspective on some of the new product initiatives. Yes, sure. I just want to qualify â I apologize for my froggy voice. And I have â Iâm getting over a lingering cold. So I donât normally sound like this. So thank you for your patience. And if it sounds like Iâm eating... Yes, if it sounds like Iâm eating candy, itâs because I have a cough drop. So the alternative is better or is worse if I didnât have cough drops. So again, thank you for your patience. Well, maybe Iâll start by extending from where Jeff was and talking about the industry clouds and Autodesk Platform Services. First, this is a vision that we have about driving the capabilities and customer outcomes that Jeff described, but not something in the short and medium-term that weâre anticipating is going to be a significant contributor to our growth. We believe this is something that we need to be doing from a technical standpoint. Itâs a long journey for us. Weâve talked about our need to invest. So there are margin implications that weâve been vocal about, where we feel the need to invest, which will limit the operating margin expansion over the next couple of years, while we invest to further this strategy, but we think itâs very important for us to do this work. At our Autodesk University, Andrew, our CEO, talked about the need for us to disrupt ourselves and thatâs what weâre trying to do is to disrupt ourselves. But I want to make it clear that we donât have any assumptions baked into our long-term growth projections that thatâs going to be a material contributor to revenue. Over the long-term, yes, when we have a broader developer ecosystem and things like that, weâll be able to monetize in more ways. But right now, thatâs not part of our short-term plans. What is part of our short-term plans? Well, letâs think about the different industries that we operate in. we operate in Architecture, Engineering and Construction, Manufacturing and Media and Entertainment predominantly. In Architecture, Engineering and Construction, our growth levers start with the proliferation of building information modeling, or BIM, mandates around the world. There is a 100% saturation of BIM use around the world. So that continues to be a growth driver for us as we see more and more countries and customers expand their usage of them. We invented them, that is a growth driver for us. Weâve been investing in adjacent market opportunities like water infrastructure with our acquisition of Innovyze that got us into the design phase for water infrastructure specifically. And given the water waste that is happening around the world from aging infrastructure, we believe that this is a real opportunity for us to capitalize on a growth lever for the company, but also to drive more sustainable outcomes for the world in the form of less water waste. Iâm really happy to get into sustainability at any point, but itâs really a big part of what we do. In construction, weâve been actively investing. So we were highly acquisitive over the last five years in construction. We invested in our own digital capabilities in construction. And as we think about our journey there, we have been working for some time on creating our vision of seamless interoperability across all stages of the construction life cycle from design to pre-construction to field management solutions to owners and operations. And you can see that we have offerings across each of those stages of the life cycle, itâs more nascent in owners and operations at this point. But we have an offering there with our tandem digital twin offering. And our goal is to drive digitization of the entirety of the workflow, and we continue to see success there, and weâre pleased with the momentum that weâre seeing in construction. Thatâs some examples in AEC. Jeff talked about the growth drivers and some of the things that weâre seeing in manufacturing. I can turn it over to him if youâd like more information there. I think I would just close by saying Media and Entertainment, itâs interesting. Itâs a part of our business, but itâs a dark course growth area. For us, itâs been exhibiting hyper growth in comparison to the rest of Autodesk. And this is because we are running the same play effectively, which is to leverage the technical capabilities of the cloud capitalize on distributed workflows, users working around the world, needing to leverage cloud capabilities to get their jobs done. The same happens in AEC. I talked about that workflow. The same happens in manufacturing. The same too is happening in Media and Entertainment. When you think about film production, weâve long had a position in post production and special effects. What weâve been doing is making small acquisitions to get us upstream and onset, but itâs effectively the same play, where the content is being created, how you manage that content, the digital workflows, all the way to finished product, and then management of that finished product, itâs a digitization of that workflow. And so these are some examples of the drivers of growth that we see at Autodesk. Super comprehensive. I want to go back to sustainability, but I also want to give Debbie a chance to take a breath. Given the context and just let Jeff on the manufacturing side, is there anything you would add based on what she said. Iâll add two things to manufacturing. First is data â data products. I mean, the data in the manufacturing system is very complex and historically, I mean, people will take a thumb drive from one machine to the next machine. And so thereâs a lot of investment weâre seeing in data and our customers â the demand is high, itâs growing faster than any of our other manufacturing products. Our portfolio of data products are growing faster than our design products, for example. And so we think thatâs going to continue and thatâs one of the reasons that weâre investing in these cloud information models and then further integrating the design and make. The second piece â and this is â maybe less obvious, but in a softening manufacturing economy, what weâve seen historically is we tend to take share. And so partly that is â partly thatâs our price point, our disruptive kind of price points. The second piece is, when you think about it and talking to some of our customers, what they do is they tend to inflation â not that weâve been inflation environments in a long time, but what they pull back on when the cost of capital goes up is buying new equipment. So the software in a manufacturing environment is a much lower percent of the overall cost. So capital outlays for big new equipment, they might delay buying a new machine, but theyâre still going to need the software. And in fact, when wages go up and they get squeezed more, they need efficiency that our software brings. They need that more than ever. So we are not immune, but we are â we get a little bit of softer impact. Thatâs great. Going back to sustainability for a moment. Itâs something that comes up a lot, but itâs very core to what youâre enabling and the water example is very tangible. And so maybe from the CFO perspective, you can talk more about the sustainability focus and what that â the takeaway is what the benefits are from the investors side, given this is an investor conference and thereâs a lot of cohesion there. Yes. So sustainability is in infused into everything that we do at Autodesk. Itâs very much a part of our values and itâs a part of how we think about developing our software, selling our software, and making an impact. We believe that our software truly will have a positive impact on the world and driving more sustainable customer outcomes. What does that actually mean? Well, first, if you think about the industries that we operate in, letâs just take AEC and manufacturing as the two primary examples. These are two of the most wasteful industries on the planet. They create a lot of waste that contributes to carbon in the atmosphere. If you digitize those workflows, you reduce waste. If you find out on the construction site as one example that something doesnât fit or that youâve purchased the wrong component or things like that, you can avoid it by having the right design decisions upstream. You can avoid it by having a direct connection between what youâre seeing on the field, on the construction site and connecting it back to the design. Thatâs just one example. But digitizing these workflows reduces waste and reducing waste drives more sustainable outcomes for the planet. We also have technology that gives our customers insight into the environmental impact that their designs could or will have on the planet. So things like our insights carbon calculator, when theyâre â when a customer is creating a design in the AEC space, they can get estimates around what the carbon output would be from a particular design, and make design decisions at the beginning that would reduce the downstream carbon footprint. These are some examples of things that we do to focus on sustainability and sustainable outcomes. Obviously, weâre very serious about what we do around sustainability and ESG, broadly speaking as a company that like most companies, but the distinguishing factor for us is really this connection that we have to our customers and to particular industries and driving more sustainable outcomes for the planet and weâre very passionate about it. Great. Five minutes left. I want to spend one more kind of focused on the near-term and some of the indicators that youâre seeing, and then weâll zoom out big picture. But you provided some context on the call, in the earnings call just around fiscal 2024 and a few things to think about in the context of the growth margin tradeoffs. And so just thinking about the near-term obvious growth opportunities you have in front of you and the margin profile you have today versus the target levels. Can you just put a little bit more context around how youâre thinking about that trade-off both now and into the upcoming year? Yes. So to reiterate some of the things that we said on the call last week, first, I mean itâs an interesting world in particular with FX. So we highlighted the fact that all else remaining equal, we see, at this point, a 5 percentage point revenue growth headwind next year from the continued strength of the U.S. dollar. So thatâs out of the gate. Thatâs an exogenous factor outside of our control out of the gate. The second is that from our exit of the Russia market, we see a follow-on incremental 1 point headwind to our revenue growth next year from that exit. So out of the gate, we have 6 percentage points of headwinds for our revenue growth next year. We wanted to be transparent about that. Weâre in the planning process as we speak. So how that plays into where we ultimately guide is work that weâre doing now, and weâll talk more about on our February call. But as you can imagine, against that backdrop with those kinds of headwinds and it will make it difficult for us to grow much beyond double digits as we get into next year on the top line. Now on margin, weâre also in the planning process and seeing through some of the trade-offs there. I think the key, and I mentioned some of this on the call, we want to make sure that we keep an eye on delivering a healthy margin, but also not be too short-term in our thinking. We have a strong balance sheet â the business is performing well. Itâs resilient in this environment. We feel like itâs important that we continue to invest, we believe in our strategy, we believe in the long-term growth prospects of the company. So we want to continue to invest in the midst of that strategy versus the alternative, which could be reducing our cost structure to offset FX volatility. We donât think that, that makes sense in the short-term, and thatâs more than anything else what we wanted to signal. Obviously, weâve demonstrated a track record of delivering on our operating margin goals and are â itâs important to us to continue to demonstrate that we deliver on those goals. So thatâs something that weâre thinking through as we think about our margin target for next year. But thereâs a lot of trade-offs here, and we just want to make sure that weâre not being too short term in our thinking, Iâll also be transparent about what weâre seeing today. Itâs well appreciated. Jeff, the closing question for you, and then Iâll come back to Debbie with a similar line of thinking, is just â a lot of change in the air. 2023 planning cycle is upon us. What are some of the key points of focus that youâre thinking about and what are the key priorities that youâre focused on that you would expect if weâre having this conversation next year, weâd be touching on, that are incremental and different than maybe what weâve touched on here today? Yes, a couple of things. I mean, we continue to see healthy growth in the products that have been leading our markets for years. And so weâll continue to invest in those products and delight the customers of those products. At the same time, we are really focused on our industry cloud, which we unveiled at Autodesk University as well as our cloud formation models and data seamlessly flowing through those. And what we do is we strike the balance in those investments to keep customers happy and like I said, delighted and renewing with our market-leading products, offer market-leading products and then investing in the future because, as Debbie said earlier, like we think that long-term, thatâs where customers need to go and we want to lead the way for them. Great. Debbie, key focus areas for next year? Any last minute takeaways youâd like for investors to take away from the conversation here today? I think, I mean, if you take away anything, I think, take away this that Autodesk is a resilient company with strong growth prospects over the medium- and long-term. We are well positioned to execute in the midst of virtually any macroeconomic cycle, but certainly the one that we find ourselves in now. And one of the things that we didnât talk about a whole lot is the transition that weâre executing on starting next year to move our multiyear contract base to annual billings. And I wonât get into too much of the details except to say that if you believe in that vision, and we believe in that vision, what it means is that one of the outcomes over the medium- and long-term is that as we normalize our free cash flow pattern, today we believe weâre trading at a discount on our free cash flow multiple because of the volatility that we see in our free cash flow, and ultimately we are looking to remove that volatility. Itâs easier for us to manage the business, our customers want it, and it should make it so that over time, Autodesk becomes a more valuable company. So next year is the trough year when we think about the free cash flow during that transition, all else being equal, it should be by years of successive growth, all in these â in service of delivering on our growth objectives, which for free cash flow were to deliver double-digit compound annual growth through the period of fiscal 2026. So if you believe in that vision, thatâs a good time to be thinking about the long-term. Very well said. A lot to go through, I promise I have that on my list, but Iâm glad you brought that up. I appreciate you both making the time today, spending some time with us in Vegas. Thank you. Thank you, both.
EarningCall_1975	Good morning, and welcome to the Toll Brothers Fourth Quarter Earnings Conference Call. [Operator Instructions] The company is planning to end the call at 9:30 when the market opens. During the Q&A, please limit yourself to one question and one follow up. Please note this event is being recorded. Thank you, Jason. Good morning. Welcome, and thank you all for joining us. Before I begin, I ask you to read our statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the availability of labor and materials, inflation and many other factors beyond our control that could significantly affect future results. With me today are Marty Connor, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior VP and Treasurer. One person who is not with us today is Bob Toll. Bob passed away in early October at the age of 81 and this is the first time in the 56 years since Toll Brothers was founded back in 1967 that we look to a new year without him. About 500 of us gathered in November to honor Bob at our headquarters with thousands more watching on Zoom. The event was attended by national business and political leaders and by the first subcontractors who worked with Bob in the 1960s, '70s and '80s. Friends from the Philadelphia area he had known since childhood attended, along with dozens of his family members. It was a fitting tribute to a one-of-a-kind leader and a man who helped shape this industry for decades. Although he is no longer with us, Toll Brothers will always be Bob's company. We miss him very much. Turning to the business at hand. As Bob would insist, I'm pleased with our performance this year and extremely proud of the entire Toll Brothers team. In a year filled with supply chain disruptions, labor shortages, permitting delays, inflation, increasing mortgage rates and many other operational challenges, we delivered over 10,500 homes, the most in our history, and grew homebuilding revenues by over 15% to $9.7 billion. In the fourth quarter, we exceeded the midpoint of our deliveries and revenue guidance by 365 homes and $368 million, respectively, as we focus on converting our backlog as efficiently as possible. Our fourth quarter adjusted gross margin of 29%, a 310 basis point increase compared to last year, and we met our full year guidance of 27.5%, which was a 250 basis point improvement over fiscal 2021. We reduced SG&A expense as a percentage of revenue by 110 basis points in the fourth quarter and 80 basis points for the full year. Before taxes, we earned $1.7 billion in fiscal 2022. Net income was a record $1.3 billion or $10.90 per share diluted resulting in a return on beginning equity of 24.3%, a 720 basis point increase over fiscal year 2021. At fiscal year-end, our book value per share stood at $54.79 and our net debt-to-capital ratio was 23.4%. While we achieved record results in fiscal 2022, we are faced with a challenging market, primarily due to the dramatic increase in mortgage rates since March. Our net signed contracts were down 60% in units and 56% in dollars in the fourth quarter with no discernible change nearly halfway through our first quarter of '23. However, both web and foot traffic were only down 15% in Q4, suggesting that while many potential buyers are on the sidelines, they remain interested and may just be waiting for more clarity on the direction of mortgage rates and the overall economy before they transact. As we navigate this market, we are strategically balancing the delivery of our large high-margin backlog in fiscal year 2023 which is down just 7% in value from year-end 2021 with the generation of new sales for future deliveries. We continue to assess and adjust where necessary product offerings, price and incentive levels in each of our communities, taking into account local market dynamics, including elasticity of demand, the size of each community's backlog and the depth and quality of our landholdings in the market. We intend to continue making appropriate adjustments as fiscal year 2023 progresses. Fortunately, because of the size of our backlog and the strength of our projected '23 earnings, we are able to look beyond the immediate slowdown in demand and focus on positioning the company for success in fiscal year 2024. Let me take a moment to discuss our projected '23 results. With the year-end backlog of nearly 8,100 homes valued at $8.9 billion, and with a midpoint of 8,500 homes projected to be delivered, fiscal '23 is setting up to be another solid high-margin year. Our backlog is supported by substantial non-refundable down-payments averaging about $83,000 per home. Through our build-to-order model, our buyers choose their specific home site, structural options and design studio finishes that match their lifestyles and their tastes. As they customize their homes, they become both financially and emotionally invested. Additionally, with approximately 20% of our buyers paying all cash and the average LTV for those who obtained a mortgage at 71%, affordability is less of an issue for our buyers who tend to be wealthier with more disposable income. As a result, our backlog cancellation rate has been the lowest in the industry for decades, both through good and bad markets. During the fourth quarter, our cancellation rate as a percentage of backlog was 2.9%, just slightly above the average of 2.3% since 2010. I want to emphasize that the right metric to focus on for our business is cancellations as a percentage of backlog. Cancellations as a percentage of current quarter sales is simply not as meaningful for a build-to-order company with a substantial backlog. The question should always be, what percentage of the homes that have been sold and are being built or cancelling. For us, that number has consistently been the lowest in the industry. Based on the strength of our backlog and including estimates for increased cancellations and incentivizing, we are projecting a fiscal 2023 adjusted gross margin of 27%. We expect to earn between $8 and $9 per share next year which would be our second best year ever and for our book value per share to increase to over $60 at fiscal year-end 2023. As I mentioned, because of our strong backlog and in an environment where potential buyers in many markets were on the sidelines, we chose not to aggressively chase the market down over the past six months. Also, because of our build-to-order model, we did not have to take dramatically lower prices to clear a large inventory of spec homes. Instead, we have taken a more patient and balanced approach. In recent quarters, our delivery times for to-be-built homes has been extended in some cases, up to 16 months, which was not acceptable to many buyers. Additionally, building costs have been elevated due to the spike in inflation over the past two years. In that environment, it did not make sense to aggressively drop prices. Thankfully, quota delivery times have started to come down as we work through our backlog and as trades free up capacity in this slower market. We are also beginning to see some building costs come down beyond just lumber, which continues to steadily drop. The opportunity to build faster and at a lower cost may be here. Extended delivery times for our to-be-built homes have also resulted in the market for our spec homes being stronger than normal. With elevated spec demand and as cycle times and costs come down, we plan to thoughtfully replenish our supply of specs in select markets to generate additional deliveries in late '23 and throughout 2024. Community count in '23 and '24 will also drive results. As part of our strategy, we are timing community openings to take advantage of better seasonal opportunities. We are positioning for the spring selling season, where there is typically more demand even in tougher times. We are going back to opening our new communities in perfect white glove condition with decorated model homes, reflecting the traditional way Toll has always done it. That did not occur as often during the market frenzy that followed the pandemic where we often opened early without roads or models. During COVID, you could sell out of the back of a station wagon with success. That is no longer the case. As an industry, we probably will not have a better sense of the depth and length of this downturn until we are further into the spring selling season in March and April and hopefully, after the Federal Reserve's work is done. We recognize that if market conditions do not improve, we will need to be more aggressive with price reductions to rebuild our backlog and turn our inventory. And we'd rather be doing that when cycle times and building costs are coming down and when more of our backlog has delivered than three or six months ago. Turning to our land strategy. We continue to assess all transactions, whether they involve new land opportunities or takedowns under existing options, using our rigorous underwriting standards that are focused on both margins and returns. Our existing attractive land portfolio allows us to be highly selective in this process and to walk away from or renegotiate deals that no longer meet our higher thresholds. Over the past three quarters, we have walked away from over 9,000 of our option lots and many additional deals have been deferred or restructured. This cost us $12 million in forfeited options and sunk development costs, $6 million of which was in the fourth quarter. At fiscal year-end, we owned approximately 37,700 lots and controlled about 38,300 through options. This is a 6,000 lot or 7.5% reduction in total lots in the fourth quarter alone. We continue to target an overall mix of 60% option and 40% owned over the longer term. Excluding the loss allocated to our backlog, 56% of total lots were controlled through options. Our existing land should allow us to grow community count 10% in fiscal year 2023. We also control enough land for further community count growth in 2024. As a reminder, we acquired much of the land for our planned fiscal year '23 community openings prior to 2021 before land prices started inflating. In fiscal '22, we spent approximately $2.2 billion on land acquisition and development. In light of current market conditions, we expect to significantly reduce the spend in '23, which should free up capital for other uses. With over $3 billion of liquidity at fiscal year-end and substantial operating cash flow projected in fiscal year 2023, we are in a strong position to pay down debt, buy back stock and opportunistically acquire control of land that may become more attractively priced, all while maintaining a conservative and low leverage balance sheet. In the fourth quarter, we repurchased $159 million of our common stock. Since the beginning of the fiscal year, we have repurchased approximately $543 million or 9% of our outstanding share count at the end of fiscal year 2021. We have also paid approximately $90 million in dividends in '22 and we retired $410 million of long-term debt. We expect debt reduction and share repurchases to remain an important part of our capital allocation priorities for the foreseeable future. We are planning to retire $400 million of our 4.375% bonds in mid-January when they become callable at par and we are targeting $100 million of share repurchases per quarter in fiscal year 2023. Thanks, Doug. As you mentioned, we are pleased with our fourth quarter and full year results. Our deliveries, revenue, net income and earnings per share were all quarterly and full year records. We noticed a few analysts wrote overnight about our drop in average price per home in new contracts quarter-over-quarter. We want to point out that this is not reflective of an actual price drop, but rather the elevated average price from Q3 associated with our calculation methodology, which we described in detail last quarter. Turning to fiscal year '22's fourth quarter. We delivered 3,765 homes and generated revenues of $3.6 billion, which were up 12.7% in homes and 21.4% in dollars from a year ago. The average price of homes delivered was $951,000. Fourth quarter net income was $640.5 million or $5.63 per share diluted compared to $374.3 million and $3.02 per share diluted a year ago. Included in net income was an after-tax net benefit of approximately $105 million related to the settlement of a legal claim over a 2015 gas leak in California, including an offset for the $10 million we used to fund our new foundation. Adjusting for this net benefit, net income was $535 million or $4.71 per share, up 43% compared to last year's fourth quarter and still an all-time quarterly earnings record. For the full year, we earned $10.90 per share on a GAAP basis. Excluding the net benefits associated with the settlement and contribution, we earned $10 per share [even]. As Doug mentioned, our fourth quarter adjusted gross margin was 29%, up 310 basis points compared to 25.9% in the fourth quarter of 2021. SG&A as a percentage of revenues was 7.7% in the quarter compared to 8.8% in the same quarter one year ago. The year-over-year reduction in SG&A percentage is primarily related to the leverage from increased revenues, but also to tighter cost controls as total SG&A expense only grew $6 million on $630 million in additional revenue, excluding the $10 million contribution we made to our charitable bond -- charitable foundation with proceeds of the legal settlement. Joint venture, land sales and other income was $152.5 million during the fourth quarter, which includes an approximately $141 million benefit related to the legal settlement. That compares to $63.5 million in the fourth quarter of fiscal year 2021. Excluding the settlement, we exceeded our guidance on this line item by approximately $12 million. Write-offs totaled $22 million in the quarter. Approximately $6 million of this amount was related to walk away and predevelopment costs on option land that we decided not to pursue. The remainder was associated with anticipated losses on the pending sales of two wholly-owned city living land partials that we have decided not to build. Instead, we will sell. Both are under contract and in due diligence with buyers. We did not have any impairments on any of our traditional homebuilding land or operating communities. We continued to generate strong cash flow this year with $978 million of cash flow from operations. We ended the fiscal year with over $3 billion of liquidity, including $1.3 billion of cash and $1.8 billion available under our revolving bank credit facility. In fiscal year 2022, we invested $2.2 billion in land acquisition and land development and our spend dropped in each quarter as the year progressed. We also returned $633 million to shareholders through share repurchases and dividends and we reduced debt by approximately $410 million. Our net debt-to-capital ratio was 23.4% at fiscal year-end. As Doug mentioned, we are planning to further reduce our debt by repaying $400 million of senior notes due in April but callable at par in mid-January. After we repay these notes, we will have no significant maturities of our long-term debt until fiscal 2026. During the quarter, we transferred two New York City -- New York market City Living projects into joint ventures as part of our capital efficiency initiatives. Results from our former City Living segment are now reported in the regions in which the projects are located, primarily the North for this and all future reporting periods. Prior periods reported in our earnings release have been reclassified and additional periods will be reclassified in our upcoming 10-K. Our forward guidance is subject to the usual caveats regarding forward-looking information. As Doug mentioned, the 8,098 homes in backlog at fiscal year-end gives us good visibility into next year. The contracts in backlog are supported by sizable non-refundable down payments, additional promissory notes, and as Doug laid out not to be minimized, the emotional attachment our buyers have to their new, highly personalized homes. However, given the unpredictability of the current demand environment, the volatility in mortgage rates, inflationary pressures and unclear global and macroeconomic conditions, I want to stress that our forward-looking projections, especially for the full year are subject to greater uncertainty than normal. With that said, we are projecting fiscal year 2023 first quarter deliveries of approximately 1,750 to 1,850 homes with an average delivery price of between $950,000 and $970,000. Consistent with normal seasonal patterns, first quarter deliveries are expected to be the low point of the year, with deliveries for the full fiscal year weighted to the second half. For full fiscal year 2023, we are projecting new home deliveries of between 8,000 and 9,000 homes with an average price between $965,000 and $985,000. We expect our adjusted gross margin in the first quarter of fiscal year 2023 and for the full year to be approximately 27%. We expect interest and cost of sales to be approximately 1.6% in the first quarter and 1.5% for the full year. This would represent a 20 basis point reduction in interest expense in cost of sales year-over-year as our leverage continues to decline. We project first quarter SG&A as a percentage of home sales revenues to be approximately 13.5% versus 13.4% one year ago. Included in first quarter SG&A is about $12 million of our annual accelerated stock compensation expense that should not recur in the remainder of the year. It was approximately $10 million last year. For the full year, we project SG&A as a percentage of home sales revenues to be approximately 11.3% and expect total dollar spend to be flat with 2022. Other income, income from unconsolidated entities and land sales gross profit is expected to be approximately $10 million in the first quarter and $125 million for the full year. Much of this full year income is projected from sales of our interest in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. While the market for rental properties is currently being disrupted by the volatility in rates and economic uncertainty, we do project selling our interest in four of our joint ventures by the end of the fiscal year. We project the first quarter and full year tax rate of approximately 26%. Our weighted average share count is expected to be approximately 112.5 million for the first quarter and 110 million shares for the full 2023 year. This assumes we repurchased a targeted $100 million of common stock per quarter. Based on land we currently own or control, we expect to grow community count by 10% by the end of fiscal year 2023. Putting this all together, that works out to be between $8 and $9 per share for the full year which would move our book value to above $60 at fiscal year-end 2023. Thank you, Marty. We continue to believe that the long-term prospects for the housing market remain positive despite the recent market weakness. Demographic and migration trends continue in our favor. In addition, there continues to be a substantial shortage of homes in America as how the starts have not kept up with population growth for at least the past 15 years. We believe these fundamental drivers will support the housing market well into the future. Before I open the call to questions, I want to again thank the entire Toll Brothers team for another great year. We are now facing a tougher environment. But we've been through this before. We are executing on the right strategy for our company, and I am confident that our experienced teams will once again rise to the challenge and deliver another solid year for Toll Brothers in fiscal 2023 and beyond. [Operator Instructions] As a reminder, the company is planning to end the call at 9:30 when the market opens. [Operator Instructions] Our first question comes from Michael Rehaut from JPMorgan. First, I'd love to get your sense of current pricing. You guided for a 27% gross margin for fiscal '23, which was better than we were looking for and I think speaks to the strength of the backlog and your ability to maintain some margins in the backlog. Can you try and contrast that to current pricing and the amounts of discounts that you're currently offering or incentives, trying to think about real-time gross margins and pricing in today's backdrop? Sure, Michael. So our guide is 27%. And I think Marty clearly laid out some caution we have in '23 because of the current environment. If you look on paper at those 8,100 homes in backlog, the margin is higher than 27%. But we are putting a cushion on that because we do know that there will be what we think is some modest elevation of cancellations. We also have some additional homes that we need to sell to hit the $8,500 midpoint of the '23 delivery. And so we buffered it a bit when we've come in with our guide of 27% because of the current market conditions. In terms of where we are today, the average incentive nationwide on the next home sold is 8%. And remember, that's not coming off of zero. Even in the very good times through COVID, we always had an incentive in the range of 3% to 4% guys. Is that about right? Great. No, that's very helpful. I guess secondly, you noted the SG&A for fiscal '23 on a flat dollar spend, can you kind of walk through the puts and takes of that? And to the extent that revenues would be, let's say, less than expected. Where is your ability to flex there and conversely, if you're able to close more homes due to better cycle times, how should we think about the variable on the upside? Mike, it's good to hear from you. I think SG&A is a significant focus of ours. Unfortunately, as an operating entity, we are not immune to the effects of inflation. And so we're pretty proud that we're able to keep the number flat year-over-year. Now that is on a lower expected revenue basis. So every day, we're working towards some initiatives to try and evaluate headcount and deal with some of these inflationary pressures. Our personnel are down around 6% in the last six months. Our open positions are down significantly over that same period of time. So we are doing a nice job of holding the line on headcount. We are facing an environment where we may need to turn the dial up a little bit on marketing spend and outside broker commissions. So we are working diligently to keep SG&A as low as we possibly can. Obviously, more revenue will help and less revenue or hurt in terms of the leverage. We've given you our best estimate of what we think it will be for 2023. It was all super helpful, particularly the comment about the strategy around the spring selling season being a better time to get more aggressive on things. Just I guess, as a point of clarification, Bob Toll, I remember, talked about the spring selling season really begins in some places in January. And I guess I wanted to get some clarity on your incentive number there that you gave today about 8%. Obviously, I would assume that it's including everything, whether it be rate locks and rate buydowns and so just if you could clarify, is there anything that would be decremental to your gross margin that you're doing in the negotiation with the buyer that's not in that 8%. And then your order ASP, I think you said last quarter, like-for-like was like $1.15 million on average or something like that or like up 7%. Just wondering if this quarter's reported order ASP, you think is pretty much like-for-like or if it's a different number? So I'll answer the first part. And then Marty, you can jump into the second part. Stephen, the 8% is all inclusive of whether it be price drops, incentive increases or closing cost assistance or mortgage buydowns or anything that we can think of and that you can think of is included within that 8%. And yes, Bob, you said talked about Super Bowl Sunday to Easter or the Super Bowl now in February. So it's a few weeks before Super Bowl Sunday, and it generally extends through late April is the heart of the traditional new home selling season. And as I mentioned, even in tougher times, we always expect more homes sold during that period than other times of the year. And so I think we strategically have made a good decision to work hard on delivering our backlog and protect it to incentivize where there is elasticity where the market is responding to incentives. But to really wait for delivery times to come down for building costs to start coming down and to focus on when it makes the most sense to be a bit more aggressive to go chase deals if we need to do that. And that is by each community, by each market and based, of course, upon the overall bigger macro market conditions and economies. And so that is the strategy in place. I also talked about layering in some additional spec build where appropriate in those markets that have better dynamics and to do that at a time when we can build those specs for a bit less to set up good results for 2024. Marty? Yes. I think I'm going to default to it is a like-for-like analysis with the number you quoted of $1.150 million. But I would caution that like-for-like is very tough for us because we have differences in geographic mix quarter-over-quarter. And we have differences in our various segments of aff lux, active-adult and luxury. So it says like-for-like as we ever get. When you saw -- we're going to get that out -- I heard that yesterday, I'm not going for that one. When you sell home some $300,000 to $4 million, it's just quarter-to-quarter, there can just be such differences because of geographic mix and price point mix. Great. Yes. No, I appreciate that. Second question I have relates to the impact of mortgage rates. And I know that you talked about the fact that your buyer is not as sensitive to mortgage rates in terms of affordability. And yet, your buyer is also fairly savvy. And mortgage rates right now are -- we just had it reported at 6.4%. I mean it's already down like 70 basis points or something like that in a very short period of time. The spreads are still super wide. I think it's entirely possible you could see a mortgage rate come down meaningfully in the next six months. And so my question is, if that happens, do you think your buyer would -- that you would see an improvement, a tangible palpable improvement in demand as your buyer opportunistically takes advantage of that? Or do you think your buyer is basically insensitive to rates regardless if they fall or rise -- relatively insensitive, sorry, I should say? Okay. Yes. So I don't think our buyer is even relatively insensitive to rates. I think they're very smart. They're wealthy and they are definitely aware of and focused on rates. Back in August, when we were all together, I spoke of some green shoots because rates had broken below 6% and we were encouraged for a few weeks. And of course, that went away as rates went up into the low to mid-7s. And now they are in, call it, the mid-6s. And there are some very, very modest green shoots of the last few weeks as rates have come down, but I am not ready to get sucked back into the conversation I had with all of you in August when we felt better because it's just -- we had Thanksgiving in the middle of this, and it's just not enough time to understand if that move from 7.25% to 6.5% is enough to start triggering more demand. It's December, it's not the timing of the year to really comment on that. And we got a bit burned by the comments that the industry made in August that didn't play out. But longer term, if these rates can break through 6% and get into the 5s, I think we're really going to be on to something. And I think that applies to whether it be first time or whether it be the Toll Brothers buyer. Our buyers are definitely wealthier, they have more equity in their homes, if in fact, they have a home that they're going to be selling. There's more cash that they put up. There's lower leverage on the mortgage. And so we have a lot of good things going for us. But they are absolutely aware of and sensitive to where rates are moving. Yes. That's what I think as well. Thanks very much, Doug. Just as a clarification, though, can they lock the rate when they're buying like through the end -- through the close? They can lock -- we can help them lock or they can lock a rate one year out, and that's why delivery times for us coming down is very helpful because when we were quoting 14, 16 months in some of these communities that were so backed up, it was very difficult to lock. They can -- let me explain when I say lock, they can cap a rate a year after, and it may flow down. They can lock a rate about 110 days before closing where they can definitively lock in a mortgage rate, but you can buy a cap as far as one year out. But I do think if a buyer wants to buy a build-to-order home from Toll and it's a, call it -- let's just say it's a 13-month delivery, and they can't do anything with it right now in terms of a lock and let's say they have a home to sell, I think there may very well be some growing confidence over the next three to six months, that rates will be coming down when they can lock, call it, seven, eight, nine months out. And as those rates come down, that will make it easier for them to sell their existing home and we'll give them a lower rate on the Toll home. And I think some people already feel that way. But I think that should grow as the Fed gets closer to being done with their business. Thanks for all the great detail so far. First question just on the margin guidance, and I certainly appreciate the disclaimer there about the unknown and the uncertainty I was just hoping to dig in a little bit more to the trajectory you guys have. Effectively, it sounds like it incorporates margins holding pretty flat through the year with the 1Q guide identical to the full year. Is there cost relief being assumed there that might be offsetting higher incentives and pricing pressure on specs as the year unfolds there? Is it mix driven? Why -- I'm just trying to think through why margins would hold stable for the year in an environment right now that seems like it's -- pricing is under pressure? We haven't built in cost reductions in the backlog. We continue to maintain high, what we call, building cost reserves or contingencies in our underwriting. And as for, Marty, sequentially through the year? I think the biggest factor in what would be perceived to be a declining margin environment that's offsetting that is the lumber pricing inherent in our deliveries as the year goes on. Lumber fell steadily over the last few quarters, and that will be reflective and supportive of a more flat margin for 2023. You had that number -- just from the third quarter to the fourth quarter, lumber dropped $12,000 to $14,000 per house just in one quarter there. Okay. So basically, to think about that incentive number you gave earlier at 8%. It's up probably 400 basis points, 500 basis points from nine months or so ago. A lot of that is being offset, at least as '23 progresses through lower lumber on a per loan basis. We are feeling -- I talked about building costs beginning to come down and cycle times beginning to come down. The front-end trades, the excavator, the foundation and concrete, the framer, window installation, siding, roofing, rough mechanical, electric plumbing, HVAC, and everything you do before you insulate a home and button it up with drywall, those front-end trades are now feeling less action as there are less starts. And they're the ones coming forward now saying, "Hey, we have some capacity." And as soon as you hear the capacity word as a builder, you say, great, and here's the new price. And so there's negotiation occurring on the front end, and that will naturally move through to the back end as those finishing trades also feel less activity. Got it. That makes sense. Second question, this is just more of a strategic question or thought. You kind of maybe alluded to this a little bit, Doug. But I think it makes a lot of sense being willing to forego some sales in the near term with the backlog you have and kind of the seasonally slower time of the year. Just given your build-to-order model, though, how long are you willing to forgo sales or kind of give up some market share, recognizing it seems like you would be setting yourself up for a pretty big air pocket in '24 unless you're willing to meaningfully increase the mix of specs in your business in '24. Because if your build cycle, even if it improves to 12 months, you're not going to have an opportunity for a lot of sales unless you see a demand improvement through in the spring of next year. So how long are you willing to kind of give up that market share in the near term and maybe not be as aggressive on pricing? Or is the answer to that spec ship that you are willing to take higher? Great question. Our head is not in the sand. I mentioned that we're very focused strategically on '24, and we will pull the levers necessary to have homes ready to be delivered in '24, which means we will increase spec build starting in the new year. That will be ready in early mid, end of '24. And it's been interesting, the last couple of quarters, while we're about 75% build-to-order, 25% spec, and the spec business for us has been better, it's been higher margin. The client, one of the reasons is they can lock a rate for a quicker delivery, and they want a little more certainty around the finances associated with buying the home. So our spec business has done well, and we've had a bit better pricing power, which gives us confidence. We're not going 50-50 and maybe we get to 30-70. We'll have to see, but it's going to be based on certain markets and how those markets are doing and where the elasticity of demand has been. So we will continue to keep a close eye on market conditions and adapt accordingly. And if that means not just building more spec to set up those deliveries, but being a bit more aggressive on incentives, we're going to do that. We're not going to lose market share. We have the land to grow this company. We already mentioned 10% community count growth coming this year on the land we control, we have strategically delayed those openings, as I mentioned, so that they hit in a better part of the year, which is the spring season, and they hit, we're actively building models everywhere and holding off openings where in COVID, we would have opened them. We would have had what we call money shoes opening, where it's hard to get on the job site you got to work hard to buy a home. We're going to -- you're going to -- this is going to be Ritz-Carlton white glove, everything perfect, and we're going to do it at the right time of the year. So there's a lot of moving parts for us, but because of the landholdings and the ability to grow community count and our flexibility on both spec build and pricing to market where appropriate, I'm confident our strategy is in place to have a really good '24. It's actually Paul Przybylski. I appreciate you guys giving the order incentives at 8%. I was wondering if you could combine that with your traditional market color and where incentives may be higher or lower than that average? And then also, if you could give us any color on your various business segments and how orders performed in the quarter. Sure. Paul. Happy to do that. Interestingly, and it's the first time in some time, the East is better than the West in sales. We've talked about Smile States and everybody moving south and everybody moving west. And it's simply because at West, prices went up a lot more through COVID. And so you have markets like Boise and Phoenix as two examples out West and the Nevada markets of Reno and Vegas as examples where we had communities where prices were up over 40% through COVID and notwithstanding the long-term positive prospects for those markets because of affordability, job growth, sunshine, lifestyle, they as always happens in these cycles, the faster you go up the first you are to come down. And so the Western markets are softer. They have been slower. We have bigger backlogs out West because we were so hot out there through COVID. And so we're being a bit more protective of that backlog and a bit more careful to not chase those markets down lower which is necessary because of the inelasticity. So places like New Jersey, Philadelphia, Atlanta, Massachusetts, Michigan, Virginia and all of Florida right now are our best performers. In terms of market segments, the active adult empty nester, which it's not just 55 and over, it's the boomers that are moving down. That has been our best segment for good reasons. They pay more cash. They're less impacted by rates because they have a lot more equity in the home they raise the kids in that they've owned for 20 or 30 years, and they're more affluent and they're willing to put either all or a lot more cash up and have lower mortgages -- the softest -- and the other three segments, which -- the other two segments, which would be affordable luxury and move-up luxury are running about the same and City Living is doing the best, which is right now, New York only. We have two buildings, one in Manhattan and one in Jersey City that are crushing it in terms of sale. They're all in JV that's going to come into the other income line, but we sold 80 units in Jersey City in six months at $1 million plus a unit. And we're about to open on the Upper West side of Manhattan with what we think is significant pent-up demand. So I haven't said that in a long time, but the City Living segment is doing very, very well, but it's very small and again, in joint venture. Okay. I think over the -- let's call it, the past 12 to 18 months, maybe even a little bit longer, you probably entered maybe a half a dozen new markets. Can you maybe give us some color on where those stand? And are you still committed to those markets, given the new environment and the likelihood you haven't achieved a scale yet. Sure. So we had in three markets in South Carolina, Charleston, Myrtle Beach and Greenville through the acquisition of 1 builder down there, it's fantastic. And those markets are doing very well. They're part of the Smile States, when we talked about Smile States and now they're part of the East as we talk about the East. So we're very, very happy with that acquisition. We had a very small acquisition in San Antonio. We have a great presence in Texas. We've previously been in San Antonio. We actually have land in San Antonio for our own account when we acquired that builder. That's a small market, and we're just beginning to integrate there, I'd say it's too early to say. But generally, Texas is doing just fine. What else more recent guys? Well, that's a new market. So Spokane, Coeur D Alene, which was not a builder acquisition, but it was a new market on the Eastern side of the State of Washington. And of course, Coeur D Alene is in Idaho, but it's right down the road from Spokane. That's had a very slow start. We just entered Long Island. And at $3 million, $4 million, we're doing really well. That's -- and we opened four months ago, not great timing, but we actually have really good sales. Nashville is a new market, just too early to tell. We have a couple of urban buildings, not high rise, but midrise and we haven't even opened our first suburban building. So that will take a little bit of time. Tampa opened maybe three years ago, terrific sales -- we're having some production issues there that we're working through. But long term, I think we're very pleased with being in Tampa and Marty put it on the board for me, and that rounds it out. Doug, just following up on Alan's question and Steve's earlier around just the strategy of how you evaluate the spring and not mean sense to kind of push on a string in December. I guess any more quantification for what's kind of the trigger point on a pace basis where you just say, hey, this isn't working in the spring because the back half of your fiscal year, you ran about a 1.2 a month. So is it -- if you just flatline at 1.2, been, hey, like we've got to drive back towards 2 or whatever the number is? Or maybe just a little elaboration on metrics that you're going to be looking for and what's acceptable? Sure. So there's not one metric. We don't have a sales quota. We've never run this company top down -- top line down but we're very mindful of the need if we get to that point of driving more sales. And I'm sorry for the vague answer, but that means that we analyze every community locally. We start having meetings with the sales team, with the community team. We do a deep dive into the market comps and we start making pricing decisions accordingly. We also may have some modest shift in product offering. Maybe you come in with a smaller house. Maybe you come in with the same house, but you pull some features out of it. There's a lot of different moves that we make. It's studied weekly, but it's studied very, very locally. So I can't tell you that if we sit at one, two sales per month and really want to be at two, we're going to start making some dramatic company-wide moves. It's going to continue to be market and community specific, and we will act accordingly as we roll through the spring season. Understood. Okay. And then maybe from a more near-term standpoint, given some of the comments earlier in the quarter and how you say you got burned by them. But it does seem like maybe you ended the quarter closer to 1 a month. So when you make the comment about no discernible improvement, is that kind of relative to quarter end pace? Is it -- you were down 60% for the full quarter, and you're just saying still down about 60%? Maybe just give us a little more on the current sales pace and what you're trying to -- the message with that comment? Yes. So the demand was pretty even between August, September and October. So our comments on November and the first -- the beginning of December here are related to the entire fourth quarter. So I wouldn't read more into it than that. To my earlier comment on we're going to continue to react the need to incentivize where appropriate. Remember, we haven't given up on ROE, and we are very focused on ROE, and we will continue to focus on ROE, not just in terms of any future land buying or in terms of renegotiating of existing deals, but also in terms of the need to turn inventory. And so building costs coming down, cycle time coming down, and the need to turn that inventory is front and center in our mind. Jason, thank you very much. Thanks, everyone for your interest and support and great questions. We are always here to help clarify any further questions you may have. And have a wonderful, wonderful holiday season, and we'll see you in the new year. Thank you.
EarningCall_1976	Good afternoon, and welcome to the Caleres Third Quarter Earnings Conference Call. My name is Melissa, and I'll be your conference coordinator. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead, Miss. Good afternoon. I'd like to thank you for joining our third quarter 2022 earnings call and webcast. A press release with detailed financial tables, as well as our quarterly slide presentation are available at caleres.com. Please be aware today's discussion contains forward-looking statements, which are subject to a number of risks and uncertainties. Actual results may differ materially due to various risk factors, including but not limited to the factors disclosed in the company's Form 10-K and other filings with the U.S. Securities and Exchange Commission. Please refer to today's press release and our SEC filings for more information on risk factors and other factors, which could impact forward-looking statements. Copies of these reports are available online. In discussing the results of our operations, we will be providing and referring to certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures as well as others used in today's earnings release and our presentation on the Investors section of our website. The company undertakes no obligation to update any information discussed in this call at any time. Joining me on the call today is Diane Sullivan, Chairman and CEO; J. Schmidt, President and Jack Calandra, Senior Vice President and CFO. We will begin this morning's call with our prepared remarks and thereafter, we will be happy to take your questions. Thank you, Logan, and good morning, everyone. It's an exciting time at Caleres with our team's energy running high as our momentum continues. Today, I'm very happy to report that Caleres continued its strong performance in the third quarter of 2022. We built on our excellent first half results, which were driven by another period of outstanding, operational and financial execution. These results are further proof of the strength of our brands, of our compelling product and product creation power, of our disciplined inventory management and of course, the agility and resiliency of our operating model that is showing strength. For the third quarter and even with as the consumer navigates this challenging macroeconomic environment, we achieved record quarterly sales of $798 million, nearly 2% higher than the third quarter of 2021, with improvement once again driven by a 7.6% year-over-year increase from the brand portfolio segment and we delivered another strong return on sales, reaching more than 7% as the brand portfolio recorded robust third quarter earnings and Famous held its operating margin in the double digits, achieving 12.3% and all-in, this generated operating earnings of $57 million and earnings per share of a $1.15. I will note that at $1.15, we've ended the first nine months of 2022 with $3.86 of earnings per share or a $1.66 above our pre-pandemic record. In addition, during the period, we also grew total Caleres market share. We continue to manage our inventory well and ultimately ended the period nearly 16% lower than the second quarter of 2022 and we returned $24 million to our shareholders through share repurchases and dividends. All in, excellent results with a team that is determined to continue to drive this momentum. Now, as you know, this will be the last time that I speak with all of you as CEO as I will transition to Executive Chairman in mid-January. I cannot express how much of an honor serving as CEO of Caleres has been for me. I'm proud of what we've accomplished and proud of the diversified portfolio, the consumer and product driven organization and the inclusive culture that we've built during that time. You can absolutely count on the fact that the strategic focus areas of delighting consumers, building product that fits and is relevant, creating inspiring experience and engaged chains are well embedded into the fabric of who we are, that will never change. I want to thank my leadership team for their collaboration, creativity and drive for results and of course, their commitment to all of our colleagues, consumers and our partners and I want to thank all of you in the investment community for your interest and support of me and our organization. To say that I'm excited about the future of Caleres would be an understatement. I see tremendous potential for the earnings power of the company. In fact, with the record earnings performance in '21 and our expectations for another record this year, I am confident our pre-pandemic earnings level is firmly in the rear view. Furthermore, I believe in the resiliency in the portfolio and I'm completely confident in our ability to create long term value for many stakeholders. I believe our expertise and capabilities in brand building and product creation, marketing, digital commerce and our supply chain management provide a unique foundation from which to continue to build and I'm also confident that this will be a successful executive transition. As you well know, J and I've been working side by side for many years and I can say that without reservation, he has an unending commitment to excellence. He knows the footwear category, our business and our consumers very well and he is ideally suited to lead the organization through its next chapter and his leadership roles, numerous ones at Caleres and his distinctive merchant mind has prepared him well to stare the company into the future and although many of you may have met him by now, I would like to take a moment to introduce Jack as well, who joined us in September as CFO and is joining his first Caleres' quarterly earnings call today. As you get to know Jack in this role, I'm confident that you will be impressed by his strong financial background and his consumer goods expertise. As you can imagine, this next step in my personal career is as exciting as it is bittersweet. That said, I'm thrilled to move to my new role as Executive Chairman and I look forward to supporting J, Jack and the rest of the Caleres' leadership team as they build on what we've accomplished together and I also look forward to focusing on continuing to enhance the Caleres culture, drive strategic initiatives to unlock growth and assist in ensuring we have a value enhancing pipeline of growth opportunities ready for when the timing is right. Thank you, Diane for your kind words, your confidence and your support. We've worked together for a long time and I feel so fortunate for that opportunity. In the past 12 years as our CEO, you have led the transformation of our financial performance, our portfolio of brands, our digital business and our employee culture. I want to thank you for your leadership and mentorship and I look forward to your ongoing council as Executive Chairman. Now let's talk about our third quarter performance, Caleres did deliver another period of strong results. We leaned into our diversified brand portfolio and our advantaged inventory position to meet the robust demand in key trending segments of the footwear market. At the same time, we continue to prioritize investment areas, namely consumer marketing and experience that is value driving and essential for future growth. I'll begin with our Famous footwear segments. Famous continued to perform at a high level during the third quarter, up against the blockbuster period last year, Famous beat our expectation, delivering a modest year-over-year sales decline. However, by limiting promotional activity, the business generated margins higher than pre-pandemic levels, which were also in line with our plan. Jack will walk through the specific key financial metrics of each segment in more detail in just a few minutes, but I would like to call out a few highlights that drove our quarterly performance at Famous; namely kids, brand curation, fashion acceleration and consumer experience. First, our back-to-school kid's business was a highlight, outpacing last year's robust performance. In fact, our kid's business increased 3% in the 10 week after school period versus 2021. The results for the first -- the full quarter were even better up 6% as we positioned the right inventory behind the right brands and styles. Clearly, the kids category is a strategic differentiator and a long-term growth driver for Famous and this recent performance further solidifies our position as a destination for back-to-school footwear. Second, the curated assortment of national brands and styles continued to resonate with the Famous consumer target, the Millennial family. Famous' top 25 brands represented 89% of sales during the period and we saw acceleration of those key brands as inventory strengthened later in the quarter. Famous also experienced strength in its non-athletic business, aligning with the demand we saw with the rest of our Caleres brands. Third, we are seeing meaningful progress in our effort to meet the consumer and to build our competency on the fashion side of the business. We know that when she buys for her family and for herself, she is spending more, connecting more and returning more often. This was accelerated by growth in top key market brands as well as by the vertical integration with our Caleres brands. Our own Caleres brands performed very well at Famous during the period, with sales increasing 19% versus last year. LifeStride in particular was a standout, breaking into the top 10 of all selling brands at Famous for the quarter. Our Dr. Scholl's footwear experienced similar results, posting a double-digit increase across both men's and women's segments. I will also call out Naturalizer, which had impressive year-over-year sales performance, increasing our Fashion component for the Famous consumer, while offering a strong comfort proposition. All of these improvements demonstrate our ability to take our extensive understanding of our consumer and deliver the right brands and styles in the right quantities and locations to drive highly profitable incremental sales. This is all in addition to the core athletic and sport business that Famous is known for. Lastly, Caleres has continued to invest in the consumer experience at Famous, amplifying a tangible brand image across our Omni channel. In recent quarters, we have replatformed famousfootwear.com, updated high potential and high performing stores, initiated a new store concept that brings the best footwear brands and trends to life and showcases all of the enhanced visual assets and communication focused on the family that we display on our website. So far the results seem very promising. Our digital performance improved 2% in the quarter and our early reads from our new store concepts show a significant uplift in financial performance. We are encouraged by these developments and look forward to providing more updates at year end. Overall, Famous has delivered a strong performance during the first nine months, holding its powerful double-digit operating margin, while underscoring the strength of the Famous brand and while we recognize that there is uncertainty for consumers given the threat of mounting inflationary pressures, Famous is well positioned to compete and win even in a challenging market due to its leadership position with the family, its advantaged assortment of national brands, retail locations in key markets across the country with exceptional service by our team and enhance consumer experience in stores and online, supported by customer insights. Next, I'd like to move to the brand portfolio. Brand portfolio turned in an outstanding performance in the third quarter of 2022, achieving another period of year-over-year improvement across all key financial metrics and putting us well on our way to delivering a significant step up in the segment's overall annual earnings contribution in 2022. This performance was driven by robust demand and strong consumer reaction to our fashion products with most of our lead brands delivering positive sales trends during the quarter. These results reflect the progress the team has made against specific key initiatives, including elevating our product design, fit and relevance, sharpening our brand positions and messaging and aligning inventory with demand with our edit-to-win strategy playing nicely for more of the right styles, skews, quantities and sizes to meet the consumer's needs. And while you've heard from our peers that retailers are being more conservative with inventory, our capabilities have allowed us to minimize the impact to Caleres. For example, our drop shift partnerships continue to support meaningful sales outcomes. We expect this trend to continue through 2023 and it serves as another example of how we can continue to connect with consumers, maximize our inventory investment and provide our retail partners flexibility in periods of uncertainty. Also during the quarter, the brand portfolio achieved an outstanding performance in our brand's own website sales, highlighting the power of our brands and our improved digital capabilities. This included a nearly 22% growth from our own e-commerce sites with solid year-over-year increases from nearly every brand with the largest gains coming from Sam Edelman and Naturalizer. In total, the brand portfolio site saw an increase of 24% in new customers versus 2021. Clearly, these results demonstrate how we can leverage our powerful brands, our customer analytics and our growing expertise in this area to unlock more value from the total Caleres customer files going forward. I'd now like to highlight some brand level detail focusing primarily on the portfolio's lead brands. Beginning with naturalizer, which has delivered an outsized performance all year long, gaining market share and driving sales, earnings and average unit retail improvement During the third quarter, Naturalizer sales increased nearly 60% over 2021, with gains in dress, casual and boots, especially tall shaft boots. Average unit retails increased by 20% over last year, driven by newness in style and innovation. The brand's focus on inclusive sizing has resonated with consumers, not only through offering extended sizes and width, but also by offering wide shaft proportions in its tall boot assortments. The brands also launched an elevated look with improved functionality on Naturalizer.com. The new site emphasizes the strength of elegance and utility, along with comfort and fit and it connects with consumers through authentic product concepts and stories. The results, sales of Naturalizer.com grew more than 50% in the third quarter and new customers to the site grew by 19% with over half of this increase in younger consumer demographics. Naturalizer's performance serves as another example of the power of our brands, combined with the power of our capabilities and our talented team members. The ongoing evolution here has placed the brand in the top 12 of all fashion brands and sales performance for third quarter according to NPD. Next, our Sam Edelman brands delivered continued strong results, with sales increasing 26% year-over-year. While the brand's wholesale performance showed strength across all footwear categories via trend-right styling, it's samedelman.com business more than doubled in the quarter. Key to driving this performance was a heightened focus on the aspirational luxury consumer, including fall direct mail and a global marketing campaign, featuring supermodel Naomi Campbell. These initiatives translated to a 75% increase in web traffic, a 55% increase in new consumers and a new record in digital sales for the month of September. Clearly, there is a lot of momentum with Sam. Next to Allen Edmonds, where newness in its well-known brand icons as well as sneaker and boot offerings showed continued improvement versus last year with higher average unit retails and margins. Product collaborations and limited drop event continue to delight consumers and drive full price selling. Our cordial [ph] and trunk show was our most successful ever and our collaboration with the brand Barber on exclusive styles became immediate best sellers. Both these events highlight the brand's commitment to authenticity and craft, which is at the heart of the Allen Edmonds brand. Also new this quarter is a relaunch of our Collectors' Loyalty program, allowing us to enhance our relationship with our best customers. There are many other brand examples I could give, but to summarize, the consumer continues to respond to newness and fashion aligned with the brand's clear DNA. Our brand portfolio is more diversified and relevant and focused than ever and our teams and processes are flexible and able to pivot to meet changing consumer demand. Looking ahead across the entire portfolio, the brand teams will lean into their strong product creation ability, build on consumer insights and build on our own ecommerce business, manage inventories using speed to market as a catalyst and further are Edit to Win initiative, all to unlock opportunities for future growth. Overall, 2022 is progressing in line with our expectations. In light of the more challenging macroeconomic environment, the entire team at Caleres will be focused on controlling what we can, managing expenses and reducing our overall debt levels. However, our strong execution through the first nine months allows us to stay with confidence that despite the uncertainty in consumer spending and the broader economy, we are confident in our ability to deliver record earnings per share this year. In closing, I am energized to be taking on the CEO role at this moment in Caleres' evolution. Our team has established a great foundation from which to build and I am optimistic about our prospects for long term profitability. Further, I am highly confident in our ability to generate strong levels of cash and drive additional shareholder value. Thanks J, and good morning, everyone. I am thrilled to be speaking with you on my first Caleres earnings call. Today, I'll provide additional details on our strong third quarter results, discuss our capital allocation progress and plans and share our improved outlook for full year 2022 financial performance. As a reminder, my comments will be on an adjusted basis and will focus on the comparable period in 2021 with some supplemental comparisons to the third quarter of 2019 where helpful. Please see today's press release for a reconciliation of adjusted results. Sales were $798 million, an increase of 1.8% versus last year. As Diane mentioned, this performance was driven by a 7.6% increase in brand portfolio sales. Famous footwear sales declined 2.6%, slightly better than expectation, and comparable sales were down 0.8%. Gross margin was 42.6%, effectively in line with last year, reflecting a decrease in Famous gross margin, an increase in brand portfolio gross margin and a higher contribution of brand portfolio sales to total company. Famous gross margin was 44.7%, down 290 basis points versus last year. The decline reflects more normalized pricing and increased promotional activity versus last year when inventories were exceptionally low due to supply chain constraints. Notably, gross margin was up 370 basis points versus the third quarter of 2019. Brand portfolio gross margin was 37.9%, a 490 basis point increase versus last year, due to higher wholesale prices, which are up 16% on average, growth in higher margin sales from the direct-to-consumer channel and a favorable brand mix. Gross margin and brand portfolio increased 70 basis points versus the third quarter of 2019. SG&A expense was $283 million or 35.5% of sales. As communicated on our second quarter call, this includes approximately $9 million of higher stock and incentive compensation expense, most of which is a timing shift from Q2. Operating earnings were $57 million and operating margin was 7.1%. Operating margin was 12.3% at Famous and 6.9% at brand portfolio. Net interest expense was $4 million about $900,000 higher than last year, given higher borrowings on our revolving credit facility and a higher borrowing rate given the increase in LIBOR. Diluted earnings per share were $1.15 at the high end of our previous guidance. EBITDA for the trailing 12 months was $299 million or 10.1% of sales. Turning now to the balance sheet and cash flow, we ended the third quarter with approximately $365 million in borrowings on our revolving credit facility and no long term debt. Inventory at quarter-end was $649 million, up 19.5% versus last year and up slightly compared to the third quarter of 2019. On hand and available to sell inventory was up and goods in transit were down materially. Notably, inventory was down 15.8% sequentially. By segment, inventory at Famous was up 17.5% versus last year and down 11.5% versus 2019. At Brand Portfolio, inventory was up 22.6% versus last year and up 14.1% versus 2019. We recognize the importance of maintaining a healthy relationship of inventory to sales and expect continued improvement in inventory levels in Q4. Regarding cash flow from operations, we generated $19 million during the quarter and deployed cash for strategic investments in the business, paying our dividend and buying back shares. In the third quarter, we repurchased 838,000 shares at an average price of $25.72 per share for a total cost of $21.6 million. Including the dividend, we returned $24 million in cash to shareholders in the quarter. Looking ahead, we expect to generate a significant amount of cash flow from operations in the fourth quarter. While we have 6.4 million shares remaining under our current board authorization and will continue to consider share repurchases based on market conditions, we believe at this time the best use of free cash flow after maintaining the dividend is to reduce our revolver borrowing and increase overall liquidity. As such, our guidance does not assume additional share repurchases this year. Given our strong performance year to date and our current expectation for Q4, we are tightening our fiscal year 2022 earnings outlook to the upper end of our previous guidance range. As such, we now expect full year 2022 diluted earnings per share to be between $4.30 and $4.40. We are reaffirming our previous guidance for full year 2022 sales to be up between 4% and 6% versus 2021 and we are providing guidance on several additional metrics as follows. We are planning continued improvement in inventory levels and expect Q4 ending inventory to be up mid-single digit percent versus last year. Given the recent increases in interest rates and the likelihood of an additional increase from the fed in December, we expect our interest expense to be about $14 million for the year and finally, we expect full year capital expenditures of about $55 million. Thanks, Jack and as you can see, we are extremely encouraged by our results year to date and even with the uncertainty in the macroeconomic environment, we're very confident we'll close the year in a record setting manner. Going forward, our portfolio is strong, our teams are aligned and we still have plenty of runway for growth. So we're poised to generate significant value for all of our stakeholders. [Operator instructions] Our first question comes from the line of Steve Marotta with C.L. King & Associates. Please proceed with your question. Good morning, Diane, Jay, Jack and Logan. Diane, congratulations again on just incredible career and an incredible run at Caleres. You're going to be very missed I'm sure on the calls. And Jay, of course, welcome again. Can you talk a little bit about November to date and if it's differed at all from the rate of sales in the third quarter at both Branded portfolio and Famous. Yes, Sure. Let me start and then I'll kick -- I'll kick the ball around a little bit this morning with both Jay and Jack, but on this one, as it relates to our brand portfolio business, quite honestly, our trends going into the fourth quarter have continued to be as good, if not better than what we saw in the third quarter. So we're feeling very good about how that is looking for the fourth quarter. As it relates to the Famous side of the business, as you've heard from many folks, that certainly the customers a bit under stress. There was some weather related issues out there and sentimental has been a little off. So we were -- would try to be super thoughtful and our guidance given both the strength of BP and a little softer on the Famous side, how do we put those pieces together to really guide very smartly for the fourth quarter. So Jack, maybe you could just talk a little bit about what the assumptions are around that. I think that's probably the most helpful way to share our thinking. Sure. Thanks, Diane and high Steve. So really at the low end of our guidance of $4.30, we would assume that that Famous comparable sales could be down as much as low double digits and then at the high end Famous would be down sort of mid-single digits on comparable sales and what I would say is kind of where we are quarter to date is kind of in between those two numbers. So feel really comfortable with the range we've given both to protect on the downside and then to give us some upside opportunity as well. Yeah and then reiterating that brand portfolio, feel very good about the current trends on that and they seem to be continuing. That very, very helpful. Absolutely yeah 100% and I think I asked this on the last call as well and I know you don't specifically provide order book information, but as we look out through the first half of '23, can you talk a little bit about what you're seeing maybe how much dropship has increased as a percent of sales during quarters, so that the initial order book is not completely reflective of what is ultimately sold during the quarter and maybe you could provide a little bit of -- it might be a scale of two halves next year. Yeah, that a great question and I'll let J talk a little bit about the order book and dropship because that's really -- actually the dropship business has been -- we were early adopters. So I think in that and if that's continued to be a real advantage for us, particularly I would say the last six months Jay. Yeah. It really provides a lot of flexibility and really a way to maximize our inventory going directly to the consumers and I would say two things. Number one, the dropship business has continued to grow high double digits during the quarter and we're seeing that around that 20% of our business. So again, it's supplemental to the total, but still very, very important significant to the brand portfolios business. The other thing is, is that our order book is actually really in line with where we've been going into the quarters, as we go through with so much of it being dynamic now with our dropship and our replenishment business that we're really seeing more that come through that way. So we feel pretty confident in our order book as we go into spring right now. Where it is, is we actually it's in the same percentage of where we've gone into each quarter. So it allows us to really capture the rest of it into their. So yes, it's been in line with I would say historical new normal quarters. I think '22 is a funny year and it was a little lopsided as we went quarter to quarter, but this really reflects where we've been in the third and fourth quarter. So we feel quite confident. Yeah, and it has evolved, right. We used to look at order brook only. We've got to look at the drop-ship capabilities. We look at our own direct-to-consumer businesses. So it's a mix and all of that is very much in line now with what our outlook looks like. So feeling pretty positive about that and I think, Steve, the other thing on that point is, we really did have the inventory on the brand portfolio this fall, which really helped accelerate our business and when you have a good business going into the next season and that is very helpful as well. So, how that all works. Sure, sure. Excellent. One more question as it pertains to cost and pricing, can you talk a little bit about what is going on in the first half of '23 and is there the potential actually for sourcing deflation in the second half of twenty '23 compared to the second half of '22? Well, I think I'll start and J. can add some color to it. I think we're thrilled with the price elasticity that our brand showed really all through 2022. That price increase of 16% that really stuck on the brand portfolio was I think fantastic. I think our priority for sure there may be some deep deflection and the input costs, but there's also really going to be additional ocean freight savings and other opportunities. So and Steve, I think, both Jay and Jack would certainly support this point that our focus is absolutely on continuing to hold and maintain these margins going forward. So while we're going to do everything, there will be some -- there will be tailwinds. There will be some headwinds and all-in our goal is to continue to deliver higher growth margin levels. I would say absolutely and then the other thing is we'll continue to attack that with speed all the way through the reorder system and I think that'll help us pick up additional scale and savings as we go forward as the supply chain really returns back to what we've seen at more normal lead time levels. Good morning. Thanks so much for taking my question. I just wanted to ask about the inventory moving through to only being up around mid-single digits by the end of the year. It's certainly impressive. So can you just talk about your strategy on how you're going to move to that inventory both at Famous and the brand portfolio and then I guess how are you thinking about promotions at the brand portfolio and are you concentrating those more in your DTC channels versus letting them flow to some of the wholesale partners. And then I guess on just balancing newness in this product creation that you're talking about to drive demand versus moving through that excess inventory. Thank you. Yeah. So I'll start Abbie, you had a lot of questions, if I don't unpack them in the right way, let us know and we'll and we'll certainly add some more color to it. I think our inventory position, we feel let's just talk about the Famous footwear side. I think we're in terrific position at Famous. As we got some of new goods in during the course of the quarter, we actually did see some acceleration in those pockets of in demand kind of styles that that Famous had. We have got plenty of room and have within our guidance to make sure we maintain our competitive position in the marketplace in the fourth quarter of this year. So I feel like again, through all of our guidance and what we've planned that we don't really see any issue and we want to make sure that we go into the first quarter next year in a really clean position and in fact, I think J, we saw that almost 60% of our inventory is really new in this quarter. So, we're really hoping that that newness is going to really motivate the consumer to buy. So we believe we have it pretty well covered there. On the brand portfolio side, again, we all know that in the second quarter, our inventories increased as all of the pandemic issues glided and some things came early as the other came a lot early, but as we've gone through the back half of this year, we have really not been focused on promotion or liquidation at all. It's been fundamentally full price selling because we frankly did not have the inventory. Last year, we were down and I think it retailed somewhere and on average about 30% on our inventory levels and brand portfolio last year. So the fact that we have some inventories is terrific and we're planning on ending the year as Jack mentioned in a good spot. So, while it was lumpy through the air here and there, but of course, where wasn't it, as we end this year going into next year believe we have tons of opportunity to chase and to manage the business and whatever this new normal kind of looks like. Yeah and I just said, is that in brand portfolio, we really thought it come in early and so this was really -- we really ended third quarter exactly where we thought we would with inventory and we see fourth quarter coming into that same place and also that we don't have to front load anymore because of the supply chain normalizing. So we're going to see it return to a much more manageable type of business with better turns throughout the -- as we go forward. So anyway, but the fall is really -- it's exactly what we said. It came in early and it's really being driven down and fortunately it's in the right sales that the consumers demanding. Thank you. Our next question comes from the line of Laura Champine with Loop Capital Markets. Please proceed with your question. Thanks for taking my question and congratulations Diane and welcome again Jay and Jack. I really just have one question and it's about when Famous Footwear can be expected to turn that comp positive again and I guess embedded in that question is what's going on from an AUR perspective, whether for better or for worse right now and in this current period? Well, I'll take -- I'll start with the end right now for the third quarter, our AURs were actually slightly up in Famous Footwear for the quarter. So that actually reflects, I would say good solid demand and health to it. We really saw athletic come down in the third quarter and we thought non-athletic increased at the same time. So as we look to move that more to an even balance, I think we're going forward for that for 2023. I think we're still going through in fourth quarter and really trying -- I think really, I think our forecast really reflects any risks that's out there, but I think we'll see that moving into 2023. So Laura, I add maybe a couple things Jay as well on this topic. If you look at the quarter, right, we were down just 1% on a comparable store basis, which really wasn't -- not bad in this overall environment, particularly as you think about the athletic business, which is 60% of our business in the quarter as a category in the total market was down in the high single digits. So we think as the consumer continues to move and the better balance, they -- when they start buying athletic in a little more robust way and as Jay and the team continue to build out that not the other non-athletic and fashion side. So we're balancing sort of the categories within the store and Famous, we think that actually is going to truly help and lift that that comp from down one to what we expect in '23 to be in a more positive place. So a lot of it is this category -- category driven and as we drive the Fashion side of a little bit stronger and savings that will really help. I think that's a big strategic shift for everybody and kids that's going to allow us to change the momentum. Yeah. Thanks for taking my questions and Diane, best of luck to you in your new role. So I want to start, I got a few questions. I want to start on the Famous side, so the range of guidance in the fourth quarter, obviously that's below what you delivered in Q3 and I'm just trying to better understand that, how much of that the macro seems worse than what it was in the third quarter versus maybe the kids businesses, maybe a little worse just given that we're post back to school and I'm wondering maybe how boots are influencing kind of the trend that you're seeing right now, just maybe given kind of a warm start to the season although better weather in the last week. So can you maybe unpack some of that in terms of kind of how you're looking at the current trend in that business and the guide for the quarter? Maybe I'll just start Mitch and give you a little perspective. Recently obviously because of the seasonality of everything and with the weather being is a little more challenging late October into early November. As that's changed those categories that are more seasonally influenced not only at Famous, but everywhere has shown really good rebound. So as you would expect, that that's very much kind of what our performance looks like. I think the other thing is that there is tremendous amount of shifting going on and in the macro environment that we wanted to make sure that we really had and the right kind of room in the fourth quarter to make sure sort of delivered that the earnings per share that we laid out there and gave Famous plenty of room and the company to make sure that we could do that and go into '23 in a way that we felt was really teeing up and continuing to support the momentum. So Jay and Jack, I'm happy to have you add any other comments. I'll just said, we did see boots off to a strong start in September and Famous and then as it got warmer, it cooled off a little bit the trend and then going into November, it started to pick up again. So we're feeling good about that piece of it with the fashion part of the booth business being the strongest right now. I would just add that I think the results we've seen quarter to date on Famous are pretty consistent with what we've seen in the industry and just a reminder, which is probably different from a lot of others is that Q4 is our smallest quarter. So less material on the full year than I think some of our other players in the industry. And then just to follow up on boots, can you just remind me if I recall correctly last year, December was particularly warm. I don't know if that was a negative on your boot business last year, plus I think there are a lot of latent boot deliveries. So just as you as you look at that comparison, as you kind of kind of see the quarter playing out, how much of an opportunity is there on boots over the balance of the quarter? And even on the brand -- on the BP side just in terms of maybe replenishment, can you kind of walk me through that. Yes. Well, on a BP side, I'll start at that piece. Our boots are really significant portion of our business up to 30% across the portfolio and we do see more opportunity. Our inventories really were very at a line last year and so we really didn't have the boot inventory. We're in good place there now. So we do see nice sell through is coming through as we go in the fourth quarter in that piece of it and even with Famous boots in Q3 were actually up a little bit through the quarter and we do feel like we have more opportunity there as we go in, particularly on the fashion part of the boot business, which seems to me the best part right now. And then Jack, just on -- again on Q4, just maybe I haven't kind of had the chance to sort of back into the margins for the quarter, but can you just kind of maybe kind of high level talk about some of the puts and takes that you're thinking about Q4, maybe especially on kind of the merch margin side and kind of how you're anticipating promotions. Yes. Well, I think we're expecting an increased level of promotional activity certainly versus last year and Mitch, I think there's a couple of factors there. One is we know that inventories in the industry are higher. We know that the consumer is -- the consumer wallet is a bit more stretched than it was last year and so I think those two factors are inclining us to think that this is going to be a more promotional period. We also have versus last year our inventories, we had we had very little inventory last year because of some of the supply chain constraints. So for those reasons, we're expecting, I think to get to a more normalized level of pricing and promotional activity in the quarter and that's factored into our guidance. And I guess final question just on the Famous margins, you mentioned that the gross margin there it's up 370 Bps from Q3 '19. So just maybe you kind of remind us some of the structural changes to the business that has allowed you to deliver that level of profitability and how sustainable you feel like those changes are? Well, let me start on that Mitch on some of the structural changes that I can really actually speak to it from a total company perspective and there's a couple of probably most the biggest significant areas with the really in the margin rate assumptions across the company, both in for Famous and for Brand Portfolio, we really believe that we are going to be able not to maintain things at the high level at Famous in '21, but somewhere between historical and those '21 levels, which is you're even seeing us do a little bit better than that today. So that's one element. The Brand portfolio again, the margin improvement that we're seeing now, getting much higher -- high 30%, let's hold 40% at some point in time, but that structural change has happened. So the whole margin profile of the company because of how we've been able to price, the edits we've done a whole lot of other host of other things that really changed that. The second thing was we exited brands and we exited stores and that structural cost came out of our P&L as well. Interest expense was a bit different, share buyback, depreciation and amortization has been a big factor of it as well and then even corporate payroll. So when we look at all those pieces and add them up and we take a certain percentage, we don't assume it's all going to be better. It's very, very clear to see that the materiality of that is going to be significant for us going forward with the most important, we look at this management of SG&A and expense on a day-to-day basis. We took $100 million out a couple of years ago. We continuously look at that to make sure that we're reallocating that spend in the right way, but the real one is going to be those margin rates and that's going to be critical and that's where I would say 80% of our focus is on making sure that that continues to be where it is today or better as we go forward. So, that -- I think that's what I'd say with respect to the structure for the entire enterprise. Is that helpful for you? Ladies and gentlemen, our final question comes from line of Dana Telsey with Telsey Advisory Group. Please proceed with your question. Good morning, everyone. Congratulations Diane and hello Jay, Jack and Logan. So just current trends we've been hearing about end of October into November, can you frame how it's looking for you guys with Famous and the Brand Portfolio and next up, the path of the Brand Portfolio is very impressive both in terms of margins, sales increases and how it combines and interacts with Famous Footwear. With that path of operating margins of the brand portfolio improving, what do you see is the long-term opportunity in terms of that margin and the stickiness of the famous footwear operating margin now in that double digit range with the promotional environment, anything in terms of how you're managing pricing and promotion that maintains that stickiness or is the benefits from supply chain reduction, can it offset some of the promotional headwinds that may arise, thank you. Well, let me start Dana on a couple of those things. I think as the short answer is the sustainability of this on the operating margin side is yes. We absolutely believe there is enough stickiness with as the structural changes that we've made, the way that we're approaching the business, the product creation capabilities we have and our focus on margin as I just said is absolutely going to allow us continue to make progress against that and I know Jay and Jack, as we move into '23 we'll certainly be sharing more with you about that and are really planning to do an Investor Day sometime in the first half of '23 where we share a little bit more where they'll share a little bit more of their outlook for the next couple of years. So I think more to come on that, but the short answer is yes. We absolutely believe that we can. And then secondly, Jay a little bit. I spoke about a little earlier, but maybe on the trends that we're seeing and then maybe Jack can close it out on reiterating kind of what are some of our assumptions were. Well, we're certainly seeing, on the I would say the nonathletic side of the business, we're seeing multiple categories open up in terms of loafers and flats are very, very good right now and again, anything that feels comfortable really trending nicely as consumers continue to select new things to add to their wardrobes. Our boot business on the brand portfolio side is good. It was also good on Famous and we see that as starting to tick up as the weather gets colder. I did say more the fashion side of that is really where the dynamics are and obviously our brand portfolio fits in perfectly there. You picked up on it. It also works very nicely on our vertical integration there with several of our brands lifestride shoals, even some franco sarto and Naturalizer coming in nicely as we really open up that whole famous opportunity there as we love to integrate that and it's coming up really nicely. Back to the margin question, we don't see any return on that. We feel like we've made enough structural changes and also the way that we're running the business both on the Famous side that has really more of the brands they want at higher retails and then also we really did change the mix of where we're really focusing on the brand portfolio side and that gives us reason to believe that that will continue. Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Sullivan for any final comment. I just want to say thank you for joining us this morning and wishing everybody a happy Thanksgiving. We'll see many of you next week and looking forward to that. Thank you.
EarningCall_1977	Hello, ladies and gentlemen. Thank you for standing by for the Viomi Technology Company Limited Earnings Conference Call for the Third Quarter of 2022. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Claire Ji from the company's IR department. Please go ahead, Claire. Thank you. Hello, everyone, and welcome to Viomi Technology Co., Limited earnings conference call for the third quarter of 2022. Other reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and are posted online. You can download earnings press release and sign-up for the company's email distribution list by visiting the IR section of the company's website at ir.viomi.com. Participating in today's call are, Mr. Chen Xiaoping, the Founder, Chairman of the Board of Directors and Chief Executive Officer; and Mr. Thai Wickham, the Head of our Financial Department. The company's management will begin with of prepared remarks and the call will conclude with a Q&A section. 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 views expressed today. Further information regarding this and other risks and uncertainties is included in the company's annual reports on Form 20-F and other filings are 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 by law. Please also note that, Viomi's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as an audited non-GAAP financial measures. In addition, Viomi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our Founder and CEO, Mr. Chen Xiaoping. Mr. Chen, will deliver his remarks in Chinese followed immediately by English translation. Mr. Chen, please go ahead. [Foreign Language] Thank you, Mr. Chen. I will quickly translate our Founder's remarks before discussing our financial performance for the third quarter of 2022. Hello, everyone. Thanks for joining our third quarter 2022 earnings conference call. In the third quarter, our total revenue reached RMB685.8 million, below our previous guidance, other result of lingering weak market demand and that the pandemic resurgence. In addition to the macro headwinds, the complete cut off the sales of Xiaomi branded sweeper robots in the 2022, adversely impact our third quarter revenue. Furthermore due to the adjustment of the product portfolio and increasing the proportion of the revenue from product categories with relatively low gross margins cost temporary decline in the company's overall gross margin in the third quarter. However, we estimate the gross margin will return to a normal level in the fourth quarter. To build our long-term product competitiveness and brand awareness, alongside our ongoing elevator and print ad campaigns, we jointly launched a video interview program with Langchao Studio and Gongmao Home Appliances. In this program, we built deeper into the topic of how the IoT home solution is reshaping the future homes of Chinese people with Zhang Quanling, senior media specialist and the investor. And, Li Feng, the Chairman of Gongmao Home Appliances. In the interview, asking about Whole-Home Intelligence, we responded to the senior media specialist Yi Lijing's question about how home development -- how smart development with in-depth information on our onestop IoT home solution and our four capabilities, four services approach to the smart home. With smart home appliances and smart home products now covering all scenarios, more people want to live in homes of the future immediately. Although, our investment in product innovation and branding resulted in a temporary loss in the context of a challenging macroenvironment, we expect that, given the continuously expanding user base of smart home appliance, the industry will soon approach an inflection point. Viomi has taken the lead and the position our company to capitalize on this demand by completing the hardware and software integration and upgrade necessary to create a truly smart home. We believe our communications with consumers and our exploration of the future of smartification will encourage more consumers to become smart home users, in-house our brand influence and promote development of industry. Separately, we have made good progress in product innovation, brand promotion and the channel expansion over the past few months. Underpinned by our effective long-term brand and the product development strategy, we continue to strengthen our trending technology brand positioning. launch event on October 25th. The event focused on our software upgrade and product integration across four dimensions, including healthcare, energy conservation and environmental protection, active intelligence and the natural interactions further improving our onestop IoT home solution from the software side. At the same time on the hardware side we launched a series of new smart home appliance, including Alpha our AI range hood with AI smart eye suction; Master Pro, our 1200G Quanxian AI water purifier with integrated heat purification; Alpha 3 Pro, our AI sweeping robot equipped with an all-purpose base station; and Super 2 Max, our AI gas water heater with intelligent temperature control. In the category of smart home products, we introduced Super 2 AI smart door locks with an ultrawide-angle digital peephole. These new products achieved good results and have received broad consumer recognition in their pre-sale and crowdfunding stages. By deeply integrating our software and hardware, we provide richer home use scenarios and more intelligent user experiences, empowering more users to enjoy the convenience and ease of IoT home solutions. Our continuous product innovation is supported by our elevated research and development capabilities, as well as our efforts to build deep talent resources. In August we held our first annual Scientific and Technological Meeting, where we generously rewarded our technological innovation teams and individuals and the winner of the technology superstar price was rewarded a Tesla car, constantly encouraging ongoing risk R&D innovation. Furthermore, following the approval we received to establish our Guangdong Work Station in the first half of 2022 we obtained authorization to set up a post-doctoral workstation in Foshan. Moving forward, while we will continue to cooperate with universities and professional institutions to cultivate top talents for our society, incubate smart home programs and promote the overall development of the smart home industries. As of the end of the third quarter, we have applied for more than 5,500 global patents and accumulate paid 3,500 authorized patents worldwide, along with more than 2,100 innovations in the latest list of the Fortune series top 20 enterprise for scientific and a technological innovation. The Fortune series top 100 manufacturing, top 100 private enterprise and top 100 enterprise in 2022. Now we ranked third place 38, 60 and 73, respectively, attachment to our technological innovation capability and our comprehensive strength. Furthermore, we continue to execute our largest store and value merchant channel strategy in the third quarter and open additional Viomi flagship stores encompassing over 200 to 400 square meters in provinces, including Hebei Anhui, Hubei, and Fujian, among others. Meanwhile, the sales volume of our bundled home solutions increased steadily. With various solution options and prices to meet consumers' diverse demand, our offline merchants signed whole-home solution orders ranging from tens of thousands to hundreds of thousands of RMB with customers in Hunan, Guangdong, Ningxia and other areas in this quarter. 2022 in Berlin, marking our first appearance at one of the marketplaces for the consumer and electronic industries where we received positive feedback from the European market. Going forward, we will enrich our overseas offerings with additional product categories and expect a breakthrough in the scales of export sales as a result. As we forge ahead, we will continue to concentrate the following three aspects of the operation optimization. First, on the product side, streamline the number of our SKUs, adjust resource allocation and focus on more technological advanced products while improving the home smart product landscape. Second, continuously refine our operational structure and implement disciplined cost control measures. Third, adhere to our solid long-term development strategy with adequate funding reserves to support our operations while creating long-term value for all of our users and shareholders. Thank you. That concludes our Founder's remarks. Now Mr. Thai Wickham, the Head of our Finance Department, will go over our third quarter 2022 unaudited financial results in more detail. Net revenues were RMB685.5 million compared to RMB1,056.5 million for the third quarter of 2021. Net revenues were below the company's previous guidance. The decline was mainly due Revenues from IoT @ Home portfolio decreased by 41.6% to RMB376.0 million from RMB643.5 million for the third quarter of 2021. The decline was primarily due to the SKU adjustments for some categories, as well as the complete cutoff of sales of Xiaomi-branded sweeper robots. Revenues from home water solutions decreased by 23.6% to RMB119.9 million from RMB157.0 million for the third quarter of 2021. The decline was primarily due to the decreased demand for water purifiers. Revenues from consumables decreased by 11.8% to RMB70.2 million from RMB79.6 million for the third quarter of 2021, which was in line with the decreased demand for water purifiers. Revenues from small appliances and others decreased by 32.2% to RMB119.7 million from RMB176.5 million for the third quarter of 2021, primarily due to the product portfolio adjustment within this categories. Gross profit was RMB135.9 million compared to RMB239.7 million for the third quarter of 2021. Gross margin was 19.8%, compared to 22.7% for the third quarter of 2021, the decline Total operating expenses decreased by 16.5% to RMB242.5 million from RMB290.3 million for the third quarter of 2021, primarily due to the year-over-year decrease in selling and marketing In more details. Research and development expenses decreased by 19.1% to RMB66.5 million from RMB82.2 million for the third quarter of 2021, mainly due to the reduced expenses in product development, as well as the decrease in research and development experts and related salaries and expenses. Selling and marketing expenses decreased by 22% to RMB143.1 million from RMB183.4 million for the third quarter of 2021, mainly due to the decrease in sales related expenses and General and administrative expenses increased by 33% to RMB32.9 million compared to RMB24.7 million for the third quarter of 2021, primarily due to the increase in the estimated allowance for accounts and notes receivables recognized in the current period. Net loss attributable to ordinary shareholders of the Company was RMB59.6 million (sic) [RMB79.6 million] compared to net loss attributable to ordinary shareholders of the Company of RMB29.3 million for the third quarter of 2021. Non-GAAP net loss attributable to the ordinary shareholders of the Company was RMB78.7 million compared to non-GAAP net loss attributable to ordinary shareholders of the Company of RMB22.2 million for the third quarter of 2021. Additionally, our balance sheet remains healthy. As of September 30, 2022, the Company had cash and cash equivalents of RMB760.1 million, restricted cash of RMB65 million, short-term deposits of RMB83.7 million and short-term investments of RMB259.5 million. The details of our unaudited results for the third quarter 2022, was introduced as above. Thank you. This concludes our prepared remarks. We will now open the call for Q&A session. Our Founder and Mr. Thai will join the session and answer questions. Operator, please go ahead. Hi, thanks management for taking my question, I have two questions. The first one, can you please give us more insight or color on the SKU adjustment in the third quarter for robotic sweepers. And my second question is what the recent trend of robotic sweepers in China and overseas market. And are you expecting demand to remain weak in fourth quarter and 2023? Thank you. Yes, thanks for Mark's question. For the first question about the SKU adjustment as we introduced in the previous call, actually, we are - actually, we are in a transactional product strategy and brand positioning in an ongoing process. The cleaning of certain products and integration of new products during this, weak demand period to a certain extent, put pressure on our operating results. It might take a longer time for the new products to be set by the market. Actually, we are promoting - and introduce more premium and with high technology products to the market. And we emphasize more like bundle sales, bundle sales are one-stop home solution products. And for the second question about the overseas market, in the third quarter, with the international geopolitics and foreign euro exchange rate lasting, the overall consumer sentiment in euro is still low and adversely impacted our overseas sales. But we started to sell more product categories in addition to sweeper robot like air conditioners, refrigerators, washing machines and heaters, et cetera. Our overseas sales are expecting a recovery in the coming season. Also as we mentioned, just now we participated the IFA 2022 in Berlin in September for the first time, which is the world's most significant technology marketplace for the consumer and electronic industries. And we showcased a number of new products to the Euro consumers and franchises and we shipment positive feedbacks. In the meantime, we see the, soften Asian markets with great potential, and we are actively exploring - more new franchise in these areas and thank you. And so, can I just have a quick follow-up. So in terms of demand do you expected in 2023 to sort of rebound as same as what you talk about in fourth quarter? Thank you. Okay. Due to the complex situation of COVID-19 and the weak consumption in recent quarters, we tend to be more prudent about the estimation and guidance. As far as we can see, the overall popularity of the Double Eleven Shopping Festival is yet not - as good as last year, and the sales scale of Q4 is expected to decline on a year-over-year basis. With the respect of gross margins, we estimate - we estimate it maintains stable level for the whole year, let's say, above 20%. Also, we are continuously working on the operation optimization, both of the structure and number of SKUs has been optimized in an orderly manner. And we continue to refine our operational structure and implement disciplined cost control measures as mentioned as well. Thank you. Thank you, Viomi. I have three questions for you. My first question is also about overseas market. What is the overseas revenue and its growth rate? How about the overseas revenues proportion in sales and what is the outlook for overseas demand? [Foreign Language]. Okay. As we mentioned just now in the third quarter, the international geopolitics and euro exchange rate last time. So we did not - we are also adverse impacted by the overseas sales. We start to sell more categories, as we mentioned just now. And on going forward, we will keep enriching overseas offerings with additional home appliances product categories and expect new breakthrough in scale of export sales. The proportion of the overseas - our revenues, we will share in the future, yes. Thank you. My second question is about the strategy of premium new products and solutions and considering the relatively weak demand in the Chinese market and overseas market but Viomi build some pressure for its strategy regarding premium products. How does Viomi think about the demand of China in the future and will Viomi consider and making adjustments in the â strategy? [Foreign Language] Okay, okay. I'll quickly translate our Founder's answer. Firstly, the - both domestic and overseas market environment, as we can see are all shrinking the market demands are on a sluggish level. And secondly, as we can see the Western world and the e-com world, marketing SaaS come to a balance - coming to a balancing point. And also in the domestic world, we can see in most of the developing areas like the rural areas are developing fastly, we see more demand in the younger generation. And so, our strategy is about to facing the situation and meeting the challenge is, first, we will - we will make more medium-level products which has price advantages. And also, we will enrich our overseas product portfolios, and we will go deeper in the - its European market. Thank you. Thank you for Founder's answer and translator. My last question is about the cooperation with Xiaomi. What is the proportion of the revenue from Xiaomi in the third financial quarter? Whether the carbon cooperation is based on water purifiers what is - whether there are other categories that will cooperate with Xiaomi and what is the arrangement of the cooperation in the future? [Foreign Language] Okay. About the cooperation with Xiaomi, the proportion of revenue from Xiaomi is in the third quarter is around 40%. And as we mentioned just now that we gradually decreased the Xiaomi brand with the robot business since early 2021 and completely cut off this business in the year 2022. Currently, the major product categories we - cooperate with Xiaomi was our water purifiers and smart kitchen products and small appliances like peephole structure. Recently, certain model of, Xiaomi-branded water profile supplied, by us have achieved remarkable sales in the market. Looking forward, we will maintain a stable cooperation with Xiaomi and export further reciprocal opportunities in additional categories. Thank you. [Foreign Language] I'll quickly complete Mr. Chen's answer. Our cooperation with Xiaomi and developing our cooperation with Xiaomi about three aspects, firstly, about the cooperation with water purifiers this amount of revenue is stable, and we are working on new SKUs in the future. And also, we are expanding the order categories of kitchen - smart kitchen appliance. And thirdly, we are discussing about the smart home products in the future. Thank you. Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Claire for any additional or closing comments. Okay. Thank you once again for joining us today. If you have further questions, please feel free to contact us through the contact information on our website or The Piacente Group, the company's Investor Relations consultant. Thank you. Ladies and gentlemen, 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_1978	Right, I think weâre good to go. Iâm Martin Dunwoodie, the Head of Investor Relations at Johnson Matthey, and thank you for coming along today and for those of you who are attending on the webcast. Can I ask just before we start, that everyone turn mobile devices off or to silent. Iâm very pleased today to welcome our Chief Executive, Liam Condon and our Chief Financial Officer, Stephen Oxley. Weâll have a presentation, followed by plenty of opportunity for Q&A, both from the room and weâll also take questions from the webcast. Iâll point you to our cautionary statement ahead of the presentation, and with that Iâll hand over to our Chief Executive, Liam Condon. Thank you, Martin and a warm welcome to everybody here in the room, and of course everybody who is listening to us and joining us online. Itâs fantastic that particularly the people in the room can be here. Itâs great to get together again after that long COVID period. Just to give you a short rundown, how weâre going to do things today, Iâm going to give a very brief introduction and then Stephenâs going to talk us through the financial results and then Iâm going to come back and talk about some of the strategic progress weâre making, particularly against the milestones that we already outlined at the end of May, and then weâre going to have plenty of time, thatâs the majority of time is reserved of course for Q&A. Now, I have to say itâs eight, almost nine months since I joined the company, and you might remember, we presented a new strategy at the end of May, and quite a bit has happened since then. And if I reflect, two monarchs, three prime ministers, four chancellors of the exchequer. Of course, we have an ongoing horrific war in Europe and energy crisis, huge inflationary pressure. So thereâs a lot of turmoil, thereâs a lot of turbulence, and against that background I think at least Iâm pleased to be able to say our results and these are my first half year results, are in line with market expectations. I think weâre making good progress on the strategic milestones and Iâm going to explain a little bit why I think that is as we go through the presentation later on. And I think a really important point, the growth markets that we identified back at the end of May is kind of the future areas for growth for Johnson Matthey. They are actually coming at us faster than we originally anticipated and Iâll explain that a little bit. Across JM, we are in a stage of transformation and I think weâre making good progress here. Before we go into the financials, which Stephen is going to explain, I just want to highlight a couple of elements, a few elements where I think weâre making very good progress, just as kind of proof points of where we are and how weâre doing. Now, the first one from a portfolio point of view, we said we identified a certain portfolio where we said this is where we want to play, this is where we want to play to win, this is where weâre going to win. And whatever is not part of that portfolio being platinum group metals, Clean Air, of course Catalyst Technologies and Hydrogen Technologies, we said weâre going to divest other businesses and our divestments are on track and we said weâre going to do that within two years and we already announced a smaller divestment again today. Itâs just a sign that weâre making progress. Our Catalyst Technologies pipeline has expanded significantly. Last time we spoke, end of May, we had 70 plus projects. We now have 100 plus projects. And real significance of this is, we set to reach our mid-term targets of mid to â we said single high digit over the mid-term growth for Catalyst Technologies. We only need basically 10 to 15 projects to be able to reach that target, and if we have 100 projects, of course we have a higher probability of success and Iâll explain some of the projects where weâve made tremendous success already a little bit later on. And their expansion activities are on track, particularly for platinum group metals and Hydrogen Technologies. This is really important for us, because thereâs tremendous growth expected here. This is a difficult environment to be building and expanding, but luckily or thankfully all our projects are on budget and on time, so good portfolio progress. On the people side, Iâm really happy about how our team is coming together. We have a new team and every leadership team typically goes through various phases of coming together. Some never come together, but typically thereâs a forming stage, thereâs a storming phase, and thereâs a norming phase and thereâs a performing phase, and Iâd say very clearly with our team, weâre currently in the norming phase and weâre looking really very much forward into getting into the performing and high performing phase in the second half of the year. So a lot going on, and weâve built out our commercial and capital project capability, so I think this is really good progress. And from a market customer point of view, important I think from a results point of view that weâre in line with no big surprises, in line with expectations, no big surprises up or down. Thereâs no fireworks this time around. Itâs only a half year results, but I think this was important to tick that box. Catalyst Technologies and Hydrogen Technologies are the two areas that we identified for significant growth going forward. Both of them already in the first half, had significant growth. So high double digit growth for or very strong double digit growth for Catalyst Technologies and Hydrogen Technologies double sales, and we actually expect this trajectory to continue. So this was just an important proof point that weâve identified the right businesses for growth going forward. And finally, on the sustainability side, we got â I mean we have many ratings from different sustainability agencies across the world. EcoVadis is one of the most renowned. We got the platinum rating from sustainability point of view. This is the highest rating you can get, and the actual rating we got puts us in the top one percentile of 90,000 companies. So again, for a company like Johnson Matthey, Innovation Company completely committed to sustainability, I think this is great recognition of our commitments and the progress weâre making so far. So, these are just some elements that give me confidence that weâre on the right track. Of course itâs a long journey. We got a lot ahead of us, but important to see that we are making progress. And with that, I think itâs important now that we dive a bit deeper into the half year results and that you get a sense also for our outlook for the remainder of the year. Thank you, Liam, and good morning everyone. So our underlying results overall are in line with market expectations and reflect the challenging economic environment. Weâre also reporting against a strong prior half year, which benefited from both a COVID bounce and higher metal prices. So let me start with the headlines. Sales is half, weâre up 5%, but operating profit declined 30%. Earnings per share were 88 pence compared to 117 on a continuing basis. And as a reminder, this excludes health, which we divested in May. Sales growth was supported by higher pricing as we acted to mitigate cost inflation. Nevertheless, operating profit was impacted both by increased costs and lower average metal prices. Weâre working hard to pass on cost inflation to our customers, but there is a time lag as we negotiate prices. As a result, we expect further recovery in the second half. We have a strong balance sheet. Net debt came in at Â£963 million, and our net debt to EBITDA ratio of 1.5 is at the lower end of our range of 1.5 to 2 times. Weâre paying an interim dividend of 22.0 pence, in-line with last year and our policy to at least maintain our dividend while targeting a payout ratio of 40% over the medium term. Now let me turn to our performance in more detail. On a continuing basis, sales grew 5% at constant currency to Â£2 billion. There were strong gains in our growth businesses, both Catalyst Technologies and Hydrogen Technologies. These were partly offset by lower metal prices and reduced refinery intakes in PGMS. Clean Air sales grew 2%, mainly because of price increases, which offset a marginal decline in volumes. Clean Air sales grew 2% as I say, and thereâs also strong sales growth in our value businesses. And as Liam mentioned today, we announced the sale of Piezo Products, a small part of Medical Device Components. So turning now to profit, group underlying profit decreased 30% to Â£222 million with a decline in metal prices and higher input costs, which we partially recovered. Lower metal prices impacted profit by around Â£40 million and the net impact of inflation was Â£40 million. We benefited from a weaker pound with FX translation benefits of around Â£18 million. Corporate costs decreased by Â£10 million, mainly due to lower pension charges, as well as the early benefits from our cost transformation program, and Iâll talk more about the individual businesses in a moment. But looking at the rest of the income statement on an underlying basis, our finance charge decreased from 28 pence to 21 pence, reflecting higher interest income, lower average borrowings and reduced metal leases. The underlying effective tax rate for the first half was 20%, and I still expect a full year rate of 19%. Underlying earnings per share declined 25% to 88.2 pence with a lower underlying operating profit. Looking at cash, we generated Â£133 million of free cash compared to Â£190 million in the prior half year, and as expected, working capital was higher reflecting increased volumes in the second quarter and especially in Clean Air. CapEx was Â£137 million, which includes our ongoing investment to improve PGMS refining assets, as well as to increase Hydrogen Technologies U.K. manufacturing capacity. We continue to focus on maintaining balance sheet efficiency and low levels of working capital. So looking now at the individual businesses, Clean Air sales were up 2%, as we increased prices to mitigate cost inflation and offset a marginal decline in volumes. In light duty diesel, sales were slightly up, in line with the market. In the Americas we benefited from strong underlying market growth and our customers outperformance. Europe represents about 60% of our light duty diesel business and sales here decreased as OEMs prioritized commercial sales of vehicles over passenger car platforms that we serve, because of the semiconductor shortages. Light duty gasoline sales rose 3%, underperforming the global market, and our growth was driven by a strong market in the Americas, as well as in Asia following COVID lockdowns in the prior year. In Europe, sales were broadly flat due to previous platform losses. Our heavy-duty business was up 1%, strongly outperforming the global market. We delivered strong sales growth in Europe due to pent up demand and our customersâ platform performance. In the Americas we continue to benefit from a cyclical recovery in Class 8 truck production, and this was offset in Asia by declines in vehicle production with COVID lockdowns, so heavy-duty production in China was down 63% in the first quarter and 30% in the second, which severely impacted the business. Underlying operating profit decreased 32% to Â£108 million, but there was a progressive improvement through the first half, whilst vehicle production increased, and we started to recover cost inflation. Margin was also down at 8.5% as improved pricing and efficiencies were more than offset by cost inflation which was not fully recovered. So we typically have five year contracts with the OEMs and negotiating price increases takes time. We recognized some inflation benefit in the first half, and we continue to strengthen our commercial focus and expect further recovery in the remainder of the year. Clean Air is on track to generate at least Â£4 billion of cash through to 2031, though the amount this year will be lower than the Â£800 million generated last year when we benefited from a working capital unwind. So moving on now to PGM Services. Sales decreased 11% to Â£282 million, largely because of lower metal prices and reduced refinery intakes with less auto scrap as a result of a buoyant secondhand car market. Our metals trading service performed well, although sales were also lower year-on-year due to less market volatility. PGMS operating profit declined 29% to Â£125 million as a result of reduced metal prices, lower volumes and higher energy costs. In Catalyst Technologies, sales grew 18% to Â£275 million, driven by higher prices, growth in catalyst refills and higher licensing income. In Catalysts we delivered double digit sales growth. Refills grew, supported by higher volumes and pricing, including the pass through of cost inflation. Licensing revenues more than doubled year-on-year and we won seven new licenses in the period. We are unlocking new growth in markets such as low carbon hydrogen, sustainable fuels and low carbon solutions. So example, so far this year we have won three licenses in North America, the first large-scale low hydrogen carbon hydrogen license, and two, sustainable fuel projects at a commercial scale. Our licensing pipeline is growing and we now have over 100 sustainable technology projects, which will drive growth over the coming years and transform the scale and profitability of this business. And as a reminder, as a result of the war in Ukraine, we exited our activities in Russia. This has led to a loss of catalyst sales and high-margin licensing income. Underlying profit fell by 32% to Â£21 million due to higher input costs and an impact of about Â£5 million from Russia. In Hydrogen Technologies, revenues more than doubled, supported by higher commercial sales in fuel cells, as well as initial revenue for hydrogen electrolyzers. Volumes also increased as we released capacity used for customer testing and qualification. Hydrogen Technologies recorded an operating loss of Â£24 million as we continue to invest to scale the business. So as you have seen, inflation has had a major impact on our first half performance, so Iâd like to look at costs in a bit more detail. Here, you can see the breakdown of our cost base, along with levels of inflation. Raw materials represent about 40% of total costs and prices here have increased 6% year-on-year. This excludes substrates in Clean Air, which represent a large proportion of raw material costs, but these are a pass through. Labor costs represent 30% of our cost base. These rose 3%. Weâve made one-off payments rather than higher salary increases to help alleviate the pressure on our employees from the current high cost of living. Energy and utility costs have more than doubled, and although these constitute a relatively small proportion of our total cost base, this had a significant impact on profitability. We incurred inflation costs of Â£80 million during the first half and we recovered about half of this. And as I said earlier, given the time lag as we renegotiate prices, we expect further recovery of inflation in the second half. So as we navigate a challenging environment, we are focused on what we can control. Weâve made good progress delivering our cost transformation program that we set out in May, targeting Â£150 million of annualized savings by â24, â25, and weâre on track to deliver Â£35 million this year. Initial activities include accelerating efficiencies across the group and creating a simplified organization. Weâre taking out layers to reduce management headcount by 15% and consolidating our shared service center operations in Malaysia. We continue to optimize Clean Airâs footprint and weâre accelerating that footprint rationalization. In addition, we have a program underway to improve margins in Catalyst Technologies, and weâre continuing to strengthen our commercial muscle to help grow the top line. So finally, turning to the outlook for the full year. Weâre clearly in a period of heightened political and economic uncertainty, which makes forecasting difficult. Our performance will continue to track levels of auto production and precious metal prices. Whilst visibility is low, we do expect overall operating performance to be within the current range of consensus. So let me walk you through the moving parts. In Clean Air, supply chain disruption has eased progressively during the first half and we expect vehicle production volumes will continue to improve. Most recent IHS data suggests auto production for fiscal year â22, â23 will be 4% higher than last year with volumes in the second half expected to be 4% higher than the first. With continued volume recovery, we therefore expect Clean Airâs operating performance to be higher in the second half. We also expect PGMS to deliver a stronger second half with increased efficiency and inflation recovery, and assuming metal prices remain at their current level, we anticipate an adverse impact on full year performance of around Â£40 million compared to 2022. In Catalyst Technologies, weâre focused on further increasing pricing. The profit impact of lost business with Russia is likely to be about Â£10 million, meaning full year profits will be lower than last year. Weâre continuing to invest in Hydrogen Technologies to capture significant growth opportunities in this space and therefore we expect a larger operating loss this year compared to last. Longer term, the geopolitical situation is driving significant acceleration towards a net zero economy, and we are investing to position Johnson Matthey for growth in the markets and technologies that support this transition. So in summary, weâre navigating a challenging external environment and mitigating the impact of market uncertainty by managing those things that are within our control. Weâre actively managing cost inflation to protect profitability. Weâre accelerating our transformation program and we will continue to maintain a strong balance sheet while investing to position the company for growth. Great! Thanks a lot, Stephen. So Iâm going to walk us through now the strategic progress that weâve been making against our milestones, and first, again a quick reminder, this is the portfolio that we have and this is the portfolio where we said we want to play to win, because in these four business areas, Johnson Matthey can and should be and often is a market leader, a global market leader, and we believe going forward these are the areas that we should focus on to drive growth and value creation for our company. So itâs this portfolio, and its playing-to-win is our strategy with these four businesses to be a global market leader. Now, strategy of course is something very, very long term typically, and we had of course the question, well, how are you going to measure and track progress? And we gave you end of May these milestones, and said beyond the half year and full year financials, look at these milestones, and according to these milestones we will update you on progress we are making, and that will help you understand whether or not weâre on track with our strategy. Thatâs the way we laid it out. Now I have to be very open here. We did this end of May and the period that weâre covering only goes up to end of September, so weâre talking four months. So again, you canât expect tremendous progress from a strategic point of view in a short space of time, like four months, but I hope to be able to show you enough progress that youâll be as convinced as I am that we are absolutely on the right track. Now, this was end of May, and since end of May there have been some really interesting changes in the environment around us. This is when we talk about whatâs accelerating and driving growth in our growth markets. Little bit off the radar for many people. The pace of decarbonization activities in China has actually accelerated. If you read the media, you might get a different impression. But China has for example the worldâs biggest fuel cell market. Demand is increasing significantly. The market is developing rapidly. A lot of people donât know, because we havenât been able to travel there for the last three years, but we have a big team on the ground. We can sense this. We see this, so demand in China is growing very, very strongly. We have a completely changed landscape in Europe due to the energy crisis. Significant regulatory changes. Think of repower, the EU strategy and for example, doubling the demand for electrolytic green hydrogen. These are very significant changes. There is an acceleration and demand for renewable energy, and probably the biggest and the most poorly named is the Inflation Reduction Act in the U.S. This is in essence the worldâs largest renewable energy incentivization bill. It basically is a renewable energy bill that incentivizes low carbon intensity. So depending on how carbon intensive a certain technology is, whether itâs electrolytic green hydrogen or whether itâs low carbon blue hydrogen, you get a certain amount of incentivization, and thereâs a social component related to wages paid in the U.S. This is massively driving investment and demand in the U.S., and this is really a game changer for anybody who is in the industry. You would really see this as a pivotal moment for the renewable energy industry globally and very specifically in the U.S. And this has only happened after May, after we announced our strategy. And this is what I mean by our growth markets are accelerating and coming at us faster than we originally anticipated. Now, coming back to us, let me briefly take you through our strategic milestones and overall where we are. Starting with the customer targets, we had set out the target for Hydrogen Technologies that we want two large-scale strategic partnerships by the end of our fiscal year, meaning by the end of March, and we publish at some time in May. So, if you think of that map I just showed you, the opportunities in China, Europe and the U.S., thatâs in essence the nature of the strategic partnership discussions that weâre in right now, are looking at tapping into those opportunities that are evolving and evolving very rapidly, and these discussions are at an advanced stage, and thatâs why Iâm very confident that we will be making announcements to you in that period that weâve already outlined. So for me, this is on track, in the sense that we clearly intend to be able to update you by the end of the fiscal year about these partnerships. Clean Air: Our Euro 7 targeted business is on track. Thereâs been a lot of discussion around Euro 7 recently. We were happy to see that the Euro 7 proposals have finally been released. Thereâs different elements in there. These regulations are broadly in line with what we were expecting. Thereâs very strong standards have been set for heavy duty diesel. Thereâs also reductions in light duty diesel, and it looks on the surface like not much has changed for light duty gasoline, but what has changed is the criteria around real driving emissions. So for example, the speed at which you need to be able to meet your emission standards or the temperature which will have a significant impact on multiple OEMs. So there will, there are technology changes required here, and this opens up new opportunities for us. Light duty is supposed to come in â25, heavy duty in â27, still subject to political ratification, but again, broadly in line with what we were expecting and fully in line with our goal to achieve at least Â£4 billion in cash flow by 2030, â31. So we believe here, weâre very much on track with the business weâre winning today and within the frame of the regulatory framework going forward. Catalyst Technologies, I mentioned it briefly. Stephen mentioned it briefly, that the three contracts we have won. Neither of us mentioned the amount, the financial amount. The first three contracts, this is low carbon hydrogen again in North America and sustainable fuels in North America, and if you think of where the dollar is today and the dollar versus sterling, it is of course attractive to have a growing and strong U.S. related business. These are worth Â£75 million over the initial life time. Initial lifetime means typically three to five years. You get a small upfront payment and then income comes in over three to five years, and then you have later on an opportunity for a catalyst refill. So we havenât baked that into these numbers, that comes later on. So its three to five tears, Â£75 million, and we only need 10 to 15 projects to achieve our high single-digit growth target over the medium term. You can do the math, and here weâve got three projects, already weâre Â£75 million against the background of a business that currently has sales of Â£450 million. This is already in a very short space of time, a really significant achievement and thereâs a lot more to come, because the pipeline again has increased from 70 projects to 100 projects. So I think this is really exciting. Now there was one element that wasnât on here, but I think itâs worthy of just mentioning it to you as a significant achievement, because I mentioned the importance of China. We got our first fuel cell recycling contract with Unilia, one of the biggest fuel cell players in the world based in China, and this is really important because weâre basically at the end of increasing our refinery expansion capabilities in China, so that we have end-to-end refining capabilities. This allows us to tap into a much bigger part of the market than was previously possible and itâs really important from a competitive point of view. But we donât only offer great technology, we also offer a recycling opportunity and that is a competitive advantage that is hard, if not impossible to match. So gaining this first contract is actually strategically quite important for us, and thatâs even though it wasnât on the original milestones, thatâs why I just added it here to kind of fill in the picture for you. So overall, on the customer side, from the milestones that we outlined at the end of May, I would say weâre very much on track. Now, from an investment point of view, I donât think we need to go through all of the details around our various investments, and weâve already mentioned the value business as divestments. I think the important message here is whether itâs Platinum Group Metals, Catalyst Technologies, Hydrogen Technologies, weâve got a lot ongoing. Itâs all on budget and itâs on time, and I think this is due to also fantastic work internally. Weâve been building out our capital projects execution, planning, design and execution capabilities. This has been a weakness in the past. We spent an awful lot of effort in ramping this up. And so far this is paying off and allowing us to deliver so far our projects on budget and time. Thatâs not a forward-looking statement, in terms of a guarantee that this will always be the case, but itâs good to be in the situation that weâre in right now that weâre on budget, on time with our investments. So here as well, I would say very much on track. On the people side, this was the other I think weakness that was identified end of May, beyond the capital projects execution, planning, design and execution capabilities, whereas our commercial capabilities, I think weâre a fantastic technology company. We havenât had an equally strong commercial muscle, so weâve been ramping up capabilities there. We have somebody in the audience with us today. If anybody wants to have detailed questions, our commercial muscle man is Anish, whoâs leading the commercial council, which basically aligns activities across the entire company with a very strong focus on pricing. So for example, what Stephen mentioned, the ability to pass on pricing to negotiate with OEMs, that wasnât a core strength of JM in the past. This is something weâre working on intensively, and I think weâre making great progress here, but itâs something thatâs in progress, and again, itâs very important that we build this muscle, taking strategic key account approach across customers where relevant. Thereâs huge opportunity for us in here. So on this one, I think weâre making good progress. Still a way to go, but this is one of the reasons also why weâre confident that the second half will be better than the first half, is because weâre actually in better shape now from a commercial point of view. Capital project, the execution, Iâve already mentioned. I believe weâre doing quite well and what weâre instilling in the organization is the idea of a high-performance culture. Culture is always a â it sounds a bit esoteric and I don't like to get carried away in esoteric discussions. I think the key point for us here is that we as a company develop a culture of feedback and learning for a very simple reason. If you want to grow a company, you need to grow people and to grow people, you have to have a culture of feedback and a culture of learning. And this is something that we are trying to embed now throughout the company as a core element, that we're developing our people, in order to be able to better develop the company, serve our customers better and create more value. So this is something where we're I think making good progress. Still a way to go, but it starts at the top and the leadership team role modeling this. We're also launching our first commercial incentive scheme. I have to say, after 205 years it's probably about time that we get one in there. It's taken a bit longer than I personally would have liked, but we're getting there and it's going to be in place and will help make a difference. So also here, still early days, but we've built out key capabilities and I think from a cultural point of view, we are making good progress. Last one on sustainability. This is how we measure sustainability. These are the three categories: Products and services, Operations and People. And again, between end of May and end of September, it's a relatively short time period to be measuring these types of a â or looking at these types of criteria. But the good news is we are on track with all of our targets so far, so I think that's very helpful. And again, I mentioned already the EcoVadis rating, were also top rated from MSCI and many others. I think that external recognition is important, that we're not just telling ourselves we're doing the right things, but that others are auditing us and also coming to this same assessment. So also here, I think we're very much on track from a sustainability point of view. Now, that was just a quick kind of speed run through the milestones, because I promised at the capital markets day our full year results presentation, end of May, to keep you updated about progress. And you can expect then when we get to the full year results in May, that again weâll go through the same format and I'll tell you what's working and if we're not on track with any of these targets, we will outline that transparently as well. So to summarize for today, overall results as Stephen has presented are in line with expectations. I believe we are making good progress on our strategic milestones and I hope I've given you enough data points to substantiate that. And as outlined, our growth markets, particularly driven by the energy crisis in Europe and the Inflation Reduction Act in the U.S., our growth markets are getting bigger and coming at us faster than we originally anticipated, and that's why I'm personally completely convinced about the bright future for Johnson Matthey. So I think we've a lot to look forward to and you can now look forward to a q-and-a with Stephen and myself. Thank you very much. Good morning! It's Maggy Schooley from Stifel. I had two questions if I may. I'll take the first one which is more strategic and then follow-up with the second, more near term. Given the opportunities that you've highlighted in Hydrogen Technologies, particularly what the Inflation Reduction Act brings, that requires a level of local content to really garner those production or other tax credits. So thus far you've been putting capacity down in the UK and in China and I was hoping if you could discuss with us your plans to actually put local content and capacity in the U.S. to take advantage of that opportunity. And if so, does that fit within your Â£250 million investment plan or should we be thinking that perhaps we have slight creep on that as well. Thanks a lot Maggie. So you're completely right. If you want to benefit from the incentives in the U.S., production will need to be in the U.S. That was a key element of the program, one of the criticisms I think of Europe of the program. And we had earmarked certain funds within our current CapEx budget, also for expansion in the U.S., but without giving too much away, as we have our strategic long term partnership discussions, some of those revolve also around, let's say additional presence in the U.S. So if and when that takes place, we would then give you all the details around that, what that actually involves. But it's very clear that to avail of the opportunity, we would need to have a presence or let's say, have a bigger presence and production capabilities and refining capabilities in the U.S. So and the second if I may, itâs more near term. Clean Air second half waiting, obviously there will be some question marks around that, so a two-part question. Obviously you're making traction on pushing through those inflationary price actions. Could you give us some understanding of the remaining 50%? Have you agreed all of that uplift or are you still in the process of agreeing that? And then secondly, you point to the first quarter weakness from China. Obviously we're seeing more COVID lockdowns in China now. Do you believe in your client discussions that clients have gotten better about circumventing these types of lockdowns, or is this still a risk that you feel you would like to highlight as we go through the second half of the year? Okay, let me start Maggie with the inflation. And as I outlined, because we have such long contracts with the OEMs, they are typically a five-year period, it's the Clean Air part of the business where it's actually most difficult to pass these on. It's a longer negotiation, hence the hence the lag. And we're making really good progress, so we have various customers where everything is agreed. We have some that are in progress, absolutely. But given the lag, that's why we're confident that there'll be a catch up in the second half from the first half cost that we've incurred. Yeah, yeah, I mean as you sort of heard from what I outlined, heavy duty particularly was massively hit in Q1. What we've seen is a kind of a progressive recovery. IHS are talking about a 4% second half over first half recovery. The moment we're not being impacted, but there obviously are lockdowns in Beijing and Guangzhou. They are not affecting us directly at the moment. I'm not sure they are affecting our customers directly, but you know that's clearly one of the variables in the second half. Thank you. Two questions if I could do. Firstly, just in terms of strategic progress, particularly in Catalyst Tech, youâve clearly talked about a bigger pipeline there, but I just wondered what's happening to sort of momentum within that pipeline, i.e., you know customer reaction. Are they moving a lot more quickly than expected, and I guess the potential for that sort of opportunity can pull forward in Catalyst Tech. And just secondly, one for Liam, I guess just sort of reflecting back on nearly kind of nine months of being within sort of JM, I just wondered if youâd sort of update us on your thoughts on the group. Back in May when you presented, you were impressed by a depth of talents, expertise within JM. I just wondered, with sort of almost nine months in the role, how have your kind of thoughts changed? Yeah, just the customer reaction. So I think the fact that we've gone Kevin from 70 projects in the pipeline to 100 in a very, very short space of time says everything. We're really excited about the opportunities. These are real projects that we are winning and you know our expectation is that that will carry on, so a really, really good start. The technologies that we have are clearly, they are clearly â were clearly working. Iâll maybe add to it. You're asking also about the customer footprint and has something changed a bit beyond kind of the regulatory environment, has something changed. What's changed for us very clearly is in the past our chemical business would have been largely focused â sorry, our CT business, Catalyst Technology would have been largely focused on the chemical industry. What we've noticed, and this is literally the last six months, the energy industry has massively ramped up demand. So think of oil and gas, looking for new opportunities to decarbonize, and oil and gas as we all know right now are making a fortune, but they know they need to invest in renewable energy going forward and that was a good time to do it when the pockets are full. So that has literally kind of changed the landscape. I think the great thing about us is, as JM, because there's a lot of people talking about the technology. We have the technology ready to go, licensing technology ready to go, and that helps us in these discussions. It's not a kind of a theoretical discussion. It's one where it's plug-and-play if we can get into the customer. On the nine months thoughts, yeah well I was quite shocked myself to realize it's almost nine months, time is flying. To be very honest, I would say, if I think about the technology â the feedback from customers on our technology. I think when I presented the end of May, I highlighted that as a strength. In the meantime I've been able to talk to a lot more customers. I've been more than impressed. It's like I've met so many customers who are just convinced that we have the best stuff and across the board, particularly in the Hydrogen Catalyst Tech space, across the board saying what you do is really unique and I hadn't appreciated how strong that that technology advantage is. On the positive side, on the let's say, the negative or weaker side, probably the commercial weakness which had been identified wasn't clear to me that it is or was as weak as it was. And for example, and this is the discussion around our ability to pass on pricing, we were just â we have an organization that is not used to having the difficult discussions around pricing. That requires a certain skill set, a certain capability, also a systematic process to doing that, we didn't have that in place. We have that in place now and that gives me confidence going forward, but that is â the whole situation kind of reemphasize that we have a big opportunity. If we can strengthen the commercial muscle and make it as strong as the technology muscle, I think that's the way I wouldâ¦ Hi! Charlie Bentley, Jeffreys. Could I just ask you a couple of questions? On the split of that pipeline, the kind of 100 projects, how does that split between kind of more traditional projects, low carbon hydrogen, SAF, that would be really helpful. And then secondly, just on the energy inflation, I mean is that â is there a kind of -- how does that break down between Q1 and Q2. I guess we haven't really seen this. Thereâs so much in kind of some of the peer reporting that we've seen so far this year on the, kind of the â I mean you're two big peers in Clean Air. And then just a final question. I mean, Iâm not sure I saw it in the release, but is â can you disclose the price that you got for the Piezo products business? Yeah, let me â I'll deal with the last question first. I'm not going to give you a precise number, but it's sort of low 10âs. So relatively small, but actually really important part of progressing the pipeline of disposals. So on the inflation, I mean it's essentially kind of built through that first half, and as I said, we're recovering about 50% in total. It's actually easier in part to the business to recover than others. So if I think about CT for example, in part of a catalyst business, we have price lists, so essentially we can pass that on. Typically, our price lists have been refreshed every 12 months. We're now refreshing them every month, so you can see a much more immediate response. That compares on the other end to Clean Air where it's much, much, much, much longer. You know, I think the really good thing here is that the inflation, the energy inflation is the biggest component thatâs hit the bottom line, and if you think about how that operates in the business, Clean Air is the most energy intensive; we bake the product essentially. So if that's a transitionary element, that should be the bit that comes out the first. Yeah, and on the pipeline Charlie, this is all related actually to the, let's say the sustainable, the emission reducing projects going forward. And to give you like a ballpark, Iâd say about 50% of that is sustainable fuels, and the other 50% is split between low carbon hydrogen. So basically blue hydrogen and what we call low carbon solutions, which is again a decarbonization activity. And then on top we have the, let's say the classical also catalyst or the traditional business. But specifically, this pipeline was related to the low carbon offerings. Should we go to â so weâll go around, Ranulf. So itâs easier, I think Ranulf right next to Charlie. Sorry, I meant easy. Hi! Ranulf Orr, Citi. I have just a few questions as well please. Firstly, on the guidance range and the sort of implied second half EBITDA growth from minus nine to plus 13, itâs quite broad given weâre already you know part way in. Could you give us some ideas of how you might get towards the top end of that range and what might be a plausible scenario there, firstly. The second question is on the SABIC MOU and perhaps you could give an idea of the opportunity there, and how much sort of resource and effort is having to go into that. And just in addition to that, does that form a large part of the 100 project, you know pipeline project increase? And then thirdly, on Catalyst Tech margins, slightly longer term, can you help us understand the economics of these new projects that are coming through and you know what kind of profitability might be attached to the Â£75 million sales. Thanks. Okay, let me start with guidance. So I'm obviously happy with the guidance. There are a number of variables in there. You know we've talked historically about auto volumes being the single largest component. That is absolutely the case plus our precious metal pricing, but critically for the second half will be the amount that we can pass on those inflation recovery price increases, so there's some key variables externally. And then internally you've heard me talk about the efficiency program, the Â£150 million program, which we aim to pass on Â£35 million. So there are some kind of big sort of ups and downs in there. What will out-perform, push it out, I think would be enhanced recovery of those cost increases with price increases as we've talked about, that's the kind of the big variable on the second half. And obviously those auto productions hold up in the way that the industry is expecting. Yeah, and I'll take Sinopec. We are working with SABIC as well, but let's stay on Sinopec for a minute. I think it's important to understand that the background, both in Catalyst Technologies and Hydrogen Technologies, in the past we've had quite a lot of transactional type sales. Like one off projects where we might sell a catalyst or we might sell a membrane or we might sell a component. And given the massive increase in demand, what we've clearly said is, we're not going to engage in these transactional activities anymore. We're only interested really in strategic partnerships, and we want to â our strategy in essence playing to win is win with the winners. So we want to identify who are the companies that we think going forward are going to be creating the biggest opportunities from a value point of view, by addressing the need to decarbonize. In China, that is clearly Sinopec. I mean, this is by far the biggest company. Its Chinese state policy is to decarbonize. If you want to win in China, Sinopec is a good place to start and the MOU that we have in essence covers the entire value chain. I mean everything from fuel cells, electrolytic hydrogen, blue carbon hydrogen, and we're in the process of evaluating what exactly we could and should do together. So it's only an MOU stage right now. We would expect to be able to update you then in the future on how that is progressing. But to be very clear, the 100 projects that were mentioned, Sinopec is not part of that. So that would be upside to the 100 projects that we've mentioned. And then from a valuation kind of point of view, like the CT pipeline and how does it all fit together, so the 70 â maybe staying on the concrete example, Â£75 million for three projects. So these are three very attractive projects. So you can say an average of 25% on those three projects. Typically you'll get a smaller upfront payment in the first year and then in the subsequent kind of three, four years you'll have the breakdown of the rest of the payments. So if you seal the deal upfront, you know the income is coming then over the following years. That's why you don't necessarily see it on the P&L today, but you know itâs coming. That's the mechanism. And clearly we've stated our CT midterm margin profile should be at least mid-teens and these projects are crucial for getting us back in that direction. Yeah, thanks. Good morning! Andrew Stott, UBS. The first one is on the large â I'm using your phrasing Liam, large strategic partnerships in hydrogen tech. What type of partnerships are we talking about? Is this an equity JV? Is this just a â is large a reference to the size of the contracts you're going to get? I'm not asking you to announce an announcement before you announce it, but I sort of am. Secondly, Clean Air, I had two specific questions on Clean Air. So thank you for the disclosure on cost inflation, that's very useful. And Stephen, you mentioned that most of that cost inflation is Clean Air. I'm wondering, how much of the initiatives are surcharges and how much are negotiated prices? Because obviously that has massive implications as we go forward on inflation, particularly on energy. And then sorry, staying with Clean Air, Euro 7, what's your experience of revenue per vehicle you know versus Euro 6 obviously? Let me pick up the inflation. So it's 50% is Clean Air. So 80 million in total, 40% -- sorry, Â£40 million overall recovery half, but half of the inflation, the gross inflation is Clean Air. So it's essentially a negotiation, because these contracts were struck in a lower inflation environment. So we're literally, physically having to open those up. So it's not a simple just surcharge that we add to the invoice in Clean Air. We can do that more easily in Catalyst Technologies as I described. They are just not structured in that way and that's the problem. So we're physically having to collate the evidence of the underlying energy cost increases, present those to an inflation committee and then negotiate. I think the important thing on this one is the OEMs have a high interest in sustainable partnerships with strategic suppliers. So they are of course completely open for discussion, but you need to have the right evidence base, and we didn't have that set up, because we weren't set up that way, now we do. So going forward it's much easier for us to manage than let's say in the first or partially the second quarter. And then pricing on the Euro 7, I'm not going to comment specifically on pricing. All I say is that we are confident and pleased with the win rates that we have and the book of business that we're building that very much supports our expectations of more than Â£4 billion of cash over the 10 years. On Hydrogen Technologies, the definition of large, so to help you think about it, weâre completely agnostic from a legal structure point of view, whether JV, joint development agreement, supply agreement, that doesnât matter for us. It just needs to be purposeful. When we say large, typically what weâre talking about is long-term agreements or minimum five years, that kind of where thereâs a lock-in on both sides where typically we would be developing bespoke products for a certain supplier. So itâs customized, and that often typically involves a joint development agreement, and typically thereâs â because it goes two ways, there should be then a take or pay commitment. So these are like really significant. These are not kind of transactional contracts that we would be entering. Hi! Itâs Riya Kotecha from Bank of America. I have two questions, please. My first one is on Clean Air and pricing. I just want to know how youâre thinking about sort of the confidence in passing these on, given that beyond maybe the first quarter of next year you have a much weaker demand outlook on the auto side. And to what extent do you think youâre sort of more reactive and delayed versus peers in pricing, given that now we see some OEMs even talking about cutting auto prices. And so how do you then have confidence that in a five year contract you pass that through? Yes, if Iâm honest and we talked about it, weâre probably slightly later out of the blocks than we will have liked, and that reflects the kind of the commercial muscle or perhaps the maturity of that muscle than we would like. I think what I can back down to or what would it come to is the strength of the relationship and the importance of our product to the OEM. I think thatâs what gives us confidence, and we are having some good early successes. So I think if we can carry that momentum through into the second half, well, thatâs why weâre confident of further recovery than in the first. I mean, just to add to it, of course now where itâs like almost end of November, so weâve got a couple more months under the belt of the second half of the year, and itâs also based on that progress that weâve seen based on the system that weâve implemented now of negotiations with the OEMs. Thatâs what really gives us confidence that we can do a better job in the second half. Okay, thanks. And then my second question is on Euro 7. I appreciate there was some tightening of diesel, but gasoline was you know seemingly unchanged and I think itâs not unreasonable to say that it was overall somewhat underwhelming. And broadly speaking, what message do you think this sends from the EU about sort of the relative importance of combustion engines versus EVs? And do you see any risks that the competitive landscape sort of increasingly becomes a bit more aggressive on the volume side and on winning whatâs left of the platforms? Yes. So as you rightly say, I mean itâs been hotly contested, the whole Euro 7 from multiple different viewpoints with a lot of particularly health related NGOs saying this clearly doesnât go far enough, and we would also agree that more could be done. But, I think whatâs underestimated, letâs say a heavy duty diesel and to a degree, light duty diesel is clear, itâs stricter. Whatâs underestimated I think is on the light duty gasoline side that the switch to real driving emissions actually is a significant change. So, things like temperature again, like the speed that actually in many cases will require an upgrade, which will automatically come with a better emission system. So thatâs why we still see an opportunity here, and itâs brought forward versus our expectations, its â25 instead of â26, â27. So I think overall, broadly in line. Yes, more could be done. But I think thereâs also a realization that if you look at the growing pains on the electrification side from a supply chain point of view, I think thereâs a growing recognition that youâre still going to need an ICE for quite some time, and you canât just flip a switch and itâs a little bit like oil and gas and renewable energy. You canât just run down one and ramp up the other. There has to be a transition and it needs to be managed over time in a manner thatâs getting emissions down as quickly as possible, but without somehow destroying the whole fabric of the economy. Thank you. Gunther Zechmann from Bernstein. Liam, you referenced the deteriorating external environment since the May update. Can you just talk us through the levers that you can pull to offset that without compromising the medium to long-term growth drivers that youâve highlighted? And then secondly, just coming back to Clean Air, everyone is experiencing the cost increases. So whatâs the competitive reaction youâve seen from the other suppliers? Are they increasing prices to a similar amount? Are they also looking at price increases renegotiating what is very similar contracts on their side as well? Are they more looking at surcharges? So if you could just generally without probably commenting on a specific competitor, but can you just talk about the dynamics there, please? Yes, sure. So, Iâll start and Stephen will join in, and I just want to try and frame it right when we say deteriorating environment. On the CT and HT side, I was trying to paint a rosy picture. So not deteriorating, actually booming. There, the challenge is scaling up, thatâs different. And then rather on the Clean Air side, thatâs typically more closely linked to whatâs going on in the overall economy as part of the automotive supply chain where thereâs still supply chain disruption, COVID-related and still various other issues. So our levers that we can pull to manage the situation, in essence weâre looking at what we can control. So cost, tightly managing cost is hugely important. Weâre looking at accelerating our efficiency measures. We had this Â£150 million target for 2024, 2025. Weâre tracking towards Â£35 million for this year. And the run rate of that will of course be much higher and weâre doing whatever we can to actually accelerate those savings. So I think thatâs one core element. Second one is clearly this ability to pass on pricing from a commercial point of view, particularly in the Clean Air space, where I believe in the past couple of months weâve made very good progress, just not visible on the half year results. But, we have enough proof points there that weâre making good progress. And then overall, what will ultimately â in the Clean Air what will be dependent on this, how volumes and metal pricing ultimately plays out. At least now, still forecasts are 4% growth for the year, so weâll see how that plays out. But we do have additional measures that we can pull from a, letâs say an efficiency point of view, to make sure that we can track towards the right numbers. And then just on the pricing. I mean it varies in different parts of the business. Iâd say that the most sensitive is on the catalyst refill side that is most sensitive to price increases, particularly in somewhere like China, thatâs where weâre seeing the greatest pressure. The flip side on the Clean Air side, although itâs taking longer to get the inflation increases through, I think thatâs where weâre in the strongest position given the long-term nature of those contracts. So just to follow up on that, the mechanisms that your competitors are exploring at the magnitude of the cost pass-throughs in Clean Air specifically, is very similar to what youâre doing? Well, I think if one of our lawyers was in room and we know that, I think weâd really get in trouble. So I think we can conceptually answer it, but not practically, because of course any type of pricing and competition, thatâs always a very delicate discussion. Iâll try not. No, but I think itâs â so first of all, hi and hello everyone! So Anish Taneja, CEO, Clear Air. Itâs a very good question and Iâm going to answer it from our perspective. So a lot of the questions you had on Clean Air was very short term, and the answers were perfect, so I donât need to add anything to that. But if you look more long term, based on what the competitive scenario in the markets give us is a unique opportunity to be the long-lasting partner for our customers, and therefore, itâs important for us to have a sustainable pricing, where we just measure, are we able to win business on a higher price than our competitors are offering. And that is a clear indicator for us as we take a look at it. And we just recently won a very big business for the years â26 and to come, which we will announce in January, and there we won the tender with 4% higher prices than our competitors were offering. And I think when we get that feedback, thatâs showing us that our strategy is going in the direction. We will be the one long-lasting partner where our customers can trust that our commitment to Clean Air is really honest and that we have the capability from a technology side and a commercial side to get higher prices than our competitors do, and I think thatâs the most important indicator weâre looking at. Okay. I will move to the web. From the webcast a couple of questions from there. So two from Chetan Udeshi, J.P. Morgan on hydrogen. Firstly, the large-scale strategic partnerships in Hydrogen Technologies, are these for fuel cells or electrolyzers or both? And secondly, will the new strategic partnerships present an upside to the Â£200 million sales target by 2025 or are the partnerships needed to achieve the Â£200 million of sales? Yes. So they are both fuel cells and electrolyzers in all cases weâve been discussing so far, and whatever we do here is upside to what we have previously been discussing. Okay. And then from Alexandre Cornu at CPR Asset Management and again, focused on hydrogen. In the U.S. and Europe, IRA and repower EU havenât yet been able to fast track the developments of the industrial value chain. Project FIDs, so Final Investment Decisions, have even been pushed to the right. Although mid to long term the attractive outlook is not in question, how will that shape the evolution of your activities dedicated to these areas in the short term, i.e., the next two years? Yes. So I think there is a â at least what we sense, there is a significant difference now in Europe versus the U.S. So I think the comment is completely accurate for Europe and that the FIDs, these Final Investment Decisions, are taking too long and we havenât gotten over that hurdle. The reason is fairly simple; there are incredibly complex regulations behind this. I mean if you read the relevant documentation, this is like thousands of pages. You need a very big dictionary to understand, you need a lot of experts in the room. This is complicated stuff, and because itâs so complicated, itâs unsure what actually, which criteria need to be met in order to be able to avail of an incentive in Europe today. So thereâs a big job to be done I think in de-cluttering and making the regulation clearer. This is different in the U.S. with the IRA, the Inflation Reduction Act. Itâs very clear. Itâs very straightforward and Iâm 100% sure this will be driving investment in the near term, meaning in the next one, two years and not in two, three, four, five years. Thatâs the way I would differentiate it right now. And I think there will be a reaction in Europe, hopefully also in the U.K. that will ensure, because at the end of the day, hydrogen is a global business. Itâs not local and we need to make sure that different locations are competitive and a part of that is having regulations that are easy to understand and easy to implement. Then just to go back to the Hydrogen Technologies question. So the partnerships that weâre talking about are an integral part of the Â£200 million, but what weâre seeing is real upside on top of that, particularly to the sort of the medium, longer term. The sort of volumes that weâre discussing give us real confidence that that business is outperforming what we thought even six months ago. Yes, I mean to be very clear, these will be not really relevant for the Â£200 million, given the fact that these are long-term strategic partnerships. The real kicker will of course be in the outer term, and thatâs the part where we havenât given guidance. We havenât baked in any numbers, but versus our internal estimates this is a significant upside. So as we announce those, we would give you then more color and flavor around what that actually means. Okay, if we move back to the room, I think there were a couple of hands I saw earlier. Yes, one in the middle. Sorry, Iâm making you run. So lady in the middle. Thank you. Hi! Alycia Samsudin, Iâm from Berenberg. Iâve got two questions. Firstly, on margins. Iâm wondering if thereâs been a fundamental change to achievable margins given the around 30% EBIT in Clean Air? And then Iâm also wondering if the Euro 7 business will come in at around 30%? So Iâll take that. No, is the answer. Weâre not expecting a shift in margin. Indeed, through Euro 7 we expect some kind of an uplift actually. Go back to what I said about inflation, particularly being transitionary. So we would expect to get back to historical margins and actually as we accelerate the cost optimization program that gives us potential, I think for upside. Okay, thank you. And then do you think the Euro 7 benefit will only materialize in 2025 or could it benefit sooner if automakers front run the instruction of legislation like they have done previously. I think it will be from 2025. I mean just getting the technology in place takes time. So, it is earlier than we thought. We were thinking â26, â27, but I donât really see much benefit before 2025. Okay. So if we go to Nicola. Sorry, Ranulf, Nicola hasnât had a first go. So Iâll have Nicola first, and I think given the time Ranulf, youâll be the last question today. Sorry, Ranulf. Hello everyone! Its Nicola Tang from BNP Paribas. It was just a kind of one question, a few sort of sub-questions on the PGMS Services business. You mentioned in the slides the kind of pressure from energy costs. I was wondering if you could just remind us how easy it is to sort of pass through either through surcharges or contractually to your customers on that cost. And whether that higher energy costs combined with lower precious metal prices is having an impact on volumes that your customers are sending or do you think the volume sort of weakness is just because of the sort of scrap auto kind of issue? Thanks. Yes. No, so the volume is very much driven by input availability of metal rather than pricing. On the energy side, again itâs a mix. So we have some long-term contracts with customers, particularly on the auto scrap side, but then we also have spot business. So itâs exactly the same as the Clean Air, CT sort of a situation. Some we can reprice very quickly with surcharges in PGMS, but for the most business, itâs opening up some of those contracts. So again, thereâs a lag effect. Thanks, Ranulf Orr, Citi. Just a question on the long-term sort of nature of Euro 7 and youâre talking about contracts being awarded for the rest of the platform life or combustion engine vehicle platformâs life at least. And how do you manage the risk around this and what kind of visibility are OEMs giving you, because we have no idea really what the market will look like for these types of vehicles in 2028, 2029, and should Mercedes suddenly want to pull the plug on its entire diesel as an example given the reference, are you left on the hook with a load of capacity you built to sustain this platform for seven years, itâs suddenly not there, and how do you manage that I guess? Thank you. Given that Anish is here and is heading the Clean Air business, I guess it would be best if Anish gives you a direct answer. Yes. So the first thing is we donât really believe there is an opportunity to pull out the diesel platform because you all know that the OEMs have CO2 targets that need to achieve and the diesel production with the hybrid and the electrification is the only way they can achieve that, and without diesel, they would not achieve it. So I donât really think thatâs a realistic scenario. We have won some Euro 7 tenders already recently, and obviously weâre discussing with the customers how weâre going to handle those, and everything what we see so far is that they are going to put them in place. Nevertheless, how the regulation went out now or whatâs going to happen on the final political journey, getting the Euro 7 regulation finally validated. And what weâre doing as well is we are adapting our cost structure and production structure anyway. So Liam and Stephen talked about the transformation. And obviously we keep in mind how to find synergies on those several platforms that we have for the customers. So I think we are very well prepared when that business kicks in to be much more efficient than we are today. Great! Well, weâre out of time at the moment. So thank you very much for all the questions. Thank you, to Liam and Stephen for the presentations. If you have other questions that you think of afterwards or stuff that we havenât answered so far, please do come back to all of us in the IR team, and weâll do our best to get back to you with answers on those.
EarningCall_1979	Welcome to the Anavex Life Sciencesâ Fiscal 2022 Fourth Quarter Conference Call. My name is Clint Tomlinson, and Iâll be your host for todayâs call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. The call will also be available for replay on Anavexâs website at www.anavex.com. Before we begin, please note that during this conference call, the Company will make some projections and forward-looking statements. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. We encourage you to review the Companyâs filings with the SEC. This includes, without limitation, the Companyâs Forms 10-K and 10-Q which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, risks inherent in the development and/or commercialization of potential products, uncertainty in the results of clinical trials or regulatory approvals, need and ability to obtain future capital, and maintenance of intellectual property rights. Thank you, Clint. We appreciate everyone joining us on today's conference call to review our most recently reported financial results and to provide a business update. We are excited with a continued advancement of our lead product candidate ANAVEX 2-73 in Alzheimer disease and Rett syndrome. As we maintain our attention on execution across each of our clinical programs and overall business operations, we are planning to present top line data of the randomized, double-blind, placebo-controlled Phase 2b/3 study ANAVEX 2-73-AD-004 for the treatment of early Alzheimer disease in a late breaking oral presentation at the upcoming clinical trials on Alzheimer disease, CTAD Congress 2022 on December 1, 2022 at 4:30 PM Pacific Time in San Francisco, California. In our Rett syndrome program, we are nearing completion of the randomized, placebo-controlled EXCELLENCE Phase 2/3 study for the treatment of paediatric patients with Rett syndrome. We expect to update on the complete enrollment accordingly. Earlier this month, we announced that the FDA granted Orphan Drug Designation to ANAVEX 2-73 for the treatment of Fragile X syndrome. Fragile X syndrome is the most common form of inherited intellectual disability and the most frequent single gene cause of autism spectrum disorder with an estimated population of approximately 62,500 in the U.S. and over 1 million worldwide. Recent guidance received from the FDA confirms our strategy to advance ANAVEX 2-73 for the treatment of Fragile X syndrome in our double-blind, randomized, placebo-controlled Phase 2/3 development program. We will share more details about this clinical program as it becomes available. In August, we reported a relevant new peer-reviewed publication in the journal Science Translational Medicine titled âWidespread cell stress and mitochondrial dysfunction occurs in patients with early Alzheimer disease.â This publication provided further scientific evidence of the relevance of sigma-1 receptor activation as a compensatory mechanism to chronic CNS diseases. Further pipeline expansion of the Anavex platform using gene biomarkers of response, applying precision medicine for neurological disorders with unmet medical need is expected, including; meeting with the FDA to discuss the ANAVEX 2-73 Parkinson disease program, including a pivotal Phase 3 study; a planned initiation of ANAVEX 2-73 imaging-focused Parkinson disease clinical trial sponsored by the Michael J. Fox Foundation; a planned initiation of a Phase 2/3 clinical trial for the treatment of a new rare disease indication; and a planned initiation of ANAVEX 3-71 Phase 2 clinical trial for schizophrenia. And now, I would like to direct the call to Sandra Boenisch, Principal Financial Officer of Anavex for a brief financial summary of the recently reported quarter. Thank you, Christopher, and good morning, everyone. During our fourth fiscal quarter, we reported a net loss of $14.3 million or $0.18 per share. The reported net loss includes $6 million in non-cash items. Our research and development expenses for the quarter were $11.4 million as compared to $9.4 million for the comparable quarter of fiscal 2021. General and administrative expenses were $3.9 million compared to $2.9 million for the comparable quarter of fiscal 2021. Our cash position on September 30, 2022 was $149.2 million. During the full fiscal year 2022, we utilized cash and cash equivalence of $24.2 million to fund our operations. Within our current cash utilization range, we believe we have a sufficient cash runway to fund operations and clinical programs beyond the next four years. The overall increase in expenses over the comparable period is primarily related to the expansion of our team, and an associated increase in non-cash charges period over period. Thank you, Sandra. This is an exciting time neuroscience and rare disease drug development, and we remain on track for the readout of the placebo-controlled ANAVEX 2-73 Phase 2b/3 Alzheimer disease clinical trial, a condition of significant unmet need and economic burden for which there are only limited approved pharmacological treatment options, as well as initiating biomarker-driven precision medicine clinical studies as planned. Thank you, Chris. We'll now begin the question and answer session. [Operator Instructions] And our first question is coming from Charles Duncan from Cantor Fitzgerald. Congrats on the progress in the quarter. I had a couple of questions with regard to the AD top line that you're planning to talk about towards the end of this week. I guess I'm wondering, what would define success for you? And can you help us understand the enrollment criteria for those patients? Was it primarily a clinical diagnosis of Alzheimer's or was there some imaging or some other confirmation for those patients being Alzheimer's? A good question. So let me address this. The requirement for enrollment into the study required AD pathology, which was assessed by physician assessment of -- criteria of Alzheimer pathology as well as, [if available], PET scan or a spinal tap confirmation of a better presence in the patient. Okay. And then defining success, obviously, statistical significance is one thing. But what would you like to do with the data and what could be next steps? I think it really depends on the data. I would refer to waiting for Thursday to then be able to respond more properly to this question. Okay. And then moving on to the EXCELLENCE study. In terms of the endpoint, can you help us understand what is the endpoint that you're most focused on? Is it RSBQ AUC in Rett? Or is it the Clinical Global Impression of Improvement? It's really both. So the RSBQ is the assessment of the parents and the CGI-I is the assessment by the physician. So both are relevant and they should actually match or correlate with each other. And so we believe both endpoints are critical. I would say the first half since we have to finish the trial, which is 12 week long. If we complete the enrollment this quarter, which we expected, and we are on track to do that, we would need to add 12 weeks. So it will be then in the first half. Congratulations on all the progress and certainly a big quarter for Anavex. On the Alzheimer data that's coming up next Thursday, could you give us a little detail like how the data will be presented? Is it the primary endpoint? Would you combine the two high-dose and median dose arm and then look versus placebo or each of the arm will be individually assessed against placebo? And are they powered enough to show us like 20% improvement? How is it going to look like when we see the press release? Yes, I would really recommend to wait for the data on the 1st of December. And we just have powered the study according to our knowledge from previous clinical trials. So we think we are in good shape. I would recommend to wait for December 1. Got it. Totally understandable. A quick question indeed. Can you disclose like what percent of patients agreed to have the -- either the scan or CNS tap to look at further biomarkers? I think that the -- it's not -- I don't have that information on top of my head. So we have to wait for December 1. So a follow-up question on the Alzheimer's data. And I know it's probably difficult to speculate what the data will look like. But Christopher, can you talk about your plan if the study meets the primary endpoint? Or if the study fails to meet primary endpoint, what sort of plan on individual scenarios, please? Again, I would comment just to recommend to wait for December 1. It's not a good point today to speculate on that. We are very close. So I think it's best to discuss it when the data is there. We always know that the FDA responds best when there's existing data to discuss. So that's my recommendation. Okay. Then maybe a question on the cash runway guidance. The full year runway is very encouraging. But does that include a potential additional Alzheimer's study if you need to do another one, please? Guidance is really based on the historical advancement of our cash utilization rate, which was always very consistent over the last years. So it's an extrapolation, if you so like. So it's a conservative extrapolation, so with the increase. And it has definitely all the studies which we have planned to initiate and to execute included in that budget. Okay. Last question to confirm the Parkinson's disease program. So there is a possibility that the next study that you conduct in Parkinson's disease will be a pivotal study based on your discussion with the FDA? We are aiming for that. We have very strong evidence from the PDD study that the effect on MDS-UPDRS, which is the main primary endpoint of this indication has been very favorable with ANAVEX 2-73. So the plan would be to make sure we are able to move forward as quickly as possible. That would mean to aim for a Phase 3. So thank you again. We are very much looking forward, and we're very excited about the company's potential as we build on biomarker-driven precision medicine studies with significant unmet medical need and economic burden. And we're looking forward to clinical trial readouts in autism disease and pediatric Rett syndrome. Thank you.
EarningCall_1980	Ladies and gentlemen, welcome to Luckin Coffeeâs Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode during management's prepared remarks. And there will be a question-and-answer session to follow. Today's conference is being recorded. At this time, I'd like to turn the call over to Mr. Bill Zima at ICR for opening remarks and introductions. Please go ahead, sir. Hello, everyone, and thank you for joining us on today's call. Luckin Coffee announced its third quarter 2022 financial results earlier today. A press release is now available on the company's IR website at investor.lkcoffee.com. Today, you will hear from Jinyi Guo, Chairman and CEO of Luckin Coffee; and Jing An, CFO of Luckin Coffee. After the company's prepared remarks, the management team will conduct a question-and-answer session based on questions submitted via the company's webcast. And this Q&A session will also be joined by Reinout Schakel, CSO of Luckin Coffee. As a reminder, investors can submit questions via the Ask a Question section on the bottom of the webcast during the call. We will be referring to a slide presentation on today's call, which can be found via conference call webcast link, as well as on the company's IR website. Again, the IR website link is investor.lkcoffee.com. During this call, the company will be making some forward-looking statements regarding future events and results. Statements are not historical facts, including but not limited to statements about the company's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. Further information regarding these and other risks is included in the company's filings with the SEC. With respect to any non-GAAP measure discussed during the call today, the accompanying reconciliation information related to those measures can be found in the earnings press release issued earlier. During today's call, Dr. Guo will speak in Chinese and his comments will be translated into English. Now, I would like to turn the call over to Dr. Jinyi Guo, Chairman and CEO of Luckin Coffee. Dr. Guo, please go ahead. [Foreign Language] [interpreted] Hello, everyone, and welcome to today's conference call. Thank you for your continued support of Luckin Coffee. I am Jinyi Guo, Chairman and CEO of Luckin Coffee, and it is my pleasure to be speaking with all of you again. In the third quarter of 2022, despite the negative impact from COVID-19 pandemic related restrictions nationwide, our performance continued its strong momentum, which proved once again our solid and highly resilient business model. And that the Chinese coffee market space continued to expand. As I always said, we firmly believe that the China's coffee market is large with strong growth potential. We'll continue to commit to our long term strategy of focusing on our core business of coffee as well as strengthening our customer insights. At the same time, in the face of increasingly fierce competition, we're confident that our first mover advantages in terms of branding, supply chain, digitalization, and store presence, we can achieve healthy and sustainable growth, as well as increase our market share and strengthen our competitive advantage, all while ensuring reasonable profitability. In terms of our performance, the third quarter of 2022 continued our strong growth momentum of the first half year of 2022. Total net revenue was RMB3.9 billion, representing a year-over-year increase of 65.7%. Our operating profit margin achieved a double digit for the first time in our history, reaching 15%. Self-operated stores profit margin was 29.2% and same store sales growth was 19.4%. The number of net new store opening was 651. Cumulative transact customer reached 123 million as the end of the third quarter of 2022. And the average number of monthly transacting customer reached to 25.1 million in the third quarter, representing a year-over-year increase of 71%. An Jing, our CFO will share more details on our financial results later during the call. This year we launched our ESG related work and established a sustainable development governance structure, as well as began to formulate our sustainable development strategies. We recently released our corporate governance report, namely, transformation and reinvention Luckin Coffee 2020 to 2022 corporate governance reports, which provides a systematic review of Luckin Coffeeâs transformation over the past two years in terms of our corporate governance as well as our cultural values and other important topics. And we would like to take this as a basis to establish a good example of building long term corporate governance. Furthermore, we plan to officially launch our sustainable development strategies and objectives in the first half year of 2023. We'll take a sustainable development as an important basis to continue to create both customer value and social value and lay a solid foundation for the long term development of Luckin Coffee. In the third quarter of 2022, our competitive advantages in branding, products R&D and store layout continued to play important roles in terms of the three pillars of people, products and places. From the perspective of people, Luckin Coffee remains popular among consumers with average monthly transacting customers further increasing by 4 million compared to the second quarter, reaching 25.1 million for the third quarter. We also won the Top 50 Emerging Chinese Consumption Brands with Strong Growth of the Year 2022 by CBNData and the Top Chinese Brand 2022 from YiMagazine. From the perspective of products since the beginning of 2022, we have launched more than 100 new SKUs. We continue to strengthen our product strategy of professionalism and good flavors, insist on product innovation and continuously launched blockbuster products. Innovative products such as prunes flavored velvet latte and [indiscernible] Series are all well received by the market. Our coffee beans have recently been awarded the IIAC gold medal for the fifth consecutive year. From the perspective of places, as of the end of the third quarter of 2022 we retained our leading position within the industry with 7,846 stores in total. And the number of net new store openings was 651 in a third quarter of 2022. We believe that China's coffee market has substantial upside potential with significant opportunities and weâre full of confidence in our future expansion in the cities at out years. In terms of our supply chain, we continue to deepen our strategic cooperation with the world's leading coffee bean traders and purchase high quality coffee beans in large quantities in worldâs renowned origins such as Ethiopia, Colombia and Brazil among others. We have become one of the largest green coffee bean importers in China. In September 2022, we have reached an understanding for strategic cooperation with Xiamen C&D Corporation, Mitsui and ECOM Agro Industry Corporation Limited of Switzerland to purchase Brazilian coffee beans. With the support of the Brazilian embassy, we will continue to carry out cooperation in the coffee industry in Brazil, share ideas and practical experiences and promote the deepening of cooperation in the coffee industry. IT is the core driving force of our business, while continuing to strengthen the construction of a comprehensive digital system we also attach great importance to the protection of users privacy information and data security. In May 2022 Luckin Coffeeâs app has obtained the security certification from the China Cybersecurity Review Technology and Certification Center, which is a real milestone as it is the first batch of enterprise apps in the new retail industry and cater industry to obtain this certification. At this time, I would like to turn the call over to An Jing, our CFO to discuss details related to our financial performance. Thank you very much, Jinyi. Good morning, evening, everyone. My name is An Jing, the CFO of Luckin Coffee. This is my first time [indiscernible] all, and it's my honor to be part of the Luckin management team. Although I've joined Luckin for just over three months, I can already see that this is a unique company with a very professional management team and a corporate culture that stands for innovation, transparency, and a determination to succeed, forged under the leadership of Jinyi. I also was able to witness the company's consistent efforts to continuously launch new high quality products that is suitable for the Chinese customer, optimize the customer experience by providing convenience and affordability and further enhancing the Luckin brand, which is already one of the most well liked brands in China, particularly for younger customers. Furthermore, after having worked with the finance team, as well as the various operational teams over the last few months, I believe that our teams are very professional, highly capable and they're well integrated. And I'm very excited to try and help bring our finance team and the functions to the next level under my leadership. I would also like to thank Reinout, our former CFO and the current CSO for a very smooth transition and the close cooperation. And look forward to working with a broader team in achieving our common goals and create a long term shareholder value. Lastly, I'm very much looking forward to developing a dialogue with all of our investors and then communicate more with all of you going forward. Next, please allow me to share more color on our third quarter financial performance. As Jinyi mentioned earlier, we are continue to be impacted by pandemic related store closures in various cities throughout China during the third quarter. Although the impact was less severe than in previous quarters, it still had a substantial impact on our operating results. As the winter season approached with [indiscernible] COVID-19 cases in recent months, the company experienced around 330 daily store closures on average in September and October 2022. As of the date of this earnings release, the number of daily store closures on average in November 2022 was about 500 and we believe this number may further increase. The lack of visibility from these uncertain and unclear operating environment means we are not providing any forward-looking guidance at this time. We have, however, been able to deliver yet another quarter of outstanding financial and operational results. Let me go through some of the quarterly highlights. We reported RMB3.9 billion of net revenues, an increase of 65.7% compared to the same period last year. Both of our store formats reported a strong top line growth. The net revenue of our self-operated stores reported over 50% year over year growth with SSSG for self-operated stores of close to 20%. Our partnership revenue grew by more than 110% in the third quarter and currently amounts to 23.1% of our total net revenues. This was a result of a continued progress in customer engagement, of a continued store expansion and the successful new product launches, demonstrated by 25 new fairly proven SKU this quarter, including, for example, the Amori Apple, Velvet Latte. In terms of our customer engagement, we saw continued growth in transacting customers. We acquired another 4 million average monthly transaction customers in the quarter and reaches record high of 25 million, an increase of over 70% year on year. And perhaps most notably, as a result of our strong results and the benefits of scale, we recorded an operating profit margin of 15%, which is a further material improvement compared to last year and also last quarter. We are very pleased with our result as this clearly demonstrated our strong momentum and overall progress towards achieving our key strategic objectives. In terms of the store growth, we opened 651 net new stores and accelerations compared to the second quarter to meet the ever growing demand for our products. The net new store growth is the strongest since 2020. We now have a nationwide footprint of close to 7,900 stores as of September 30, 2022, which provides us with significant benefit of scale. In terms of the store mix, we opened 405 net new self-operated stores this quarter for our partnership stores. We opened 246 net new stores and entered into two new lower tier cities. This is in line with our strategy of increasing store intensity in Tier 1 and 2 cities. We will rapidly penetrate in lower tier cities to further improve store coverage and better meet customer needs. During the third quarter, we saw a further material improvement in our profitability profile. Specifically, our reported operating margin reached a record high of 15% as a result of our strong results, relentless focus on efficiency and a cost of control, as well as benefits of scale. Store level profit margin of self-operated stores continued to stay at a high level close to 30% and a notable improvement compared to the 25% achieved in the same period last year. For our partnership stores, we do not disclose any metrics on profitability. However, as can be seen from our partnerships store revenue breakdown in the earnings release filed earlier today. Revenue contribution from profit sharing, one of the contributors of partnership revenue and profit almost doubled year on year to RMB145 million during the quarter. We see our overhead expenses ratio continued to improve during the quarter. Our general and administrative expenses increased by RMB62 million year-on-year, which reflects our continued investments in our business. The G&A expenses as a percentage of revenue decreased from 13.7% in Q3 last year to 9.8% this quarter. Thanks to the benefit of scale. The sales and marketing expenses threshold is relatively flattish at 4.1% compared with the same period last year and a slight increase compared to last quarter of 3.9% Compared to last year, we spent more on advertising expenses as company continued strategy investment in our branding through various channels. The expenses as related to the fabricated transaction and the restructuring has decreased by RMB11 million compared with the Q2, thanks to professional liquidations of the company [indiscernible] was completed in the first half of 2022. With majority of the company's historical issues being resolved, I believe the expenses related to the fabricated transaction will further decrease over time. During the third quarter, we had a positive operating cash flow of RMB470 million, which included a settlement of payable to equity litigants of RMB385.2 million. If we exclude the payment to equity litigants, the operating cash flow increased to RMB802.1 million in the third quarter of 2022 compared to RMB8.3 million in the same quarter of 2021. In terms of our balance sheet, as of the end of the third quarter, we had no interest bearing debts since we have fully redeemed the senior notes fee for the amount of our $110.6 million on August 26. As of September 30, 2022, after payments of the equity litigant settlement and the redemption of note fee, our cash position remains very strong with close to RMB4 billion of cash and cash equivalents. We have a healthy balance sheet and we'll continue to review our liquidity requirements on an ongoing basis to ensure that we can meet all of our business needs and to continue to further optimize our capital structure. [Foreign Language] [interpreted] Lastly, I would like to thank all of our stakeholders again for their long term support of Luckin Coffee. Now, we would like to open the floor to questions. Ladies and gentlemen, we will now begin the Q&A session. I will now turn the call over to Alicia Guo at Luckin Coffee, who will moderate today's Q&A session. Thank you. Now we would like to open the floor to questions. The first question, Luckin continues to expand its footprint rapidly in the third quarter. Could you let us know whether the store expansion is within your expectations? And can you provide us with any guidance on your store expansion plans for the next few years. [Foreign Language] [interpreted] Thank you for your question. Based on publicly available information, Luckin Coffee has become one of the largest coffee chain brands in China in terms of store counts. As of the end of the third quarter, we had 7,846 stores in total, covering over 230 cities with 651stores newly opened during the third quarter. This growth is in line with our expectation. Our two store models are highly complementary to each other, with the newly opened 405 self-operated stores mainly operated in Tier 1 and Tier 2 cities, while the newly opened 246 partnership stores mainly operate in lower tier cities. In the past two years, we have built an industry leading digital site selection and store expansion management system. Based on our analysis, we believe there are still plenty of locations in both higher tier and lower tier cities that meet our site selection requirements. And the market is far from being saturated. And we believe the China's coffee market size will further expand, driven by the accelerated promotion of coffee consumption. And we're confident of our future store expansion. The pace of our store opening this year well demonstrated our ability to expand and we will closely monitor the relevant developments in the market. Maintain a strong and competitive expanding pace of store openings to further increase our presence and better meet consumer needs. Regarding the partnership store model, we will reopen the recruiting channel for partners in lower tier cities from this December. Please stay tuned for further official announcements. Thank you, Dr. Guo. Let's move on to the next question. In the second quarter of 2022, Luckin has announced the launching of the sustainability development strategy. And recently, the corporate governance report has been issued. Why company decided to start to focus on the sustainability develop at current time point? And what does this mean to the company? Also, could you please share more color on the corporate governance report? [Foreign Language] [interpreted] Thank you for your question. This year marks the fifth anniversary of Luckin Coffee. In July 2022 with the approval of our Board of Directors The Sustainable Development Committee was formally established. This marks the official launch of our Sustainable Development Strategy and it also means that going forward, we'll pursue long term value and we'll more proactively address social responsibility. In the past four months, we have systematically constructed our sustainable development governance structure, forming the value orientation of high degree of synergy between business growth and sustainability. We're now gathering suggestions from all stakeholders, including consumers, suppliers, employees and partners, shareholders, regulators, and friends from industry and media by conducting a survey, which is estimated to be completed in the near future. We believe this will help us establish our sustainable development strategy in a more constructive and comprehensive way. We choose to start with corporate governance, because we believe a sound corporate governance is not only the precondition to building a sustainable business model, but a good starting point and solid foundation for carrying out environmental and social responsibility. Our corporate governance report consists of five parts based on our core values, namely, integrity, craftsmanship, innovation, ownership and corporation. This report gives a thoughtful review of our journey over the past two years to get back on track and the efforts we have made in taking responsibility, led by our new core values. By fully resolving the historical problem, reshaping our corporate culture and values, optimizing our governance structure, implementing a strategy of enhancing internal control and empowering technology continuously, enhancing talent development and incentive mechanism. I hope this report can help all of you to better understand our positive changes. And we would like to take this as a new starting point to remain prudent and pragmatic to promote our sustainable development work in a transparent, virtuous, and scientific manner. This report is an important cornerstone for Luckin Coffee to enter a new stage of sustainable development and create broader value and lay a solid foundation for our continued high quality and sustainable development. Thank you, Dr. Guo. The next question is, what are the main factors driving your SSSG growth in the third quarter? How much of this is the result from the introduction of new products? And is that sustainable? How should we think about your store capacity? Is there a limit to how far we can further increase items sold per store per day? And how should we think about that? Thank you for the questions. We anticipated that further normalization of SSSG for self-operated store compared to the last six quarters. And I would expect that trends to continue going forward. The key driver of the items sold per store per day included an incremental sales from the launch of new products and ongoing strong performance of our blockbuster products. [indiscernible] we have launched a series of new products such as Amori Apple, Velvet Latte, which have sold 2.2 million carbs within the first week since launch. Our ongoing blockbuster product such as the newer latte, Coconut Milk Latte, Coconut Cloud Latte, etcetera, continue to rank in the top ten of the best-selling products and contribute substantially to sales and enhanced the branding power from increasing store presence and marketing initiatives. As coffee become essential to more and more Chinese customers, we gradually experience the benefits of scale and the strengths of our brand as we open more store nationwide. And in terms of the selling of the items sold per store per day, it basically depends on the store efficiency and the traffic. Our overall goal is to satisfy all the needs from customers, the store efficiency and our IT facilities and system [indiscernible] will help us to continually optimize and standardize the operation and increase the efficiency. The traffic, as our footprint covered more [indiscernible] and our brand awareness keeps strengthening, we will attract more customers in the future. In terms of pricing strategy, our affordability proposition is an important differentiator. We are profitable at this price as demonstrated by our store level margins during the third quarter and do not anticipate any major changes in our pricing strategy. Thank you, Ms. An. The next question is, the average monthly transaction customers reached over 25 million in the third quarter, a notable increase compared to last year and also last quarter. What are the key drivers behind this? And what is your strategy, both for attracting new customers and retaining existing customers going forward? Thank you for the question. I believe this is due to our scale. This quarter we newly opened 651 stores and entered into two new cities, which enabled us to reach to the new customers in the new markets out there and fulfill their needs. There's a strength of our products, professional, and a good taste. In Q3, we have launched a series of popular products and [indiscernible] series, which is also the important driver of the new customers. At the same time, our ongoing blockbuster products continue perform well, which plays a critical role in helping us retain the customers. And actually, these popular products have already been featured as the basic menu of the customer in long term of our branding power. In Q3, we have launched some marketing initiatives along with the new projects and new packaging such as the Chinese Valentine's Day and the first cup of coffee in autumn. And those topics are popular among the young generation and they attracted them to try our new product and out [indiscernible] refine the customer operation, which also played an important role in retaining the existing customer. Empowered by the technology, we could better understand the customer needs and have a more efficient and accurate interactions and communication with customers without bothering them. In addition, our RMB9.9 coffee initiative in Shanghai also help to reactivate the existing customers and drive the increase in the number of new customers. In the long run, we will continue our marketing strategy with the idea of [indiscernible] using different marketing and the branding initiatives to build our brand as the representative of a professional fashion and awareness. Covering the good quality coffee with creativity, the young customer favored embracing the young generation and gradually building their brand loyalty. Thank you, Ms. An. The last question is, can you please give us an update on the overall status of the restructuring and the overall capital market strategy? Any further relevant developments? Also, I notice that you early repaid the outstanding debt, why did you decide to do that? Thanks for your question, and I'm happy to take this opportunity today to address that to the extent I can. As mentioned in our Q2 earnings call, the provisional liquidation of the company in the Cayman Islands was completed in the first half of 2022 and we reported that we had made substantial progress in resolving the outstanding US securities litigation, including receiving final approval of the $175 million settlements of the Federal Class action. I am pleased to be able to share some additional information today regarding our progress under remaining U.S. securities litigation. Firstly, on October 7, 2022, the New York State Core preliminary approved a $7 million settlement with a class of investors who purchased our January 2020 convertible bonds, but were not included as creditors in our Cayman scheme. The settlement is still contingent upon final approval of the court and we expect the court to hold a hearing on final approval in Q1 2023. Secondly, there were three securities lawsuits filed by investors in our ADS, who opted out of the Federal Class settlement. We have reached agreements to resolve all three actions. One of the actions has already been dismissed, pursuant to the terms of the settlement and we expect the other two to be dismissed on the company's satisfaction of the terms of those settlements, which should occur in Q4, 2022 and Q1 2023. Finally, we currently expect that all lawsuits filed due to our historical accounting issues will be dismissed by the end of Q1 2023. But let me turn to the repayment of our debt, the key rationale. On August 26, we announced a full redemption of our only outstanding offshore debt securities of $109.9 million dollars of 9% Series B senior secured notes due 2027. A key reason is for the early redemption. First and foremost, to optimize our capital structure. We have a very healthy liquidity position, a business that is profitable and generate substantial free cash flow, while the debt was relatively expensive at 9% interest. From a corporate finance perspective, it was therefore a relatively easy decision for the company. Secondly, the early redemption means the company has currently no offshore debt obligations, which provides us with additional operational flexibility. And lastly, it allowed us to return fully back to normal by terminating the role of the scheme supervisors as defined under the restructuring support agreement. Now my answer to the capital market strategy question is consistent with my previous response. The priority for us is providing sustainable long term value for our shareholders by executing on our business strategies, by delivering outstanding products and services to our customers, maintaining strong internal controls over our financial reporting, to ensure we operate with the highest level of integrity and expand our ESG efforts. We remain committed to the U.S. capital markets and are closely monitoring all relevant developments and take actions we believe are in the best interest of the company and all our stakeholders. We will share further updates if and when appropriate. Thank you, Dr. Guo, Ms. An, and Reinout. This is all the time we have for today's earnings conference call. We thank you for your participation on today's call. We look forward to providing you with regular business updates and look forward to speaking with you again next quarter.
EarningCall_1981	Good morning. This is Alvin Concepcion, Vice President of Investor Relations at Big Lots. Welcome to the Big Lots Third Quarter Conference Call. Currently, all lines are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. On the call with me today are Bruce Thorn, President and Chief Executive Officer; and Jonathan Ramsden, Executive Vice President, Chief Financial and Administrative Officer. Before starting today's call, we would like to remind you that any forward-looking statements made on the call involve risks and uncertainties that are subject the company's safe harbor provisions as stated in the company's press release and SEC filings and that actual results can differ materially from those described in the forward-looking statements. We would also like to point out that commentary today is focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP adjusted results are available in today's press release. Third quarter earnings release, presentation and related financial information are available at biglots.com/corporate/investors. A question-and-answer session will follow the prepared remarks. Good morning, everyone, and thank you for joining us. The current environment continues to be challenging for our consumers. Inflation is at a 40-year high and consumer sentiment remains historically low. Household savings rates are below pre-pandemic levels as consumer have had to draw down on savings to fund current expenditures. Our customers being pinched and this pressure has been affecting discretionary purchases, especially for high ticket items across the retail industry. In particular, low income customers whom we serve have felt the most pain, and most are living paycheck-to-paycheck and racking up more debt. Our results have been affected by this pullback in demand for much of the year, and while this environment has been hard, we are responding in kind and fighting for our customers even harder. Each quarter that goes by, we are learning and adjusting our assortments and promotions to meet her where we can. We are making good progress and we expect that to be increasingly evident as we go forward. In a challenged economic environment, it is important now more than ever to help our customers stretch their dollar even further. We see a tremendous opportunity to draw more trade down customers, leverage our deep experience in bargains and offer incredible value for our customers. We are taking this moment as an opportunity to strengthen our business model by creating a better shopping experience, offering even more deals, more exciting products, and making these bargains and treasures even easier to find. We have made some key hires with the new Chief Merchandising Officer and Chief Marketing Officer to bring these plans to life. We remain focused on growing margin, reducing expenses, improving our liquidity, and making highly disciplined investment decisions. Our intent today is to cover the results and progress we've made in Q3, provide some comments on Q4 and describe how we're tackling the current challenging environment and strengthening our business. Before going into that, I'd like to welcome Margarita Giannantonio as our new Chief Merchandising Officer and John Alpaugh as our new Chief Marketing Officer. I'm very excited for the leadership that Margarita and John bring to the table. Margarita is a deeply accomplished off-price retail industry leader with more than 30-years of experience in merchandising, sales, marketing, and product development and home, housewares and apparel categories. She's our first Chief Merchant in more than a decade to come from the off-price retail world. John's background includes a deep and diverse set of experiences, among them brand positioning and launch, enterprise strategy, customer insights and analytics, e-commerce, market research and budget management. John has the strongest vision for how to message value that we've had since I've been here. They together will help us drive success in becoming our customers' go to destination for bargains and treasures. Now on to the results. The third quarter marked another quarter in which we met the challenges of a tough environment head on, and did what we said we'd do, but we can't say we're happy with the results and we certainly need to do better they were in line with our guidance and in importantly, inventories continued to come down materially on a year-over-year basis. We have tightly managed costs and have strengthened our balance sheet and liquidity position. I'd like to thank our team for their hard work as we punch our way through these tough economic times. Last quarter, we said we'd simplify our value offerings and communicate them better, offer more bargains, leverage our scale, and more deeply partner with our vendor partners to deliver compelling opening price points across our assortment. I'm pleased to say we made progress in all those areas. We have been reducing our opening price points to create unique deals. Through cost engineering and using our scale and relationships with suppliers, our opening price points in furniture are now at pre-COVID levels across more than 60% of SKUs. We expect nearly all of our furniture to see price revision in Q1 2023. As it relates to bargains, which are closeout items, off-price brands and limited time deals, it remained a good environment for procurement. As we made meaningful progress towards rightsizing our inventories, our increased open to buy capacity has enabled us to procure 160% more bargains at retail, when compared to Q2 and about 90% more year-over-year. We procured great deals in categories such as toys, home appliances and soft home, and we continue to see great deals. We have good bargain purchase momentum going into 2023. Over the past month, we've made great purchases in toys for Mattel and other top toy brand vendors. Comforter sets from a major specialty store and accent pieces in furniture and black and decker small appliances. With regard to treasures, which are more unique, quirky, trendy and seasonal items, we created excitement with the Disney Pop-Up shop within the lot section in Q3 and had success with kids, hoodies, hand towels, aprons, mugs, and backpacks and purses. In Q4, we are we are having early success in Grinch branded apparel and accessory items, novelty family sleepwear, giant candy bars, ugly holiday sweaters and leggings, and even a guitar with amplifier. And essentials which include category staples, we've cut about 1,700 unproductive SKUs. As an example, we carried six lines of neosporin and will now carry one. [indiscernible] that only sell well during certain seasons will now only be available during the peak selling season rather than year round. We're eliminating over 240 cosmetic SKUs that are high strength items. By reducing unproductive and duplicate SKUs, we're able to offer her a more compelling and productive shopping experience. It also creates more room for more bargains. The productivity gains in Q3 will be used to fund more bargains, which will make our offer even more engaging particularly in food and consumable categories. There will be more to come as we continue to curate our assortment in the remainder of 2022 and into 2023. We know that our customers will shop us when they see a great deal and are thrilled about our assortment. I'm pleased with the progress we've made on both fronts. Looking at specific category performance in the quarter, seasonal comps grew strongly, up 7% in Q3 fueled in part by heavy promotions. Halloween items were up about 30%, driven by items such as a nine foot tall witch, skeletons carrying a coffin in an animated witch's broom. We have leveraged our insights into consumer behavior and factored them into the Q4 holiday season. For example, we saw continued strength in outdoor decor and desire from consumers to celebrate a holiday. As a result, we have placed some of our bigger buys in Christmas trees and outdoor dÃ©cor, while reducing our buys on indoor decor this holiday season. Our food category was up 1% and the consumables category was down 5% in Q3 with renewed strength in beverage, seasonal food items, and paper. Furniture soft home and hard home categories were down double-digits as they continue to be impacted by consumers delaying or cutting back on higher ticket purchases. We have been addressing this through introducing lower opening price points especially in furniture and more bargains in our store, and we expect these efforts to gain more traction over the coming quarters. The lot apparel and electronics were down 4%. The lot and apparel items drive a lot of excitement in our stores and showcase some of our newest items and best deals. As we progress into the fourth quarter, the lower opening price points great bargain's and fund treasures and more productive essentials will help drive sales momentum. That said, we have seen significant pressure in the market environment, particularly in higher ticket discretionary items. So we do not expect a significant change in the comp sales momentum in Q4 relative to Q3. Therefore, we expect comps to remain in the down low double-digit range in the fourth quarter. With regard to gross margin, it will be sequentially higher versus Q3 in the mid-30s range, which is inclusive of additional markdowns related to accelerate store closures and efforts to clean up slow moving inventory. And we continue to expect to end the year with a healthy inventory position, which will be flat to down year-over-year. I'd now like to talk about how we're navigating the current environment and creating opportunities to strengthen our business. We remain laser focused on actions that enable us to better adapt to continuously evolving customer needs, build upon core competencies and deliver incredible value. I'll provide a few examples of these activities. First, we will own bargains and treasures. Our company was built on providing phenomenal value and we're leaning into it in a much bigger way. Customers come to our stores for great deals and exciting products, and we simply haven't had enough of these. So we're accelerating our efforts to optimize and differentiate our assortment with more bargains and treasures. By the end of 2023, our assortment will be two-thirds bargains and treasures, up from the high 40% range today. Bargains are expected to be one-third of the assortment, up significantly from mid single-digit penetration in 2022. Bargains and treasures will bring more excitement to our assortment and will ultimately increase new customer growth and loyalty. Second, we will communicate unmistakable value. We've done a great job in sourcing bargains and growing their value based private brands such as Broyhill and Real Living, but we have not done a good job communicating and curating our incredible value offers to make it an easy and compelling shop for our customers. This means we will better communicate value and make it easier for customers to shop our stores. We don't want our customers to have to wonder if they're getting a better deal and somewhere else. So we will do this through clear value messaging that will communicate unmistakable, comparable value in everything we do. We'll do this by having ticketing and marketing that is clearer than ever before. For example, we have simplified the end caps and focused more on bargains and treasures rather than essentials. By October, nearly 90% of our end caps were focused on bargains and treasures versus 40% in July. In January, we are going to introduce comparable value pricing tags to showcase our value offers more and to make the shopping experience even better. These efforts are designed to drive customer trial, frequency and loyalty. We're also well positioned to provide value as a trade down destination. Our private brands, especially Broyhill, will play a key role in increasing our appeal. Both Broyhill and Real Living continue to do well with sales growth of around 10% at each brand. Across all divisions, these brands represented 30% of our business in Q3, up from the mid-20s last year. Recall that our seasonal customer has a household income that is two times higher than our core customer. So we see that category as a year round trade down opportunity. We have 38,000 associates, who are value creators and will bring these efforts to life. Our associates play to win and maintain an obsession with the customer, which has led to a very positive customer feedback. We've achieved a net promoter score in the 80% range in Q3, which is top tier in the industry and over 20 million customers have rewarded us with their loyalty. We will continue to focus on earning their business each and every day. Third, we will increasingly focus on rural and small town markets where we know we outperform with our strong assortment of furniture and home goods, while taking a prudent near-term approach to opening stores. Overall, new stores continued to perform with strong performance in rural and small town markets. In these markets, we face less direct competition in our home categories and have a lower cost structure. Therefore, these typically generate more cash and profitability than urban stores. As we think about our real estate strategy in store openings and closings in the future, we see an opportunity to reshape our store portfolio more towards these rural and small town markets with an emphasis on furniture and home goods. Fourth, we will win with omnichannel. We've made tremendous progress in our e-commerce capabilities that have helped strengthen our lead and omnichannel against other off price retailers. In the last three years, we have enabled multiple same day and next day delivery options and ship from store capabilities. We've also expanded our extended aisle assortment in our shipping channels and greatly improved the customer experience. We've added new pay options such as Paypal, Apple Pay, reducing friction at checkout, and we've improved our inventory accuracy and have made it easier for customers to find available nearby store inventory. These efforts have enabled strong sales growth. Year-to-date e-commerce sales growth has been strong at 12% and it now represents 7% of our business, compared to 2% three years ago. While we're proud of our achievements, we still have more work to do in order to keep our lead. There remains friction in the customer shopping experience, and our value offerings haven't been as easy to find as we'd like. Therefore, we are removing friction with improved site navigation, access to deals, streamline cart and checkout to improve our conversion rate. In October, we entered Phase 2 of a multi-year order management system for a single view of the inventory to improve the omnichannel experience. And fifth, we will drive productivity. We remain focused on growing margin, reducing expenses and making strong investment decisions. We're navigating the current environment and creating opportunities to strengthen our business. For example, we'll be sharper and more productive on pricing and promotions aided by new tools to improve our efficiency. We have described regional pricing model in California, which will grow to other markets that allows us to flex pricing to improve competitive position and optimize margin profile. We also talked about our work in food and consumables, which indicates a $20 million annualized gross margin opportunity that we are already actioning expect to see continued benefits from in the fourth quarter and beyond. This work has been rolled to hard home with other divisions to follow. We're going to be targeting higher sell throughs by more significantly editing our store -- our assortment across stores. This will lead to inventory being placed in more productive stores and will also lower the amount of inventory built for display purposes. We've achieved significant structural SG&A reductions over the past several years, but continue to see more opportunities going forward. To sum it up, we have made meaningful progress in the face of the challenging environment in the third quarter and we expect to continue to gain traction in the fourth quarter. We are determined to be the best destination for bargain and treasure hunters and in doing so greatly improve our operating results. I'll now pass it over to Jonathan, and I'll return in a few moments to make some closing comments before taking your questions. Thanks, Bruce, and good morning, everyone. I would also like to thank the entire Big Lots team for their unstinting efforts through these challenging times. I'm going to start this morning by going to more detail on our Q3 results, which I will discuss on an adjusted basis excluding store asset impairment charges and will then address our outlook for the fourth quarter. A summary of our financial results for the third quarter can be found on page nine of our quarterly results presentation. Q3 net sales were $1.204 billion, a 9.8% decrease, compared to $1.336 billion a year ago. The decline versus 2021 was driven by a comparable sales decrease of 11.7%, which was within our guidance range. As you will recall, our third quarter sales started off down in the low double-digit range in August and as expected that trend continued through the quarter. High inflation in the macro uncertainty is continuing to cause consumers to delay or cut back on discretionary purchases, especially of high ticket items. Importantly, we continued to successfully drive inventory levels lower and we're able to reduce promotional activity as the quarter progressed. Our third quarter adjusted net loss was $87 million, compared to a $4 million net loss in Q3 of 2021. The adjusted diluted loss per share for the quarter was $2.99 versus a diluted loss per share of $0.14 last year. Gross margin rate for the third quarter was 34%, down 490 basis points from last year's rate and in line with our guidance. This included significant impacts from higher markdowns and freight, although as we will discuss in a moment, we expect to see both of these headwinds turn. Turning to adjusted SG&A. Total expenses for the quarter including depreciation were $518.5 million below the $523.3 million last year and better than our guidance of up low single-digits year-over-year. Store payroll costs, general office and equity compensation were all below last year as we proactively cut costs. These cuts are offset in part by cost increases on some other lines, particularly in distribution and outbound transportation expense. As Bruce noted, as part of our ongoing productivity and efficiency initiatives, we expect to continue to drive structural savings. Adjusted operating margin for the quarter was negative 9.1%, compared to a loss of 0.3% in 2021. Interest expense for the quarter was $6.3 million, up from $2.3 million in the third quarter last year due to higher amounts drawn on our credit facility versus last year. The adjusted income tax rate in the quarter was 24.8%, compared to last year's rate of 29.3% with the rate change primarily driven by lower non-deductible executive compensation, partially offset by the effect of employment related tax credits and audit settlements. The effective income tax rate comparison was also significantly impacted by the increased loss before income taxes in Q3. Total ending inventory cost was up 5.3% last year at $1.345 billion in line with our guidance and driven by higher average unit cost of on-hand inventory. This represents a significant sequential improvement versus earlier quarters in the year and we are pleased with the strong progress we have made on inventory normalization. During the third quarter, we opened 20 new stores and closed three stores. We ended Q3 with 1,457 stores and total selling square footage of $33.4 million. Capital expenditures for the quarter were $38 million, compared to $46 million last year and depreciation expense in the quarter was $37 million, up $1 million to the same period last year. We ended the third quarter with $62 million of cash and cash equivalents and $460 million of long-term debt. At the end of Q3 2021, we had $71 million of cash and cash equivalents and no long-term debt. We did not execute any share repurchase during Q3 that have $159 million available remaining under our December 2021 authorization. On September 21st, we completed the refinancing and replacement of our existing $600 million senior unsecured credit facility with a new $900 million five-year revolving asset based loan facility. In addition, we expect to further strengthen our balance sheet through asset monetization. This includes the outright sale of approximately 25-owned stores we expect to complete by the end of the year or early 2023. In addition, we are continuing to evaluate sale leaseback proposals on our remaining owned stores and other owned assets. On November 29th, our Board of Directors declared a quarterly cash dividend for the third quarter of fiscal 2022 of $0.30 per common share. This dividend is payable on December 28th 2022 to shareholders of record as of the close of business on December 14th, 2022. Turning to the fourth quarter outlook, we expect the sales environment to remain challenging. We therefore now expect comps to remain in the down low double-digit range. Net new stores will add about 170 basis points of growth versus 2021. With regard to gross margin, we expect the rate in the fourth quarter will improve sequentially versus Q3, but remain in the mid-30s range, which is inclusive of a drag from additional markdowns related to accelerated store closures and efforts to clean up slow moving inventory. Sequential gross margin rate improvement will be driven by the factors we laid out on our last call, including easing of inbound freight costs, other cost of goods reductions, more targeted and efficient pricing and promotions, and an expected shrink benefit as we lap the cumulative shrink accrual adjustment we recorded in the fourth quarter of last year. We expect SG&A dollars to be roughly flat versus 2021, due primarily to increased accelerated depreciation from fourth quarter store closures, higher occupancy costs from new stores, higher outbound transportation costs and costs related to two incremental forward distribution centers. These will be offset by cost savings, including lower store payroll and general office costs. We now expect to deliver over $100 million in SG&A reductions this year versus our original plan, of which approximately $70 million is structural. This will be partially offset by outbound transportation expense, including the impact of higher fuel rates. As a reminder, the $70 million structural savings will come from store payroll, supplies and other goods not for resale and headquarters costs. The balance of expense reductions is driven by expense flex on lower sales and lower bonus accruals. We expect to continue to drive savings in 2023 and beyond as you heard Bruce discuss. With regard to CapEx, we now expect approximately $170 million versus $160 million previously, with the increase due to higher than expected new store opening costs and some projects being pulled forward from 2023. We continue to expect over 50 store openings in 2022 with a similar or slightly higher level of closures. The latter included outright sale of approximately 25-owned stores, I referenced earlier. Overall, we have seen outperformance in rural and small town markets. As Bruce mentioned, these stores face less direct competition and have lower cost structures. Therefore, they generate more cash and profitability than urban stores. As we evaluate store openings and closings, we are focused on optimizing the fleet towards these small town and rural markets. We expect full-year depreciation of around $156 million, including approximately $43 million in Q4. We expect a share count of approximately $29 million for Q4. We continue to expect Q4 inventory to be flat to down, compared with the prior year. As Bruce mentioned, this increases our ability to go after bargains and closeouts in the future as we will have more open to buy. Last, all of our account during Q4 excludes the expected gain on sale of our owned store properties, as well as any potential further impairment charges. Beyond this year, we remain confident that operationally enhance our ability to drive significant long-term growth and value creation. Thank you, Jonathan. I'd like to end the call by again thanking our associates for their focus on delivering for our customers. There are a lot of things to look forward to as we transform our business. And I'm looking forward to sharing with you all the progress we're making. I'll now turn the call back over to the moderator, so that we can begin to address your questions. Thank you. Thank you. We'll now be conducting your question-and-answer session. [Operator Instructions] Our first question today is coming from Greg Badishkanian with Wolfe Research. Please proceed with your question. Good morning. This is Spencer Hanus on for Greg. Can you just unpack what is leading to the slowdown in 4Q comps? And does the guide embed in improvement as we move throughout the quarter? And as we think about modeling the fourth quarter and think about the cadence of shopping, is it going to be more normalized this year and we could potentially see a pickup as we get closer to the holiday? Or how are you thinking about all those dynamics? [Technical Difficulty] is still present. They are pinched high inflationary rates and a pullback or a delay in discretionary high ticket items like our furniture is still front and center. We have moved through some of the seasonal product, which is good, but keep in mind that our home categories are the categories that truly resonate with our customers over the long-term. And they are -- they bring more sales, higher basket, and because of that, when these customers are pinched during this time it is a drag on our overall comps. So -- and you see that in our Q3 results. Our food and consumables performed pretty much like other companies in terms of what customers are buying in those non-discretionary items. But the discretionary items are lagging a bit and that's going to continue into the fourth quarter. The good news is the work that we're making in increasing our bargains, our opening price points in those categories, the end caps and making sure we've got more bargains in treashers is going to play out nicely and should be a good trade down opportunity as we go into 2023, but it is a lag into Q4 at this time. Jonathan? Yes. I would just add Spencer, I think the focus in the last couple of quarters has been on inventory normalization, we've driven some comps. We've taken a margin rate hit to get that. We're now pivoting more to driving margin higher and kind of getting back to the inventory we want to have. So we think we're well set up coming into spring to be in a better position for all the reasons Bruce discussed, but that's somewhat the dynamic thatâs been playing out over the last couple of quarters. Got it. That's helpful. And then just to follow-up on your last point on inventory, do you expect the destocking to be complete by the end of 4Q? Or should we expect that to continue into the spring and 2023? And then on the structural savings of $70 million is all that going to be realized in 4Q? And do you think you can still pull out more costs as we look forward here? Yes, so Spencer, the $70 million is a full-year number. That -- we call that out, I think, on the prior call. So a decent amount of that has already been achieved in the first three quarters. Some of it is coming through in Q4. Going back to your question about inventory, yes, we expect to end the year very clean on inventory, as well as dealing with the seasonal overhang that we've had for the past couple of quarters, we've been dealing with other slow moving inventory, including in some areas in furniture where given the change in the environment, there's been some obviously slower terms there. So we feel good about where we're going to end Q4. We think that's sets us up very well coming into 2023, both in general, but also in terms of capacity to go after closeouts. And Spencer, I'll just come back to your second part of the first question on normalized cadence as shopping as we get closer to holiday. We saw this in leading up to Halloween where customers were slow to shop and then it picked up and we see the similar thing happening in Q4, a slow start to customer traffic. And it's reflected in all the competitor promos that you've seen probably out there. I'll just tell you, I've seen retailers before Halloween going 50%-plus off on holiday product. I'm not seeing that before in a long, long time. And so yes, I think as we get closer and we're in the thick of it now, coming off Black Friday and Cyber Monday where shopping patterns are getting better. The traffic is getting better, as we'd lead up to Christmas. We did have a strong showing both online and in-store for Black Friday and Cyber Monday for e-commerce. Thank you. Our next question is from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question. Yes. Hi, good morning guys. Thanks for taking the question. Wanted to ask about the gross margin little bit more, you guys talked about reducing prices and you gave us some guidance for this fourth quarter, but you mentioned that it will resetting prices in furniture in 2023 probably I'm assuming the first half. How will that impact the gross margin for next year? Will there be as much recovery? Or it sounds like it could be a bit more challenged for longer, kind of, should the new level be this mid-30% gross margin? Hey, Joe, good morning. Yes, good question, so there were two big dynamics that have driven our rate down in 2022 and that's been freight and markdowns and promotions and we see both of those getting incrementally better, including in Q4, by the way, but certainly continuing into 2023. We're pretty much paying peak freight rates now based on the contracts we entered into in the spring of this year. We see a very significant tailwind from freight coming, particularly as we get into the sort of second quarter, the latter part of the second quarter and beyond in 2023. And now some of that will use to take prices down. As we've referenced, some of it will be taking to the bottom line. But we also expect to be much less promotional coming through 2023 than we needed to be in 2022, given the excess inventory we were carrying from much of the year. We're also -- as well as freight, we're also expecting some cost of goods benefits to flow through that will help from the price adjustments that we're making. So they're the principal dynamics, and then Bruce wants to add something. Yes. Hi, Joe. I'll add that, like we said in our opening remarks, already restored especially in the furniture area, our opening price points at least across about 60% of it. We by the end of Q1, we'll have that all basically restored and we've done that through negotiations, reengineering. So the margin will be good as well. And then when you -- we also add in the work and the traction we're making on the bargains or closeouts as we historically have talked to it. That penetration is going to grow substantially into â23 and we see that as being margin accretive a good opportunity both for the customer and for us to increase sales and margin into â23. And I'll just add Joe one other comment, you know, from a long-term standpoint, we haven't changed our outlook on gross margin. We think as we're dealing with a huge freight headwind, which is starting to turn, we've got a big markdown impact in there, but we fully expect over time to get back to that 40% or greater gross margin we've talked about. We just had a massive bubble to work through coming off of â21 into â22 and we're seeing the end of that. Got it. That's helpful. Thanks guys. And that kind of leads into the next question, maybe bigger picture like strategically, it seems like there's a tremendous amount of pressure, we wonât -- not seem. We know there's tremendous pressure in the environment right now and all this year. And yet you guys -- it feels like some of the strategic efforts you're making continue to shift a little in pivot? And I'm wondering if that's necessary given just we're working through a tough environment. I know you always have to change your strategy and adjust, but I just was hoping you could maybe address some of that like how much of this -- because it feels like you guys layouts in the strategic initiatives each quarter and they shift a little bit? And I'm just wondering if they need to shift as much as they have been, because the environment is really the issue? That's a good question. I don't feel like we've changed our strategy, I think if there is certain parts of it, that we accentuate and some things that were delayed back from when we started this in 2019, primarily in the increased penetration or desire to have more bargains and treasures than essentials like we essentially are nice. They add to the basket and their solutions and they build consistency and trust in the shop. But they're not that differentiating for us. Bargains where we can be off price, compared to other retailers and treasures, where we can delight her are differentiating and it's something that just got delayed, because of the pandemic. We had already opened up going back to that type of an assortment before the pandemic hit and the pandemic delayed it. If you recall, when I joined the company about four years ago, the company was only in closeouts to about 9% penetration of the entire store that dropped to 5% or so, 5%, 6% during the pandemic, because it was only included consumables in the CPG companies pulled back on the availability closeout. We opened up those bargains back in â20 to cross all categories, saw nice growth that helped us to continue to offer those deals, if you will. And now with the rich environment and opportunity out there and the need to meet our customerâs where we can. This is a great opportunity to lean into what we always wanted to do. So the bargains and treasures has been a strategic pillar for what we want to do and why we exist for her to help her live big and save lots. And now this is just the right time to accelerate into that. And being a value creator, the thing is that this is all about communicating clearly the value we have many times unless you're a professional shopper, you won't know that our deal or what our price is way better than what they can get somewhere else. And we just need to be very clear about that. And so, tightening up our end caps to have more bargains and treasures rather than essentials, which are not competitive, but needed is a more compelling shop. Having tickets on all our products with the comparable is makes it easy and makes her feel good about what she's shopping. That value perception grows. The rural stores growth has been one that we've been talking, but we've been talking about that we have many underserved markets and what we see in the rural stores, and we put out there higher number of stores of growth potential. We still see that, but it's just we're curtailing it a bit now dealing with the tough economic times. But quite frankly, we think there's a tremendous opportunity in the rural markets where it's underserved. And definitely there are very limited competitors that can sell everything from a fork to a sectional or a bedroom set. And we do that, I think we have a great opportunity to be that off price home solution for her. And so that isn't necessarily a tweak, itâs something that's just becoming more and more evident. Omnichannel has always been there, when we joined the company, Jonathan and I a few years back, it was less than 0.5% of the sales, itâs now 7% of the sales. Most of that is through the store 60%-plus, 40% BOPIS. All those things were strategic pillars for the last several years and are continuing to give us competitive advantage against our competition and the off price roll. And driving productivity, we've taken up hundreds of millions of dollars in structural costs and we'll continue to do that as we get better at running our company. So I don't see it as a change strategy, I see it as a honing of the key priorities going through this topic on Joe. Hi, good morning. Thanks for taking our questions. Our first question was if you saw any acceleration in higher income consumers trading down into your store? And how you're thinking about the role of trade down playing out in Q4? Good morning, Kate. I'll take this question, I believe trade down is happening, I think it's happening in our box and into our [Technical Difficulty] box. What we're seeing customers do is trade down from best to better, to good. And we're also seeing customers coming into our box and that's realized through a higher percentage of higher income household customers. And so that's good. I think we're -- we've got a great assortment for trade down. And I think as recession looms and things get difficult and our customers spend through their savings, we're well positioned especially with our Broyhill line that covers all our home categories and furniture. We're seeing that, that customer is usually 2 times the household income of our core customer. Real Living is also playing in nicely. In fact, Real Living sales have outpaced Broyhill sales for the first time this year. Both of them have grown 10% year-over-year despite this tough economic condition we're in, which is another indicator of the trade down that's happening. Once again, we're going to go in the lawn and garden season here in Q1, Q2. We've got a heck of assortment, I think we've got the best patio furniture assortment, casibels, umbrellas, than anyone out there in terms of value. It's just tremendous value we offer. We've always seen that customer being 2 times the household income of our core customer and we'll continue to get that trade down there. So along with all the other bargains and treasures that we'll be adding, the opening price points, I think we're going to have a very compelling assortment and a delightful shopping experience for those trade down customers. Okay, thank you. And our second question was just on the reduction of SKUs, I know you mentioned in your prepared comments a couple of places where you reduced SKUs, is this a broader initiative or is it more opportunistic at this point? No, it's a broader initiative, something that we've been looking at throughout the last several years, especially with the pandemic that just delayed it, because that's which she was shopping and we -- but we also knew even while we're doing well in those areas, which are predominantly in the essentials, which is for the most part food and consumables and make up the majority of that. We always realized we have redundancy. And the example I gave in the opening remarks like six lines or six different packaging types or sizes of neosporin. We're not a drugstore, we're not a drugstore. We don't need that. By freeing up this redundancy and unproductive SKU base in those essentials, we're able to offer more solutions in the essentials, other than six type of neosporin, and also able to fuel the open to buy for our differentiating assortment changes in bargains and treasures and that's what exactly what we're doing. So it's just -- what this does is it allows us to accelerate that initiative that was already in the making. Good morning. Thanks for taking my questions. I guess my first just a real quick housekeeping question. Maybe it was just my line, but Jonathan you cut out when you were running through your SG&A expense deleverage drivers. Can you just run through those again real quickly? Yes, I'd be happy to recap what we said on that. Let just make sure I have it in front of me. So you're talking about Q3 or our guidance for Q4, just to be clear? Yes. So in terms of the improvement we've drilled versus our outlook and last year, so payroll costs, general office and equity compensation were all down. And then we did have some higher expense in distribution and outbound transportation that offset that. Got it. Okay, that's helpful. And then just in terms of the -- I guess, the five points that you guys laid out in terms of this -- I don't recall necessarily a turnaround plan, but just tweaks to your existing plan. What should we expect in terms of the timing for rolling out all those initiatives? Like when do you -- like what's kind of phasing of that or when do you expect that all to be completed? Hey, Anthony, Bruce here. It's in progress, it's been in progress, bargains and treasures. Weâve -- like we said in our opening remarks, we've leaned into that heavily. We grew the bargains and treasures penetration 90% or the purchasing procurement of bargains 90% over last year Q3 and sequentially the Q2 160% and that increasing as we go into fourth quarter and free up that open to buy with our better inventory management. So that is going ongoing right now and the signage and the ticketing is in process that ticketing will be rolling out here shortly. The comparable ticketing and the better signage will be rolling out, as well as the more honed promotions and crisp promotions that truly drive the value differentiations. The stores we continue to grow the stores, albeit at a slower rate. We're projecting a lower amount of stores at this time than what we're seeing in the previous releases. But that's just because of the economic times. We think as we get better with that weâll accelerate back into and we've got a very good team to do that. But the focus is on rural stores and the home categories where we excel in and outpace the competition. Omnichannel, we continue to invest in. We're doing it right now. We just added PayPal, Apple Pay, we're removing friction, our conversion rates never been better through the holiday season than it is right now with the things we're doing. We're focusing on the productivity and the profitability growth, not just growth at any cost. So it's ongoing as well. And once again, the driving productivity quite frankly, we've been taking our costs ever since Jonathan and I joined the company and we think that's the best way to fuel our growth. So all of this is in progress, I think the biggest thing is that the penetration of bargains is going to grow significantly in â23. And the reason for that is we're able to find clean, good quality bargains augment our assortment. It's exactly what the customer wants, and we've got a great new Chief Merchant and Margarita who comes from the off-price world to help develop the muscle we already have to play harder in this area and compete. And we've got a great new Chief Marketing Officer and John to really make sure the customers understand the compelling value we have for her. Hey, good morning and thanks for taking my questions. So just curious to get a better sense of how closeouts are performing. I imagine that they're up over year just because you're increasing the penetration. But I'm curious what the sell through looks like on those? Some of the pushback that we hear is even if you're able to bring in closeouts and more opening price point items. The consumer is just not buying these discretionary categories, so I'm curious to know what you're seeing so far and if that that's been true or if the [indiscernible] has been good on those? Hi, Jason. I'll take this and Jonathan can add to it. I think the key thing that we've done with the leadership of Margarita and John is to know before we buy in price when it comes down to closeouts and bargains. And I think we've done a really nice job in being circumspect about that. You really need to know, how you're going to sell these products before you buy them, that's the biggest thing. And then you need to be able to display them in a way that she understands the value and we've seen that. I'll give you a perfect example, we had a higher place for sale, just a great deal with margin accretive points last quarter that we're selling for [$99.99] (ph) and the comparables were much higher than that. And the good problem to have was that the customers are complaining that we didn't have anymore. And so that's what success looks like, that's the urgency, that's the delight, that's the excitement and that's how we win. And so I consider our focus on bargains to be a margin accretive strategy. It will be and it's really starting with the end in mind the customers, setting the prices right, buying the amount that makes sense and then selling through it and leaving them hungry for more. That's great to hear. And then as a follow-up question, I was curious if there's anything that's happened this year that changes how you're thinking about the long-term. I think you have targets out therefore, I believe it was low single-digit comps and getting back to an operating margin closer to like 6% to 6% range. I imagine that we'll take time to get back there, but I'm curious if there's just been any sort of change to that sort of framework? Hey, Jason. Yes, I'll take that one and good morning. Yes, fundamentally, our long-term view is unchanged. We think there are some near-term factors that are clearly significantly weighing on that, that will abate over time and we believe in our model and its ability to produce those, kind of, margins and returns over time. And again, don't underestimate the impact of things like freight, which we've talked about being 400 basis points to 500 basis points drag on our operating margins when you combine both the gross margin and the SG&A impact. We've had this extraordinary impact of promotions and markdowns this year, due to the excess inventory position that we and many others fan ourselves in. So those things we expect to abate significantly starting in â23, and then there's the impact of all the other things that we're doing that go back to the 5 points that Bruce talked about and beyond those in terms of driving our margins higher over time. And if I could squeeze in one more for Jonathan, just curious on the new ABL, is there a covenant on that, that we should be thinking of? And I'm curious where the leverage ratio sits now in relation to that covenant? There's a spring fixed charge covenant, which kicks in if our excess availability gets to a pretty low level. But generally no, we don't have the same covenants that we had in the prior revolving credit agreement. Thank you. Our next question is from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your questions. Hi, good morning. Thanks for taking my questions. A couple of follow-ups just on the merchandising changes that you talked about, Bruce. I was wondering if you could just help quantify a little bit more how much you think the assortment needs to change versus what you normally do in a given year. But again, I think some of the initiatives seem like they make a lot of sense in the current environment we're in. Just trying to gauge how unusual this level of change is for you? Thanks. That's a good question, Brad. You know, the -- we've been through a roller coaster ride in retail over the last few years. And I would tell you that the movement that has happened in pricing to the consumer as a result of the pandemic and inflation is much more dramatic than what we're doing here in terms of honing our assortment to exactly what she needs. So the movement to bargains, while that's an increase -- substantial increase from where we are today, it is a good methodical increase for what she wants. The cleanup of essentials, she'll actually -- I would expect her to be welcoming that, because it will have more solutions and also once again her shopping experience we'll be enhanced by all the bargains and treasures we'll be able to have. So the movements that we're talking about, while they'll make us much more competitive, it's not like a total turnaround, itâs not like weâre turning around and saying we're going to become a grocery store, because that's where she is shopping. We don't have the ability to do that, that's not where we win. It's a consistent shop. We're going to hone that. But where we win is going to be in the home categories having those opening price points right, having the bargain penetration she expects from us and in a leaner more solution-oriented essentials assortment. So I don't want you to lead this conversation and think that we're having a massive pivot on these items. We're not, we're just leaning into what we know through our customer research she's looking at. And quite frankly, it's going to be a much more welcomed change than what she faced during the pandemic. Thanks. That's really helpful. And then can you talk a little bit about the plans for stores in 2023? You've been opening stores, but you're also closing stores. Will you be slowing the pace of openings and what are you thinking in terms of closings as you review that profitability that's through a wall basis? Thanks. Hey, Brad. Good morning. Yes, generally speaking, we still strongly believe in the long-term store opening opportunity, particularly with regard to the rural and small town markets that we've talked about quite a bit on the call. That said in the near-term, we intend to be prudent and cautious given the overall environment. So we haven't confirmed a number of openings for 2023 yet, but it will certainly be lower than 2022 and we'll confirm that as we get to the call in March or at least our updated expectations. With regard to closures, we do have an accelerated number of closures this year, which is driven both by selling outright a number of our store sites, which will -- as we talk about yield, yield some fairly significant proceeds in Q4. And then there are other stores -- underperforming stores that we look to accelerate the closure of. So the closures this year will end up being somewhat higher than the openings. Going forward, we would hope and expect to return to a more normalized level of closures, but we'll certainly continue to look closely at underperforming stores. And then overall, I think just to reiterate that our real estate strategy is going to be increasingly oriented towards these rural small town stores where the economic are significantly stronger than in the urban stores. Thank you. That does conclude today's teleconference and webcast. A replay of this call will become available. You can access the replay until December 15th by dialing toll free 877-660-6853 and enter replay confirmation 13734153 followed by the pound sign. The toll number is 201-612-7415 replay confirmation 13734153 followed by the pound sign.
EarningCall_1982	Hello, ladies and gentlemen, and thank you for standing by for the 36Kr Holdings Inc.'s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managementâs remarks, there will be a question-and-answer session. Today's conference call is being recorded. Thank you very much. Hello, everyone. And welcome to 36Kr Holdings third quarter 2022 earnings conference call. The companyâs financial and operational results were released earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.36kr.com. Participants on today's call will include our Co-Chairman and CEO, Mr. Dagang Feng, and our Chief Financial Officer, Ms. Lin Wei. Mr. Feng will start the call by providing an overview of company and performance highlights of the quarter in Chinese, followed by an English interpretation. Ms. Wei will then provide details on the company's financial results before opening the call for your questions. 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 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 prospectus and other public filings as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please note that 36Kr earnings press release and this conference call include discussions of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. 36Kr's earning press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. And please note that all amount numbers are in RMB. In the third quarter of 2022, we maintained steady growth across our business highlighted by our fourth consecutive quarter of profitability. This strong performance in COVID-19 resurgences as macroeconomic headwinds was largely thanks to our dual focus on boosting our influence and advancing commercialization. As we strove to empower the new economy sector throughout the third quarter, we continue to optimize our services and build barriers to competition with our content ecosystem, setting the stage for our ongoing excellent performance. To start I like to share with you some of this quarter's breakthroughs and innovations in brand influence and commercialization. First let's look at content, we are committed to creating value with our high-quality content. It is the cornerstone of our development and powerhouse that propels continuous expansion of our brand influence bolstered by our content platform strategy with dual focus on PGC and UGC. We have enriched our content offerings and created a multi-dimensional content ecosystem encompassing pan-commerce, pan technology and pan-life content. In this quarter, we continued to produce engaging professionally-created content, with the number of our articles with over 100,000 page views climbing to over 155,000 among them several articles on pan-business and pan-life topics triggered heated discussion, driving PVs up to 300,000 and even beyond 800,000 in some cases. In addition, several of our original articles were recommended by WeChat's Top Stories Select in the third quarter, leading to a daily pageviews of over 1 million for several consecutive days. I'd also like to highlight an insightful article written by our secondary markets in the third quarter, Haitian a blockbuster which generated huge buzz and over 800,000 views. Furthermore, our brand-new vertical sub-media outlets 36 Carbon launched only six months ago achieved nearly 200,000 views with it's in-depth coverage of Ecoflow, getting the outlets off to a flying start, which significantly boosted our visibility in the dual carbon sector. As for our UGC model, we implemented a breakthrough innovation in the third quarter by optimizing operations for the 36Kr apps Latest Post feature, we established a discussion forum for our short content, creating ourselves for penetrating content creation circle. This specific core user retention while also drawing attention and responses to our content substantially reinforcing users' weakness. In addition to our engrossing text and graphic content, video content is one of our most effective tools for increasing user diversity. We unleased price vitality in our short video and live streaming content during the third quarter, with several of our short videos achieving over 1 million streams. Among them our original content on the topic of The Truth About How Hospitals Make Money gained more than 4 million views on Bilibili. In addition, 36Kr received two gold medals and one copper medal at the China Content Marketing Award for its excellence in content production and dissemination, highlighting the industry's recognition of 36Kr's original content generation and commercialization capabilities, as well as our brand influence. As of the third quarter of this year, the number of our short video followers exceeded 7.4 million amount in the number of our followers in Bilibili surpassed 1.5 million at the end of October making us a leader among institutional accounts on Bilibili. Regarding live streaming, our Youth Watch and CEO Tips programs continue to pump up fresh content for using a continuous stream of high-quality reporting with coverage of new topics. Together they completed 25 live streaming sessions in the third quarter. Notably Youth Watch established cooperation with WeChat video accounts to launch a specialized column setting a new record in the number of stream generated. Beyond our UCG and PCG content, we also explored data accumulation, community operation during the quarter and leveraged our experience in primary and secondary markets to launch the 36Kr Venture Capital platform. This platform capitalize on our data mapping resources to continuously empower early-stage projects to secure financing. As of now, the platform has attracted over 10,000 startup companies and over 1500 institutional investors, including such big names as Matrix Partners and Plum Ventures, with 1000 weekly connections facilitated on average. As the saying goes fortune favors the brave, 36Kr Venture Capital platform marks both side for us as we expand beyond media surveys to data tools and founding facilitation services, enhancing visibility and exposure for high-quality startup companies and connecting them with investors. Powered by these efforts and achievements, as of the end of this quarter did involve followers grew by 18.6% year-over-year to 26.7 million. We have also noted consistent improvements in our brand influence and user attention which have laid a solid foundation for our commercialization initiatives. With that, let's now turn to the commercialization progress of our main businesses. First, our advertising revenue increased by 20% year-over-year powerful evidence of brands appreciation of our effective brand and marketing. Thanks to our continuous service innovations coupled with our CSR program, Seeking the Light, the number of our customers rose by 20% year-over-year, while ARPU held steady at last year's level in the third quarter. We continue to create new advertising content and formats for brands targeting fee and consumers. For example, we made a commercial video for Wuling Hybrid Electric Vehicle entitled the truth about Oil Resource Depletion featuring our fresh perspective, this pioneering short video won raves from the customer. Our verticals sub-media outlets or youth also continue to gain brand influence boosting this commercialization potential by connecting content format from various channels including tax graphics or lab training or use consumer feed the varied needs of our diverse customer base as for commercialization multiple well-known companies including iQiyi, Huawei, Jingdong and Zhihu became repeat customers in the third quarter and we established new cooperations with Bon Way, STEPVR and other New Economy brands. Although serving the New Economy sector is a key differentiator and advantage for 36Kr, we also continued to innovate an office of our services more traditional industry customers. For instance, we established in depth cooperation with the staff to operate their brand strategy in preparation for their new product launch, but skillfully integrating product testing of similar products with our detailed, informative industry specific content, we helped XTEP cement their strategy for becoming a world-class Chinese running shoe brands. This collaboration was an in-depth industry content, product videos and product launch was force for 36Kr and represents a potential new tool in our arsenal for empowering traditional consumer brands. We are confident that as we continue to refine and enhance our services, we will attract more traditional brands seeking an influential and creative partners in their marketing strategy. In addition, we recently entered into strategic cooperation with FutureCar a leading North American media platform, focusing on the automotive industry. Through authorized content sharing and mutual commercialization support, the two parties will jointly tap into opportunities in the global new energy vehicle sector innovation this marks an important expansion of 36Kr global business footprint during our media network and our commercialization prospects in the North American market. Regarding our secondary market products, we teamed up with Guotai Junan Securities during the quarter to share our insights into the real asset industry current situation and future investment trends to the 36Kr Capital pipe program. Meanwhile, we established partnership with renowned companies such as New Hope Group, ClouDr, Linmon Media and Jenscare to provide empowerment services in market value management and brand management. Also 36Kr cell phones sector and market business we set up a joint venture in the third quarter with a well-known U.S. financial media company CapitalWatch. Going forward the JV will focus on offering marquee value management services for Hong Kong listed companies. Turning to value-added enterprise services. In this quarter, we continued to provide high-quality services for clients by integrating online and offline formats to mitigate the impact of COVID-19 on their business. As a result we've established cooperation with more enterprises and governments clients increasing our number of customers by 26%. So the revenue from this segment also increased by 4.7% year-over-year. One notable success was the heavyweight IT Forum we've hosted in September, Lean In: 2022 China Fund Partners Summit. Through our communications with a massive number of startups and investing institutions we have developed a deep understanding of both the current situation and future outlook across broad-based industries. We capitalize on these advantage to analyze the key structure impacting the development of R&D plans for industry, policy and market perspective. helping local farms gain deeper insights, adapt to changes and capture opportunities in the new investment era. In addition, we concluded our WISE New Economy Kings conference last week with Long China innovation as this year theme. We invited New Economy professionals including entrepreneur Wang Shi, economist Guan Qingyou, and Charles Li Xiaojia, entrepreneur and former Chief Executive of the Hong Kong Stock Exchange to conduct in-depth discussions of trending industries at a run which attract total exposure exceeding 4.5 billion across all audience. The platform offline activities we continue to make friends with our consulting services and value-added enterprise services in the third quarter. For our consulting services, our 36Kr research institutes continue to deepen industry insights and publish compelling industry research reports enhancing its brand influence. During the quarter we expanded our customer base with additional government agency customers in Beijing, Chengdu, Shenzhen, Hangzhou and Chongqing, as well as renowned enterprises, including Lenovo, Baidu, ByteDance and P&G, elevating this business commercialization as for our contentâs operation agency services, we continue to explore content services, mobilization standardization of our app to enhance our service efficiency and quality. At a Huawei Developer Conference 2022, 36Kr was granted the Excellent Technology Content Partner Award for providing agency operations services for Huawei's browsers. In addition, we attracted new partners and established collaborations with various eminent financial institutions and enterprises, including Shanghai Pudong Development Bank, Ping An Puhui, and Huatai Securities, thanks to our high popularity and an unparalleled word of mouth effect. At the same time we continue to make progress in our regional business expansion. With our dual headquarters in Beijing and Shenzhen, we focus on expanding our presence through our 12 core regional offices in Guangzhou, Sichuan, Chongqing, Jiangsu, Zhejiang, Hubei and Shaanxi. Alongside growing regional customer diversity. Revenues from enterprise clients is also increasing rapidly with operating by more than 50% and contract sets by over 60% year-over-year. Adding local enterprises to our client roster has improved the balance of our governments and enterprises clients clearly reflecting the effectiveness of our lower tier market expansion strategy. Notably, our regional office in Jiangsu organized its first WISE event events during the quarter establishing a benchmark as we build regional influence of our vertical segments and explore regional commercialization opportunities. With respect to our subscription services on top of our existing traditional process, we upgraded our curriculum and turning our customer base. During the third quarter we upgraded the funding acceleration camp and partner with well-known companies including Microsoft China and Mengniu to provide internal training as we build out a complete curriculum subscription service will bring us more commercialization opportunities going forward. Next, I'd like to share our latest accomplishments with respect to our Enterprise Service Review Platform. According to Northeast Securities data, the digital economy has become a key driver of China's economic development, accounting for 40% of China's GDP and rising representing our second growth engine and commercialization breakthrough, the enterprise service review platform is dedicated to empowering the thriving sub industry. In the third quarter, our enterprise service review platform reported exceptional performance across multiple operating metrics, as well as creating -- as well as great progress in functionality improvements, user acquisition, innovation and commercialization. First, Enterprise Service Review Platform maintained rapid growth in its operating data, with monthly active user rising more than 12-fold year-over-year to exceed 1 million. The number of authentic user reviews also surged, growing by almost 10-fold year-over-year and 54%, quarter-over-quarter to exceed 50,000. We showcased 7,300 pieces of mainstream software on the platform this quarter, up 59% year-over-year and the number of more chance on our platform is now approaching 1000 up 328% year-over-year. Products functionality improvements based on the underlying data of software products. We've used a labeling system for software evaluation, allowing users to write reviews by choosing appropriate labels, which improve review efficiency and effectiveness. In the meantime, we upgraded the rate control system for review verification to increase review authenticity and reliability. We also elevated buyers experience by enabling profile saving on the H5 page of our app. Finally, we revamped our business portal in the Baidu mini program leading to pick daily unique visitors of over 5000, just two months after its launch. As for our innovations in customer acquisition, in addition to continuous optimizations of our consumer profile system, and grant promotions in various regions, we launched an exclusive long enterprise service team party on the enterprise service review platform. We invited experts from leading enterprises or popular industries with an interest in digitalization, such as catering and new consumption to explore industry solutions in real industry scenarios. This event deepened participants understanding of digital transformation from a practical point of view. Additionally, we've strengthened the content capabilities on our enterprise service review platform in the third quarter by combining professionally generated content and enterprise service review platform products with the usual centric approach. We love the unique value of IP contents in guiding industry trends and forging connections among professionals. Not only through our dual growth dialogue program and digital growth program, we focus on real business cases and also our user review to elevate the user experience and commercial value of enterprise products from user perspective. Lastly, we're also made significant strides in the commercialization of our enterprise service review platform. To-date, our enterprise service review platform has received orders with a combined value of over RMB10 million. It has also established strategy cooperation with Lenovo, a Fortune Global 500 company to provide in depth marketing services to the Lenovo SMB unit. Specifically, leveraging the data we have accumulated via the enterprise service review platform, we deliver valid marketing, qualified leads and assist Lenovoâs SMB units in process customer acquisition. Meanwhile, by jointly developing a program for specialized, sophisticated, differentiated and innovative companies to acquire massive traffic from small and medium sized enterprises. We have increased Lenovo with a powerful new tool to enhance their brand influence. This collaboration marks an important milestone in the commercialization path of our enterprise surveys review platform and a benchmark for future cooperation with more renowned companies. We have established other benchmark cases through brand promotion of well-known SaaS vendors such as Xinren Xinshi, Hotpay, Weiling Technology and Dustess.com building a flywheel for the enterprise service review platform through IP growth. Looking back at the third quarter despite the COVID-19 resurgences and macroeconomic challenges that deal weighed on everyone in the industry. We remain focused on optimizing our content ecosystem, service system and operations, while also driving our commercialization. These efforts contributed to our encouraging financial performance in the third quarter highlighted by our double-digit revenue growth year-over-year and the profit for the fourth consecutive quarter. In addition, we continue to break new grounds with our second growth engine, the enterprise service review platform and the leverage rapid improving operating metrics and daily commercialization results. Looking ahead, we will continue to hone our unique competitive advantage to maintain our business vitality and resilience. riding the wave of industry upgrades and digital transformation, we will unlock greater commercialization potential for new growth avenue in the new economy sector to create more value for users, shareholders and investors. With that, I will now turn the call over to our CFO, Lin Wei, who will discuss our key financial results. Please go ahead, Lin. Despite the lingering challenges in the external environment, we are very pleased to have extended our strong growth momentum into the third quarter with another quarter of double-digit top-line growth alongside a 11.5% year-over-year increase in total revenues. Notably, our advertising businesses continue for increasing 20% year-over-year. While our enterprise value-added services also recorded solid growth of 5% year-over-year. In addition, thanks to our consistent and effective efforts to optimize our cost structure and operating efficiency. Our gross profit margin and operating margin both improved year-over-year in the third quarter of 2022. And we delivered a fourth consecutive quarter of profitability. Our resilient diversified portfolio of products and businesses, bolstered by our content capabilities and multi-dimensional ecosystem aptly positions us to achieve sustainable growth and generate long-term shareholder value as we move forward. Now I'd like to walk you through more details of our third quarter 2022 financial results. Total revenues were RMB 94.6 million in the third quarter of 2022, an increase of 11.5% compared to RMB 84.9 million in the same period last year. Online advertising services revenues increased by 20% year-over-year to RMB 63.9 million in third quarter of 2022. The increase was primarily attributable to more innovative marketing solutions we provided to our customers, as well as proactive sales strategies. We adopted to navigate the challenging environment during the quarter. Enterprise value-added services revenues increased by 5% year-over-year to RMB 23.6 million in the third quarter of 2022 as we continuously and proactively developed various new enterprise level services for our customers. Subscription services revenues were RMB 7.1 million in the third quarter or 2022 compared to RMB 9 million in the same period of last year. The decrease was primarily because some of our offline training programs are canceled or delayed due to the resurgence of COVID-19. Cost of revenue to RMB 35.5 million in the third quarter of 2022 compared to RMB 37.3 million in the same period of last year. Gross profits increased by 24% year-over-year to RMB 59.1 million in the third quarter of 2022 compared to RMB 47.6 million in the same period of last year. Gross profit margin was 62% in the third quarter of 2022, compared to 56% in the same period of last year. Operating expenses were RMB 62.1 million in the third quarter of 2022, a decrease of 23% compared to RMB 80.3 million in the same period of last year. Sales and marketing expenses were RMB 32.2 million in the third quarter of 2022, a decrease of 9% from RMB 35.5 million in the same period of last year. The decrease was primarily attributable to the decrease in share-based compensation expenses and marketing expenses. G&A expenses were RMB 16.6 million in the third quarter of 2022 compared to RMB 3.9 million in the same period last year. The decrease was primarily attributable to the decrease in allowance for credit losses. Research and development expenses were RMB 13.4 million in the third quarter of 2022 compared to RMB 13.9 million in the same period of last year. Share-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses, as well as G&A expenses totaled RMB 2.6 million in third quarter of 2022 compared to RMB 4.9 million in same period last year. Other income were RMB 5.7 million in the third quarter compared to RMB 1.5 million in the same period of last year. This fluctuation was primarily attributable to income generated from write-offs of accounts payable in the third quarter of 2022 after the company fulfilled all applicable notifications and other risks eliminated with barriers. Net income was RMB 2.5 million in the third quarter of 2022 compared to net loss of RMB 31.3 million in the same period of last year. Non-GAAP adjusted net income was on RMB 5.1 million in the third quarter of 2022 compared to non-GAAP adjusted net loss of RMB 26.4 million in the same period of last year. Non-GAAP net income attributable to 36Kr's ordinary shareholders was RMB 1.7 million in the third quarter of 2022 compared to net loss of RMB 30.5 million in the same period of last year. Basic and diluted net income per share and per ADS were RMB 4.2 cents in third quarter of 2022 compared to basic and then diluted net loss per ADS of RMB 74.4 cents in the same period of last year. As of September 30, 2022, the company had cash, cash equivalents and short-term investments of RMB 164 million, compared to RMB 194.3 million as of June 30, 2022. The decrease was mainly attributable to net cash outflow from operating activities, as well as certain long-term investments in several new economy startup companies were made in the third quarter of 2022. And I will translate my question. So we've learned from your financial report that the Enterprise Review Platform [Foreign Language] developed rapidly across multiple operation metrics. Could you share with us more about your like monetization and time line for this business in the coming years more about the mid and long-term strategy for [Foreign Language]? Thank you. Since the beginning of this year, we have been trying to optimize our enterprise service review platforms operations, and explore commercialization opportunities based on our operational data, our enterprise service review platforms, primary metrics all improved rapidly year-over-year, including monthly active users. Daily active users are the number of real reviews and the number of pieces of software showcase. Our year-over-year basis of enterprise service review platforms MAU grow by over 12-fold to exceed 1 million. The number of real review increased by almost 10-fold year-over-year and 54%, quarter-over-quarter to over 50,000. We also showcased our 7300 pieces of mainstream software up 59% year-over-year. And the number of merchants, our enterprise service review platform approached 1000 year-over-year increase of 328%. So in terms of commercialization, we established cooperation with Lenovo in the third quarter to empower customer acquisition and brand management, marking an important value in our enterprise service review platform commercialization costs. So regarding future plans, we will leverage the existing data on our enterprise service review platform to convert more leads for delivery. So for the next quarter, we will initiate a new product function. We will continue to collect usersâ real reviews and combine basic product data expert opinion to issue personalized industry selection reports and product comments reports will help users make product selection decisions. We think this will highly improve our surveys and also improve the value of the commercialization. At the same time, from the perspective of SaaS providers, we will continue to enrich our industry solutions and industry case base, develop case-based products and reach out to decision-makers by various means such as product functions, articles, live broadcast, thereby forming industry consensus and helping to improve the efficiency of sub-product selection. With respect to commercialization, we'll continue to build benchmark cases and extend our collaboration models with leading well-known enterprises such as Lenovo and the Volcano Engine and into more enterprises, creating center lives, commercialization models and expanding our commercialization scale with maximum efficiency. So for the macro economy, protests on the 20th CPC National Congress has also emphasized the importance of digitalization. Contrary to popular perception, or COVID-19 flare ups has actually facilitated the development of cross topics as more holistic digital transformation. So we expect that if we have more focus on the functionality of enterprise, so it's review platform in 2022 and we will assume a real -- very high growth comparable to the 2022 of the commercialization for the year of 2023. Congrats for the great results. And thank you for taking my questions. Iâm Lingyi Zhao from SWS Research. My first question is, how do we expect the growth potential after the relaxation of COV control measures? And how about expected goals? And my second question is, could you please comment, share some outcomes on the recent WISE conference and what adjustments have been prepared of offline activities for December and next year. Thank you. Hi, Lingyi. Thank you for your question. This is Lin. I guess I will maybe answer your first question because it is regarding some financial guidance for next year. And then, Mr. Feng, will answer your second question. You mentioned that the lifting of the pandemic control measures. Yes, that's a very good signal of our good job. Basically, I think all of our businesses will benefit across the board. But in terms of timing, that will be some business will benefit, earlier some will be benefiting later. Namely, advertising, I think that will be the number one business factor that will benefit from this because in business world, I think expectations or confidence matters the most. I think the linking of the control measures will give the business or enterprise side, a very good expectation or confidence. So I don't think they will wait to see the growth to happen in realistic, but only the sign of recovery will give them the confidence to starting to do marketing again, and to do customer acquisition, so they can accelerate their growth. So that's why I think in terms of advertising that will be directly linked to the macroeconomy recovered. I think that's why advertising business will benefit first. And advertising in terms of its volume, that's number one, contributor to solicit payers business. And I think that's very good, a very good sign. And that's very important. And gradually, I think after because this measures just I think announced in this week, so it's still very early to tell but gradually, I think after those measures, was taken all over the country, I think our enterprise value-added services, which are mainly comprised of offline events and some consulting businesses, as well as our subscription business, which comes out a lot of offline training programs and finding courses. I think that will benefit also from this macro. So that will happen a little bit later than the advertising business. But the overall, all three major businesses will benefit. And to qualify that benefit, I think, in terms of advertising, that's the biggest volume that will, let's say, in the first three quarters of 2022, advertising grow, I think the growth rate is between 10% to 20%, if you look at first three quarters results. I think next year, as Mr. Feng just mentioned, I think next year, I don't have will outgrow 2022s performance, which means maybe higher maybe to 15% to 25%, or even higher. That's for growth rate, I think enterprise value-added services, which include the [Foreign Language] platform, as well as our subscription business, which includes a lot of training programs and courses that will benefit in terms of growth rates, -- growth rate will be greater that will be even greater than the growth rate of advertising business. But in terms of volume that will be smaller than advertising. That's overall, the answer for your first question. I think, now Mr. Feng will answer your second question. Thank you. So after overcoming many challenges. This year, so we successfully hosted our WISE conference. We have prepare, like Plan B to Plan C, Plan D, Plan F to prepare this conference. So we adopted [Technical Difficulty] model and offline format, in Beijing and offline format in Hangzhou. And we're also invited up to 100 distinguished guests, including famous entrepreneur Wang Shi, like the famous investor, [indiscernible], and also economist and some of the government's agencies for this conference. So our conference, attract close of over 4.5 billion across offline, online audiences, and having collaboration with over 50 mainstream media. So from the commercialization prospect, although the primary parts of the conference will have in Beijing and combine these, the offline, in Hangzhou. We have little impact on our revenue of the offline activities due to the impact of the COVID-19 resurgences. So we are much more satisfied with the commercialization this year. So anytime or the web conference is our focus conference. And we will also have a few customized offline events focusing on local clientsâ needs like enterprises and commerce. And also, we will have some of the events that will like a small site. So regarding the next year as the COVID-19 restrictions are lifted, we will increase the frequency of growth of major industries and customized events. Also, we will have issued more our own IP events for the next year. So as the reopen of the restriction, we will have more offline events and also it will generate more revenue in 2023 over 2022. I will translate myself. My question is about short video business. Can you give more color on the future plan for development and commercialization of short video? Thank you. And so our short video business is a very important strategy for the end. And so, we used to service more 2B customers and so, the short video will service more the end customers and will also help us to obtain more collaboration toward the end brands but also directly brought us more attention from diversified user growth. Okay. From the perspective of brand influence, 36Kr's short video business have generated frequent recognition from the industry in the past year. So for example, 36Kr recently received two gold medals and one copper medal at the China content marking award is the one of the most recognizable award in the industry. So CCMA highly praised 36Kr's excellence in original content production, and content marketing capabilities. In addition, you should remember our followers on Bilibili surpassed 1.5 million at the end of October. Many of our original videos have also amassed a high number of streams. Among them, our original content of topics, released at the end of November has racked up more than 4 million reviews on Bilibili. So the most important thing is that our rank in the institutional medium is so much high. Some of them are like government, or the individual medium that was just beyond us. But as for the institutional media, we are like the first one in the Bilibili. In terms of commercialization short video revenue doesn't force our economy, 15% of our total advertising revenue, an increase compared to the same period last year. The short video formats only effectively increase our average revenue for advertising customer. And it also enhanced the comprehensive of our service to a certain extent, enabling us to provide services to a broader array of advertisers. Thank you. And there are no further questions. And I'd like now to turn the conference back over to the company for closing remarks. Thank you once again for joining us today. If you have further questions, please feel free to contact 36Kr's Investor Relations with the contact information provided on our website.
EarningCall_1983	Greetings, and welcome to the Maximus Fiscal 2022 Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Batt, Vice President of Investor Relations and ESG for Maximus. Thank you. Ms. Batt, please go ahead. Good morning and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and James Francis, Vice President of Investor Relations. I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of the risks we face including those discussed in Item 1A of our most recent Forms 10-Q and 10-K. We encourage you to review the information contained in our most recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law. Today's presentation also contains non-GAAP financial information. Management uses this information internally to analyze results and believes it may be informative to investors in gauging the quality of our financial performance, identifying trends, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-K. Thanks, Jessica, and good morning. We ended fiscal year 2022 on a high note, reflecting the growing momentum in our core business. Signed contract awards in the company were at an all-time high, which includes securing the CCO rebid totaling $6.6 billion, a record signing for Maximus. Our contract backlog also stands at an all-time high of $19.8 billion. The short-term COVID response work has concluded as anticipated, and the management team is energized and focused on executing our recently refreshed strategy. As noted in our press release, total company revenue for fiscal 2022 increased 8.9% to $4.63 billion. This is net of a decline in COVID response work of approximately $800 million compared to fiscal 2021. Adjusting for this normalized organic growth was approximately 18%, which came from new or expanded programs in all three segments. The other source of top line growth was full period contributions from the Attain Federal, Veterans Evaluation Services and Aidvantage acquisitions in the U.S. Federal segment. On the bottom line, the full fiscal year 2022 adjusted operating income margin was 9.0%, which, as a reminder, adds back only the intangibles amortization expense. Adjusted EPS again only adjusted for intangibles amortization was $4.37. Our earnings exceeded the high end of the guidance range we provided in August due to the combined benefits in the fourth quarter, totaling $28 million, or $0.33 per share. First, several contractual and legal items were resolved in the quarter. This resulted in a $17 million benefit, or $0.20 of earnings per share, and split roughly evenly between the U.S. services OI, the U.S. Federal Services OI, and the other line item which represents items that are not allocated to a particular segment. Second, there was an $11 million or $0.13 EPS one time gain on sale related to our former headquarters, which was finalized in the fourth quarter. And given the nature of this transaction, we did not include any gain in our prior guidance range. In addition to those benefits, it's worth noting that the VES business and U.S. Federal had notably strong performance, more than offsetting the PACT Act related investment I spoke to you last quarter. For the U.S. Federal Services Segment revenue increased 19.4% to $2.26 billion. The total growth was driven by full period contributions from the 3 acquisitions I mentioned, partially offset by the decline in short-term COVID work. New work wins and expansion on recompetes examples of which include the additional region one in VES, the SEC modernization effort announced last year with expanded scope and the CMS contact center operations recompete with higher run rate drove a normalized organic growth rate in the segment of 4.8%. The operating income margin for U.S. Federal Services was 10.4% in fiscal 2022 as compared to 10.0% in the prior year. As I mentioned, the segmentâs fourth quarter earnings were bolstered by approximately 1/3 of the contractual and legal items. For the U.S. Services segment, revenue decreased 3.3% to $1.61 billion. Normalized for the COVID work decline, organic growth in the segment was over 30% driven by new work wins and are successful conversion of some short-term work into longer term contracts. Examples include eligibility support contracts in Indiana and Arkansas, long-term care assessment work across the country and a multi-year unemployment insurance contract with California. The U.S. Services operating income margin was 11.3% for the full year with the segment's fourth quarter earnings bolstered by approximately 1/3 of the contractual and legal items. As I mentioned, margins for the segment were lower in the second half of fiscal 2022 as the COVID response work concluded. Meanwhile, redetermination activities tied to Medicaid, which have been paused since 2020 under the public health emergency continued to be a headwind to the segment's profitability. I'll cover our redetermination assumptions in the fiscal 2023 discussion. For the outside the U.S. segment, revenue increased 9% to $764 million. This is net of currency impacts, which reduced revenue approximately 6%. Organic growth was about 11% and driven primarily by volume increases on the U.K. Restart program, as it ramped over the course of the fiscal year. The segment realized an operating loss of $15 million for fiscal 2022, due to the unfortunate rebid outcome in Australia, which included severance costs, and the write down on a percentage of completion project that we described in the third quarter. Let's turn to the balance sheet and cash flow items. As of September 30, 2022, we had gross debt of $1.37 billion, and we had unrestricted cash and cash equivalents of $41 million. We paid down approximately $128 million of debt in the fourth quarter, which brought our debt ratio to 2.6 times at September 30, down from 2.9 times at June 30. As a reminder, this ratio is our debt net of allowed cash to pro forma EBITDA for the last 12 months, as calculated in accordance with our credit agreement. Let me speak to our capital allocation strategy. While strategic acquisitions remain a core focus of our strategy over the broader horizon, in the near-term, we plan to prioritize debt paydowns using our free cash flow. We had strong cash flows in the fourth quarter to finish the year. Cash flows from operating activities totaled $290 million and free cash flow was $234 million. Day sales outstanding or DSO were 62 days at September 30, 2022, compared to 68 days for the same day last year. As a result of an increasing portion of our revenue coming from the U.S. Federal government, our DSO range is now 60 to 70 days, down from the 65 to 80 days that we have historically targeted. Let's go to fiscal year 2023 guidance. Revenue is projected to be between $4.75 billion and $4.9 billion. Adjusted operating income is estimated to be between $390 million and $415 million, which is before the estimated $94 million of intangibles amortization expense. Adjusted EPS, excluding intangibles amortization is projected to be between $3.70 and $4 per share. There are two important factors to note in this guidance. First, the guidance range does not reflect any redetermination activities across the entire fiscal year 2023. As a brief reminder, the National Public Health Emergency which has been extended in 90-day increments since January 2020 provides enhanced Medicaid funding and other benefits to states. A condition of receiving that funding is that states are precluded from performing eligibility checks, known as redeterminations on their Medicaid population. With many of our state contracts, the redeterminations generate billable volumes, which are accretive to the U.S. services segment. We have been precluded from performing redeterminations since early fiscal 2020 due to the public health emergency. Currently, there is no projected date for resuming redeterminations so we have excluded any benefit from our guidance. While we still estimate a $0.15 to $0.30 per quarter benefit to EPS once redetermination start, we felt this approach was prudent given this as a factor outside of our control. Once there is better visibility to the end of the public health emergency, which could be announced in fiscal year 2023, there will be upside to guidance. The precise impact will depend on the exact timing of the emergency exploration as well as factors that I discussed last quarter, including how the volumes will flow through our programs and outstanding operational decisions by state customers. The second important factor is that short-term COVID response work, which has provided temporary benefit and enhanced cash flow to the two U.S. segments in prior periods has come to an end. Therefore, there is no short-term COVID response we're contributing to our forecast for fiscal 2023. Reflecting on the revenue guidance, the $4.825 billion midpoint represents mid-single digit growth over fiscal 2022, while also overcoming $300 million of erosion from short-term COVID response work. The primary drivers are a combination of new work wins in fiscal 2022 and higher -- reflects core work replacing the short-term COVID response work. And we are still below the earnings potential of the company given the ongoing public health emergency and no redeterminations assumed across the year. This is why our margins are rolling up to below the 9% low end of the target adjusted margin range for the company that we laid out at our Investor Day in May, and which was based on our expectations for when the PHE is over. The adjusted EPS guidance includes between $85 million and $95 million of interest expense, which equates to about $40 million to $50 million of incremental cost compared to last year. As mentioned earlier, our total debt balance at September 30 was $1.37 billion. We entered into a second interest rate swap in October, bringing our total portion that is effectively fixed to $500 million from $300 million previously. I'll briefly share our forecasts on segment margins, which remain in line with expectations we communicated at the May Investor Day. We expect our U.S. Services segment to be between 8% and 10% for the year. The ending of the PHE is required to bring this segment into its target range of 11% to 14%. We expect the U.S. Federal Services margin to be in the 10% to 11% range, which is consistent with fiscal 2022 results and within the target range of 10% to 12% for this segment. Finally, we expect outside the U.S. operating income margins at the low end of the 3% to 7% target range which improves on fiscal 2022 position. This segment is anticipated to have more stability in fiscal 2023 thanks to strong core programs in place, and less disruption caused by residual pandemic factors. On the broader topic of margins, I'd like to offer some commentary on a topic we are often asked about, which is the impact of inflation to our financial profile. Our largest cost is labor, and we have experienced rising market wages. Approximately 30% of our revenue comes from cost plus contracts, where we are reimbursed for all costs, meaning rising wages drive higher revenue with little impact to the bottom line. For the remainder of our contracts, we have seen some margin erosion in the past year to varying degrees. Our government contracts are typically priced over multi year periods, and include labor rate escalators on the order of 2% to 3%. Market conditions have led us in some cases to raise wages more in the 4% to 5% range, and that difference puts pressure on our margins. Therefore, we estimate that the margin impact we have experienced from higher wages is 1% to 2%. This has been felt particularly in our U.S. services segment, which has predominantly fixed price and performance-based contracts. So the impact in this segment is at the high-end of that range. We typically prefer long-term fixed price contracts, as they give us the opportunity to drive efficiency and improve margins over the life of the contract. In an era of high inflation, however, we bear the risk until the next repricing opportunity. As we have bid on new contracts over the past year, we have been able to price in higher labor rates, meaning we expect to recapture margin over time. Last point, labor costs are only one of many factors that drive margins on our fixed price contracts. We continue to drive efficiencies through process improvement and technology. Turning to our quarterly profile, I want to point out that we expect a lighter first quarter of fiscal 2023 as compared to the fourth quarter of fiscal 2022, which included some positive items that won't recur, most notably the gain on sale of our old headquarters, and the resolved contractual and legal item. Also in the first quarter of fiscal 2023, we expect higher severance than normal driven by recently executed cost reduction initiatives. From a cash flow standpoint, we expect free cash flow between $225 million and $275 million for fiscal 2023. Let me note that our expectation for the first quarter is relatively flat free cash flow, given seasonal factors as well as our second of two payments for the payroll tax deferral that we elected under the 2020 Cares Act, which is about $28 million. Our free cash flow conversion should continue to be at least 1.3 times GAAP net income, which reflects the significant non-cash items such as intangibles amortization and stock compensation, as well as the low capital requirements of our business. The full year effective income tax rate should be between 24.5 and 25.5%. And weighted average shares should be between 61.2 and 61.3 million. Thank you, David and good morning, everyone. As David's remarks underscore while we continue to operate in an environment influenced by federal policy decisions, FY '22 affirms several fundamentals that investors have come to count on in our business model. These include, first, our ability to grow our core business through significant new contract wins. Second, the highly recurring nature of our revenue as evidenced by the great confidence our customers express through rebid awards. And third, our disciplined M&A strategy, through which we create the next platforms for organic growth, aligned with our refreshed 3 to 5 year strategy and catalyzed particularly by our acquisitions of attain and veterans evaluation services or VES. As we look ahead at FY '23, Maximus continues to be well positioned for organic growth, and to deliver on our near and midterm operating income margin commitments. While moving into a period of stability as we transition progressively out of a more volatile time. Our stability and reliability in an uncertain time is evidenced in our core business, where we operate long-term contracts for agencies with large budgets focused on citizen services. These contracts are largely either entitlement programs or essential government functions. Our portfolio of contracts has a weighted average life of eight years, and our new work win rate is strong. Our re compete win rate is more than 90%. Speaking first of the new work we secured as COVID work declined. Within U.S. services, we announced in Q2 a $425 million contract with the Indiana Family and Social Services Administration. I'm pleased to report that our project teams worked closely with the customer to seamlessly transition to program during Q4 from the incumbent to Maximus, experiencing minimal turnover in personnel, and no interruption to customer service. Transitions of this nature are complicated. And having this completed in advance of the PHE unwinding was a clear customer priority. I'm proud of the Maximus team as we once again demonstrated our ability to smoothly take over the operations of a complex mission critical contract. Our VES business expanded in FY '22 with nearly $400 million total contract value or TCV, awarded across District 6 and 7 and volumes increasing solidly through Q4. As we work through existing cases in anticipation of new cases related to the PACT Act in early calendar year 2023. Further in U.S. services, we successfully converted several contracts originally secured to support short-term COVID unemployment insurance work to longer term relationships, including a more than $200 million TCV contract in California. These and other new work wins across all three segments enable us to more than overcome COVID reductions and deliver mid-single digit growth of 4.2% at the midpoint of our guidance range in FY '23. This gives us confidence in our longer-term commitment to sustainable mid-single digit organic growth. Turning to recurring business, two recent successful repeats, where CCO and CDC, which I'll speak more to now. In September, we announced that Maximus was awarded the contact center operations or CCO award by the Centers for Medicare and Medicaid Services. The total value of the contract with just over a 9-year period of performance is $6.6 billion. This award reflects the commitment of thousands of Maximus employees who each day provide exceptional service to their fellow citizens. More recently, we successfully want to recompete with the Centers for Disease Control and Prevention or CDC. Under the contract, which has an awarded value of $100 million over five years, Maximus will leverage its technology capabilities and operational improvement skills for the CDC info program, which provides critical health information to millions of Americans. Both wins are key drivers in our contract backlog which stands at an all-time high of $19.8 billion. With respect to FY '23, in particular, the number of programs up for rebid is lower than normal, adding further stability to our forecast for the coming fiscal year. Coming out of this volatile period, we remain focused on our customers with whom we enjoy stable partnerships as we carry out the critical programs for which we are responsible. As I mentioned, the volumes in our VES business remain high. While we work closely with the VA to reduce current caseload in anticipation of further increased volumes due to the PACT Act. The VA has already begun receiving benefit applications as a result of the PACT Act, and we expect to see the corresponding downstream requests for disability examinations in early calendar year 2023. With respect to a advantage, our student loan servicing program, we are diligently managing staffing levels while remaining fully prepared for both return to repayment and the Biden administration's Debt Relief Program, once a final determination is made in the courts. We have a long-standing partnership to support the Department of Education Federal Student Aid, focusing on the end-to-end borrower experience and helping to fulfill their mission. Finally, broadly speaking, our U.S. services state-based Medicaid and AKA related programs continue to deliver solid operational performance with no significant rebuilds of key contracts on the horizon. As a provider of Medicaid eligibility related services to more than a dozen state In the meantime, we continue to evolve the clinical aspects of that business in support of our 3 to 5 year strategy, successfully supporting our customers with complex, conflict free independent assessment services. As David mentioned, we've made the conservative decision to prepare our FY '23 forecast excluding any presumed benefit from Medicaid redeterminations. We continue to work closely with our clients to be ready to respond when the PHE is lifted. As we've noted before, we anticipate that our customers will vary in their approaches to the PHE unwinding, when it occurs. Taking advantage in some cases of federal waivers that are available and the timelines and guidelines that have been designed by HHS to maximize continuity of coverage. Our delivery model can accommodate these varied approaches demonstrating our agility and ability to meet our customers' needs. In some cases, we expect the process of fully re determining eligibility across the state's Medicaid population to take up to one year once it commences. I'd like to underscore our anticipated financial resilience during a potential downturn in the economy. Our balance sheet is strong. Our business model providing essential government services enables high cash generation and conversion due to modest capital requirements. And our portfolio of contracts gives us confidence, stability, and continued growth through different cycles in the broader economy. Our progress expanding our addressable market to include state administered unemployment insurance programs, during the pandemic puts us in a strong position to assist those customers again, in the event of sector or regional unemployment increases. Finally, incorporated in our FY '23 guidance and underpinning our post PHE. And midterm margin outlook is our commitment to structuring Maximus to best support our strategy. What this means is that in normal course, from our project operations to our back-office functions, we will continue to carefully manage our costs and drive efficiencies in the business. Each business segment is taking a fresh look at their expenses. And we are reviewing our corporate support functions to ensure they aligned with our goals and are optimal for our organization now and into the future. To be clear, the leadership team is focused on meeting our margin commitments we articulated on our May Investor Day. I will now turn to award metrics and pipeline as of September 30th. For fiscal 2022, signed awards totaled $10.5 billion of TCV. Further, at September 30th, there were $800.1 million worth of contracts that had been awarded but not yet signed. These awards translate into a book to bill of approximately 2.3 times. Let's turn our attention to our pipeline of opportunities. Our pipeline at September 30 was $30.7 billion, compared to $32.5 billion reported in the third quarter of fiscal 2022. The September 30 pipeline is comprised of approximately $3.4 billion in proposals pending $3.1 billion in proposals in preparation and $24.2 billion in opportunities tracking. Of our total pipeline of sales opportunities, 74% represents new work. Additionally, 57% of the 30.7 billion in total pipeline is attributable to our U.S. Federal segment. When we unveiled our refreshed strategic priorities in March, we communicated a total addressable market of $150 billion in annual value. Going into FY '23, our teams heavily scrutinized our pipeline to ensure the opportunities being actively worked aligned with our strategy. I'm pleased to share that we are already seeing an increase in opportunities specifically related to our strategy. The investments we've made in our people and expertise are driving a focus on our strategy, particularly in the areas of clinical services and technology solutions. As part of my closing remarks, I'd like to take a moment to congratulate the nearly 11,000 Maximus employees on the CCO contract on the success of their first day of open enrollment for coverage under the affordable CARE Act. Our valuable and dedicated employees handle more than 35 million calls a year from those seeking AKA coverage through the Health Insurance Marketplace. Open enrollment for which kicked off on November 1st. On day one, our team's answered incoming calls with no disruption in service for the 10s of 1000s of Americans seeking information and to sign up for these essential health benefits. I'm proud to note that more than 95% of consumers that day reported they were satisfied with the service they received. A record level since the creation of the marketplace. Finally, let me conclude where I began. We ended FY '22 with growing momentum in our core business supported by organic expansion in all segments, and the full year contributions of our FY '21 acquisitions. These achievements enable us to overcome the revenue reduction we see as short-term COVID work exits our portfolio, we enter FY '23 with a record backlog a healthy pipeline, strong core business delivery, minimal near-term rebid risk, and solid progress delivering the business in a tough interest rate environment. While we cannot precisely forecast the outcome of policy measures, like the PHE unwinding or student loan debt relief, our operating model designed to maximize variable cost with modest capital requirements, positions as well to respond when these issues resolved. Finally, we are already seeing the organization embrace and respond to our 3 to 5 year strategic plan to which many contributed as evidenced in our pipeline of new work opportunities and wins. As scale again builds in the business, we are committed to growing margins ahead of revenue and structuring the company optimally for the future. Good morning. Welcome to the Q&A session. We will first go to the line of Charlie Strauzer with CJS Securities. Charlie, do we have you? Just starting off with David, if I could, just if you have the organic growth rates for Q4 by segments? That would be helpful. Sure, yes. For the company, organic growth in Q4 was about 3%. That reflects overcoming COVID Work declining by nearly $200 million from the year ago quarter. So normalized for the COVID work decline, organic growth is about 25%. And that's strong in all three segments at over 50% in U.S. services, 13% in U.S. federal and 15% in outside the U.S. Those are all normalized for the COVID decline. Got it. And David, maybe a little bit more color to on some of these the one time not benefits you saw on the quarter, the building scale, and if you talk a little bit more about what some of those benefits were? Sure, and Charlie it's Bruce. I'm going to start and then turn it over to David. So the nature of some of these items precludes us from sharing too much detail, but let me give you some color on the contractual items that I mentioned and highlight that. For that one in particular we came to an agreement with a customer who I can't name them, essentially reflected are working with them to reach an equitable adjustment for a contract that was bid well prior to the pandemic. And so consequently, we were facing higher costs than had been in our BID model for labor. And it was a very difficult and unanticipated operating environment caused by the pandemic. I'm really pleased with that outcome. It's an example. As I said before, if are going and engaging with our customers, when we have a situation like that, where a contract needs to be adjusted, amended to reflect current, the current environment. We worked in partnership with them to negotiate that modification. And it better reflects the lessons learned from implementing the contract and also more current labor market realities. David, anything to add? Yes, just for the contractual and legal items, the $0.20 of diluted EPS impact. I'll just clarify that the combined pickup of those in Q4 was a reversal of charges that were mostly incurred in prior periods. So while the benefit is outsized in the fourth quarter results, it is reflective of higher operating profitability on the affected contracts. And speaking to the $0.13 real estate transaction, I view that as more truly one time and more of a non-operating item, since our former headquarters is the only building that we owned. And then just looking at your call for adjusted operating margins of 8.3% to 8.5%, this coming year. What needs to happen, obviously, aside from redeterminations, to get those numbers higher, going forward? As you said, obviously, the PHE expiring in the redeterminations are the key component to meeting the committed margin ranges. And that would be the biggest piece. I will share as well and anticipation of our guidance, we had run a forecast scenario for the PHE ending in January. And for the post PHE period, we would still forecast adjusted OI margins in the ranges that we provided at Investor Day, for each segment and the nine to 12% range for the total company. Let me also point out on Slide 9 of the earnings presentation, there's a chart that crosswalk fiscal year '22 results to the midpoint of our fiscal year '23 guidance. And as we've been saying, the COVID work was at a higher-than-average margin. But at this point, it's behind us. And we do have a more direct line of sight to our profitability going forward. Then, just a few more thoughts as we committed at the May Investor Day, we do intend to improve our margins over time. And one component of that improvement is continuously refining our cost structure and carefully managing it as we grow revenue. We've been giving our cost structure, I'd say even more attention recently, given the pressures of inflation that I covered in my prepared remarks. I should also mention that our strategies to grow a higher mix of clinical and technology work, which can drive higher margins over time, we believe that support higher margins. And then we'll just one last indicator I'll point out is for our outside the U.S. segment, despite a difficult year, it finished profitable in the fourth quarter. And while we're not satisfied with the margin that it posted, and we have more work to do, it does give me confidence that we can deliver more stability in that segment. And then, Bruce, can you just be tying back to your comments about the pipeline and the strategic refresh that you talked about at the Investor Day. Maybe some more granularity or insight as to what you're seeing in the business the green shoots from that? Let's start back with the pipeline. As I mentioned in my prepared remarks. The pipeline as of September 30 was $30.7 billion. And I'm pleased that 74% of that represents new work. And within that 57% of the total pipeline is in the U.S. federal services segment. So very strong pipeline in federal services. Two areas where we're seeing a number of green shoots. I like that term. I'll pick it up from you. Our clinical assessments and technology solutions supporting IT modernization initiatives from federal agencies. So I'll start with the former. We're seeing opportunities across federal agencies beyond the VA, supporting areas such as fitness for duty exams and other areas related to occupational health for federal employees as an example. At the state level, we're also seeing more state Medicaid agencies bring together assessments related to Medicaid populations that have historically been done by multiple parties, and they bring them together into consolidated RFPs, which obviously are very attractive to us. Both of those types of areas of work and opportunity are well suited to Maximus through the prior acquisitions that we did, beginning with a send you a number of years ago in 2015, 2016, if I recall correctly, but then also, most recently, the veterans evaluation services acquisition. Regarding the latter area that I mentioned, which is technology solutions, supporting IT modernization, we are seeing continued budgeted resources in RFP development and procurements related to IT modernization initiatives across a number of federal civilian agencies, the one that's been in the press, probably the most, is the IRS. And that's been kind of most publicized in his numerous term. And while there are many vendors in this space, it is a crowded market, we feel that we're very well positioned from a reputation and capabilities perspective again, really thrilled with how we've developed in this area as a consequence of the attained federal acquisition. Finally, I think find most encouraging is how we're starting to see a lot of collaboration across the business, in the sales functions and the solution development teams to pull through capabilities from one segment to another. So I'll give you a quick example. A small example of how we're leveraging our market leading experience in U.S. services in our capabilities in Medicaid eligibility and enrollment as we look at things like health benefit enrollment processes for federal employees. Similarly, we're also seeing cross-selling opportunities. Here and there, in our federal segment, to incorporate business process services or BPS into complex solutions that might begin as a technology consulting services or TCS opportunities. So those teams are working well together, and we're bringing the full capabilities of the company to bear for our customers. The net, net of all this, in my mind is that 18 months ago, we really wouldn't have been eligible to bid on much of the type of work that we're now seeing. And seeing what we're now seeing, it gives me confidence that will generate the revenue synergies that we anticipated through the acquisitions that we accomplished. Hope that helps. Let me jump in quickly, if you don't mind to clarify 50% of the total 30.7 billion pipeline is in U.S. federal services. Yes, thank you, Charlie, back to you. And just kind of like a couple of last minute, last smaller philosophical questions, in terms of the midterm elections now being over and the results being out there. What are your thoughts, Bruce on potential impact of benefit from that? Well, it's interesting, Charlie. I'll say the first thing that I point out is we look at this in the context of well, does it mean anything to the PHE redeterminations, if PHE unwinding and the impact on redeterminations. And one of the things that I found quite interesting is, there's of course a lot of speculation. Will the PHE remain in place post January. We know, of course, that the federal government didn't provide 60 days notice of an ending but they've said it'll be in place at least through April. On the one hand, there's this kind of triple threat that folks are talking about with COVID and RSV, and seasonal influenza, which certainly creates arguments for keeping the PHE in place, at least through the winter months. But I'm speaking to the kind of the outcome of elections and kind of where, what's the sentiment of the legislative branch. We found it very interesting that the other day on Tuesday of last week, the Senate voted to end the public health emergency declaration $62.36. So certainly, bipartisan support, they're much more bipartisan than when the measure was last voted upon for it, and it was $48.47 along party lines. So while there's no indication that the measure is going to be brought up in the house, and the White House is promised a veto of it. I think gives you a sense of kind of the sentiment in at least in that part of the legislative branch. What it might mean, more broadly, at this point, we think it's going to be business as usual, as it relates to the major IT modernization initiatives that are underway? They will progress, as we've anticipated, they've generally enjoyed bipartisan support. And I think there is a recognition that there are antiquated and aging legacy systems out there that need to be brought up to speed. And it's less controversial, quite frankly, to talk about modernizing IT environments, and is necessarily to talk about hiring more agents to handle enforcement. The other thought I would have is just that, of course, the major programs that we operated you well know our entitlement programs and mission critical programs for government that generally have done well, even in environments where there may be gridlock legislatively between Capitol Hill and the White House. So presently, we're not forecasting any significant impacts from the Veterans. Thank you, ladies and gentlemen, this concludes today's event. We thank you for your participation and interest in Maximus. You may disconnect your lines at this time and enjoy the rest of your day.
EarningCall_1984	Good day and thank you for standing by. Welcome to Symbotic's Fourth Quarter and Fiscal Year 2022 Results Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. Thank you, Victor. Hello everyone, welcome to Symbotic's fourth quarter and fiscal year 2022 results webcast. I am Jeff Evanson, Vice President of Investor Relations and Corporate Development. Our press release and discussion today will include forward-looking statements based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Including as a result of the factors described in cautionary statements and risk factors in Symbotic's financial release and regulatory filings with the SEC. By which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, certain financial measures may be discussed that are not recognized under US Generally Accepted Accounting Principles, which the SEC refers to as non-GAAP measures. We believe these non-GAAP measures assist management in planning, forecasting and evaluating our business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their most comparable reported GAAP measures are included in our financial press release, which has been furnished to the SEC and is available in the Investor Relations section of our website and in our filings with the SEC. These non-GAAP measures may not be comparable to measures used by other issuers. Today, we will provide guidance for the first quarter including revenue and adjusted EBITDA. We're not providing guidance for net loss today which is the most comparable GAAP financial measure to adjusted EBITDA. We're not able to provide reconciliations of adjusted EBITDA to GAAP financial measures, because certain items required for such reconciliations are outside of our control or cannot be reasonably predicted such as the provision for stock based compensation. On today's call we are joined by Rick Cohen Symbotic's Founder and, Chief Executive Officer and Tom Ernst Symbotic's, Chief Financial Officer. These executives will discuss our fourth quarter and fiscal year 2022 results followed by Q&A. Thank you, Jeff. 2022 has been an incredible year. We went public in June and over the past year weâve signed new contracts to increase our backlog to over $11 billion and we added a new customer with a multi-site contract as well. Our team has responded with incredible effort and passion, and in August we gave every full-time employee shares in Symbotic. We're all partners here. The proof is in our quarterly results, fourth-quarter revenue more than doubled compared to a year-ago and gross profit and adjusted EBITDA, both reached record levels. Our roadmap is clear. We are facing the challenges of hyper-growth and we are executing well and very focused on customer deliverables of quality and speed. The market for our systems is huge and demand is growing with repeat orders from new and existing customers that are battling for our capacity. The global supply-chain is undergoing transformational change and as the innovation leader we are benefiting from a variety of trends. Traditional Big Tech is laying off while we are hiring. Our supplier network is improving and supply-chain shortages are going away, just as we are increasing orders and partnerships and demand for our systems is increasing, because we solve critical problems and providing people with the necessities of life, like food, like clothing and like household goods. During the quarter, we significantly increased internal manufacturing output, we also accelerated system deployments and secured Tier 1 partner capacity to grow even faster, while we remain focused on our internal and external innovations. As announced in our earnings release, I'm returning to the role of Chief Executive Officer. When reflecting on our critical next phase of growth, we determined that a single point of leadership is the best way to lead Symbotic. I'd like to take this opportunity to thank Michael Loparco for his many contributions, including advancing our partner network and helping us to scale for future growth. 2023 is off to a great start and we're excited about our future. Thank you, Rick. Our fourth quarter revenue of $244 million grew 167% over the prior year period, despite last year's fourth quarter including approximately $35 million of proof-of-concept milestone revenue. Excluding that one-time revenue, total fourth quarter revenue more than tripled year-over-year. We initiated a record five new system deployments during the quarter and as planned advanced one system into the fully functional production stage. We now have 17 active system deployments with multiple customers, which represents an increase from 13 systems last quarter and an increase from just five systems in the fourth quarter of last year. On, September 26, two days after our quarter closed, we won an agreement for five systems with new customer UNFI. Under the agreement, UNFI also has an option to implement Symbotic's warehouse automation systems in additional distribution centers. Our extraordinary revenue growth was driven by both faster progress on deployments already underway and five deployment started during the quarter. We accelerated deployments by standardizing our systems and streamlining our deployment processes. Next, we gained speed through our scaling efforts, including strong contributions from our outsourcing partners. Finally, while still seeing challenges, the overall supply-chain environment has improved. One of the very attractive financial elements of our business model is our recurring revenue stream, which represents a significant portion of the lifetime value of the systems and our over $11 billion backlog. This stream of revenue is associated with software license and maintenance, along with operation services that begins when we complete system deployments and recurs monthly as the customer uses the system and our services. During the fourth quarter, we completed our first fully functional system against our large backlog. This deployment triggers recurring revenue for that system. In the near term, we expect the recurring revenue streams to be small relative to our rapidly growing systems revenue, but as system completions waterfall recurring revenue should grow to have much higher gross margin than systems revenue and it should grow to become a greater portion of total revenue and provide powerful operating leverage to our business. Our fourth quarter system gross margin continues to reflect significant costs associated with rapidly scaling our operations and the burden of elevated pass-through steel cost that together represent several 100 basis-points of systems gross margin in the quarter. In addition, the fourth quarter include significant one-time expenses including costs related to adding outsourcing as an option to our business model. Excluding these one-time and outsourcing costs, system gross margin would have marginally improved quarter-over-quarter. In the fourth quarter, operating expense growth moderated to 7% sequentially despite redundant costs associated with ramping partners and ongoing investments in our innovation initiatives like [Symbot] (ph) and break pack. Operating leverage improved as we achieved a record 8.2% adjusted EBITDA loss rate compared to 26.3% in the fourth quarter a year ago, driven by our increased gross profit and slower operating expense growth. As we look ahead to achieving positive cash flow, we have strong operating leverage and with $353 million of cash on hand, we are very well capitalized to execute our growth plans. Turning to our outlook. For the first quarter of fiscal 2023, we expect revenue of $170 million to $200 million and an adjusted EBITDA loss of between $21 million and $25 million. This represents 140% revenue growth and a 15 percentage point improvement in our adjusted EBITDA loss rate year-over-year at the midpoint. In closing, we're excited about our progress in helping revolutionize the supply-chain. As, a part of this journey, we will continue to innovate rapidly and scale our business to deliver against our, more than $11 billion revenue backlog. We are excited to work in partnership with our customers, suppliers and you, our shareholders as we build this great company together. Maybe starting with, Rick, you highlighted that Michael up skilled for future growth. Maybe elaborate on key initiatives that Michael worked on or implemented? And now with you back in the CEO seat, can you talk about your strategic priorities, let's say, in the next 12 to 18 months? Sure. We had started a lot of these strategic plans over a year ago and those plans were really to outreach to partners who could make -- help us in the manufacturing process. We already outsourced to a lot of steel manufacturers, so the plans really are just to continue to develop and work on the partners and what's happened in the last year as tech has slowed down, we're finding the partners are more aggressive in pricing, we're finding partners that were fully booked before are now anxious to help us. So the partnership plan which we started a while ago is now in full bore and we're expecting that to continue to develop and bear fruit. And what Iâm finding in my role is that, the -- what's been interesting is, you can't really separate the product development from the partners from the scaling and that's why we're combining all these offices into one, because a part of what I have to do is actually go out and meet with the partners and convince them how big an industry this is, because a lot of them were focused on electronic vehicles or some other part of tech and people are now starting to realize that warehouse automation is going to be a very, very big industry. So I'm leading that effort now and we're building a team to actually work with the suppliers and build up a good backlog of suppliers and more capabilities than hopefully we need, but that'll be a good thing. Got it. Very helpful. And you talked about UNFI contract, to the extent you can, maybe quantify the terms of the agreement? The macro-environment is slowing, so maybe talk about if you're seeing any changes in the pricing discussions that you're having with your customers or do you think you can still hold-on to pricing? I can't really talk about pricing. I can tell you that the macro environment is actually working in our favor. What we're seeing is that, our customers are pretty successful customers and they're leaning in to secure the capacity as they expect to actually expand, if the market slows down, most of our customers will do very well in that environment and I want to make sure they have the capacity to grow. And Piyush, we canât speak to specific customers, but just to add color, as we think about our overall pipeline and the reception we're getting in the marketplace. The demand for our time is exceptionally high. And so we think that the opportunity for us to realize much stronger pricing than we have in the past is very high without speaking to any specific customer. One moment for our next question. Our next question comes from the line of Jim Ricchiuti from Needham. Your line is open. Question I have -- thank you. The question I have relates to the Q1 guidance, which was stronger than expected. And I'm wondering, how we might think about either the deployment of systems over the course of fiscal '23 and the cadence of revenues, obviously the revenues are going to move around quarter-to-quarter, I think we are all aware of that, but I'm just wondering if you can give us anything we need to be mindful of in terms of how revenues progress over the course of fiscal '23? Yeah, thanks for the question, Jim. So just thinking about the growth. We're pushing the business to grow on multiple fronts. And so, if you look at the quarter we just posted, we clearly had some very strong results across the board and those results are just driven by strength and our ability to install the systems quickly, about fast uptake with our supply-chain partners, new starts and an overall improving supply chain. So as we think about pushing the business on multiple fronts, it was clearly a quarter where things went in our favor. As we look-forward, we're focused on growing really fast. Now I think as we're deploying these systems through these first wave of systems, we can see some significant quarter-on-quarter variability just due to the number of systems in our overall growth, but you should think about the general trend that we're trying to take those number of systems that we're deploying and pushing that to fully functional live and grow it as fast as we can. Got it. And follow-up question is just on OpEx, pretty significant step-up in R&D and SG&A. How do you see these expense items scaling from the levels that were at in the current quarter? And perhaps as we think about the year as a whole, it sounds like you're clearly still in a heavy investment mode, given the prospects of the business and now what looks to be more available talent out there? We did see OpEx grow -- growth moderated to about 7% quarter-on-quarter and that's despite 167% year-on year growth in revenue. Yeah, I think as we look-forward and what's implicit in our guidance would be another more moderate growth in OpEx. As we think about our growth overall kind of looking at the results for the full year and then thinking about looking forward, we see some very strong operating leverage. And so thinking about that operating leverage, this OpEx growth despite growing very fast, a significant portion, the majority of our OpEx is invested in new innovation along with expanding our capacity to grow the business. So we're showing strong leverage, while still making these big investments to actually make the business grow faster and come out with new products. So it's a great position to be in. One moment for our next question. The next question from the line of Chris Snyder from UBS. Your line is open. Thank you. Can you just kind of follow up on some of the gross margin challenge or headwinds in the quarter? I think you guys called out, if I heard right, several 100 basis-points from steel and then also some one-time costs around outsourcing, can you maybe just kind of recap what those were in the quarter? And then how should we expect the GM, our gross margin to trend going forward? Yeah. Thanks for the question, Chris. So in the fourth quarter, we continued to see what we had seen all of fiscal â22, which was, we are bearing some costs associated with just growing fast in the COGS line along with those steel pass-through costs so that's been consistent throughout the course of fiscal '22, that does represent several 100 basis-points of gross margin impact to where we see a more structural gross margin, mid to longer-term. And to your question, we did have some additional one-time costs including some costs associated with outsourcing in the fourth quarter. Examples of those costs are a couple fold, I'll give you two. We consolidated our warehouse operations and enhanced some other material handling processes. And so we absorbed some of those costs as one-time in-period costs to make that shift and this is -- these are some key things that we wanted to do to really accelerate our ability to work with outsourcing partners. Another example is we have some major innovation initiatives underway, some of those costs in-part will flow into COGS not just in R&D and in the fourth quarter we made some significant headwind in some of those innovation projects that did come in as in-period costs. So I think as you think about that looking forward, we do see the fourth quarter as a low watermark and thinking about our fiscal '22 gross margin overall, we see some very strong gross margin leverage as we look forward with our operations. I appreciate that and if you just kind of look that like steel prices down pretty significantly off the high and that sounds like earlier the company is pretty confident in the ability to hold, if not, even grow price, so it sounds like there's a pretty favorable price cost outlook here over the next 12 months, how should we think about maybe that lag? Obviously, you guys aren't realizing some up stock commodities in real time. How long does it take that credit costs relief to flow through the business relative to kind of what we see in the stock market? Thank you. Yeah, Thanks for the question. So thinking about all these effects in total too, ex times these one-time effects we saw in the fourth quarter, our gross margin would have been up quarter-on-quarter. So these one-time effects were actually significant in the fourth quarter. You are pointing out steel as well, it's anywhere from six to up to a 12 month lag in terms of we lock in steel capacity for some items well in advance of installation, so as you're watching steel industries, you should think about maybe on average of six-month lag in terms of weighted for us. Go ahead, Chris. Thank you, Tom. If I can just squeeze in on one last one, so on more of the transitory gross margin headwinds like the outsourcing, the innovation, are those going away? Or are those going to stay with the business? I would imagine you guys will continue to outsource to kind of ramp if that is possible and I'm sure that innovation engine is not slowing either and that's why my last one. Thank you. Yeah. At the gross margin line, they are little bit more weighted towards the one-time. We are -- we have been and we will continue to invest to support some redundant costs that are associated with ramping on these outsourcing partners in the near-term. We see those providing very significant mid and long-term revenue. In fact, as we think about the overall strategy here with outsourcing, we see it providing us first a path to be in a much bigger company. And that path to being a bigger company gives us a path to being more profitable, but not just because of the revenue, because we think it provides structural margins that are much higher, both at the gross and operating margin level as we think long term in the business. Thank you one moment for our next question. Our next question comes from the line of Matt Summerville from D.A. Davidson, your line is open. Hey thanks. Couple of questions. First, I'm wondering if -- some of the things you're talking about today whether the headwinds related to growth-related expenses, et cetera, has that changed your expectation as far as when you believe Symbotic will achieve free cash and adjusted EBITDA positivity? Thanks for the question, Matt. So as we think about growth, obviously, we've given one quarter forward guidance. These initiatives to really accelerate our path with supply chain partners, we think provides us greater profit in the mid and long term in the immediate near term as obviously as is implicit in our fourth quarter and first quarter, we're investing just a little bit more to get there. So hopefully that gives you a little bit of context. And then as a follow-up, I wanted to talk a little bit more about the management change with Michael exiting, in one point Rick you obviously felt it was better to maybe not have a single-point of leadership? And I guess I'm curious what maybe transpired since you went down that path that led you to decide that impacts the single-point methodology, if you will, is indeed the way to go for Symbotic? And do you feel that that's true over the long-term? Or is this more of a near-term decision? Thank you. Yeah. So and I've been CEO here for 10 years. I really didn't -- I didn't anticipate everything that was going to happen over the last six months and I would say the messaging from both suppliers and customers is, a single-point is better. And so, it was a pretty straightforward decision. It -- the ability to separate out at the very top, my desire for product development and my desire to be with customers, I thought we could separate that from the scaling and the manufacturing. And the reality is, at this point they're just two intertwined. So I think at some point it will happen but this was just not the right time and I don't think it wasn't fair to Michael and it wasn't the right thing to do at this point to do that. So it was an agreeable change and that's what we did. One moment for next question. Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open. Yes, good afternoon. Thank you very much for taking the question. First is on the increased capacity that you're taking with the help of manufacturing partners. Maybe you can elaborate a little bit more in terms of how much added capacity Symbotic now has in terms of number of shipments that you can -- you have in a quarter or a year? And where do you think that can go over the intermediate to longer-term? So I'll take first. Good afternoon, Mark. So, what our initiatives during the quarter and over the course of fiscal '22 have done for us is enabled us to get visibility with outsourcing partners for growth plans over the next few years. So we've done this and we want to continue to deepen this partner network with redundant multiple suppliers and working with world class providers. So it's about having that visibility into our multiple years of growth that enables us to have flexibility to really drive to the rapid growth that our $11 billion backlog allows us to. And you think about your -- the operational changes you're making and the ability to have more redundant sources of supply or perhaps add more overall supply, what does it mean in terms of your ability to when additional customer, I mean, you spoke to one today in your prepared remarks? But did you think you can potentially bring on more customers as you add additional outsourced manufacturing partners? Thanks. Yeah. This is Rick. I -- we're going to grow very quickly. We're going to keep things under control. When we go from 17 systems to 20 systems to 25 systems, then I think we will be able to answer your question that we can grow faster, but we're not going to disappoint our customers. We're very focused on delivering on time. So what we're doing is building a real base of capabilities and when we then need to call on our suppliers to increase supply, I think they'll all be willing to step up. We're not going single thread anything. We're in multiple suppliers and part of what I'm spending a lot of time on the road with suppliers is actually convincing them how big this business is and when we will scale up. So it will be a while before -- I mean we're on an incredible growth trajectory already with this huge backlog and just fulfilling the existing customers is going to be full time, but once we get the sense that we can fulfill our existing business and grow more, then we'll grow even faster. Yeah. I'll just add to that, Mark. I mean, it's -- you know our business well, these each individual system we deploy is a very big system, a lot of revenue. So when we announced a multi-site win with the customer, that's visibility to a lot of business, so it really only takes new customers by the ones or two per year for us to have an incredible amount of business in front of us. Thank you. One moment for your next question . Our next question comes from the line of Mike Latimore from Northland Capital. Your line is open. Great. Thanks very much and congrats on the very strong results there. It sounds like you made a ton of progress in terms of capture or getting outsourcing partners. Can you provide any sort of color as to how far into the kind of execution on the outsourcing plans you are aiming one or two or seven or eight here? That's a good one baseball, a lot can happen in the ninth inning. I would -- but I guess the best way to answer your question is, we are very focused, we're very far down the line of making the decision and what has happened in the last year is lots of partners who didn't have capacity now coming back and say we have capacity. So I think we're feeling pretty good, I think we're in the sixth inning and maybe we are ahead by five runs, but we haven't won yet. But we're feeling pretty good, we still got our opening picture in and we're hitting pretty well. So I guess the best way to answer it is, we're very encouraged by the partnerships that we're able to get, we're encouraged that the supply-chain shortages are declining, we're encouraged by the chips. And so because we were kind of in a startup, we've made very good decisions and I think the partners are also looking for a new avenue for growth, so I think we're pretty far along. Great. Makes sense. I assume you're -- in terms of the current year we are in, I assume you're sort of fully scheduled for the year or is there some unscheduled periods there? Yeah. And just last one. Is there any inherent seasonality like in the December quarter just given holidays or should we not think of that? Yeah. I was just talking to somebody today in the construction space and the good thing is, we're already -- we're building everything we're doing in existing warehouses for the most part. And so there is no weather-related and really is no seasonality related to what we're doing. What happens with our projects is starting probably in the summer, people make space available and then we're just building in that space. So they've already made the decisions within our facility to give us space well before the holidays. So it's not very seasonal at all. One moment for next question. Your next question comes from the line Brian Gesuale from Raymond James. Your line is open. Yeah. Good evening. Thanks for taking my questions here. Just a couple, I wanted to maybe ask about break pack, when we might start to see some of those systems get deployed, also maybe, wondering if some of the step-up in R&D and costs incurred there are innovations on that front and maybe just how we can think about the length of time for these systems to deploy versus regular system? Thank you. So break pack is a system we talked about, we talked about at our Analyst Day that we see as a game changer in the industry. As you know, Brian, this is something that really enables us to get in and handle at the individual each level, including mixed [indiscernible] it's a game changer for the customers. We are in a live proof-of-concept deployment of a system with the customer. We haven't talked about when we expect that to turn into product that we intend to ship and make generally available to customers over and over again, so that's something that's still something to look forward to, but it is something we're excited about. Yes, it does make up a significant level of R&D investment and that was the case last year, we continued to make investments in R&D on break pack as we think about fiscal '23 as well. Fantastic. That's great color. And then, I guess maybe can we just talk about give us a little bit of sense for the systems to be completed this year? I think you had about five in the Q4 of last year, so many of these -- so you've got like a year under your belt, I think we're on kind of an 18-month kind of deployment cycle. Can you maybe just talk about what you're seeing as the supply-chain eases in terms of that 18 months? And how we might see some of these systems kind of get over their delivery milestones? Thank you. Yeah, Brian. I think our goal is to continue to start deployments of new systems and complete deployments of systems each and every quarter, you should expect that there will be some variability on a quarter in quarter out basis on, that but as you think about on the annual basis, our goal is to continue to ramp and grow this business year-on-year full year, so looking for growth. One moment for your next question. Our next question comes from the line of Derek Soderberg from Cantor. Your line is open. Hey guys. Thanks for taking my questions and my congrats on the strong results as well. I know you guys have talked about initiatives around shrinking the deployment timeline. I'm curious to what extent did -- any progress there in shrinking that deployment timeline have an impact on the upside this quarter? And then can you sort of share in terms of maybe months or days, how long it takes for a new deployment win today to reach live production? And then I've a follow-up. Yeah. Thanks, Derek. So we did benefit from seeing some acceleration in our ability to deploy, part of that is just getting some relief on supply-chain challenges and part of it is just we're getting more at bats from the first wave of systems which naturally you'd expect took us longer than they should as we get going. So -- but yes, we saw acceleration, that was a continuation of a trend we saw in the third quarter. And that's something that we're focused on continuing to drive in the near term and as we think systemically go through product innovation along with our overall approach with partners putting in systemic capabilities that can help us really improve that over the long run. Our average -- we're still seeking for an average deployment to be in that year and half-ish type of range here in this first wave of our business as we're rolling out. And we can look to drive that lower and set lower -- set faster targets when it's appropriate, but around that timeframe is still our current process. Got it. That's helpful. Then as my follow-up, was there any systems revenue associated with the five new deployments this quarter? Just wondering if you could maybe give us some detail on how long it takes from initiating a new deployment to you guys seeing the first revenue from those projects? Thanks. When we initiated the deployment, revenue starts as the work starts. So typically it's small, but yeah, our revenue is generated as work has progressed across system deployments from the start of the early build phase through that end of the test and validation phase. Strong majority of revenue comes in the bulk of the -- that installation commission test and validation of the product though. Yes, good evening. My question was actually around the new customer announcement. You had mentioned that you signed to deploy in five new distribution centers, but I recall currently you deployed sometimes multiple systems in it, the distribution center, is that going to be the case with UNFI as well? So we don't -- we didn't disclose how many phases the customer does, you're right, Rob, that it's often common for us that customer will take a multi-phased deployment in a distribution center, but our announcement with UNFI was that, we will do five distribution centers of theirs with an option to do more. Any color, Tom, that you can provide just on how -- they mentioned -- you mentioned in the press release, they currently have automation in a number of their DCs just where you are deploying these? What the current system of operation looks like in the distribution center? You -- this is a manual warehouse converting automation or they converting existing automation to yours? Thank you, Victor. Thank you everyone for joining our call tonight. We appreciate your interest in Symbotic. And we look forward to seeing you at conferences or on our facility tours or virtually over the next quarter. Goodbye.
EarningCall_1985	Okay, thanks everyone for joining us this morning. It's a pleasure to have with us Thermo Fisher. We have CEO and Chairman, Marc Casper. I think in the background we have Eileen Pattinson and Rafael Tejada from the Investor Relations team. It's been a fascinating, fascinating year for life science companies and I think Thermo embodifies why life sciences as an industry stands out and healthcare is, in a key, organic, right, very impressive. Well may be Marc I think I'll let you kick start, but that's the opening remarks and then we can get into Q&A, but thank you for taking the time this morning. So Vijay, it's great to see you. Thanks for having us at the conference as we get to the final parts of 2022. And when I think about the year, obviously we have some work to do yet to finish off what would be a fantastic year for Thermo Fisher Scientific. I'm very proud of how the company has performed, right? We're on track to deliver 12% core organic growth, really been able to raise our outlook throughout the year. We completed our largest acquisitions in December of 2021, acquisition of PPD and it's doing phenomenally well. It's doing truly phenomenally well where our clinical research business is integrated well. It's growing well ahead of the financial model. We've been able to raise the short-term performance impact, but more importantly, the long-term impact. Customers appreciate the combined capabilities and we're winning new authorizations in a way that the PPD team would have said that it would never have happened as a separate business. And so therefore, we're adding value to make a great business even better, and that combination is terrific, right? So the core business is doing great. Our largest acquisition is doing really well. And as I think about the environment, and I know we'll talk about it, as we look at the world, there's lots of scenarios of how 2023 could play out, whether it's continuation of the awesome trends we've seen or challenges from recession or challenges from persistent inflation. There's many different scenarios. But what I can say as we embark upon in the conversation is that Thermo Fisher Scientific is incredibly well positioned to navigate whatever the world throws out at us and come out of that period as a stronger industry leader while delivering fantastic results along the way and our track record in doing that is really unparalleled. I mean, it really is more -- it's I think you're [indiscernible], it's in the numbers. It's very apparent, right? The share guarantees as it's playing out. But perhaps what's been topical near-term has been biopharma and it's -- I mean, the comps, I mean, it's been phenomenal. You guys grew mid-teens coming off 25% comp, I think, maybe an average of 20% the last two years. How differentiated is Thermo? I know you touched upon this integrated offering, but what differentiates Thermo and where are you gaining? Is this across like every single biopharma end market or are there some jewels here within biopharma? Yes. So when you think about our performance in pharmaceutical and biotech, we've been growing mid-teens this year. And actually, if you go back over a number of years, that's about the rate that we've been growing, right? So it's not a short-term phenomenon, where our customers have really appreciated a trusted partner status that we've earned over many years of helping our clients achieve their innovation goals and achieving their productivity goals, whether that's the emerging biotechs or the largest biopharmaceutical companies in the world. They're all our clients and we help them achieve the mission that they have. When I look within our business, today, it represents about 60% of our core business. It's our largest end market. And we are a key enabler, whether it is our clinical research or pharma services offering, our CDMO capabilities, whether it's equipping and stocking all of the research labs through our Fisher Scientific channel, whether it's providing enabling technologies like our bioscience reagents or in the production side of the equation providing the bioproduction technologies that help our customers deal with the shift from small molecule to large molecule, which is much more intensive in terms of the usage of life science tools. So it really is an incredible end market, and we've been gaining share over a long period of time and are incredibly well positioned going forward to support that customer base. And I think on that last point, Marc, this bioprocessing, within the overall 60% pie, I think it's come up -- some of your peers have spoken about this, investors are focused on this. On the last call, you noted it's maybe 10% of company revenues. But how are you -- I know within that, it's upstream, downstream, maybe at this point in Thermo plays in every -- there is no upstream, downstream, but where does Thermo play in? And why should stocking dynamics not be an issue for Thermo based on where you play in the market? Sure. So Vijay, maybe helpful for me to do a little bit of framing about what's our role in bioproduction and then zoom into the shorter-term dynamic, right? So as you said, it represents about 10% of our revenue. We're an industry leader in cell culture media and single-use technologies and also have a rapidly growing position in purification resins, right? So that's where we play within the segment. And we're a leader in two and a rapidly growing participant in the third segment. When I go back and I think back over a long period of time, this is the fastest growing of our businesses within the biotech and pharmaceutical sector, right? So if we're saying we're growing mid-teens, this is growing several points faster than that and pretty consistently, sometimes a little more, sometimes a little less. But it's accretive to the average, but it's not like wildly different, but -- so it gives you a framework to think about it. And that's true in this year as well. That's true in the first half, it's true in the third quarter. The business is performing at a very high level. So I look at what some of the other players have talked about on what's going on and in terms of stocking dynamics and those things. And what I would say is, probably a function of what's the mix between COVID and non-COVID within one's portfolio. And based on the dialogues we have with our customers and what the percentage of the total was COVID, which is relatively modest for us, we think that our customers, in general, have an appropriate level of inventory to navigate the environment that they're in. And my assumption is that this will continue to be a very strong end market over the next year, but a phenomenal one over the next many years. That's how I would think about it from where we are today. That's helpful, Marc. And just in terms of given those carriers, that Thermo plays in cell culture, single-use, I mean, correct me if I'm wrong, but in fact in my mind that feels like these are specific products for specific drugs. They can be interchangeable, but even if someone were to stock, it's not that I can repurpose them to other areas. Is that a fair statement? Largely true, yes. I'm sure there are certain instances where certain things are reusable, but largely, they're for a particular production process. So when you think about who is buying our products and where the wins are and what's the mix of revenue, we have pretty good visibility into who's got what and why. And so therefore, we feel well positioned in terms of what our outlook is for that business. Understood. And just based on all of these commentary, it looks like Thermo clearly is in a different space, right, when it comes to this bioprocessing and stocking dynamics. Thermo is positioned differently. It's seeing a different trend versus the other players, so would that be a fair statement, Marc? Yes, you know, it's hard for me to know exactly what's going on. Obviously, if you're a super narrow company and this is your only business and you win a lot of COVID-related activity, you're going to have a hangover. We have been able to manage that quite effectively, right, and in total across all of our vaccine and therapy activity across here as well as in biosciences and pharma services. Last year, we did $2 billion worth of revenue supporting those medicines and vaccines and this year, we're on track to do $1.5 billion. And when I think about, that's all part of core revenue. We've been able to migrate the first $500 million to other activities within core and deliver 12% growth, right, in core, right? So -- and we'll continue that migration as demand comes down over time. So I feel very good about our ability to navigate that. Yes. That's helpful. I did have a vaccine therapeutic question, but before we get there, I want to knock off is based biopharma and CROs and CDMO space. And in the CRO space, again, it's been pretty volatile. There have been cancellations. Again, different companies -- it's not a consistent message. Different companies are seeing different things, right? But PPD for you, it's grown 14%. That's above your model. Certainly, it feels like it's about industry from my perspective. When you think about the outlook, right, is there anything on the macro side, cancellations or perhaps early stage biotech funding, et cetera, that should be a cause for worry and how should we think about this comp, 14% comp for '23? Yes. So for us, I mean, our job, as you know, Vijay, is to create hard comps, right? That's actually what we're paid to do. We're not paid to have easy comps and then therefore say, oh next year will be super easy. Right? That's actually what we're paid to do and that's a good thing, right? And the good news is actually the 14% comp is easier than the one that we have versus the prior year. So it gives you a sense of how well the business is performing. I feel very good about the outlook for this business. Our authorization performance is very strong. The book-to-bill looks really good. Actually the synergy pipeline and wins, which are kind of a longer term because it takes a while to flow into revenue, we've had really substantial synergies on the revenue side. And that really is coming in several different areas, right, which is why I'm so confident in the growth and performance here. We've had customers that are long-time loyal Thermo Fisher customers. But I would say PPD was a qualified supplier but not a large share of certain customers for whatever reason. Those customers have given us the opportunity to win business, all right? So leveraging those relationships to win new business, we won some very meaningful trial activity. right? And that will show up in the numbers in '23 and beyond. But we've also won a lot of really interesting new studies where we're bringing combined clinical trials packaging and some of the CDMO services into the offering that allows customers actually more efficiently and quicker time lines to bring a medicine through the process, and that's winning business as well. So I feel very good about the growth outlook. In terms of the other players in the industry, what I would say is a couple of the large players, they're delivering really solid results. And then you have a lot of noise in some of the other players, right? So actually, I think the industry is quite healthy in terms of what the outlook is for the CRO services. And I think we're clearly growing faster than the others and, which denotes another year of share gains for the business. Understood. And just maybe one last PPD question, Marc. You guys don't disclose book-to-bill metric anymore, right? But you did bring up authorizations, new wins. So is there somewhere to put a finer description around what those wins mean? And I'm assuming given PPD's business mix, there is no early stage or pre-revenue mix. Should be like very, very small for PPD. Yes. We actually -- those are important customers for us, right? We do serve the emerging biotech. We have a compelling offering. When we look at our performance, Vijay, we're seeing good performance in the various subsectors of the book of business being large -- biopharma is doing well. But we're also doing well in winning in the emerging biotech customer base as well. The book-to-bill is very strong, well, well, well over 1 and would give you confidence that we have a strong growth outlook for '23 and beyond. Fantastic. And I think that gets us to the last piece here on the biopharma side. Years ago when Thermo acquired Patheon, and I'll be honest, I didn't appreciate the idea. It's really has been -- it's been phenomenal. But again, like what some of your peers have spoken about, in an industry pulling forward delivery schedules as perhaps driving business strength. And there is some volatility in numbers here, right? Comps are an issue, et cetera. How is Thermo thinking about capacity within your CDMO space? And any sort of variables we should think of? Yes. So we've built something that nobody else has, right? And just like the whole company, right, we've been executing a very specific strategy over a long period of time. So we've been in the CDMO business for -- since 2006, right, when we combine with Fisher Scientific. We've been a leader in the clinical trials, packaging, manufacturing for many, many years, right? When we acquired Patheon, we bought a platform that we thought we could scale meaningfully. And that's what we've done. So today, we have leading capabilities in both drug substance and in drug product, small molecule, large molecule, and we built out a very strong presence in advanced modalities, including viral vector services for gene therapies, cell therapy services as well as nascent positions in plasmids, strong position in mRNA. So we built out a complete suite of offerings and have been able to scale our capacity in a variety of different ways by taking over facilities from some of the larger companies that had excess capacity, doing some bolt-on acquisitions and investing in capital to expand the network so that we have just phenomenal choice for our customers on whatever their needs are. And why am I giving you that large preamble? For the bigger customers, what they really are migrating to a relationship with us is we're going to do x volume of relationship. And we don't have a crystal ball, and therefore, we might sign up for sterile fill finish right now. But in three years from now, if we don't use as much sterile full finish, then we're going to work on other things with you and shift those commitments because you have exquisite capabilities, right? And we're really formulating some really interesting relationships around that business. And I feel really good about our competitive position. The business is having very strong growth, is a nice contributor to our growth this year. We're winning some very large pieces of business that sets up for a bright future. And I really have never seen customers pulling forward demand because they don't want excess inventory of finished products. So when I think about the -- you're in a -- I wouldn't say just in time, but during a continuous manufacturing process to keep their supply chain full. So we're not seeing any dynamic of customers bringing in demand or creating an air pocket for the future, but rather, actually, the demand and new wins has been very steady there. So I feel great about that business. That's fantastic, marc. And you did bring up vaccine and therapeutics and how Thermo has migrated that $0.5 billion of transition from vaccine to base business in fiscal '22. What difference -- is there your mix of business in the vaccine and therapeutics? How different is that versus your peers? Is it... I think it's quite different because we actually have 3 main activities, and we actually do both vaccines and therapies, right? So when I look at it, of the $1.5 billion this year, it's the sterile fill finish activity for the vaccine. So that's putting the vaccine in the final dosage form, a very difficult activity to do. Actually, we're a leader in sterile fill finish because it's a super high-quality standard work. The second activity is providing enabling technologies for the production of vaccines and therapies. Those are the nucleotides enzymes, things of that sort that our scale biosciences business provides. And then it is the purification resins, the single-use technologies as well within bioproduction. Those are the 3 set of activities. And when I look at the mix of COVID versus non-COVID, we were able to manage as such that COVID never became such a large proportion of the total that we've been able to transition smoothly the first $0.5 billion of revenue to other core. And as demand comes down over time in '23 and beyond, we will continue that evolution within the core. And all that was modeled in our long-term 7% to 9% growth. So we assume that by the end of '25, all of that had transitioned and it will -- we'll manage through that effectively. Got you. And since you brought up the transition, this year, we saw $0.5 billion transitioning, right? I think your peers are assuming maybe a 50% drop. Is that how we should think about Thermo business, of $1.5 billion going to $750 million for next year? And is that transition manageable? I mean, we'll know the -- we'll have a really good -- just like this year, we had a really good hand on the number. If I think about the $1.5 billion -- we're at $1.3 billion at the end of September, right? So we're on track to hit $1.5 billion. And we'll have really good visibility at the end of January when we do our guidance for the year about what is the customer demand patterns, and then we'll manage through that transition. So you can make whatever assumption you want and assume that we'll be able to do a good job of migrating it during the course of the year to other activities. Understood, understood. And then you did bring up the macro, Marc. Industrial and applied, again, it's growing very strong at a mid-teens clip. What's driven the SaaS trend rate? And when I think about the last cycle versus the current cycle, I know as a percentage of revenues, it's smaller. But has the mix within the segment itself changed? And how should we think about the segment in a recessionary environment? Yes. So Vijay, so let's start with how the business has shifted. What is it today and then sort of what are the prospects, right? So in the -- going into the last recession or the financial crisis, it was roughly 30% of our revenue, industrial and applied. It's 13% of our revenue today, right? So a very -- a much smaller exposure. And secondly, the mix of the business is quite different, right? And the way I would think about it is you have -- a meaningful part of that business is around semiconductor and material science, kind of new materials, batteries, the energy grid transition driven by electromicroscopy. And that's on a different cycle actually than the economy, right? Because it's semiconductor R&D and its energy transition is driving that. So it's not even the demand for semiconductors, but actually how nodes are developing is what drives the demand for that business. So that business has performed very well as good prospects. And then the rest, you could just say, is a smattering of QA/QC labs and food safety, environmental monitoring, all of the different things. And that's more, I'd call it, GDP-focused, right? And that business, obviously, has been doing well, right? And if the economy changes, then it will feel some differential pressures, but at least through the third quarter when we reported last, that business is coming, right? So it hasn't translated into any particular change in trajectory. So it's a good business for us. It's not a huge proportion of our total, and we'll do a good job navigating whatever the economic environment might be. Understood. And sorry, one last one, that 13% would you say like half of that is semi and battery testing, which is on a different part of the cycle, which should be unrelated to GDP, any sense of sizing on what that says? Okay. That's extremely helpful. And then since we're on this macro topic, I think slowdown in Europe is something some of your peers who brought up. Any -- what trends is Thermo seeing in the region? Yes. And maybe this might be a good point to step back for a minute, right? And if I think about the third quarter in aggregate, right? And I always look at what's others in the industry, what are they saying, right? And obviously, if you look at our results, it was an excellent third quarter, right? And broad-based strength, no matter how you cut the business, pretty much everything was, right? And that's been similar to the previous 3 quarters. But when I look at the industry and I look at company-specific commentary, how do they deal with guidance, did they meet or not meet, did they raise or not raise just kind of the view, Q3 was super noisy, right? So there's lots of questions. If you take out Danaher, right, excellent company scale and you take all of the companies are sort of reported by like the first week of November and you look at all the noise and the thing and you added up the market caps, so all those companies are smaller in ours, right? So as an investor, like, "Holy cow, there's all this noise." And at Thermo Fisher is our duo navigate whatever the environment is and do it better than anybody else and just deliver great results for our shareholders. And we hold ourselves accountable to that. So when I think about just the level of noise and you're just trying to figure out what is going on in the industry I think a lot of it can be execution, right? Some of it -- I'm sure there are real challenges, but some of it is just some companies execute better than others and you're seeing a pattern of noise. Europe, when you take out the testing revenue because we have very high testing share in Europe and look at core, core is actually very strong in Europe, right? It's been very strong all year, right? So the basic activity of research, the 60% of the revenue that's pharmaceutical and biotech in Europe has been very strong. So Europe, the numbers are good, right? The macroeconomic situation in Europe is very challenging, right? So for sure, right, you've got a war, you have energy disruption, you have inflation. You have all of those challenges. Our end markets where we're exposed has been very strong, right? And that doesn't mean it won't change at some point in time. But at this point, Europe has been a good market for us. And we've been able to manage through the various challenges in terms of energy supply to our sites and all of those things that a global company will do. And I feel reasonable that we'll navigate a European environment that clearly will be challenged, at least in the first quarter of '23 in terms of the winter and those issues. Got you. And then switching gears more to academic and down end markets Thermo Fisher. It's been more Steady Eddie, mid-singles, and I always thought about this as NIH budgets as being a proxy. Is that mid-single digit outlook, is that something that's seen as sustainable just given your exposure to NIH or any variables we should be thinking of? Yes. If I think back about academic and government, I take a 20-year perspective. It's a low to mid-single-digit end market. It's pretty much always a low to mid-single-digit end market. Yes, I can point to a couple of years over the '20 that it was less than that, this frustration year. I think that was in '13, something like that. I mean, occasionally, it varies off of that, but it's in that range. When I think to '23, three good facts, right, that I think are positive. The CHIPS and Science Bill is a good thing, right, in terms of funding for the academic research market in some of the fields for our industry. That's a positive. The European budget around Horizon Europe is planned to be up a couple of points. So in what is the most challenged of the economic environment, that budget is growing. And China, which is also an important market from an academic and government perspective, they have a large stimulus program going on right now for the academic institution. So I think those are three good factors that says that the environment that we've been seeing has some nice kind of green shoots, if you will, going into '23. That's helpful. I know last time around we had sequestration, but it looks like that none of that should be an issue, at least as we look at '23. I bring up sequestration, not about the budget. I bring it up that literally over my 20 years, I can think of 1 year that it was sort of off of the trend line of the sort of low to mid-single-digit growth, not the specifics of that. So that gives you a sense of the resiliency. And obviously, there are times a little stronger, there's times it's a little weaker. But at least the things that we can look at now seems like the environment should be reasonable. It also represents about 14% of our revenue. So I think that gives you at least some framing as well. Absolutely. And I know some others have spoken about customers taking vacation, lab activity sort of a slowdown more. I mean, I'm looking at -- you've got Thermo's numbers, it's not apparent, but just maybe address the topic. Yes. I mean, through the third quarter, which is the last time we reported, activity was strong. So there's nothing to read into that. I mean, we'll report the fourth quarter in another couple of months. Got you. And then maybe on the last end market here, health care and diagnostics. It's a little bit harder for me to understand what's going on with the business just given COVID comps, make it very hard. Once we strip our COVID diagnostics, do we know what the underlying core growth has been for the segment? It's bouncing between mid- and high single-digit core. So if you think about what's going on, we'll do about $2.8 billion worth of COVID testing-related revenue this year. We're assuming that the fourth quarter moves down to the endemic run rate of about $100 million a quarter so that we get down to that sort of bottoming out. And so it's been an important societal contributor in this year was obviously much larger in the previous couple of years. So we're working our way through that. But the underlying business has been strong, right? And that is the sepsis biomarker or leading allergy and autoimmunity franchise, transplant diagnostics. And I'm super excited about binding site get added to the portfolio in the first half of next year. Understood. And how should we think about utilization environment, Marc? I know allergy testing, et cetera, given travel restrictions, perhaps we're still below pre-pandemic levels. Should we think about a normalized environment next year for that part of the market? Yes. What I would say is there's some level of lower activity on routine medical procedures, and there have been some level of COVID disruption. So that probably means there should be more volume, a little bit higher volume than what we saw in this current year, and I think we'll see how reimbursement other factors are. But we haven't fully recovered in all lines to prepandemic, but we're largely there is where I would think about it. Got you. Got you. And you brought up the $100 million of net run rate for Q4. We have seen sporadic bursts just from fluid like respiratory spikes here in Q4, $100 million seems conservative. But given that's where the guidance is, should we be -- should I just analyze that number and think of that as the end of next year for next year? I think that's a reasonable assumption is to annualize the $100 million. We're obviously going to support whatever our customers needs. If it's a little bit more, then we'll obviously flow that through and that flows through at about 40% on the positives. I think you'd have to see the pandemic take a radically different turn for a wildly different number, right, where you'd say, no, it's not $400 million, it's some multiple of that, right? Could it be a little more, a little less sure? But I think it gives you enough of a, you can model something around that and say, I got it, and that's sort of what it is and I'm knocking on the table. Hopefully, it's not different than that, meaning that pandemic has taken a really bad turn and volumes are way up. Got you, and sticking on to diagnostics, Marc, since you brought the binding side, this is -- the headlines, right, can be sometimes misleading. For me, when I looked at 10x revenue multiple, that didn't sound like a Thermo kind of deal. But clearly, I'm missing something. So help us understand why that Thermo is excited about binding site? Yes. So first of all, it's a business that we've tracked for more than a decade, right? So it is a great specialty diagnostic business. Patients benefit hugely from its differentiated capability. It's the standard in the medical journals around multiple myeloma. And it's a business that has $220 million of revenue. It's growing around 10% a year. It has very strong operating margins, well above our company average. And it will be an acquisition that is accretive by about $0.07 in the first year of ownership. So that's a nice fit. But what's really interesting about the transaction is when I think about -- we always have a busy pipeline, right? And we know what we would buy. And sometimes, it's about what are the circumstances of when you can do a transaction when it's an overlap between buyer and seller. And you have a really interesting dynamic where it's a U.K.-based company, so the costs are largely pound-denominated. The revenue is largely dollar and euro-denominated. And we were able to take advantage of the weak pound, and we're able to buy the transaction what we think at a favorable moment time, in terms of what the exchange rates were. We're able to deploy our pounds to buy the business. And so I think that was interesting in terms of the moment. But also in an environment where interest rates have really gone up, the other competing bidders are often private equity, right? It's been owned by private equity for a while and they were not there, right? So we were like the fire in town. We were proactive in terms of it, and we knew that we would have a favorable environment from a competition standpoint and we think a favorable moment in time on when to do the transaction. So we're excited about it. We understand the business well. We know the management team well, and we look forward to welcoming the colleagues of the binding site to our company in the near future. Got you. That's helpful perspective and context. Sticking on to that M&A topic more, you did mention pipeline, it's always active, and you also did mention the circumstances in the bid as spread whether, has it narrowed down? I know earlier on there had been an issue, where it's been 12 months and some of these stocks are down 50% to 75%. Is the market environment more amenable to see some large deals in life science tools space? Vijay we're always busy, right? And we're always looking at things. We're always in dialogue, and there are periods of time when things get done and there are periods of time when it's slower. And I like this environment, right? Our company is over 100 years old. Our plan is to be a leader for generations ahead, right? So we worry less about what's the momentary timing of the economy or so forth. But if you're a seller, there's actually quite a wide range of outcomes of what the next couple of years look like. And if your time horizon is not in the many decades but rather in a few years, I do think you'll see some companies that are willing to transact, right? And others that have a long horizon, will say, no I'll wait it out and things will get better at some point in time or it won't play out as a negative. But there'll be companies that I believe ultimately will say, the scenarios I don't like, and I'd rather take my chips off the table. And for a company like Thermo Fisher incredibly strong balance sheet, a great track record and have been actively evaluating the industry for an incredible long period of time, we're well positioned to capitalize on this opportunity. Got you. And just given the last year transactions, Marc, we've been -- we've sized up in biopharma, which is a meaningful chunk. Should we perhaps now look at the other segments? Is that perhaps -- I don't know what the right term is, less ignored children or perhaps other areas from an M&A perspective or how you're thinking about the mix of revenue? I'm wondering a little bit less about managing to the exact mix of the different pieces. The way I think about it is the most -- obviously, the criteria is the same, right, which is strengthen the company strategically, would be appreciated and valued by our customers and clearly creates shareholder value, right? So that's high-level criteria. I mean, we're not going to get bigger for bigger's sake. We're going to do things to strengthen the company, better position us with our customers and creates value for our shareholders along the way. When I think about how we actually select, it's really based on risk adjustment, right? What we want to make sure is that we can live with a downside case on a transaction, right? Because the ability to actually do transactions over a long period of time is don't do bad ones and you earn the right to do the next good one, right? And if you do bad ones, you lose the right to continue on with the strategy. So we do study extensively in diligence what can go wrong, and we will buy transactions or buy businesses that ultimately we feel that we can live with the downside case, not that we want the downside case to come through. It's our job to avoid that. But should it happen, it's accepted, right? And therefore, we've done a lot of pharma and biotech-related transactions because we knew the revenue synergies would be substantial and they've materialized, right? But that doesn't mean that there won't be other transactions in serving health care diagnostics or industrial and applied right? It's just going to -- we would just have to characterize the risk in such a way that we feel like, yes, those will be good transactions if the downside case comes there. That's extremely helpful in giving us a peek in how Thermo looks at deals. Maybe in the last couple of minutes here, Marc, we've had some discussions on the segments and the drivers here. When I look at all of those together, it seems like fiscal '23 should be within that LRP framework. We shouldn't see a big deviation from LRP framework. Is that a reasonable statement? Yes. So if I think about what's the LRP framework, let's fast forward for a minute to in 2025, right? We said our core growth is going to average in the 7% to 9% range, that we're going to have the mid-teens EPS growth through that period. You're going to have strong operating margins exiting that period, we will have transitioned all of the COVID-related activities by the end of that period and both throw it. So when I think about next year, we'll finalize our guidance at the end of January, early February. We'll have the best view on how the year finished, what's our jumping off point, what's the end markets outlook will all be embedded at that point. The things that we have given assumptions around is testing moving to an endemic level, and we gave the flow-through on that. We talked about what FX, the pull-through was. And I think we said it's about a $1 billion headwind at the end of October, and that flows through at about a 30% range. FX has moved a little bit more favorably in the last -- it's very volatile. Well, it's actually less of a headwind right now. But who knows. It will be what it will be in January, and we will just translate the number, but it will be a little bit less of a headwind if we were giving guidance today. And then the core business would flow through at -- if you're assuming in the 7% to 9% range, it flows through 40 to 50 basis points of margin. We'll figure out the right assumption on core once we get into the year. But in general, we think about 7% to 9% is reasonable in most economic environments. If the economy was horrible, you'd be below. If the economy is as strong as we've enjoyed, you'd obviously be above it, right? We're doing 12% this year. So we're not tapping the 9%, and we're not going to sign up to something dumb on the 7%. But I think if you're just modeling right now, that's a reasonable number to take. Fantastic, Marc. I think with that, we're almost at the end of time here. It's been a very helpful conversation, but if you did want to make some closing remarks, we do have a couple of minutes. Yes. So Vijay, first, thanks for doing this and inviting us. I'm super excited as we're wrapping up '22, the company is entering '23 with great momentum. We have integrated a large acquisition, and the combined team has made the business better. Customers are choosing us. And what's awesome about this industry is everybody is growing. We're just growing faster. We're doing it consistently. We're gaining share. But everyone is doing okay, and we love the fact that we're just the fastest-growing business in this industry and a great track record of capital deployment, and super excited about what the future holds. And we'll manage through whatever the headaches of the world throws at us and turn it into an opportunity ultimately.
EarningCall_1986	Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to CWBâs Fourth Quarter and Fiscal 2022 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you, Michelle. Good morning and welcome to our fourth quarter financial results conference call. My name is Patrick Gallagher and I am the Vice President, leading our Strategy and Investor Relations team. I would like to remind listeners and webcast participants that statements about future events made on this call are forward-looking in nature and based on certain assumptions and analysis made by management. Actual results could differ materially from expectations due to various risks and uncertainties associated with CWBâs business. Please refer to our forward-looking statement advisory on Slide #2. The agenda for todayâs call is on the third slide. Presenting to you today are Chris Fowler, our President and Chief Executive Officer; and Matt Rudd, our Chief Financial Officer. Following their presentations, we will open the lines for a question-and-answer session. Thank you, Patrick, and good morning. We have a lot to discuss with you over the next week. Our remarks on this call focus on our strategic progress in the fourth quarter, our financial results and our 2023 outlook. At our Investor Day in Toronto on December 7th, we will provide further detail on how our strategic execution has positioned our talented teams to drive an unrivaled experience for more full-service clients, deliver strong core operating performance and increase value for our investors. Our full executive leadership team will be present at our Investor Day. I'll be joined by Matt Rudd, Kelly Blackett, Stephen Murphy, and our new additions over the past year of Carolina Parra, Jeff Wright, John Steeves, and Azfar Karimuddin. The change to executive team marks the successful completion of our planned succession. I'm confident that we have the right management team to continue delivering a differentiated client experience and award winning workplace culture. This year, we successfully launched our personal and small business digital platforms. We look forward to the opportunities our digital investments will provide across our established commercial business, and to open an entirely new and scalable growth channel for small business owners. We successfully combined our wealth management brands with the launch of CWB Wealth. The launch further integrates our acquired wealth management operations under one brand and strategically positions us to provide a differentiated client experience in Canadian private wealth advisory services and strengthen full-service relationships with successful business families, business executives and employees of the businesses CWB serves. We continue to increase our brand awareness, familiarity and physical presence in Ontario and are leveraging these improvements to drive market share gains. Very strong annual growth of 11% in the province was augmented by our existing full-service banking center in Mississauga and our new banking center in Markham that opened this summer. Our accelerated market share growth in Ontario will be further supported with the opening of a new banking center in Toronto's financial district next year. We're also well positioned to capitalize on opportunities available for full-service client growth in Western Canada and we will leverage our new modern flagship banking center on West Georgia Street in Vancouver to support market share growth in British Columbia. General commercial loans represent a broad section of the Canadian economy that we believe is underserved by the other banks and is a core strategic target for growth. This category is our largest full-service client opportunity and we delivered 14% loan growth last year. We have also continued to diversify our sources of funding through the strategic growth of full-service relationships with branch-raised deposits up by 8% this year. Rising commodity prices, supply chain pressures, labor shortages and strong global and domestic demand drove persistent levels of inflation. In response, the rapid and significant increase in market interest rates began to cool economic growth and fuel the potential for recessionary conditions to emerging Canada. The rapid movement upwards in interest rates increased deposit costs faster than asset yields this year, and put downward pressure on our net interest margin. Matt will speak to this in his section. We expect this pressure to reverse as interest rates stabilize and see net interest margin begin to expand next year. Our disciplined approach to growth remains within our prudent risk appetite. We continue to deliver very strong credit performance and are in a position of strength to face the potential economic volatility on the horizon. We expect to maintain credit losses within our normal historic range. We are confident we will succeed in our transition to AIRB, but don't expect that to occur in the next two fiscal years. This quarter, we materially completed the redevelopment of our AIRB tools incorporating targeted enhancements and the final CAR 2023 guidelines. As expected, with material completion of the redevelopment, we recognized accelerated amortization of our previous models. As a point of reference, following our unsuccessful AIRB submission, we commenced a parallel run of our AIRB tools to evaluate their operation through a period of economic volatility in 2021. Our goal was to determine if they would meet OSFI's use-test requirements prior to resubmission of our application. As the parallel run progressed this year, we gained significant insights into the performance of our AIRB tools and processes. We learned that our original approach to AIRB required a level of manual processing that did not support the operational efficiency needed to deliver a seamless and scalable operating model to our teams. We also identified areas within our AIRB models that required further refinement. We identified enhancements to improve the efficiency of the tools for our teams and our effectiveness as a model-enabled bank. We also made the decision to incorporate the new CAR 2023 AIRB Capital Adequacy Requirement guidelines that will be effective February 1, 2023. The implementation of these enhancements and regulatory update was supported by third-party advisors to ensure our approach reflected industry best practices. The redevelopment of our AIRB tools now better reflect our underlying credit risk with a more efficient link to our underlying data and business processes. We learned a lot through this process and are confident we will begin to benefit from our comprehensive redevelopment of our AIRB tools. We will now implement the tools into our underlying business processes to create a sustainable and scalable operating platform that will support our long-term growth aspirations. Following implementation, we will operate the revised tools and processes for a sufficient period of time to support successful resubmission of our application. Our strategic execution in fiscal 2022 enhanced our digital capabilities, increased our physical presence in key markets, and further improved our client offering to provide a foundation to accelerate full-service client growth. Our new financial scorecard lays out the key performance metrics we expect our teams to deliver over the next two years as a standardized bank to increase value for shareholders. I will now turn the call over to Matt, who will provide greater detail on our fourth quarter performance and outlook. Thanks, Chris. Good morning, everyone. If we start on Slide 7, our branch-raised deposits were up 8% from last year. That reflects 34% growth in fixed term deposits that's partially driven by a shift from existing demand and notice deposits which were roughly flat on a net basis this year. Branch-raised deposits represent 57% of our total funding thatâs relatively consistent with last year. On a sequential basis, our branch-raised deposits increased 2%. That was a 12% increase in fixed-term deposits, partially offset by a 2% decline in demand and notice deposits. The change in branch-raised demand and notice primarily reflected a shift to term deposits. We also saw a reduction in our existing deposit balances as clients put excess funds to use, and that more than offset the solid growth we saw from net new full-service client additions in the quarter. Sequentially, our capital market deposits increased 10%, reflected an opportunistic capital market deposit issuance in the quarter at favorable pricing and our broker deposit balance decreased by 3% in the quarter. If we flip to Slide 8, our total loans were up 9% in the past year. On a sequential basis, total loans were up 2%. General commercial represented nearly 2/3 of the net loan growth in the quarter. We're also pleased to see equipment financing loan growth strengthen as the year progressed, and we delivered 2% growth in the fourth quarter. Ontario loans grew 2% within the quarter and now represent 24% of our total loans. We delivered very strong 4% growth in Alberta this quarter, and BC loans remained relatively consistent. Our performance compared to Q3 is on Slide 9. Common shareholders' net income decreased 16% sequentially and diluted EPS decreased $0.16. That was primarily due to the impact of accelerated amortization of our previously capitalized AIRB assets, as Chris mentioned in his opening. Adjusted EPS decreased $0.02 and pretax pre-provision income remained relatively unchanged. The provision for credit losses increased EPS by $0.01. That was due to a lower impaired loan provision, partially offset by higher performing loan provision due to a further deterioration in the forward-looking macroeconomic outlook. Noninterest income contributed $0.07, primarily driven by foreign exchange revenue. Higher adjusted noninterest expenses reduced EPS by $0.07, primarily due to the continued investments in our strategic priorities. That included the redevelopment of our AIRB tools and processes, the harmonization of our wealth management brands with the launch of CWB Wealth in the quarter and the customary seasonal increases we typically see in advertising, community investment, and training costs, along with higher people costs in the quarter. Additional costs related to the accelerated AIRB amortization reduced EPS by $0.13, which is reflected in adjusting items. The other items that reduced EPS in the quarter included a $0.01 impact from a higher effective tax rate, higher LRCN distributions that decreased EPS by about $0.01 and a $0.01 isolated impact of the incremental shares issued under our ATM program. Common equity raised under the ATM supported incremental loan growth in the quarter and with an income contribution that exceeded the dilutive impact of the incremental shares. Our performance compared to the same quarter last year is on Slide 10. Our common shareholders' net income decreased 25%. Diluted EPS was down $0.29. That was primarily due to an increase in the provision for credit losses on performing loans and the impact of the accelerated amortization of our previously capitalized AIRB assets. Adjusted EPS decreased $0.15, while pretax pre-provision income increased 8%. Increased net interest income contributed $0.09 and higher noninterest income increased EPS by $0.07 compared to last year. Higher noninterest expenses reduced EPS by $0.08, and reflected targeted investments in our strategic priorities. This includes our AIRB tools and processes, digital capabilities, investments in our client offering, and our new banking centers in Markham and Downtown Vancouver as we optimize our business, deliver an unrivaled experience to our clients and position ourselves for an acceleration of full-service client growth. The accelerated AIRB amortization reduced EPS by $0.14. Provision for credit losses reduced EPS by $0.19 due to the increase in the performing loan provision that I previously referenced. Other items reduced EPS by $0.04, and primarily reflected the isolated impact of the incremental shares issued under our ATM. As shown on Slide 11, the 3% sequential increase in total revenue reflects consistent net interest income and a 27% increase in noninterest income, and that was driven by higher foreign exchange revenue and higher credit-related fees, partially offset by lower wealth management fees. Net interest income was 4% higher than the same quarter last year, as 9% loan growth was partially offset by a 14 basis point decline in NIM. Noninterest income increased 29%, primarily due to higher FX revenue and higher credit-related fees, partially offset by lower wealth management fees, and that was due to the market value declines that reduced average assets under management. Our 10 basis point decline in net interest margin is shown on Slide 12, and reflects that the growth in asset yields has not caught up yet to the growth in funding costs in the rising interest rate environment. Through Bank of Canada policy, rate increases totaling 125 basis points occurred during the quarter, and that contributed 9 basis points to our net interest margin, isolated to the impact of the increase on our floating rate loans, net of the impact on our floating rate branch-raised deposits. Higher asset yield contributed 20 basis points, and that includes the impact of higher interest rates turning through our fixed rate loan and securities portfolios that was partially offset by lower loan-related fees. Higher funding costs had a negative impact of 37 basis points. This primarily reflected increases in market GIC rates on new fixed-term deposits and pricing adjustments that were made to certain administered-grade deposit products to maintain competitiveness on pricing. Our asset mix reduced NIM by 2 basis points, primarily driven by a reduced proportion of higher yielding equipment finance and real estate project loans from the prior quarter. On Slide 13, we highlight our continued very strong credit performance. That's supported by the secured nature of our lending portfolio, our targeted borrower selection, disciplined underwriting practices and proactive loan management. Our fourth quarter provision for credit losses on total loans was 14 basis points compared to 16 basis points last quarter. Our performing loan provision for credit losses was 14 basis points compared to 4 basis points last quarter that reflected a softening in forward-looking macroeconomic assumptions, primarily due to the forecast impact of the rising interest rate environment, generating lower GDP growth, a decline in housing prices and higher unemployment rates, which also moved a larger proportion of performing loans into Stage 2 this quarter. Gross impaired loans of $167 million compares to $187 million in the prior quarter, and now represent 46 basis points of gross loans. On a quarterly basis, write-offs as a percentage of average loans of 12 basis points remained well below our historical average, and we recognized a nil impaired loan provision for credit losses. The sequential change in our CET1 ratio is shown on Slide 14. Calculated using the standardized approach, our CET1 ratio was 8.8% compared to 8.9% last quarter. While organic capital generation and common shares issued under our ATM program more than offset growth of risk-weighted assets, our capital ratios were negatively impacted by an unrealized loss on our debt securities portfolio held for liquidity management purposes, with that impact recognized and accumulated other comprehensive income and due to the rising rate environment. To support strong loan growth as we navigate current and future economic volatility, while prudently managing our capital, we issued common shares for net proceeds of $29 million under our ATM program. Despite the recent downward pressure on our share price, the net earnings contributed by the incremental loan growth, supported by the ATM issuances this quarter more than offsets the dilutive impact of the incremental common shares issued, which drives an ongoing increase in EPS and ROE. Yesterday, our Board declared a common share dividend of $0.32 per share, which is up $0.01 or 3% from the dividend declared last quarter and up $0.02 or 7% from one year ago. Looking forward on Slide 15. Current economic forecasts anticipate lower GDP growth through 2023, including a moderate to sharp decline in housing prices and a steady increase in unemployment rates. In this environment, our growth will continue to be focused on portfolios that support further full-service client opportunities and remain within our strict underwriting and pricing criteria. We expect to deliver high single-digit annual percentage loan growth, with stronger loan growth in the strategically targeted general commercial portfolio and in Ontario. Additionally, we expect to deliver double-digit annual percentage growth of branch-raised deposits, supported by our enhanced digital capabilities and continued focus of our teams to drive full-service client growth. Based on the assumption that policy interest rate increases taper off in fiscal 2023, our net interest margin is expected to increase over the next year to reflect the combined benefit of normalized lending spreads and the impact of fixed term loans continuing to reprice at the current market interest rates. We'll manage to an annual efficiency ratio below 50% and deliver positive operating leverage next year. We expect lower growth of noninterest expenses next year, and our approach to expense management will focus on execution of our most important strategic priorities with prudent management of our discretionary expenses. Supported by our disciplined approach and leveraging our enhanced credit risk management tools and processes, we expect that our provision for credit losses will remain within our strong historical range of 18 basis points to 23 basis points next year, likely on the higher end of that range given the potential economic volatility. With all other assumptions constant, a provision for credit losses in the high end of our normal historical range drives annual adjusted EPS percentage growth in the low single digits and adjusted ROE of somewhere in the midpoint of a 10% to 11% range. On the same basis, our provision for credit losses in the low end of our historical range drives annual adjusted EPS growth in the mid-single digits and our adjusted ROE that approaches 11%. On Slide 16, you will see we've introduced a multiyear financial scorecard. Our financial objectives are reflected by three key performance metrics that we expect to drive over the next two years: Pretax preprovision income growth greater than 10%; an efficiency ratio below 50%; and achieving adjusted ROE of 12% by 2024. These targets have been developed on the assumption of a relatively stable economic environment and under the standardized approach for capital management. We look forward to spending time bringing you through the value of our strategy and what it will deliver against these financial performance scorecard metrics in detail at our Investor Day in Toronto on December the 7th. Maybe I'll start with the AIRB conversion. Chris, did I hear you correctly that you're not looking to reapply to OSFI until fiscal '25? So two additional fiscal years down the road. Is that -- did I hear that right? You did. Yes. We have done the redevelopment of the models. We are doing the implementation. We will run them in an internal use test, and then we'll move forward with the application. Okay. So is the intention then for the next two years to continue to run an ATM equity issue. Is that to support the loan growth? Because it sounds like the loan growth you're anticipating you'll continue to need to have an ATM in place? Or are you considering other solutions? Well, Doug, we'll get help from a couple of factors. So I'd say under the current standardized CAR guidelines we do have a bit of a speed limit in the high single digits in terms of our loan growth and just what it consumes under that approach. We adopt new standardized CAR guidelines on February 1, and that does introduce a bit more sensitivity and the ability for us to target our lending to lower RWA densities, particularly for commercial growth. So that's quite important for us. There are pockets within there where, today, our commercial loan growth is at 100% RWA density. Under CAR guidelines next year, going forward, we'll be able to target growth in areas that will be below 100%, for instance, SME lending and general commercial. That attracts 85% instead of 100%, lower loan-to-value on commercial mortgages, which is the sandbox we play in. That attracts lower risk weights under the new CAR guidelines. So not quite the benefit of AIRB, which gives you credit for strong borrower selection. But at least there is some risk sensitivity introduced in those new guidelines, and you'll hear me give a little more detail on that at our Investor Day, maybe with a couple of examples. The second piece that's been putting a bit of downward pressure on our CET1, it's our core liquidity portfolio. This isn't a trading book. These are not losses that we would realize. But this is a book we're required to measure at fair value each quarter. Those, in this case, unrealized losses are recognized in AOCI and reduce our CET1. That's something that as interest rates stabilize, we'll see reverse basically as that bond portfolio either approaches maturity or eventually matures because these bonds mature at face value, obviously. So we'll have some wind in our sales. And Doug, there's a path to turning off the ATM. That is not dependent on AIRB. So when you see for next year, within your expectations, have you modeled it that you will have to continue to use the ATM through next year? Or is that something that you think you can turn off based upon your projections? It's a case where we'll likely continue to use it in the first part of the year until we adopt the new car framework. Once we've adopted that, and we can be very targeted and see that new lending come on at the lower risk density, our intention would be to structure our growth and target our growth in such a way that would allow us to turn off the ATM. That would be our priority. Of course, there are other things that can consume capital, and we'll continue to prudently manage it, but that would be our focus. And then just the third, and I promise I'll stop it. On the NIMs, obviously, it's a huge focus this quarter for all the banks, and given what we saw with Big 6, I guess, I'm not too surprised by what we saw with yourself. But can you -- I guess, my question is can you describe a scenario help where NIM start to expand? Like can you kind of give an example? And like you said, should we be looking at prime versus CDOR or prime versus BA to kind of gauge where NIMs are going to go? And I guess, ultimately, what I'm asking is like on Slide 12 -- and I guess this is a follow-on, a second part of this. But if I look at Slide 12, you have an asset yield benefit this quarter of 20 basis points as the lag impact starts to come through. And I guess my question is like, if interest rates don't move from here, like how much more of a lag of that -- something similar to that 20 basis points is left to flow through the books? Again, assuming that no more rate increases. I don't know if you can give some perspective on that. Yes. Well, there's a couple of ways you can tackle it. I mean, looking backwards, if you just look at our NIM performance this year, you'll see Q2 and Q4, where we had pretty significant increases in the yields -- bond yields. I think Q2 we would have been up more than 100 basis points within that one quarter on yields. And then if you look in Q4, we would have been very close to 100 up. And in both those two quarters, we saw a downward pressure on our NIM where just -- it's just a case where the deposits reprice a lot quicker than the assets, given the difference in duration of those books. We had one quarter this year in third quarter where we had only, and I just put air quotes around âonlyâ 40 basis point increase in the yield curve through the quarter, and that's a quarter where you saw us expand our NIM a little bit. So on the basis of stability in market interest rates, which is really what we need, it allows our assets to catch up and continue to reprice where deposits have been pretty quick to react already. So just to give you a sense of a bit of the torque here, if we look at just the change in Bank of Canada rates through the year, our deposit costs, I mean, they reflect about, call it, half of the Bank of Canada rate increases. On our asset side, it's about 1/3. If we just saw no further shifts upwards or are no significant shifts upwards, that delta nearly closes over the next year in terms of assets catching up and passing through about the same amount of that Bank of Canada increase. So that's why we're feeling pretty constructive on NIM next year and seeing just a mechanical path to NIM expansion just from our asset book catching up to our liability book, frankly. Just, Chris, in your opening remarks, you said don't expect AIRB transition over the next two years, I want to make sure I understand those comments. I didn't expect anything fiscal 2023, but you're also saying you don't expect the transition to 2024. Yes. So what we're doing is we redevelop the models and processes. So now in fiscal '23, we'll put them into implementation and then we will run a use test and then take it forward for approval. Gabe, this is a long-term win for the bank as we think about what the future has of us being able to manage capital much more proactively and really target our lending and really focus on portfolio management. It just provides all sorts of opportunity. So we're just going to make sure that all of the internal processes are such that we have a clear path and we're absolutely convinced we have no issues. So that's the -- we just want to give that sort of time frame that just sets the stage for what we're doing. We're confident in the work we've done, and we're confident in the process we have going forward. And we just want to say that I don't expect to see it for two years. And I appreciate it's a long-term process, but investors obviously want to know. Today, you talked about stuff like more manual input, and I think fixes or refinements to some of your existing models, are those some of the items that you learned over the course of this year or, I don't know, for prior year? Yes. That was the outcome of our parallel run. We found that the ability to replicate did not -- was not as strong as it could be. So we are putting in more automated processes that allow us then to have a structure that just eliminates the challenge of replication so that we have a really strong process in place. Okay. I'm going to ask Doug's question differently. Just if you can -- I was not fully paying attention there, but you can really dumb it down as far as -- in the last few quarters, you've talked about margin expansion and it's gone the other direction. You're seeing margin expansion in the coming year. What are the critical factors? Is it just that the rate hikes kind of flatten out at some point and that has less of an inflationary impact on your funding costs and then the assets just reprice gradually and catch up? Is that the gist of it? Pretty much it, Gabe. Like we need a quarter where yields don't go up 100 basis points in a single quarter. I mean, that's highly unusual in a historical context, and it happened in two quarters this year. The interesting thing, our deposit costs, they've actually behaved quite well, and we're pretty please. I mean, we've made a lot of investments over the years to start building a funding profile that's a bit more consistent with what you'd see at the larger banks. When you look backwards at the last year, and I look at the change in our deposit costs relative to the large banks and including some that are being celebrated for their strength on that regard, our deposit cost increases kind of in the top quartile. I think maybe only one other bank that had a lower increase in their deposit costs over the last year. We're about the same as one other one. And then the four others actually had more of an increase in deposit costs. So I wanted to highlight that because some might find that surprising. Really, the difference we've seen has been on the asset yield side. For us, this has been a mechanical repricing of our book at the higher interest rates. And I can't speak for others, but there are other ways to find yield in this environment. But for us, we have not adjusted our credit risk appetite, it has remained very consistent, and we don't take on market risk or trading risk outside the management of the interest rate risk in our banking book. So for us, it's just a timing factor, and we expect that to resolve next year. And really, all we need is have a quarter where even if you see increases, they're just not at the pace and speed that we saw through the last fiscal year. Okay. And just to -- your statement there, well, I guess not the statements, but on the update, those are prospective changes. So it only affects new originations but the way I'm reading it in your annual report, in the CAR guidelines, it sounds more prospective. It wouldn't affect your existing balance sheet? Yes, it does. Yes, you're absolutely right, Gabe. You do a remeasurement on adoption of the existing book. Now the existing book is based on what we've originated over the last couple of years. And while there are areas within the new CAR guidelines that allow you to target lower risk weight densities, there are other areas that go the other way where you can end up holding a higher risk weight than what we would have had under the current standardized approach. So on day 1, you're adopting the portfolio you have. But on a go-forward basis, you can absolutely be targeted and reduce the risk weight density if you are prudent and smart lenders, which that's how we categorize ourselves. So historically, you weren't optimizing for rules that didn't exist yet in their proposed form, but in the future, you will basically. Yes. And then last one, expenses. So I know I've been harping on this for a while now, but I don't want to gouge you for 7% expense growth. That's a great outcome compared to what we've seen in the last little while, and you're looking at a sub-50% mix ratio next year. Just want to -- on the quarter, the salaries and expenses were pretty flat year-over-year. Is that anything unusual in there? That's the biggest expense component. Was there anything unusual there? Or is that a sustainable? Kind of I guess that we're all living in the world of wage inflation and probably does not mean anyway, but others? Yes. I mean, we've taken a pretty measured approach and dealing with wage inflation. I mean, we did make some targeted adjustments through the year where we felt we needed to. But it was just that. It was targeted. I think what we've seen in the last quarter is it's proven to be the right approach because that -- a lot of the heat has come out of the labor market, at least from our perspective and what we've seen kind of emerging here over the last quarter. When we look to bring in new talent, our proposition hasn't come here for a financial windfall that people are coming here because they believe in the strategy. They like the upside, they like the culture, but they're not coming here to make a higher wage necessarily. We're competitive, but we don't need to be top of the table, and that's consistent with like loan pricing, deposit pricing, our proposition is service, value and culture, and not necessarily price. And it's similar on wages. So I think that's allowed us to weather the storm pretty effectively actually. Just a question on the delay of AIRB. I'm wondering if there's any expense implications that we need to think about specifically for next year? No, Meny, even though we have some implementation work to do, and we're building some automated portions of that implementation. It gives us a much better sustainable operating model for sure, maybe pushes out the time line a bit. But when we think about expenses for next year or would this cause me to think there's a higher run rate or puts our ability to lower our efficiency ratio in jeopardy? No. We're executing the work that we need to execute, but it's not one that we think will cause any pressure on NIEs next year. It's a case where as we progress with AIRB, now that we're through this big chunk of development work, that was the big push in terms of effort from our teams and our third parties to get that up and running. It was a very expensive piece of that process. And from here, things start to get less expensive. Understood. When we look at the credit picture for CWB specifically and broader, I mean, it definitely doesn't look like there's any big credit issue out there, just more of a normalization. But I'm wondering, more from your perspective, speaking to customers, are there certain areas or geographies where you are hearing about more stress? I'm thinking, in particular, maybe the franchise finance business in particular. Are there any areas that you would highlight that are dealing with more challenges across your customer base? We've not seen any particular portfolio have kind of systemic increase in risk, which is great. The franchise finance, of course, came through the COVID structures with actually very good outcomes. We've got a very -- we've talked before about a very defined lending process within franchise finance with we're focused on suburban hotels that have lots of flexibility, with operating leverage that can cut their costs quite dramatically, which they did. And the borrower profile that we focus on there is to make sure that there are typically multiple hotel owners on flagged hotels, so they come in into it with a very strong loan to value. And what we've seen is really great resilience in that whole portfolio through the entire global finance through the entire COVID period. So we're not seeing that as one that is providing extra risk. But again, we are following all of the segments of the portfolio as we monitor the future and see what will occur as the impact of higher interest rates come on the economy. Well, we are -- our largest portfolio is in British Columbia. That's our -- we have a big footprint of branches there. That's the largest portion of HSBC from what I understand. We have lots of clients that we share. We have lots of opportunity to be very focused on how we approach that market. We have grown up in BC and Alberta. So we've got a good familiarity there, good brand awareness, and we'll be very focused on making sure that we can look and speak to clients. Just by pure coincidence, Sohrab, we just opened a flagship banking center and regional office like right down the street from them. That wasn't obviously intentional, and this was planned a while ago, but just kind of further highlights how well positioned we are relative to that opportunity. And just, I guess, that's both in terms of client and talent acquisition on your part, maybe attrition on their part. Is that fair to say, Chris and Matt? I think we're focused on the same markets. Our general commercial focus is definitely one that HSBC has always been very active in. And as I say, we do share clients. So we've got a very similar underwriting structure as they would. The opportunity, I think, both for clients. And as we look at supporting our growth with excellent staff, that would be an opportunity. And just to stay with it for two more kind of quick follow-up questions. The type of outlook or guidance math that you provided, both in terms of loan growth and NIM, I guess, that did not factor in any -- did it factor in any kind of windfall gains, whether it's business or otherwise from this HSBC disruption? Or did it assume status quo as far as the competition kind of landscape is concerned? Yes, Sohrab, I think it's fair to characterize it as it was more status quo. I mean, when we were developing our outlook and budget for next year, frankly, we did not have this necessarily top of mind. So this is something I would look at as putting a bit of wind in our sales relative to the hand we thought we might have been dealt next year. So obviously, other things can happen, but we look at this one, and it gives us a pretty high degree of confidence in the outlook, put it that way. Okay. And then, Matt, just one final one then just on that same topic. I mean, obviously, HSBC is both active on the retail and the commercial side. I think you run more into them on the -- you respect them as competitors, I think is the way, ultimately, Chris characterized it as competitors on the commercial side. Would -- is there any -- from what you would have seen in deals that you would have been with them, is there any indication that the removal of them as a competitor will be net beneficial to margins, I don't know, either on asset yields or funding side? Or that may be more of an impact on the consumer books, less so on the commercial where you're at? Yes. I'm not -- I'm racking my brain to think about when we've been up. We're up against the big banks, and we often see them pretty significant pricing pressure, and we find ourselves priced a little bit wider of the large banks. And then people take it because they're -- frankly, we're charging for a premium service and then delivering it. Again, to HSBC, though, at times there, we've seen them get aggressive, but overall, they're fairly well behaved, I think, Chris, unless you've seen something different? I think on the commercial side, I think it's not a dissimilar approach to the client base, not a dissimilar pricing structure. I think they'd be much more aggressive on the personal side. I just wanted to ask about the dividend increase, it was $0.01. Annual earnings per share down, adjusted down. And what's the thought process there? Why bother for just $0.01, and this is a bank that's using an ATM? So I just wonder if you can just talk to the decision to suggest that the Board to raise the dividend? Yes. So we think about it, Darko, from a payout ratio first. And I think if you look back historically and you look back to the last time we had medium-term targets, we wanted to be in that 40% range. If we're going year-over-year comp, I think last year, a tougher comp from an earnings perspective because we had very benign PCL. We had performing loan releases, et cetera, and a fairly low payout ratio. Even with this increase, we'd be still in the mid-30s, which we'd still characterize as fairly low. So when we think dividend, when we think payout ratio, it's about the ratio of earnings, very confident in the earnings outlook and the ability to grow and expand from here. So that was the logic behind the increase. I mean, it's something we look at is more structural, whereas use of an ATM, a bit more reactionary, a bit more in the moment based on immediate, more near-term capital needs relative to near-term capital demand from loan growth, whereas the dividend a bit more structural and not the tool I'd necessarily look to as a capital management tool. Okay. And then just switching to the AIRB tools that are sort of in your toolkit. I just wanted to understand a little bit, like my understanding was you were already using parts of it to help you to gather insights into the lending book and the behaviors and so on of certain products. So what is it now that requires a full year and plus of using this tool that you would not have already garnered from using it up until now? Or am I just missing something? Am I missing the full extent of what you're capable of using? Or maybe you can just provide some sort of insight into how much of it you were using this past year versus what the full use would be next year? So the difference, Darko, is that when we do a loan underwriting, we use a scorecard. And the scorecard that we're using today, which does utilize the AIRB categorization on risk for the different portfolios we're in, it's a pretty manual scorecard. And what we will be replacing that with -- and the model that drives that is the one that we've replaced. What will be replacing that is a more automated process for the manner under which we calculate the risk rating per client. Essentially that gives you that granular look on loan-by-loan, and that's where that implementation time is taking over the next year. Before I start the question, I'm just going to be really borne with this one. So I got to apologize in advance for that, but I really want to understand it. I think you guys, be it that the guidance has been a bit of a moving target throughout in 2022 and in Q4, again with a sharp decline in margins. So I'm wondering if you could really talk to us about what the real surprise was from the last quarter's conference call as you kind of move through the quarter? Not to put too fine of a point on it, but you guys offered like, let's say, the NIM guidance at the end of August. So I guess what moves so sharply against your expectations in September and October to drive margins down a sharper than expected? Maybe you could comment relative to the waterfall you provided on Slide 12, which is very helpful. And I guess the reason I'm asking this is, I guess, how confident are you more broad in the guidance for the year ahead? Like is there a margin of safety built into your 2023 outlook? Or is that kind of a best case scenario where it could be walked down throughout the year? Yes, no problem, Lemar. So the outlook we provided, and if we look at where just simply pull up the two-year yield curve as an example, our expectation when we got through the quarter and had our call was that, and this was not a CWB position, this is frankly what the curve reflected. At that point, the expectation was that yields have captured about all the upcoming Bank of Canada rate increases that they were going to capture, and we thought we would level off from there. Rather than leveling off from there, we saw continued sharp increases in the yield curve. And that's something that you see right away reflected in GIC rates. And you look at the sort of funding we generated in the quarter, no different from the other banks, I would think if you ask them. A lot of the deposit growth in the quarter was GICs, which is just natural in the sort of rising rate environment and the sort of rates you can get on a GIC these days. So that was the biggest factor, Lemar, is interest rates we thought were done sharply increasing and they just kept going for the rest of the quarter. Felt that immediately in deposit costs, and it's something where asset yields will catch up. So when we look through to next year, if we continue seeing each quarter 100-plus basis point movements in yield curve, that would be a very challenging environment for us to expand NIM and just because our deposit book is shorter dated than our lending book. So that would be a very challenging dynamic for us to work through. I don't think that's different from the other banks, but I wonder if other tools were used to help find yield in this sort of an environment. Okay. That's helpful. And then can you talk about kind of a margin that state that you guys building in that 2023 outlook on your Slide 15? Or is that exactly what you guys are thinking in your internal models? Yes. So for us, obviously, we would need stability in interest rates to think about robust expansion of net interest margin. If rates continue to tick up a bit next year, we'd be thinking about a less robust expansion of net interest margin. Beyond running through different scenarios, we're comfortable with the outlook of an increase to put a fine point on it. Just sorry if I missed this in your prepared remarks, but can you talk about that FX benefit? And more importantly, is this something that -- well, first off, how is that manufactured? And is this something that you could potentially manufacture going forward? Could we see the noninterest income line elevated because of FX and maybe even these credit-related fees? But FX more specifically, it looks like that was a really big one. Can you manufacture that going forward? Or this sort of go back to that normal level, which is -- looks like something around $7 million or $8 million lower than it came in this quarter? Yes. On the -- so we saw very unusual things in the interest rate curve and beyond what we expected. And I mean, somewhat related on the USD-CAD exchange rate, that was a pretty sharp and significant movement in the quarter and not something that we expected either. We have a small U.S. dollar balance sheet, a little bit of a net asset as the position it usually fluctuates in. So the sharp strengthening of the U.S. dollar in the quarter is what drove that gain, not something we necessarily manufactured or engineered. It's frankly just what happened. Looking forward, I'd say, from the start of the quarter, the USD was weaker than usual and finished the quarter stronger than usual. If you got back to neutral -- if you call a CAD 0.75 neutral-ish, if you go back to there, we'd be giving back about half of the gain next year. So if you're thinking about the noninterest income line, that's one that I'd circle and say, likely going downwards. The one I'd circle as going and more than offsetting that decline would be in wealth. I mean, we've just done a harmonization, a rebrand and really the full integration of the acquisition, and that business is ready to rock and roll and really leverage cross-sell to and from the rest of the business. So we've circled that as something giving an offset there. So will you see really large noninterest income growth next year? I don't think so given that FX potential headwind. But will we continue to grow and will it be pretty solid growth? Yes, and wealth will be the big help there. Okay. And then just on that wealth, can you give us the ballpark? Is this a revenue line that could grow double-digit range? We hope so. You need a bit of help from the market there, and that's we put a headwind on the growth rate this year. But from the new client generation and harvesting a lot of the cross sell, that would be the growth target of this business and in an environment where, call it, market wasn't helping or hurting. Okay. So it sounds realistically only a partial offset. If I normalize that other noninterest income line, the $8.5 million, it looks like it's got -- like if you're suggesting that comes down by half, $4 million, I'm guessing you're not looking at wealth hitting that $18 million level anytime soon just based on your commentary. Is that fair? Yes, that would be fair. Yes, and then I think through next year, you'll see the normal growth in credit-related and retail fees. Those typically just grow with the loan and deposit book. There were two pieces guidance given in Q3. You addressed the NIM and what the reason was for that decline. But the other piece of guidance was the 20 basis points of provisions that you expected to put up in Q4, it's nice to see 14, but you also mentioned that things maybe have deteriorated, the outlook has deteriorated, and sequentially, that premium is down quarter-over-quarter. So maybe what changed from the Q3 guidance that you provided for this quarter and what the decision was for that 14 basis points? Yes. So I'll tee it up, and Chris will finish so we can brag about credit quality. But for us, if I gave you the guidance of zero basis points impaired loan PCL in the quarter, you guys might have thought I hadn't had my coffee that morning. It's highly unusual for us to put up no impaired loan provision. And I think Chris, here's your chance to talk about the way we manage credit here. Yes. Well, Stephen, we've talked about many times, and we really are very focused on that core client, very strict underwriting, secured loan portfolio, strict follow-up monitoring, we got a strong management team should we have clients that move into our watch are impaired. So credit is in our DNA. We make sure that it's something that supports our ability to grow. And growth is our focus. But prudent growth is really the #1 outcome that we've been able to deliver, and that's our intention going forward. That said, obviously, it's not sustainable for us to think we're going to deliver either zero or even single-digit impaired loan PCL. Just structurally, that's not a consistent or supportable assumption, we think. But at times, we can have quarters where it's just very, very benign. And this quarter was very, very benign. When you think about impaired loan PCL, you think about write-offs being much lower than usual. You think about our impaired loans going down $20 million-ish quarter-over-quarter, like these are all strong indicators, but also things I'd circle and say are fairly unusual, but in a good way, I suppose. Our teams have done a great job so far. Okay. And maybe just my second question. Just for the guidance for loan growth, when we look at the different buckets of the segments that you lend in, should we expect similar growth in those segments? Is that what's building your guidance for next year, like general commercial real estate, things of those which were the highest year-over-year? Yes. We're obviously most bullish about general commercial. That's a book we've had a lot of success and that's our target client, and that's one that we expect continued very strong growth in next year. Portfolios that we circle perhaps for lower growth, which is relatively consistent with the themes you've seen this year, but our real estate portfolios and commercial mortgages, we've obviously been very targeted there. We will continue to do so. In real estate project lending, we've been very specific about the sort of project and borrower we're targeting in that book. And that's one, I'd say, would grow at less than the portfolio average next year, just maintaining that same discipline and prudency. And then equipment is one, it likely rebounds and grows pretty similar to the overall loan book, which would be a nice rebound year-over-year, frankly. And then the personal lending is probably one that grows out to about the same level as the overall book would be kind of our feel right now. And obviously, this can shift and change as the year goes. And so, Rob, in his question, highlighted another interesting opportunity. But based on how we see it right now, that's kind of a high-level estimate. So I want to challenge you a little bit on the deposit -- branch-based deposit growth outlook. And I guess that comes from two perspectives. First off, you put 8% growth up this year, which is still a good rate, but you're forecasting double-digit growth next year. And I think in what's going to become a more challenging environment, right, for economic conditions because of liquidity across the broader system, and then also competitive intensity for deposits is ramping up as well. So just wondering what is it in your plan that gives you confidence that you can grow at a faster rate in '23 than '22? Well, it is our target, Paul. We've talked about this ability for us to take many of our single product to multiproduct. We continue to work on improving that product suite that attracts the clients to the bank. That continues to be a way that we are winning more clients, and that is an addition to our deposit opportunities as well, the launch in this past year of our personal and small business digital. Small business is a growth area for us. It hasn't been a historic market for us that we look to gain traction in with our ability to hit that with the product that we think is going to have some good market appeal. So it is a key focus, right, as we think about the core client that we're on and having that both sides of the balance sheet for us and for the client as what we're really looking to drive for. And again, that 14% growth of general commercial last year is indicative of that targeted focus, and that's continuing. And that's how our teams are kind of looking at the market. And that's where we're looking to really help drive that branch-raised deposit growth as well. Okay. And then sort of a follow-on question. How important is that branch-raised deposit growth in terms of your expectation for NIM expansion next year? I mean, I don't know if you can quantify it at all, but let's say, deposit growth was 2% different than expected, whether higher or lower? Like is that enough to actually impact your PTPP guidance? Or is it sort of a nonmaterial impact? Just trying to get a sense if you can help with that. Yes. Paul, I wouldn't highlight it as a material impact, especially on the PTPP. I wouldn't look at that as a big headwind. A lot of the growth in branch-raised deposits has been in GICs, which are quite expensive. So for us, we're thinking that, just in the high rate environment, that continues to be a big proportion of our branch-raised deposit growth, and we'll continue to see a migration from the cheaper notice and demand into term as a continuing impact next year already. Our opportunity would be to get more of the, call it, notice and demand, cash management, less expensive deposits. We've assumed we have a fairly solid batting average on that next year. If we did not deliver that same batting average and didn't see solid growth in notice and demand, yes, I mean, it puts a headwind on NIM, but not something I'd look at and say that would be the reason we wouldn't deliver NIM expansion. I don't think it would be a big enough factor. The biggest headwind against delivering NIM expansion next year would be similar to what we saw in the fourth quarter this year, second quarter this year, just the yield curve massively expanding like it just did. Okay. That's very helpful. And last question for me is just going back to that NIM headwind. Matt, you've articulated it well in terms of what happened in Q2 and Q4 in terms of the move of the yield curve. What I want to understand just a little bit better is, does it matter what part of the yield curve? And obviously, I asked that question because we know Bank of Canada rates are going up in Q1 and perhaps the long end of the curve or medium end of the curve, if you will, might not move that much or might actually come down. Like what does that shift or twist in the curve mean for your funding costs? Yes. On the funding side, our bellwether would be the kind of more near term in like that one, between kind of one and two years. And then on the lending portfolio, that's kind of like a two or three-year type tenor would be more important. Just wanted to go back to noninterest expenses, and I apologize if this was already asked. But it just seemed higher than usual for some of the line items like professional fees and others. So just wondering if there's anything sort of onetime in nature there. And specifically for that professional fees line, let's moved around quite a bit, so wondering where you see that going, just given some of the projects like AIRB that's going on at the bank? Yes. So professional fees, kind of the big, big pieces that fell into that bucket this quarter. AIRB, obviously, some expenses fell into there. The other piece was in our wealth harmonization, the costs we incurred to complete that. Some of those costs ended up in that bucket. So those are the two items that would have pushed it up sequentially. Thinking through the next year, I mean, that's a bucket if we just thought on an annual basis, it's one that I wouldn't see a potential for a large increase. That's one that I think finds a bit of stability and perhaps starts coming down a bit. And that's really our AIRB project kind of getting through this initial build phase and now moving into an implementation phase. And just our overall kind of volume of strategic projects were coming down. That's one I'd circle and say there's opportunity for stability in that bucket rather than you would have seen a pretty big buildup of that bucket over the last couple of years. I think we've plateaued there, and you'll likely see that start working down. And just wanted to go back to margins and that guidance for modest improvement for margins next year. How much of that will be tied to improvements in loan yields or loans repricing into higher rates? I'm just trying to get a sense of how quickly your book turns over and whether you see potential or any potential competitive pressure potentially limiting that ability to reprice? Well, the competitive story, it's certainly reflective in the commercial mortgage book, which you saw lower growth in this past year as we really kind of picked our spots in growing that. We're going to be zeroed in on our core client, that general commercial, and we had very strong growth in 2023. We see that, and really maintenance of our yields, too, in that category. So we want to make sure that we're deploying capital in a very effective and efficient and accretive way. So we will be targeted and ensuring that we have -- we think it through. Yes. And just to give you a sense of speed of the churn. I think you heard me say that, so far, our asset yields and really our loan yields, if I isolated them, would be behaving in the same way. I mean, they've reflected about 1/3 of the, call it, market rate increases. You fast forward a year, and nothing else happened in terms of the curve or shape of the curve, and you just allowed that book to reprice and you made same assumptions on today's spreads. You might move from 1/3 to somewhere between half Q 2/3 of the market rate increases being churned through. So hopefully, that gives you a better sense. Thank you. There are no further questions at this time. I'll turn the call back to Chris Fowler for the closing remarks. Thank you, Michelle. Our performance this year reflected solid growth and continued investment in our strategically targeted full-service growth initiatives in a volatile economic environment. With a focus to grow full-service relationships with business owners and their families, we delivered very strong general commercial loan growth, double-digit loan growth in Ontario and supported our strong diversified funding profile. Our disciplined approach to driving growth within our prudent risk appetite delivered very strong credit performance, and we're in a position of strength to face the potential economic volatility on the horizon. Our strategic execution has delivered enhancements to our digital capabilities, increased our physical presence in key markets and further improved our client offering to provide a foundation to accelerate full-service client growth. We're focused to deliver strong core operating performance next year and achieve the financial performance targets we have set for 2024. I look forward to talking to you next week at our Investor Day in Toronto. If you haven't preregistered, please see our website for further details. With that, we wish you all a good day. Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
EarningCall_1987	Good morning and welcome to the Kroger Co. Third Quarter 2022 Earnings Conference Call. My name is Nadia and I will be coordinating the call today. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Quast, Senior Director, Investor Relations. Please go ahead. Good morning. Thank you for joining us for Krogerâs third quarter 2022 earnings call. I am joined today by Krogerâs Chairman and Chief Executive Officer, Rodney McMullen and Chief Financial Officer, Gary Millerchip. Before we begin, I want to remind you that todayâs discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question, if necessary. Thank you, Rob. Good morning, everyone and thank you for joining us today. We are pleased to announce another quarter of strong results, powered by our strategy of leading with fresh and accelerating with digital. Our associates continue to create a seamless customer experience, delivering fresh and affordable food anytime, anywhere with zero compromise on quality, selection or convenience. Our associatesâ incredible dedication means we have momentum entering the fourth quarter and we are continuing to consistently deliver a full, fresh and friendly experience for our customers throughout the busy holiday season. It is clear that inflation remains top of mind for our customers and for our company. We are laser focused on helping our customers by providing fresh and affordable food. Research shows cooking at home is still 3x to 4x less expensive than dining out. And we are seeing more customers engage with Our Brands as a way to stretch their food budgets without compromising on quality. During the quarter, we continue to see many of the same shopping trends we observed throughout the year. In addition to higher engagement with Our Brands products, customers are downloading and redeeming digital coupons and continuing to showcase their cooking at home skills learned during the pandemic. Our breadth of choices, quality of fresh products and the value of our personalized promotions are helping customers navigate the current environment and our customer-focused approach is working. We continue to see overall household growth and significant loyal household growth, which drives a meaningful portion of our sales volume. We are proud to serve as Americaâs grocer, especially during the holiday season. As friends and family come together, we look forward to providing our customers the perfect ingredients to create cherished memories. At a time when 48% of customers have told us they plan to cutback on their Thanksgiving celebration due to inflation, we took action and made sure our Thanksgiving was enjoyable and memorable for everyone. To do that, we introduced an easy guide for customers to build an affordable meal of our brandâs products with all of Thanksgiving favorites that a family could enjoy for as little as $5 a person. This is just one example of how we create amazing quality at a great price when it matters most to our customers. We empower our customers to create lasting food memories by consistently executing against our go-to-market strategy, focused on Fresh, Our Brands, personalization and our seamless ecosystem. Fresh remains important in todayâs environment and we are committed to bringing the freshest products to our customersâ tables. Our Fresh for Everyone strategy is grounded in keeping products fresher, longer. Our end-to-end Fresh initiative is transforming these efforts. At the end of quarter three, we have a total of 1,252 certified stores. At these locations, we see higher fresh sales and identical store sales. With these impressive results, we continue to rollout the initiative nationwide. As part of our end-to-end fresh initiative is our supply chain, where we continue to invest and enhance operations. We are improving productivity and maximizing our fleet by controlling more product movement across our network. Most importantly, we are using our data and science to maximize freshness for our customers. Beyond our end-to-end Fresh program, we are bringing more fresh products to our customers. During the quarter, Home Chef launched new plant-based ready-to-cook meals. They also collaborated with Krogerâs in-house dieticians to launch our new simple and nutritious healthy meal kits. Home Chef continues to be an exceptional example of how Krogerâs history of mergers helped bring new and exciting capabilities to meet our customersâ changing needs across the country. Turning to Our Brands, we delivered another strong quarter in Our Brands with identical sales growth that outpaced overall identical sales. This was led by our by our Kroger and Private Selection brands. Customers continue to engage with Our Brands portfolio, which offers high-quality products at affordable prices. Our brand products are loved by every member of the family, including the pets. This quarter, we saw tremendous growth in our pet food brands as families continue to treat their dogs and cats. As you know, they are like a member of the family. We continue to expand and diversify Our Brands portfolio at every price point. After launching Smart Way as our opening price point brand last quarter, we introduced several new Smart Way products this quarter and plan to rollout additional products next quarter. These products are meeting the needs of our customers on a budget and we have already seen 2 million households to purchase Smart Way products. In regard to personalization, our customers are looking for opportunities to save on the products they love. Our loyalty programs and personalized promotions allow them to do just that. We continue to use our leading data science capabilities to develop unique customer insights and offer targeted promotions on the products we know they love. This strategy is driving digital engagement with digital coupon downloads, 32% higher than last year. We anticipate these interactions will continue through the holidays with customers expected to realize more than $200 million in savings from our highly personalized digital offers. Moving on to Seamless, we are improving our Seamless experience that brings our customers fresh products anytime, anywhere with zero compromise on quality, selection or convenience. We saw back-to-back quarters of strong digital growth led by our delivery solutions. This quarter, we introduced app enhancements that make it easier for customers to engage with our savings and promotion. We launched our first in-app flash sales and enabled our customers to clip digital offers directly from their cart. Improving the customer experience is always top of mind for us and Kroger Pickup now offers 3-hour pickup lead times at all stores in our network, with as little as 1 hour lead time in some areas. We are investing in digital growth initiatives, including expanding our Kroger delivery network in new and existing geographies. We are also growing Boost, our one-of-the-kind membership program. This is the industryâs most affordable membership program and it is foundational to growing our delivery service. We are incredibly pleased with our customer response to Boost, as we rolled out the program nationwide earlier this year. We continue to invest in our associates as part of our long-term strategy. In addition to investing in average hourly rates this quarter, we enhanced the benefits available to our associates. We expanded the eligibility for our 401(k) plan participants to encourage earlier commitments to lifelong savings and we took steps to continue supporting working parents by increasing family lead time and our company-sponsored benefit plans. We are excited to celebrate amazing associates this quarter who were recognized for their outstanding work and commitment to our customers. We were the most recognized employer for Progressive Grocerâs GenNext Honorees, with 28 of our young leaders recognized for driving change and innovation both within the organizations and communities they serve. Additionally, our [indiscernible] Hispanic and Latino Associate Resource Group, was honored by the U.S. Hispanic Chamber of Commerce as the Employee Resource Group of the Year. In summary, we are building momentum as we close out the year. We are excited to surprise and delight our customers this holiday season with high-quality fresh products at affordable prices allowing customers to serve on the items that matter most. Thanks, Rodney and good morning everyone. Krogerâs relentless focus on delivering value for our customers was the foundation of our strong results in quarter three. As Rodney mentioned earlier, our consistent execution of our go-to-market strategy is resonating the shoppers and driving increased customer loyalty. We were especially pleased with the balance achieved in our results this quarter as we continued to invest in our customers and associates, while also effectively managing costs to achieve solid earnings growth. These results provide yet another proof point of the strength of our value creation model and our ability to operate successfully in different environments. I will now provide additional color on our third quarter results. Adjusted EPS was $0.88 for the quarter, an increase of 13% compared to the same quarter last year. This growth was driven by top line revenue and our disciplined approach to balancing investments with effective cost management. Identical sales without fuel grew 6.9%. Our Brands continue to resonate deeply with customers as sales grew 10.4%. The outstanding quality and value offered by these exclusive to Kroger products is an important differentiator in our go-to-market strategy and this is especially true during periods of high inflation. As we shared at our Investor Day in March, Our Brands products are margin accretive and represent a key pillar in our strategy to grow profitability, while also delivering greater value for customers. Digital sales grew 10% during the quarter with delivery solutions leading the way, up 34% year-over-year. Delivery solutions, includes the Kroger delivery network powered by Ocado, delivery from our stores via Kroger and third-party platforms and our convenience offering, Kroger Delivery Now. Our industry leading net promoter scores in Kroger Delivery are driving new customer engagement and best-in-class retention rates. Gross margin was 21.4% of sales for the quarter. The FIFO gross margin rate, excluding fuel, decreased 5 basis points compared to the same period last year. This result reflected our teamâs ability to effectively manage higher product cost inflation and shrink through strong sourcing practices, while also helping customers manage their budgets and keeping prices competitive. During the quarter, we recorded a LIFO charge of $152 million compared to $93 million in the prior year. This was primarily driven by higher product cost inflation in grocery. We still expect to see some moderation in inflation during our fourth quarter as we cycle higher inflation from a year ago. Krogerâs operating general and administrative rates decreased 3 basis points, excluding fuel and adjustment items compared to the same period last year. The decrease in OG&A rate was driven by sales leverage and execution of cost saving initiatives, partially offset by investments in our associates. We continue to identify opportunities to remove cost from our business without affecting the customer experience and are on track to deliver our fifth consecutive year of $1 billion in cost savings. Kroger Health had another successful quarter, delivering higher than expected sales and profitability despite cycling the impact of higher COVID vaccine revenue from a year ago. We continue to see significant growth opportunities in healthcare and our Kroger Health team remains committed to ensuring our customers obtain medically necessary prescriptions. Recently, we announced that we are terminating our Express Scripts agreement for commercial customers as of December 31. The Express Scripts contract would have required Kroger to fill our customersâ prescriptions below our cost of operation, something we could not accept as we aim to keep our prices low for customers during this inflationary period. We expect this contract termination will reduce sales by about $100 million in Krogerâs fiscal fourth quarter, impacting identical sales without fuel for the quarter by approximately 35 basis points. This decision is not expected to have an impact on operating profit or EPS. Included in our results for the quarter is an $85 million pre-tax charge related to the settlement of all opioid litigation claims with the State of New Mexico. This amount was excluded from our adjusted FIFO operating profit and adjusted EPS results to reflect the unique and non-recurring nature of the charge. This settlement is not an admission of wrongdoing or liability by Kroger and we will continue to vigorously defend against other claims and lawsuits related to opioids. This settlement is based on a unique set of circumstances and facts related to New Mexico and Kroger does not believe that the settlement amount or any other terms of our agreement with New Mexico can or should be extrapolated to any other opioid-related cases pending against Kroger. It is our view that this settlement is not a reliable proxy for the outcome of any other cases or the overall level of Krogerâs exposure. Currently, Kroger has two active matters pending in West Virginia and Texas scheduled for trial in 2023 and 2024 respectively. Kroger continues to believe that the claims are without merit and that it has strong defenses to these claims. Kroger is also differently situated from many of the other defendants in these cases. Our pharmacy operations have a much smaller footprint both in terms of the size of the business and market share with respect to opioids and we are proud of the outstanding work performed by our associates in delivering critical care and services to our pharmacy customers. Turning now to alternative profit businesses, which are a fast growing and key part of our value creation model. The traffic and data generated by our supermarket business continues to create a flywheel effect for alternative profits and growth this quarter was again led by retail media. CPG brands are finding significant value in our unique ability to build custom audiences that draw on our data to deliver precisely measured return on investment. Last month, KPM added a new channel to its suite of retail media solutions, welcoming Snapchat into the portfolio. Advertisers are now able to use Krogerâs proprietary capabilities to optimize Snapchatâs immersive ad formats. We are constantly innovating to expand our reach and KPM recently increased its programmatic advertising marketplace capabilities to include video and one of the fastest growing digital media sectors, connected TV. These new frontiers will provide exciting future growth opportunities for KPM. Fuel is an important part of our overall value proposition and our fuel rewards program remains a key differentiator to help customers stretch their dollars during a period of high inflation. Fuel rewards engagement remained high during the third quarter and led to gallon sales, which outpaced the market. The average retail fuel price was $3.84 this quarter versus $3.24 in the same quarter last year and our cents per gallon fuel margin was $0.50 compared to $0.42 in the same quarter in 2021. The results we reported today would not have been possible without our incredible associates who continue to do an outstanding job executing our strategy and delivering a full, fresh and friendly experience for our customers. We have a long track record of investing in our associates and are committed to continuing these investments to ensure Kroger remains an employer of choice. Building on $1.2 billion of incremental investments since 2018, we have raised our average hourly rates by over 5% so far in 2022. During the third quarter, we ratified new labor agreements with the UFCW for associates in Columbus, Las Vegas, Chicago, Fort Wayne and pharmacists in Southern California, covering more than 28,000 associates. During the fourth quarter, we have also ratified new labor agreements for associates in Toledo and Nashville as well as the Teamsterâs master agreement. Turning now to cash flow and liquidity, during the quarter, cash flow was affected by increased inventory balances. This was predominantly due to higher product cost inflation, particularly in grocery, in stocks improving to pre-pandemic levels and forward buying of inventory in pharmacy. We are comfortable that our current level and mix of inventory is appropriate to support our future sales expectations and would expect to see an improvement in working capital during the fourth quarter. Regarding capital expenditures, we are committed to investing in the business to support our go-to-market strategy and continue to see many opportunities to drive future growth. As shared last quarter, various initiatives have been delayed due to supply constraints and we now expect capital expenditures to be in the range of $3.2 billion to $3.4 billion in 2022. The net effect of higher inventory and lower capital expenditures for the year is that we continue to expect to generate free cash flow of $2.3 billion to $2.5 billion in 2022. In closing, Iâd like to share additional color on our outlook for the remainder of the year. The Kroger teamâs consistent execution of our go-to-market strategy continues to build momentum in our business and gives us the confidence to again raise our full year guidance. We now expect full year identical sales without fuel of 5.1% to 5.3%, adjusted FIFO operating profit of $4.8 billion to $4.9 billion and adjusted net earnings per diluted share of $4.05 to $4.15, representing growth of 10% to 13% over 2021. This guidance assumes a LIFO charge of approximately $500 million for the full year, which represents a $300 million headwind over the 2021 LIFO charge. Our third quarter and year-to-date results highlight the strength of Krogerâs value creation model, which has proven to be resilient in different operating environments. Looking ahead, we remain confident in our ability to deliver attractive and sustainable total shareholder returns, and we look forward to sharing detailed 2023 guidance during our fourth quarter earnings call in March. Thanks, Gary. The results weâve shared with you today are a testament to our business model strength and agility to support our customers in all economic environments. This is made possible because of the hard work and dedication of our incredible associates. Before we open the floor to your questions, let me provide a brief update on our pending merger with Albertsons. As you may know, I had the opportunity and Vivek did as well to testify before the Senate Judiciary Subcommittee on antitrust, competition policy and consumer rights this week. I shared with the senators that our merger will lower prices for customers starting day 1, continued investments in our associates and stores and customer experience and do even more in our communities than either company can do alone. We believe this merger will allow us to fulfill these commitments to our customers, our associates and our communities well into the future. We are making early progress on our integration planning as expected and we continue to engage with all of our stakeholders and regulators. We are advancing our road map to close the transaction in early 2024. We look forward to working with the regulators as they review the transaction and do not have a substantial update at this time. We would ask that you focus your questions on our quarterly performance and our progress on our strategy. Thank you. [Operator Instructions] And our first question today go to Michael Montani of Evercore ISI. Michael, please go ahead, your line is open. Thank you for taking the question. Just wanted to follow up on two fronts. One was into the fourth quarter guide it appears that ID sales could be up around 4%. I just wanted to understand the deceleration there. Was that predominantly inflation and/or the Express Scripts or is there anything else to note? Can you share any start to the quarter information? And then I had a follow-up. Yes. Iâll start and let Gary finish it. Part of it is just cycling inflation from a year ago. We are beginning to now cycle the higher inflation a year ago. Gary, with that, Iâll let you get into a little bit more asset specific. Thanks, Rodney. And maybe just to confirm, so the trend in the early part of the fourth quarter has continued consistent with how weâre performing in the fourth quarter â Iâm sorry, is continued consistent with out performance in the third quarter, Michael, as to one part of your question there. I think the other piece is, Michael, yes, I think you captured them well is, as Rodney mentioned, we do believe this recycle higher inflation in the final quarter of 2021. We expect that to have some impact on the overall year-over-year growth in food at home during the fourth quarter. And obviously, we will all see how that plays out. And then secondly, we have factored in the impact of the ESI the Express Scripts contract termination as well for January. So overall, I think if you kind of take our full year guidance, weâd be guiding between 4% and 5% IDs for the final quarter of the year. Got it. And then just a follow-up on the margin implications, it looks like those could be flat to down slightly in the fourth quarter. So I just want to understand how do you see the competitive environment evolving? And then any cost initiatives that you could share with us there? Relative to the competitive environment, we continue to see it pretty similar to how itâs been throughout the year. all retailers are doing everything they can to minimize the impact on inflation to customers the best you can do. And we obviously would use our personalized and promotions that are directly focused on individual households because of things we know they love to try to help people stretch their budget. Weâre also, as I mentioned in the prepared remarks, seeing customers continuing to move to Our Brands. And in the past, what we find is when customers move to Our Brands, thatâs very, very sticky because the high quality of the product and the satisfaction there. So what we find is even when things are getting normalized, Our Brands come out of that at a higher penetration level than going in, which is long-term good for our business as well. With that, Gary, Iâll let you get into. Yes. Thanks, Rodney. Just a couple of bits of extra color, Michael, on the fourth quarter for you. As you probably gathered from the guidance, it would be a lowest quarter for year-over-year growth in what we shared for EPS. I think a few things to bear in mind there. First of all, we will be cycling the strongest quarter from last year. Last yearâs EPS growth in Q4 â21 was the highest growth that we had during the year. So weâre cycling higher growth from prior year. Weâd assume fuel margins will be flat during the fourth quarter. So no real headwind or tailwind there, where, as you know, fuel has been a tailwind for us in the last couple of quarters. And of course, as I mentioned in my prepared remarks, year-over-year, LIFO will be around $100 million headwind in the fourth quarter of EPS because you may recall again that LIFO was only $20 million last fourth quarter when we finalize the calculations. So there would be factors to bear in mind when you think about our EPS guidance. The only other thing I might mention is that youâve heard me talk about on this call in previous quarters that when you look at our rolling four quarter sort of gross margin investment, somewhere between 10 and 20 basis points and OG&A leverage of 10, 20 basis points similarly to keep the business in balance. I would say that because weâre cycling Q4 last year gross margin was relatively flat, and OG&A was relatively flat. So I would say you should probably expect our gross margin investment will be a little bit north of the 10 to 20 basis points in Q4, but our OG&A leverage should also be north of that 10 to 20 basis points as well. Good morning, everyone. Nice quarter. If you could talk a little bit about which categories did worse than inflation in terms of unit growth in which weâre stronger on managing a lot of that was in the general merchandise. And also, Gary, could you comment on why identical sales growth, ex fuel was better than total sales growth ex-fuel? Yes. In terms of the categories, the one you identified definitely would be the weaker category in terms of general merchandise. And that would be true at the Fred Meyer division, it would also be true across the rest of the organization as well. We continue to do well in those categories relative to the market. Our teams have done a great job of making sure they have been managing inventories relative to where the expectations themselves. The other categories that would be weaker than the total would be categories where we continue to have supply chain disruptions. Gary and I both mentioned, overall supply chain is getting better, but we still have categories like cat food, dog food, baby formula some of those types of cold remedies, some of those areas continue to have some supply chain issues as well. With the identicals, Gary, go on. Yes. Thanks, Rodney. Thanks for the question, Chuck. Yes, the biggest part of that, in fact, pretty much all of it, Chuck, would be â you may recall at the start of the year, we shared that weâve made the decision to stop dispensing certain drugs in our specialty pharmacy business because it didnât really tie to overall customer loyalty in our broader business, and it isnât profitable business for us. So we made that decision at the start of the year, and we adjust that out of our ID. So itâs a like-for-like comparison, but it does create a disconnect between total sales and identical sales. One of those examples is actually helping gross margin as well as weâre making those decisions to make sure weâre optimizing the balance of the business. Thank you. And the next question goes to Ed Kelly of Wells Fargo. Ed, please go ahead, your line is open. Hi, good morning, guys. Thanks for taking my question. Gary, Iâd like to ask you about the dynamic between the LIFO charge and the FIFO gross margin going forward. there is â the FIFO gross margin have been good. And this year, there is probably $0.50 a share or more, I guess, in the LIFO charge in terms of the headwind. I mean assuming inflation eases, you get much of that LIFO charge back. Do we just add that back to earnings? Or is there a dynamic to consider when we think about the FIFO gross margin? Presumably, some of this probably still needs to be priced. Iâm just kind of curious, is the FIFO gross margin performance that weâve seen, can you sustain that when the LIFO charge eases next year? Yes. Thanks for the question, Ed. I think as you heard as mentioned on the call, we probably wonât get into a lot of detail around 2023 guidance because weâd rather put it into context of the full picture for next year. As you might imagine, there will be a lot of moving parts as we sort of bridge to share that color with you when we get to March next year. I think overall, though, certainly, some of the elements that you talked about are going to be key factors when you think about what will be at play as you think about 2023, if I kind of talk more in general themes. I think overall, I would say we feel good to answer your question about gross margin that we are very focused on and I think are proven for our model, but there are levers that we can pull to manage costs and sourcing effectively to improve mix over time with some of the momentum in our brands and the opportunities continue to accelerate fresh performance and innovation. So there are a number of areas when we look at the balancing gross margin that we believe we would expect there to be longer-term stability and our ability to manage that. I think when you look specifically at the moving parts for next year, I think there is going to be a lot of factors that will come into play as you think about next year. Youâre right in terms of if inflation normalizes and your numbers certainly correct around the $500 million in this year, which would be a $300 million year-over-year headwind because last yearâs LIFO was also inflated as inflation started to rise in quarter four last year. If you remember, our LIFO charge is calculated at a very specific week of the year, even though we try and estimate it throughout the year. So we would believe that as we will get into guidance next year, obviously, when we share our earnings, and weâre still sort of forming views around what we think will happen with inflation, but weâre probably looking at most of the external views that you are and most of the analystsâ reports that we can look at in the USDA, etcetera, would be in that sort of more of that 2.5% to 3% or so inflation for next year. We will obviously provide more color on what we believe, but thatâs sort of where most of the data that we see tend to be pointing towards. Okay. And then just a quick follow-up. Fuel margins have been really strong. I mean there has been â some of your peers in the industry have talked about that moderating next year? Iâm just kind of curious as to whether you share that view and how we should be thinking about modeling that going forward? Yes. I think again, Iâll maybe just broaden it because again, I think itâs a little bit dangerous to pick on one element of the model for next year. I do think that fuel margins have had obviously a very good run. And generally, I think margins are improving over time, but there is there has been in the last 2 years, some major volatility in shocks in the market. I think itâs hard to see those being cycled. So you look at margins earlier in this year, and I think thatâs likely to be a headwind next year in looking at the fuel profitability. But again, I think you mentioned LIFO, another example for us would be â as you look at our incentive plan, obviously, weâre having a very strong year versus our expectations, having raised our guidance every quarter. So you get to more of a normalized incentive plan next year, assuming the budgets kind of your expected payout. We continue to take costs out of our business and find new ways to improve leverage in the model. It has been 5 years, as you know, journey for us. We believe supply chain and alternative profits are potential tailwinds next year as we continue to improve efficiency in supply chain and all profit continues to grow. So I think there is a lot of moving parts. And again, rather than sort of trying to bridge you to how all those play out. I think thatâs going to be a balance of puts and takes. And obviously, weâre looking forward to sharing a lot more color when we get to March next year. Yes. I think when you look at Garyâs points overall, itâs one of the things thatâs so important about our overall business model because we do have a lot of moving parts, and weâve invested a ton of work and effort our whole team has over the last several years to reinvent the business model and make sure the business model can be successful in every economic environment. And to me, Garyâs point that he was sharing really highlight that as we look forward. Thanks, Ed. Thank you. And the next question goes to Scott Mushkin of R5 Capital. Scott, please go ahead. Your line is open. Hey, guys. Thanks for taking my question. So the first thing I wanted to â so the first thing I wanted to get some answers to a little bit is the market share, you guys market share. It seems to have stabilized, maybe even growing a little bit. Do you agree? And what do you think is leading to that? Yes. If you look at market share, the trends continue to improve, and we feel good about where we are, but weâre not satisfied with where we are. We believe the work that weâre doing on Fresh is a key part of driving that. And obviously, just the continued personalization and making sure that we have a customer experience for its household to household type relationship and then our brands always shines when an economic environment gets a little tougher. So itâs really those things working together and then our store teams continuing to do a good job of improving on friendliness. And I make that comment based on what customers tell us how weâre doing, not just my opinion of how weâre doing. Great. Thanks. Rodney. And then my second question is a little bit more short-term. I mean weâve heard some retailers, not necessarily in the food industry, but some retailers that the consumers behave or kind of changed somewhat abruptly as we work through the fall. I mean, is that something you guys have seen? And if yes, do you think itâs started to leak into the competitive environment? Yes. Itâs a great question, Scott. And when we talk to our customers, they are telling us they are changing. But so far, they are changing on purchases other than food. So itâs â they are still prioritizing food. It gets a little bit back to one of the comments I made. Itâs still 3x or 4x cheaper to eat at home versus going out to a restaurant and so many more people have learned how to cook. So if you look at the behavior changes other than the movement to our brands and being much more aggressive on downloading digital coupons and engaging with some of our promotional offers. Thatâs really the only behavior weâve seen in our business outside of the comment I made earlier on our general business, but thatâs a much smaller part of our business than many of our competitors. No. Itâs all â as you know, itâs any place you look across the country, you will see it in different stages and â but overall, what we see is pretty similar to what â how itâs been. Thank you. And the next question goes to John Heinbockel of Guggenheim Partners. John, please go ahead, your line is open. So Rodney, I want to start with a big picture here. When do you guys think about â because youâve got the data, if you think about growth in households, right? So if youâre going to comp, letâs say, I donât know, 3% or 4% longer-term, household growth would be what of that and comp growth with comp households would be what? How do you think about that? And then when you â is there any way for you to dive into your penetration right with your deciles and where the biggest opportunity is? I will start and then Gary, please add any color you want. But if you look long-term, we always build our business model around 1% to 2% inflation. And if you â as you know, any given year will be different than that. But longer-term, weâve always felt that, thatâs kind of where fundamental inflation will be. Obviously, over the last couple of years, itâs been completely different than that. As I shared in my prepared remarks, our loyal household growth was very strong this quarter, and itâs been moving in the right direction. When customers first become a loyal household, what we find is, over time, we get a higher share of that household growth. And we really are seeing that what we define as our seamless experience where a customer can engage with us where we deliver where they pick up in store and shop in store itâs that combination together that earns us the right. So as our loyal household grows, we get a higher share and that should be a tailwind to our identical sales growth over time. And that was the reason that we talked about it, and itâs something, internally, we spend a lot of energy on it. And I know, Gary, is there any other color that you think would be helpful for people to understand. I think you covered it well, Rodney. I guess the only couple of extra points, John, I would maybe add, I do think, as you know, our core strategy is to grow existing loyal customers and what was really pleasing in the quarter as we saw 2.5% growth in loyal customers. So weâre seeing customers move through the loyalty curve and thatâs always been carry the strategy to really deeply reward customers and grow that relationship. I think what we are also seeing though is that as Rodney mentioned, we are building that seamless capability with digital, we are starting to now attract a larger number of households too and the investments we are making in digital are creating that capacity to grow households as well. I think the one thing on the loyal house, as I would say, too, is what we saw during the quarter we have seen the last couple of quarters is that maybe that more affluent customer that has shopped maybe a larger number of retailers before thatâs consolidated more of their trips and total basket with Kroger as they may not need to adjust their budget because of inflation. But they feel itâs the sensible and responsible thing to do, and they see Kroger as a great place to get the right quality at a great value as well, and we are seeing that consolidation happen. And just one more quick thing. Just conceptually, I know you donât want to talk about anything beyond this year, but right? You have raised the EBIT guide quite a bit right now you are up in the high-4s. When you look at â22, what was in there, maybe the good guys and the bad guys that kind of work against each other. I am sort of wondering how sustainable is that new level of profitability grant, the margin is not up as much as the dollars are. How do you think about that in terms of how representative of that performance is and what goes and comes next year off the P&L from this year? John, as you know, we manage our business on dollars. And for us, growing dollars is what creates a sustainable business model long-term. And we always view that the better offer that we can be able to afford to give to our customers the more sustainable that is, and the only way we can do that is by managing our costs and continuing to find and identify areas of waste so that we can reduce that and fund that. Fundamentally, as you look at Kroger, we still would have that same strategy and we would still expect that over time because what we find is that really connects well with the customers. We â that allows us the capacity to continue to invest in our associates and support our communities. And when we do those three things right, the shareholders benefit. So, I know broad picture, thatâs what we would do, the way we look at things. And obviously, with everything we do, we try to make sure we are doing it in a way thatâs sustainable long periods of time. Thank you. And the next question goes to Kenneth B. Goldman of JPMorgan Chase. Kenneth, please go ahead. Your line is open. Hi. Thank you. Itâs important to list my middle initial. I am just curious, the â itâs the second quarter in a row that you have lowered your CapEx guidance. I understand why you have been clear about that. And as Rob Moskow pointed out last quarter, you are not the only company to feel that pressure. I am curious though, at what point is it reasonable for us to not be concerned, but sort of be aware of the potential impact on your growth from not being able to expand in a way that you would like. I am just curious how it affects anything in the near-term if at all? Yes. Thanks Ken. For us, I donât think itâs really something that we are concerned about. We obviously did have very ambitious plans for CapEx this year, playing some catch-up from last year. And we still believe the projects that we have on the horizon are going to be generating significant value for the company in the future and support our growth plans. But when we looked at the expectations for the rest of the year, there are a number of large projects, whether itâs in supply chain or some of the stores, just where itâs just taking longer to get them completed or there are some costs where it just makes sense to pause for a period of time and re-introduce when we believe that those costs will be more rational. So, from our perspective, we donât look at it as having a major impact on our growth model. As you know, we kind of historically were at sort of that $3.2 billion to $3.3 billion of CapEx spend a year. We have moved it up to $3.5 billion, being our sort of target range. And I would still say thatâs probably directionally where we would want to be long-term, to be pushing to the top end of our TSR model. So, we do believe itâs important to be investing in the business, and we can still see plenty of opportunities to support that growth, but we have just thought it was based on how long itâs taking with certain things to get projects completed with supply availability that we think itâs going to be a â some of those projects will now blend into 2023, but we donât have a concern today about it impacting our growth algorithm. Got it. Thank you. And then Rodney, I very much respect your request for us not to ask about the transaction. I wonât ask about it. But I am curious, is there a plan ahead to sort of have give updates to investors on a separate kind of form just because itâs obviously such a big part of the story from here. I think people donât want a black hole or a vacuum of news. So, I am just curious what the plan is to kind of update investors on progress? Is it just you will let us know during each quarter whatâs new and thatâs kind of it. And then we wonât have any Q&A around that. I am just trying to get a sense of that kind of news flow from here. Yes, itâs a great question, Ken. And itâs something that we are going to obviously manage in a very transparent way. And we wanted to go ahead and include it in this quarter, just the context of what is new, and thatâs what we have shared. If there was something material, we would share it between quarters. But in all likelihood in the foreseeable future updates would be on a quarterly basis. But if it was something material, what we would try to do on disclosure is if our wells were reversed, what is it that we think it would be helpful for someone to know, and thatâs what we always try to do. So â and obviously, feel free to give us feedback when that doesnât feel right to you because we appreciate the feedback. Good morning. Thanks a lot for taking my question. Rodney, why wouldnât the grocery sector being more competitive and see more price competition in 2023 given that the consumer is going to be under pressure there is going to be your competitors who are going to want to try and gain some share given the potential distraction from the uncertainty of the merger with Albertsons? Many consumable retailers will have this LIFO gross margin benefit into â23, and there is going to be disinflation where at times, it could be easier to make price investments in an environment of disinflation than it is when there is inflation. Yes. It really gets back to overall. I think itâs incredibly important to understand that we connect with the customer in multiple ways, and fresh is a critical component of that. We fundamentally assume over time, the market is going to get more competitive. We have done that for 25 years. We will continue to do that. And thatâs the reason why we put so much investment energy on personalizing experiences, supporting our associates in ways any way we can, pay, continue in education, even additional support on mental health and especially in todayâs environment. And what we have found in every environment by supporting and connecting with the customer from a full fresh and friendly experience and then having good prices and very aggressive promotion and then personalizing the experience, we are able to support the customer. One of the things that also supports gross margin as we continue to expect larger growth in our fresh departments, which have higher margins in center store. And then when you look at our alternative profit businesses and some of those businesses have margins better than what the center store would be. So, for us, itâs â you really have to look at all of those things together and look at those things over time, and we feel really good about the business model that we continue to develop and grow at our company. Understood. And my follow-up question is on the outlook for inflation. What are you hearing right now from your vendor about their desire to raise prices into 2023. Gary, you said previously that there will be â or some of the prognostications are for 2.5% to 3% food at home inflation next year. If you were to not raise another price from here, how much inflation benefit would Kroger experience in 2023 just from the wraparound effect of what you have already raised this year? And then when you meant to 2.5% to 3%, would it be another 2.5% to 3% on top of that? Well, I will make a couple of comments, and Gary, you can think about some of the specifics. If you look at in our fresh departments, clearly, inflation is slowing down in many categories. Chicken would be an example. You are starting to see that in some of the other categories as well. And I always make the comment high inflation solves high inflation because farmers produce more when their margins improve. If you look at on CPG companies themselves, right now, itâs kind of mixed. Some CPG companies are willing â much willing to have higher prices and give up growth. And what we find is when CPGs do that, our brand is so strong, we really gained share. And that helps the customers budget and it also improves the stickiness and the loyalty of that customer as well. So, itâs â what do they always say, all short statements and economics are wrong. And I really think you have to look at all the moving parts. I donât know, Gary, anything else you want to add to Michaelâsâ¦? Yes, I think you covered it well, Rodney. I think Michael, as Rodney mentioned, we are seeing that fresh is certainly starting to see some change in trajectory on inflation. So, I think it is the grocery category thatâs the most stubborn if you like, in terms of where itâs holding in inflation at the moment. And as Rodney said, I think from â as we look forward from our perspective, if that were to continue without being sort of supported by true cost increases, then that creates an opportunity for us with our brands to improve margin and grow share over time. So, I think thatâs the way we think about it in general. Good morning. Just a couple of simple questions. I guess as we think about the comp here or the IDs in the back half, can you just help us understand how much inflation drove the upside there versus tonnage or â you talked quite a bit about your fresh initiative. Is it those stores? Just helping us understand where the upside is coming from? And then on top of that, we often talk on the food service side of the industry about volume and tonnage, I guess is the way you talk about it relative to 2019. And I am just curious if you can help us understand where you are in terms of volume or tonnage, however you think about that relative to 2019 levels at this point? Gary, I will let you talk about the â a little color on the IDs and then on the food service after you finish health, you share some things there. Okay. Great. Kelly, I think overall, we mentioned it in our prepared remarks somewhat as well. We have seen inflation starting to level. Itâs still obviously a very heightened levels. But if you look at the trend quarter-over-quarter, it really narrowed down to less than I would 1% increase in inflation in our Q3 versus our Q2. So, what we were pleased about was in that context, the continued momentum in our overall ID sales when we look at our Q3 performance versus our Q2, and I think a lot of that ties to some of the prepared remarks that Rodney also shared around household growth that we are seeing and really some defying more share of wallet from loyal customers and seeing lower customer growth. So, thatâs the piece that I think we have been the most pleased around. And we continue to perform really well with winning that first large basket with customers. We continue to see strong momentum there. And even as customers have continued to adjust their behavior as they kind of wrestle with inflation and decide how to balance budgets, we have been really pleased with how our overall pinning that first basket has continued to maintain strong momentum. Yes. On food service, volume would actually be above where we would have been in 2019. For us, when we look at food service or food â we are always â I never know quite what to call it other than itâs a great meal, easy to cook, easy to heat up, easy to assemble. It was the reason why strategically we merged with Home Chef because we thought Home Chef on its own had great trends and could continue to grow. We also felt like their capabilities we could leverage back into Kroger to further improve our mill pit and a great restaurant quality meals would be an example. If you look at sushi, we are the largest sushi restaurant in the United States as an example. Obviously, we partner with a lot of third-parties and local entrepreneurs on that, sandwiches and all those things. So, we see food service as an important component of our growth, not so much relative to 2023. But as you start looking out at, say, 2025 and beyond, and being â having an amazing quality meal thatâs easy and leveraging our delivery network or pickup network is an important part of the growth as you look longer term. Thanks Kelly for the questions. Good morning. Thanks for taking our questions. I just had one question just on OG&A leverage. So, this quarter there was minimal leverage on a very strong comp, and that appears to be driven by wage pressures. So, as you look forward to next year, just any insight in terms of how you guys are thinking about wage crushers at this juncture and whether you think the OG&A leverage point could be lower? Yes. Hi Rupesh. Thanks for the question. Maybe just a little bit more color on Q3 and Q4 as well because I think there is a little bit more to the story there as well thatâs worth understanding. I would say that certainly, you are right, the â we saw a lot of benefit from sales leverage and productivity improvements during the quarter. The team did a great job in really managing costs, considering the inflation that we are facing in some of those cost areas. We would have also had higher incentive plan costs year-over-year in quarter higher technology costs. We are investing in a number of areas that we are seeing growth in year-over-year. And some of that is maybe flipping from capital to operating expense because as you move more to cloud-based activity. It just â it does change the mix there as well. And we also invested, as we did in Q2 in some consultants and some advisory work to help build future momentum in the growth. So, I would say the underlying improvement in productivity was stronger than the quarter would have suggested, and we feel good about the ability to leverage OG&A and fund the average hourly rate increases that we are seeing. In fact, as I mentioned earlier, the Q4 number as we are cycling a fairly flat OG&A rate in Q4, we would expect to be north of 20 basis points of leverage in the fourth quarter this year as we head into next year. Thank you. And the next question is our final question to Robert S. Ohmes of Bank of America/Merrill Lynch. Robert, please go ahead. Your line is open. Hi. This is Kendall Toscano on for Robbie. Thanks for taking my question. I just wanted to see if you could give any more color on how traffic looked during the quarter. What kind of trends you are seeing with items in the basket and number of trips to the store? And then, I guess as you are expecting inflation to moderate a little bit in the fourth quarter, what you would expect on those items going forward? Yes. If you look at the overall trends in traffic, it continues to be improving. Obviously, the overall basket itself is heavily driven by inflation. But as I mentioned earlier, our trends on market share are moving in the right direction and continue to go in the right direction. In terms of the last part, I donât know, Gary, on inflation? I think probably similar to what we have shared earlier, I think overall, as we are looking at the way the customer is changing behavior, as Rodney mentioned, trips improving, generally fairly consistent, I would say, over the year, but we are seeing higher trips from those loyal shoppers that have traditionally shopped in many different retailers for different categories and now seeing that trip consolidate to Kroger. I think is an important trend that we have seen throughout the year and continue to accelerate in the third quarter. Yes. Gary, I think thatâs a great point and thanks for the questions. And for everyone, thank you for joining us today. As always, I always like to share a few comments directly with our associates listening in because so many of our associates take the time to do that, which we appreciate. This is the time of year we truly shine. Our special holiday film made clear. We create the opportunity for our customers to transform todayâs holiday moments into tomorrowâs memories. We have had the pleasure to hear from countless associates, former associates and customers about just how touching this film has been. I know I canât watch it without getting a tear in my eye. And just reminding all of us how special it is to share favorite meals with those we love most. Thank you to our teams who put this together. Thank you for our teams who make the memories happen. Itâs a wonderful way to kick off the holiday season. As we all prepare together with our loved ones, I am so incredibly proud of our associates across the Kroger family of companies. We have accomplished so much this year. Thank you for the many ways you serve our communities and uplift our customers and each other. This concludes our call for today. We wish everyone a happy holiday season, Merry Christmas, Happy New Year and encourage you to stay safe. Thank you.
EarningCall_1988	Hello, and thank you for standing by. Welcome to CrowdStrike's Fiscal Third Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Good afternoon, and thank you for your participation today. With me on the call are George Kurtz, President and Chief Executive Officer and Co-Founder of CrowdStrike; and Burt Podbere, Chief Financial Officer. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives, growth and expected performance, including our outlook for the fourth quarter and fiscal year 2023 as well as any assumptions for fiscal periods beyond that, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise. Further information on these and other factors that could affect the company's financial results is included in the filings we make with the SEC from time to time, including the section titled Risk Factors in the company's quarterly and annual reports. Additionally, unless otherwise stated, excluding revenue, all financial measures disclosed on this call will be non-GAAP. A discussion of why we use non-GAAP financial measures and a reconciliation schedule showing GAAP versus non-GAAP results is currently available in our earnings press release, which may be found on our Investor Relations website at ir.crowdstrike.com or on our Form 8-K filed with the SEC today. Thank you, Maria, and thank you all for joining us. Let me start with a summary of our results. In Q3, we delivered 53% revenue growth year-over-year, 15% non-GAAP operating margin and record non-GAAP net income, all of which were ahead of our guidance. Additionally, we achieved record free cash flow of $174 million, or approximately 30% of revenue. There are many positive trends we see in our business, including strong competitive win rates, consistent ASPs, exceptional retention rates and the mission-critical nature of cybersecurity. However, I would first like to address the increased macroeconomic headwinds we saw in the quarter, which caused Q3 net new ARR to come in below our expectations. As we discussed on our last earnings call, organizations were starting to respond to macroeconomic conditions by adding extra layers of required approvals and extending the time it took to close some deals. As Q3 progressed and fears of a recession grew, this dynamic became more pronounced. In our smaller, more transactional non-enterprise accounts, we saw customers increasingly delay purchasing decisions with average days to close lengthening by approximately 11% and net new ARR contribution decreasing $15 million from Q2. This also impacted our net new logo additions in the quarter, even though our quarter-over-quarter POV win rates increased meaningfully over more complex vendors that require more headcount to manage. While sales cycles lengthen, we believe the vast majority of these deals are not lost, just delayed. In the enterprise, sales cycles or average days to close remain consistent with last quarter's modestly higher level. In Q3, these larger customers continue to prioritize their CrowdStrike investments, but some also had to manage timing issues related to OpEx budgets and cash flow amidst the rapidly evolving macro. To achieve this, some customers signed contracts that have multi-phase subscription start dates, which pushes their expense and CrowdStrike's ARR recognition into future quarters. While every quarter, we have some deals with multiphase subscription start dates, in comparison to last quarter, in Q3, we saw approximately $10 million more ARR deferred into future quarters. We expect these macro headwinds to persist through Q4. Additionally, given the increased scrutiny on budgets, we're not going to expect a typical Q4 budget flush, leading us to adjust our Q4 net new ARR expectations, as Burt will discuss in more detail. But this caution does not deter our confidence in the long-term market position of CrowdStrike or the resiliency of the cybersecurity market. We see strong inherent demand for our products, and we entered Q4 with a record pipeline. Pipeline expansion is even more important in times of an evolving macro and elongated sales cycles. We are working to stay out in front of pipeline creation. With Jennifer Johnson, our recently appointed CMO, now with the marketing helm, we are realigning our marketing initiatives and increasing our focus on ramping more top-of-funnel initiatives and brand awareness to drive pipeline to even greater heights. We also gained significant leverage from our partner ecosystem, with partner-sourced ARR growing 55% year-over-year. There were many positives in this quarter highlighted by the record number of customers contributing at least $1 million in net new ARR in the quarter. Additionally, ending ARR for the $1 million-plus cohort surpassed the $1 billion milestone in Q3 with a 67% year-over-year growth rate. These larger customers are standardizing on Falcon, consolidating vendors and prioritizing expansion projects that represent sizable cross-sell and up-sell opportunity that are moving forward even under uncertain macro conditions. Marquee brands that are new to our $1 million-plus cohort included a Global 500 manufacturer that landed with 10 modules, providing unprecedented visibility and protection to all areas of their environment and allowing them to consolidate four agents and vendors with their initial deployment of Falcon. Two Global 500 financial institutions who chose Falcon for its ability to replace multiple legacy security products and bolster their security posture through a single agent, a Global 500 consumer goods manufacturer that is now leveraging Falcon Complete for a fully managed approach to protecting its critical infrastructure and a Fortune 500 luxury brand, leveraging Falcon to protect both its traditional end points and cloud workloads. In the third quarter, we also delivered strong results in the public sector, driven by a Falcon Complete LAN with one of the largest US federal agencies now standardizing on the Falcon platform and a strong quarter for our SLED business with the US state government standardizing on CrowdStrike in the quarter, as well as wins and expansion across multiple US state and local government agencies and educational institutions. To date, 40 US state governments are CrowdStrike customers, of which 21 in the District of Columbia have standardized on Falcon. Additionally, we secured a win with one of the largest federal systems integrators that will be using Falcon to protect its internal estate, as well as integrate it into its MSSP offering. Moving to our expansion and retention performance. Our dollar-based net retention rate was well above Q3 of last year and consistent with our Q2 performance, which was at the highest level in seven quarters. Our best-in-class gross retention rates remained at record levels above 98%. We are also seeing more customers standardizing the Falcon platform and adopt more modules. Q3 subscription customers with five or more -- six or more and seven or more modules were 60%, 36% and 21%, respectively. This represents a 55%, 66% and 81% year-over-year increase in these respective module adoption cohorts. It was another record quarter for our emerging product category, which includes our Discover, Spotlight, Identity Protection and LogScale modules. Our Identity Protection solutions are the largest contributor to ARR within the emerging category, and Q3 was another record quarter. Net new ARR for Identity Protection solution grew to a new all-time high, and the attach rate on net new logos continue to grow rapidly. With close to 80% of cyber attacks leveraging identity-based tactics to compromise legitimate credentials and use techniques like lateral movement to evade detection, Identity Protection is core to stopping breaches. Our Identity Protection capabilities are a game changer and shoring up active directory as well as stopping ransomware and lateral movement. To punctuate the value of our Identity Protection capabilities, I'd like to share a recent seven-figure expansion with a leading global brand. This customer has a very capable security team that spent years building a dedicated identity and access management team and implementing a Privileged Access Management solution, or PAM. Even with these efforts, shortly after turning on Falcon's Identity Protection in the POV, we identified several misconfigurations, including dozens of domain administrator accounts that were not being managed by their PAM solution, a multitude of accounts without password expirations, thousands of users with compromised passwords and a potential attack path from unprivileged accounts to privilege launch. With Falcon Identity, this customer is shutting down routes to illegitimate access and significantly hardening their defenses. Q3 also marked another record quarter for LogScale as we secured wins across multiple verticals, including financial services, insurance, technology, retail, energy and telecommunications. Notable wins included a statewide insurance provider in the US and previously mentioned new Global 500 financial institution, where Falcon LogScale has enabled both organizations to log more data, retain it longer and reduce the cost of their existing log solutions, resulting in better security and more visibility across their environments. During the quarter, we acquired external attack surface management, EASM vendor, Reposify, to help our customers identify and eliminate risk from vulnerable and unknown assets before an attacker can exploit it. The acquisition closed in early October, and we expect to launch our external attack surface management module this quarter, which will bring us to 23 modules available across the Falcon platform. On the public cloud front, we continue to build momentum with ending ARR for modules deployed in a public cloud setting growing over 100% year-over-year. Our CNAPP solution continues to gain industry recognition, including winning Best Cloud Security and CRN's 2022 Tech Innovators Awards. Falcon Complete continues to shine with net new ARR growing close to 20% quarter-over-quarter as customers embrace our extended lineup of complete services, including Identity Complete and Cloud Complete. Additionally, we launched Falcon Complete LogScale during Q3 and already secured several wins. In a more challenging economic environment, there is appeal for a solution like Falcon Complete that allows companies to decrease headcount or hold headcount stable. The significant advantages of CrowdStrike's Falcon Complete offering were showcased in the first MITRE ATT&CK evaluation for security service providers. Out of 16 participants evaluating, the Falcon platform's integration of industry-leading technology and human expertise enable us to deliver the highest coverage. This was MITRE's first closed door test, which means the participants did not have prior knowledge of the adversary, and retesting was not allowed. We believe this evaluation demonstrates why CrowdStrike is the clear leader in EDR and XDR, whether our capabilities are delivered as a fully managed service from CrowdStrike or through our network of MSSP partners or operated independently by our customers. The Falcon platform also won SE Labs EDR ransomware detection and protection test. This well-regarded third-party testing firm involved 270 ransomware variations and deep attack tactics. Falcon achieved 100% ransomware prevention with zero false positives. Let me repeat, zero false positives, which we believe reflects our superior AI and machine learning models and the data mode advantage we derive from our unique graph technology in Threat Graph. Falcon's exceptionally low false positive rate represents a tremendous operational win for our customers as it enables them to significantly increase their speed to triage, investigate and remediate a verified alert. Based upon our business value assessment and realized analysis, we estimate that, on average, enterprise customers observed a 68% increase in operational efficiencies with the Falcon platform, equating to an offset of approximately 3.5 full-time employees. We believe today's macro pressures on businesses and the escalating threat environment make Falcon's value proposition as a consolidator more important today than at any other time in CrowdStrike's history. In order to solve agent bloating complexity within the security and IT stack, while also protecting the business from cyber adversaries and reducing operating costs, companies need to consolidate on a truly integrated platform, not acquired technologies stitched together by an invoice. CrowdStrike Falcon continues to be the gold standard and the security platform of record. While the cybersecurity market is not immune to macro pressures, it is a mission-critical technology. The adversaries don't stop. As detailed in our latest threat hunting report, OverWatch observed a nearly 50% year-over-year increase in interactive intrusion campaigns. We believe cybersecurity investments is resilient and is prioritized, especially among the world's largest organizations as represented in our $1 million-plus customer cohort and best-in-class retention rates and module adoption rates. With the escalating threat environment, expanding attack surface and accessibility of the Falcon platform, it is our belief that we are still in the early innings of CrowdStrike's growth journey. We believe the early and rapid success of our identity protection solution best demonstrates our ability to leverage our unique and vast threat intelligence to create and dominate new and legacy markets. We intend to continue our disruptive innovation, expand our technology leadership and bring new modules to market. Even with these investments, we are responding to current macro conditions and plan to balance growth with profitability and free cash flow, as Burt will discuss in more detail. We remain steadfast in our vision to grow ending ARR in $5 billion by the end of fiscal year 2026 and reach our target operating model in fiscal year 2025. Thank you, George, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers, except revenue mentioned during my remarks today are non-GAAP. Before we get started, I will note that the results we are reporting today include the acquisition of Reposify, which was de minimis to revenue and ARR, contributing less than $1 million to Q3 ARR. In the quarter, ending ARR grew 54% year-over-year. Net new ARR grew 17% year-over-year to $198.1 million. Given the elongated sales cycles due to macro pressures in smaller non-enterprise accounts that George discussed, the composition of net new ARR in Q3 was weighted more heavily toward our $1 million-plus customer cohort with no outsized contribution from any one deal. Our dollar-based net retention rate was above our benchmark and consistent with Q2, maintaining the highest level since Q3 in fiscal 2021. Gross retention also maintained its record level, demonstrating our strong commitment to stopping the breach, delivering value to customers and restoring trust to the security posture of companies worldwide. As George mentioned, we are also seeing more customers standardize on the Falcon platform and adopt more modules. We believe these trends will create an enduring business opportunity for the years to come. Moving to the P&L. Total revenue grew 53% over Q3 of last year to reach $580.9 million. Subscription revenue grew 53% over Q3 of last year to reach $547.4 million. Professional services revenue was $33.5 million, setting a new record for the ninth consecutive quarter and representing 46% year-over-year growth. In terms of our geographic performance in Q3, we continue to see strong growth in the US at 46% and international revenue growth at 72% year-over-year. Third quarter total and subscription non-GAAP gross margins remained relatively consistent at 75% and 78%, respectively. Total non-GAAP operating expenses in the third quarter were approximately $348.6 million or 60% of revenue versus $239.0 million last year or 63% of revenue. In Q3, our Magic Number was 1.2, reflecting the continued efficiency of our go-to-market engine. We believe a Magic Number in excess of 1.0 indicates very favorable go-to-market efficiency and supports our current investment plan. As George mentioned, we are focusing marketing investments on specific initiatives with the goal to drive an even bigger pipeline in response to the macroeconomic environment, while at the same time maintaining our disciplined approach to unit economics. Third quarter non-GAAP operating income grew 77% year-over-year to reach a record $89.7 million, and operating margin improved by 2 percentage points year-over-year to reach 15%. Looking at the first nine months of fiscal year 2023. Non-GAAP operating income grew 125% year-over-year to reach $260.1 million and 16% of revenue. Non-GAAP net income attributable to CrowdStrike in Q3 also more than doubled over the prior year, growing to a record $96.1 million or $0.40 on a diluted per share basis. Our weighted average common shares used to calculate third quarter non-GAAP EPS attributed to CrowdStrike was on a diluted basis and totaled approximately 240 million shares. We ended the third quarter with a strong balance sheet. Cash and cash equivalents increased to approximately $2.47 billion and reflects the approximately $19 million payment net of cash acquired for the acquisition of Reposify. Cash flow from operations grew 53% year-over-year to a record $242.9 million. Free cash flow grew 41% year-over-year to a record $174.1 million or approximately 30% of revenue. Before I move to our guidance, I'd like to provide a few comments about how we view the ongoing impact of the current macro climate on our business. We are maintaining our revenue guidance for fiscal year 2023 while raising our bottom line guidance. As George mentioned, even though we entered Q3 with a record pipeline, we are expecting the elongated sales cycles due to macro concerns to continue, and we are not expecting to see the typical Q4 budget flush given the increased scrutiny on budgets. While we do not provide net new ARR guidance given the current macro uncertainty, we believe it is prudent to assume that Q4 net new ARR will be below Q3 by up to 10%. Looking into FY 2024, assuming an approximately 10% year-over-year headwind in the first half of the year on net new ARR, and for the full year, net new ARR would be roughly flat, to modestly up year-over-year. This would imply a low 30s ending ARR growth rate and a subscription revenue growth rate in the low to mid-30s for FY 2024. Similar to how we partnered with customers during the height of the COVID-19 pandemic, we are exercising more flexibility with new contract payment terms as organizations navigate macroeconomic conditions. We also expect more multiyear deals converting to one year renewals than in previous quarters. As a result, we expect free cash flow as a percent of revenue to be in the range of 28% and 30% for FY 2023. Throughout fiscal year 2023 to date, we have taken advantage of market dynamics and brought on superb talent in key functions at an accelerated pace. At the same time, employee retention rates have increased. As of the end of Q3, we have grown our team by 40% in FY 2023, putting us in a really good position to execute on our plan for next year. This allows us to shift our near-term focus to enablement and productivity, while significantly slowing the pace of new hires needed to execute our plans. Assuming the macro environment does not materially weaken from current levels, we see a path to free cash flow margin of 30% of revenue in FY 2024, and we plan to generate modest incremental non-GAAP operating margin leverage in FY 2024 as we continue to march toward our target operating model. For the fourth quarter of FY 2023, we expect total revenue to be in the range of $619.1 million to $628.2 million, reflecting a year-over-year growth rate of 44% to 46%, with subscription revenue being the dominant driver of growth. We expect non-GAAP income from operations to be in the range of $87.2 million to $93.7 million and non-GAAP net income attributable to CrowdStrike to be in the range of $109 million to $107.5 million. We expect diluted non-GAAP net income per share attributable to CrowdStrike to be in the range of $0.42 to $0.45, utilizing a weighted average share count of 241 million shares on a diluted basis. For the full fiscal year 2023, we currently expect total revenue to be in the range of $2,223.0 million to $2,232.0 million, reflecting a growth rate of 53% to 54% over the prior fiscal year. Non-GAAP income from operations is expected to be between $347.2 million and $353.8 million. We expect fiscal 2023 non-GAAP net income attributable to CrowdStrike to be between $357.6 million and $364.4 million. Utilizing 240 million weighted average shares on a diluted basis, we expect non-GAAP net income per share attributable to CrowdStrike to be in the range of $1.49 to $1.52. Okay. Great. Hey, guys. Thanks for taking my questions here. A lot to unpack. George, maybe for you, I was wondering if you could dig just one level deeper into any competitive data that you've reviewed kind of looking back in the quarter. Do you feel like any big competitors here like Microsoft or perhaps even smaller next-gen competitors are having an impact? Burt, if I could squeeze a housekeeping question in as well. Clearly, ARR is the metric that you manage to. But maybe for everybody's benefit, can you also talk to how RPO and ARR growth might have different drivers? Yes. Thanks, Saket. So again, if you look at what we've seen and what we've commented on, the inherent demand for our products remain strong. Obviously, there's an increase in the macro headwinds. We talked about some of the smaller customers having elongated sales cycles. We saw 11% increase in days to close. And those are delayed deals, not lost deals. And on the enterprise, again, we're seeing consistent win rates. They remain high. And in fact, in the smaller customers, we've actually seen them significantly improved quarter-over-quarter. So from our standpoint, and we look at this very closely, as you might imagine, the landscape remains favorable to us. I really don't see another true consolidator like Falcon. And customers are looking for technologies that reduce costs, reduce complexities, actually work and stop breaches, and that's what we're delivering. So again, when we look at the competitive landscape, it remains favorable to us. And as we pointed out, we saw increased macro headwinds, and that's what we talked about. So I'll turn it over to Burt. Thanks, Saket. So first, big picture, when we think about CRPO, we think that as a noisy metric. And it's really not designed to match or correlate with ARR given the fact that ARR is a normalized annual number. And what do I mean by a noisy metric? Well, what I mean by that is there are several positive trends in our business that can create headwinds on duration relative to prior periods and not necessarily fully captured in CRPO. Some examples would include, for us, more one year deals compared to prior periods. In software, it's difficult for multiyear lands to renew as one year deals. And as renewals become a bigger portion of the business, which for us it is, this creates a headwind to CRPO. And given where we are with respect to our high gross retention rates, one year deals provide us the opportunity to expand within the customer to drive bigger bundles. Two, with the expansion and cross-sell sold co-terminus to existing contracts, these are often less than one year in duration. So our expansion business has been -- as our expansion business has been increasing, as evidenced by our net new retention rate, this would have pressure on our CRPO. And finally, on duration, we do have some usage-based deals. It could be MSSPs, the vast majority of MSSPs or uses based, and those are built monthly. And as MSSPs become a more rapidly growing part of our business, that's going to impact cRPO as well as noncommitted consumption billings in cloud. And then finally, just to comment on ARR. You pointed out that's how we run our business. ARR, though, is really an X-ray into the contracts themselves. And as we view that as the most important -- or most transparent metric into the outlook for our business, that's the one where we're focused on. So, hopefully, that gives some more clarity on how we think about cRPO and ARR. Good afternoon. Thanks for taking my question. Wondering if you guys could compare and contrast what you saw domestically versus internationally. And a little surprising to see international actually strengthen based on growth rates and the US fall off. So if you could provide a little clarity there, that'd be great. Thanks. Hey, Rob, this is Burt. Thanks for the question. So, in general, we saw the macro hit all the geos. But as we think about our split between United States and internationally, obviously, the United States is the biggest portion overall of our business. So any impact to ARR will generally be driven from that sector. Yes. Hi, guys. And thank you for the extra commentary on macro and next year, in particular. My question is really, how do you think about those macro headwinds manifesting themselves in terms of net dollar retention or expansion rates versus the growth rate in new customers? Is one side going to be more particularly hit versus the other as it unfolds over the next several quarters? Thanks, Sterling. So, for us, the good news is that we have a very healthy installed base. And we feel that we've got great opportunities in that traditional land-and-expand model. And we saw that in the ratios that we saw. Having said that, we still feel that there's a tremendous opportunity in new logos. We think that the opportunity for us to go and capture some of those new logos really has that -- goes to our model that we started and talked about since day one. So today, we still think about tremendous opportunity in the land-and-expand model, as evidenced by our dollar-based net retention rates, but also in terms of the net new logos that we have the opportunity to go capture. We talk about the TAMs that we've seen ever increasing from IDC and the fact that we've just been able to add new modules at a nice clip. We feel that we have a great opportunity to go after those new logos as well. Hi. Thanks for taking my question. George, you bought Reposify, external tax service management. A lot of customers were talking about it positively at the Analyst Day, or the user conference. Love to hear -- you said, this is going to be launched this year. Wanted to see if there's any initial indication of interest there. And how do you think that'll trail or attract in terms of demand? Yes. We've seen tremendous interest since the acquisition. We announced that at Fal.Con. Customers are looking to understand their exposures externally. And as they move more and more to the cloud, a lot of their exposures are really configuration and policy-driven. So it's a fantastic add for us. It fits very nicely within our platform. It ties into what we're doing on the vulnerability management and risk side. And overall, we're really excited about it. And customers are not only looking at it for themselves, but also looking at it from a third-party risk perspective and leveraging it across their supply chain in terms of making sure that their suppliers are secure and not putting customers at risk. So, so far, very positive feedback and we're excited to get the product launched and bring it to market. Hi. Good evening. Thanks for taking my question. George, a question for you. I think it's pretty clear that, the macro is going to impact pretty much every company, security not excluded from that. I'm curious how you're thinking about balancing sort of growth and profitability from here because on the one hand, clearly, growth has been slow for CrowdStrike and for everybody else. But on the other hand you've got this big market opportunity in front of you as an emerging consolidator in cybersecurity. Do you feel like this is a time to maybe continue to invest as maybe others are going to struggle more, they don't have that free cash flow generation that you do, or do you feel like this is a time to maybe show a little bit more leverage? Just curious, how you're thinking about that? Well, great question, Hamza. And it's always been a balanced growth approach, and it's never been a growth at all costs. And I think we've shown that with our performance and track record. And we continue to play the long game. But if you put things into perspective, we're a Rule of 83 last quarter. I mean, you think about the growth and the cash flow generation at scale at $2 billion plus ARR is pretty remarkable. We actually see this as a great opportunity for CrowdStrike as we go forward as smaller competitors fall by the wayside, as private companies look for exits we think it's a very attractive opportunity for us with our balance sheet, almost $2.5 billion in cash. And at the end of the day, as these macro trends evolve, we see a great opportunity for us now into the future to continue to consolidate customers as well as other technologies that might fit within our platform. So that's the way we look at it, balanced investment and, again, a focus on making sure that we're delivering cash flow for our shareholders. Great. Thank you for taking the question this afternoon. So total ARR of $2.3 billion, growing 54% is still absolutely amazing, I was â and it's at scale. But I was wondering, were you surprised that the net new logos that you added were down 9% this quarter? Thanks, Andy. So when we think of the net new logos, it really corresponds to what we talked about in terms of what we saw in that SMB space. The SMB space is the one that drives the velocity of our net new logos. And as we talked about, we saw an 11% increase in our sales cycle in the SMB space. And that actually equated into $15 million in terms of deals in that space that could push out. And so when you think about 15 million in that space and what it means in terms of logos, where you can do the math, it's a pretty big number. So that's how we think about net new logos corresponding to what we saw in net new ARR from the SMB space. So from that perspective, we weren't surprised at the end of the day when we saw that what happened with respect to the increased sales cycles and the amount of money that got pushed out in the SMB space. Great. Thanks for taking my question. George, for you. You've obviously been running -- you've been in sort of the security industry for a long time. When you see macro headwinds like this pop up, are there things that you all can do from a sales perspective to accelerate cycles, like going at customers sooner than you'd normally do? Just anything tactically that you do in times like this? And has anything changed competitively in the assets kind of the smaller side of the business that you play in? Sure. So let me take the latter question first. As I mentioned, we actually saw our win rates go up in the down-market SMB space. So I think we continue to do well there. And as Burt talked about, deals getting pushed out from that segment, we saw the impact of that. But when we think about what we can do and what we continue to focus on, obviously, execution is really important to us. And getting ahead of the lengthy sales cycles that you see like in the enterprise with all the various approvals and legal that you have to go through compliance, privacy, and it's just making sure that you have all of those checked off to try to fit the deals in the kind of a normal cycle that you would expect. And it just -- it takes more work and effort, and we continue to focus on full reviews of the pipeline and making sure that we're working with not only our internal sales teams, but also our partners in leveraging that vast partner network that we have. And that's been the focus. So again, as you pointed out, I've been through multiple sales cycles, economic cycles, if you will, in security. And as I said in an earlier question, I do think it's a great opportunity long-term as we push through the macro headwinds. Hi. I hope for better news today after the win in soccer, but it's okay. We'll take what you have. I want to ask about budgets. So we're working off 2022 budgets now, and we see lengthening sales cycle in the low end of the market. The question is as we go into 2023 and the new budgets are set, which is around January, what's the risk that we're going to see similar behavior or larger companies work off budgets and are less sensitive to kind of quarterly fluctuations? And if you don't mind, just to touch on, no one asked about pricing and about quarter linearity, which are two important trends? Thanks. Yes. Sure. I'll take the first part of that. When we think about budgets, again, all the feedback that we've seen is that budgets are not in the enterprise getting cut. There's so many mandates around security. And just as customers move to the cloud, what they are looking to do, though, is optimize that spend and consolidate. So they may not be spending as much money with a whole bunch of vendors, and they're looking to consolidate with companies like CrowdStrike. We spent a lot of time on selling the value. And when we think about this, and we talked about this in the past, Tal, is the consolidation of agents. It's a huge pain point for customers, the complexity of the cost. So all the conversations that I'm having with CEO, all the way down, has been around how do we help consolidate the cost, because they're going to spend the money, they'd rather spend it with fewer vendors, and how do they get a better outcome. And that's, I think, where CrowdStrike shines. And in some cases, that may take a little extra work, because we're upsizing some deals, and we've got to go through more approvals and go through more of the value selling. But again, that's what we're focused on. So, obviously, we'll monitor the environment and see if there's any changes. But in all the conversations that I've had, security remains still top of mind and top of budget for enterprise customers. I'll take the second part, Tal. So, first, on pricing, what I can comment on is that a couple of things. So one is, we see that discounting is consistent with Q2. We didn't see any change there. There were no additional escalations, to George and I, for outsized discounting on deals. Number two is, we've seen ASPs be consistent. So -- and that drives the point home about just our overall platform play and our ability to sell value. And I think that enterprise sales cycles increased a bit in Q2, and Q3 was consistent with that level. So I think that, when you think about linearity, to the second part of your question, I think that's how I think about that. We did talk about on -- for pricing anyway. When we do talk about net new ARR, I did talk about in the prepared remarks about how we think about up to 10% headwinds going into Q4 from Q3, and that's just to coincide with some of the headwind activity that we saw accelerated at the end of this quarter. So that's how we think about that. Thanks for taking my question. You said in the prepared remarks -- you talked about large customers pursuing multiphase subscriptions. Just maybe if we can dig into that a little bit. How long do you expect that ramp period to be? And do you have commitments for the ramp parts of the deal or just verbal intentions? Thanks, John. So I'll take the second part first. So we do have commitments from those deals. They're signed deals. Just that when we think about structure, we have this phase start date with respect to the subscriptions. So that's how we think about those multiphase deals. And then, I think that, when we think about those multiphase deals and the patterns that we've seen, I think that we're going to see something consistent with what we've seen in Q3. I think that more of those larger enterprise deals, they're going to sign those deals. They're going to look at their budgets. So they're going to look at their OpEx, and they're going to say, okay, well, this makes sense if we turn it on at this point, which could be a date post the quarter end. But the deals then -- I think the most important part about your question is that, the deals are locked in, and that's what we saw in Q3, and we anticipate that in Q4. Well, great. Thank you so much for fitting me in, guys. Burt, your comment saying that you expect no budget flush this Q4 is like telling a kid Santa Claus isn't coming for Christmas. And I think you guys are the only ones explicitly saying this, and I'm guessing it's because you're being more prudent and maybe more transparent than others. But I'm also wondering how much of it is pipeline versus conversion rate assumptions that inform your perspective. And I guess, maybe asked a little bit differently, how is your forecast methodology adapting to the environment and the assumptions that you're inputting into it in Q4? Thanks. Yeah. So really, I want to attack that question from the standpoint of â it starts from the fact that, we did see record pipeline again going into the quarter. So I think it goes back to what we've seen this quarter both on the SMB and in the enterprise space. I think we're going to see the consistent themes that the macro is driving. I think we're going to see the SMB space. We're going to see deals continue to be pushed out. And on the enterprise, we're going to see more multiphase deals. So that's how I think about the quarter. And I guess the one thing that I want to add is that it is important that we are continuing to drive top of the funnel. And we've got a lot of programs that are focused in on that, and it's just going to be one of those things that we have to just overcome the macro. Good afternoon. Thank you for taking my questions. Burt, to your prepared commentary around some of the flexibility that you're introducing with respect to contract negotiations, particularly on the invoicing front, wondering if you can share a little bit more detail with respect to how some of those engagements are becoming more flexible and sort of the implications on collections activity. I can appreciate you shared preliminary fiscal 2024 guidance with us on a number of those fronts, but just to get a little bit more detail as to how some of these changes in business activity behavior from customers is influencing how you're doing negotiations? And on a related matter, as the business does become more and more renewal, does some of the leverage in the model start coming from maybe changed incentives to your sales team around renewal business maybe getting a lower threshold of quota payment versus net new business, which is clearly becoming a little bit more challenging to do in this environment? Thank you. Fatima, good questions. So I'll take them both. So with respect to structure, there are two things that come to mind. One is obviously on the enterprise deals and the phased subscription start dates that will obviously impact billings and cash. The second one is flexibility on when those payments become due. So we're working with our customers to meet their budgets, to meet their time lines, and we've been flexible with respect to that. And of course, that will have an impact on cash as well. But overall, I still see â because of our business model and our strong business model and consistent Visma hasn't changed. I think that we've got this great opportunity to be comfortable in terms of what I talked about on the prepared remarks. And from a cash flow standpoint, we see a path to 30% free cash flow margin next year. And I think that just goes back to the strength of the model and the fact that we've got this business that is really durable. And with respect to how I see the big picture, I think that the things that we're doing with respect to structure really talks to the partnering with respect to our customers. And that was well appreciated well back in the â when the pandemic forfeit. It's being appreciated now in a macro with the headwinds that we all have. So, we think we're still very excited about the opportunity to be able to partner with our customers. And then second, with respect to how we think about compensating our sales team and in light of our renewal business becoming larger and larger, I think that the good news there is that when you think about renewal business, the actual cost that it is to continue to generate net new ARR from an existing client is definitely lower than to go out -- with respect to going out and getting a new logo. So I think there is some leverage to that. So that's why I think that we're in a really good spot with respect to me talking about leverage for next year. But thanks for the question. Great. Thanks. I was hoping if we could talk a little bit about the cloud segment of the market not necessarily in terms of your rate of growth per se, but rather what you're seeing in terms of company's willingness to accelerate or decelerate their progression to the cloud workloads. And within that context, what kind of share do you think you're picking up, or are you gaining share in that -- in those workloads that are moving? Thanks. Yes. Thanks. Obviously, customers are going to flex what they put in the cloud, and sort of the cloud growth is what it is in terms of the macro cloud growth. In terms of what we see in our cloud workload protection, we continue to win in those areas. We win because we've got a combination of both workload protection as well as cloud security posture management and a full suite of protection capabilities. And we have more and more customers that continue to leverage our technologies as they migrate to the cloud. So they're still migrating to the cloud. They're leveraging our technologies as it's all integrated. And in terms of our cloud workload protection across the board, it's certainly been very, very strong. So that's what we've seen in our business. And obviously, there's a broader cloud theme in the environment, and customers are going to choose when and how they migrate. But we are there for them, and we continue to win in those environments. Great. Thanks for taking my questions. Burt, just to follow-up on multi-phase subscription start dates. I just want to unpack the behavior there a little bit. It sounds like it's mostly a cash flow consideration by customers, but are there any other factors driving this behavior, whether it's resource constraints, timing of road maps or just practice more care on aligning the end and then start dates of third-party solutions being consolidated on the Falcon platform? And just a follow-up. I think you mentioned that these are confirmed deals. So I just want to make sure that that is showing up. Those deals are showing up in RPO. Thanks. Yes. Thanks, Roger. So to answer your -- the first part of your question, so I think the biggest driver is that OpEx. They're looking at starting those subscription dates at staggered times, what makes sense for them. They've got to align their resources on their end and making sure that they have the right folks looking at it. And I think for us, the good news is that those deals are confirmed. They are locked in. We signed the deal. Some might be deployed now, some might be later. And they will be in the RPO calculations. Thanks for the question. Hey, guys. Really appreciate the question. George, appreciate your comments on F 3Q and 4Q macro. Based on your conversations with customers, what is their view on 2023 cyber budgets as they start to think about them? Are they expecting near-term alleviation with a quick Band-Aid rip-off, or is this more of a long-term new normal that we might see for the next year or so? Well, as I mentioned earlier, we haven't seen any customers come back and say, hey, our budgets are cut next year. We just haven't seen it. And as I mentioned, they're looking to consolidate. They're obviously looking to deploy those resources wisely and do it with fewer vendors and get better outcomes. So, again, that's an area where I think we have tremendous strength. But nothing in my conversations -- and as you might imagine, I talked to a lot of customers all over the globe and prospects. Nothing has come back that said they're spending less on security next year. They're deploying to the cloud. They're adding capabilities. There is a whole slew of compliance requirements that are coming in around the globe that will drive additional spend. And, again, they want to do it in a way that they get the most bang for their buck in a consolidated fashion. And that's exactly what we've seen, and we haven't seen anything to deviate from that. Thank you. And that concludes our question-and-answer session. I would now like to turn the call back over to George Kurtz for any closing remarks. I wanted to thank all of you today for your time, and we certainly appreciate your interest and look forward to seeing you at our upcoming investor events. Thank you, and have a great day.
EarningCall_1989	Hello and welcome. My name is Alex, and I will be your conference facilitator today for the Amgen Analyst and Investor Conference Call from the World Congress on Insulin Resistance, Diabetes and Cardiovascular Disease Conference. [Operator Instructions] I would now like to introduce David Reese, Executive Vice President of Research and Development. Dr. Reese, you may now begin. Thanks, Alex, and good morning, everyone. Thanks for joining us for an update on the AMG 133 program in obesity and allied disorders. These are a review of data just presented at the World Congress on Insulin Resistance, Diabetes and Cardiovascular Disease. Next slide, please. Here is our standard Safe Harbor disclaimer and I should note that these slides are up on our website now for those who wish to follow along. Next slide, please. In terms of todayâs agenda, I will provide a brief introduction to our strategy in obesity and allied disorders following which Narimon, the Head of our Cardiometabolic Group in Clinical Development â Global Clinical Development, will provide a focused review of the AMG 133 data just presented at Congress over this weekend and then we should have plenty of time for questions and answers. Next slide, please. As you all know, obesity is one of the major public health challenges of the 21st century. It is a complex, very heterogeneous disease with underlying complex biology. There is a strong genetic component that is rooted in evolutionary pathways fixed into human evolution. This heterogeneity of the disease leads to diverse outcomes in different patient populations, cardiovascular disease, metabolic syndrome and diabetes, various respiratory disorders, mechanical complications to name just a few. Now to tackle this disorder, we have taken an integrated structured approach at Amgen. Next slide, please. This approach first is focused on human genetics and our large capabilities in human data to understand patient populations, the heterogeneity of the disease on a biology level and to understand how we may actually arrive at a precision medicine where we match treatments to the underlying drivers of individual patients with obesity. As always, we take a biology-first, modality-next approach and anticipate over time both large molecules, small molecules, RNA-based therapeutics and perhaps other approaches. We are developing a multi-asset portfolio with both incretin and non-incretin-based approaches. Initially, we will talk more about that as we get into 2023 and over the course of that year. And all of this again is powered on insights derived from genetics and our human data capabilities. Finally, given the complexity of the disease and the multiplicity of potential targets, we believe multi-specific molecules will be important in the evolution of this field and a prime example of that is AMG 133, which really illustrates all of the principles that I have laid out on this slide. So with that, Iâd like to turn things over to Narimon, who will now go through a detailed review of the AMG 133 data just presented and then we will open things up for questions. Narimon? Thank you, Dave. If we may advance to the next slide please. I am pleased to share the highlights of the AMG 133 data recently presented at the WCIRDC Congress. Next slide, please. Recall that AMG 133 is an investigational therapy being evaluated as a treatment for obesity and obesity-related illnesses. Among its distinguishing characteristics is that itâs an antibody peptide conjugate. It has an antibody backbone that blocks the GIP receptor and bound to this backbone are two GLP-1 peptides that stimulate or agonize the GLP-1 receptor. The molecule has been engineered to simultaneously inhibit one metabolic pathway, the GIP pathway, whilst stimulating the other, the GLP pathway. Rationale for this design is based on: one, the human genetic data that strongly suggests that reduced GIP receptor activity is associated with reduced body weight; and two, the existing body of knowledge and important clinical experience with GLP-1 agonists. Our preclinical experience suggests that synergistic effects with this approach on weight loss and that led to the molecule being tested in Phase 1. Next slide, please. So this Phase 1 study was designed as a randomized, double-blind, placebo-controlled trial with both single dose cohorts as well as multiple dose cohorts. Patients that participated in the study were obese, but did not have other medical conditions. The objectives of this trial were typical of Phase 1 first-in-human studies that is they were to assess the safety, tolerability, pharmacokinetics and pharmacodynamics, for example, weight reduction, of AMG 133. Next slide, please. This is an illustration of the study schema with the single-dose cohorts shown on the left, each single dose cohort enrolled approximately 8 patients, 6 of which would have been allocated to AMG 133 and 2 to placebo per cohort. Patients received a total of one subcutaneous administration in these separate cohorts. On the right, you see the multiple dose cohorts tested that similarly had subjects randomized to either AMG 133 or placebo. Patients enrolled in these cohorts received a total of 3 subcutaneous administrations each 4 weeks apart, with the last administration just before Day 60. And as stated in the footnote here for the multiple ascending dose cohorts, we have three other cohorts where the analysis is ongoing. Two of them were designed to assess potential dose escalation strategies and then helped inform part of our planned Phase 2 dose-ranging trial. We also had one cohort designed to provide experience with digital tools that assess things like patient activity and eating behavior. And as I mentioned, the analysis of these cohorts is still ongoing. Next slide, please. Baseline characteristics of the patients are shown here. Notably, the BMI on average range from 32 to 34 in these cohorts and the hemoglobin A1cs as you would expect for an obese, but otherwise healthy population were in a normal range. Next slide, please. Okay, here are the results from our single-ascending dose cohorts with AMG 133. Shown here on the left is the mean percent body weight change observed with single-ascending dose cohorts. Again, patients enrolled in these cohorts received only one administration of study drug. Dose-dependent and durable reductions in weight were observed as you can see across the variety of doses administered and persisted for many weeks after the one administration. And on the right, we show the pharmacokinetic data from these cohorts. And the key takeaway here is that the molecules will behave both predictable, dose-dependent plasma concentrations, and an extended half-life, which ranges from 14 to 25 days and is typical of molecules in an antibody-based type therapy. Next slide, please. Alright. Here, we have the mean percent body weight changes seen in the multiple ascending dose cohorts, where patients received a total of three subcutaneous dosing administrations each 4 weeks apart with the last administration, as you can see in that red arrow just before day 60. Again, in these cohorts, we see dose-dependent and durable weight reduction. This ranged from approximately 7% weight reduction at day 85 for the 140 milligram cohort and up to approximately 14.5% reduction at day 85 for the 420 milligram cohort. Notably, no plateau effect was observed within the dosing period of 90 days, with effects persisting for several months after the last administration of drug. We continue to be encouraged by the mean percent changes in body weight, pace of weight reduction and the duration of the weight reduction observed. Next slide, please. With regards to safety and tolerability in this study, we have not observed any notable safety concern with most treatment-emergent adverse events having been mild and transient, the more majority of which, which were associated with the initial administration of drug, that is the first administration. The types of treatment emergent adverse events observed were generally GI-related, consistent with the GLP-1 based therapies that have been approved. Next slide, please. So to conclude, we have tested a novel approach that is to block the GIP receptor pathway whilst stimulating the GLP receptor pathway with AMG 133. The results of this Phase 1 study suggests that extended dosing intervals such as every 4 weeks are viable for further testing and we remain encouraged by the weight reduction observed, the pace of the weight reduction and the durability of the effect. And the safety assessments have been supportive of further clinical testing in Phase 2, which we are pursuing and plan to initiate in early 2023. Thanks, Narimon. Alex, why donât we go ahead and open up the Q&A session? Can you remind our attendees how to ask a question? Good morning, guys. Thanks for taking my question. Very interesting dataset. And maybe three quick ones, if I may. First, I couldnât â if someone asked me whatâs the exact rate of nausea and vomiting, I donât know if I know that answer. Maybe I missed it in the poster, but I donât recall seeing that anyway. If you could just help us clarify that, number one, especially in the multi-ascending dose? Second, have you â and I realize there is a lot of variability in small numbers, but have you been able to identify a C min, which enables you to preserve the weight loss that could be very relevant to your dosing plans? And finally, do you think â and the more I look at this data, the more I wonder, do you think a quarterly dosing is possible on a maintenance basis once you are into the induction? Thank you. Great. Thanks, Umber. Good questions, all of them. First, I want to comment on the rate of nausea and vomiting as well as the C min issue, I think thatâs important. In terms of potential quarterly dosing, certainly, one of the things we are thinking about is more extended dosing intervals in a maintenance setting, for example, given the pharmacokinetics that we have observed and given the half-life antibody, like half-life of the molecule that opens up I think a lot of optionality and we will be exploring different dosing regimens in Phase 2 to address that question. Narimon, do you want to talk about the rate, in particular, in the MAD portion of the trial of some of the adverse events and the question around the C min? Sure thing. Thanks, Dave and thanks for the question. So in fact, if I may refer to the poster table 2b on safety, we have the number of treatment emergent adverse events listed there in general and qualitatively listed as mild, moderate and severe. And for those patients at the higher doses, so 280, 420, I would say almost all of them on a mild range were nausea and vomiting, GI-related. Now with regards to the C min and concept for identifying what is minimally required to preserve weight loss, we certainly have preliminary information from our Phase 1 experience, but we are going to continue to follow the pharmacokinetics here in Phase 2. So I think we will need to really investigate that further in the study to come. Thank you. Thanks, Narimon. Itâs a good question, Umer and thatâs something we will be addressing directly in subsequent studies. All right, Alex, next question. Thank you. Our next question is from Matthew Harrison of Morgan Stanley. Matthew, your line is now open and please proceed. Great. Good morning. Thanks for taking the question. I was hoping you could just talk a little bit more broadly on the dosing strategy you are thinking about for Phase 2 and in particular, are you looking at potentially a higher dose to have greater weight loss or are you considering some of these things around dosing frequency as more of a focus for Phase 2? Thank you. Yes. Thanks, Matt. Obviously, a very important question Narimon will comment in a minute here. What I would say broadly is we are designing a very robust Phase 2 trial with different doses and schedules, really to preserve optionality as we come out of Phase 2 for further development of the molecule. This is something I feel very strongly about. And so this will be a pretty hefty Phase 2 trial. Narimon, maybe you want to provide additional color on the dosing strategy we are taking. Thanks, Dave. I think you summarized it well. And Matt, in summary, I would say, we want to be able to explore both in the Phase 2. We want to look at the full range of the magnitude of dose and we want to understand as deeply as we can the appropriate intervals of that dosing. So I will say what we have elected to pursue thus far because our Phase 2 study hasnât been finalized. In other words, itâs been submitted to regulatory authorities, but we havenât cut in the final go ahead is that the details will be on clinicaltrials.gov when we do have that final protocol ready to share, but the experience will be bracketed by what we have seen and tested in our Phase 1 study in terms of the magnitude of the dose. From a frequency perspective, we feel quite comfortable with every 4-week fixed interval dosing. We will plan to assess that in the Phase 2. We will be looking at longer intervals of dosing meaning less frequent as well. And also, we will include some dose escalation strategies into the Phase 2 to really understand the optimal experience for patients and providers. Thank you. Thank you, Matthew. Our next question comes from the line of Michael Yee from Jefferies. Michael, your line is now open. Good morning. Thanks for the update and thanks for this call. We had a two-part question, but they are related. Based on the human genetics or at least animal tox data, what can you say about long-term safety of GIPR antagonism and specifically as it relates to what you would predict with diabetes effects since I know there is no diabetes patients here? So just comment on what you would expect for HbA1C and whether you will even look at diabetes patients and/or go after that population? Thank you. Thanks. I will take the second part and then Narimon can summarize some of our human genetics work, which has been quite extensive here and potential long-term safety, in particular, related to the GIP receptor. In Phase 2, we do plan on studying both patients with type 2 diabetes as well as those who are normal glycemic. So we will get a look at both of those populations. Narimon, do you want to comment on the genetics? Absolutely. Thank you for the question. We have worked closely with our colleagues at deCODE Genetics and understanding this question. In over 500 different disease phenotypes that are included in their analyses and there are many â there are hundreds of thousands of patients, if not more that they include in their databases, in looking at the variety of GIPR variants, there have been no particular safety signals or concerns that have come out of that analysis. So we feel quite comfortable with our approach in terms of antagonizing the GIP receptor. And we will continue to do the standard monitoring for safety in our clinical trials to come. Thank you. Hey, congrats on these early results and thank you for the update. Given the innovative design of this conjugate, could you talk about the relative contribution of the GIPR antibody and the GLP-1 peptides to the substantial weight loss that youâre showing in this study? And then how are you thinking about the other assets in your obesity portfolio beyond 133 in terms of any other targets or modalities you may consider? Thank you. Yes. Thanks, Jay. Let me just address briefly the second part of your question, and then Iâll ask Narimon to comment in particular on our pre-clinical data regarding the relative contributions of the GIP receptor and GLP-1. As I mentioned, weâre taking an approach rooted in genetics and human data. We expect both incretin-based and non-incretin-based therapies, or targets. We are interested in particular in molecules that have orthogonal mechanisms of action to currently available therapies or novel mechanism of action that may be complementary to existing therapies. And over the course of 2023, as I noted, we will start talking about some of those approaches as we get ready to move forward. But itâs a pretty comprehensive approach, but the foundation here is really our human genetics and human data work. Narimon, do you want to talk about the relative contribution of these two signaling pathways? Thanks, Dave. I would say that in a summary, there are contributions from both, but the real power from this approach comes from having both happen at the same time. From our pre-clinical data, there was a cystic effect observed in having both simultaneous antagonism of the GIP receptor with stimulation or agonism with the GLP-1 receptor. So we believe both components of the way this molecule had been designed are important and the effects that weâre observing. Thank you. Thank you, Jay. Our next question comes from Salveen Richter of Goldman Sachs. Your line is now open. You may proceed. Good morning. Thanks for taking my question. Two from me here. What do you think the peak body percentage weight change would be if you were able to maintain the every 4-week dosing since the 60-day period? And secondly, apart from the potential benefit of less frequent dosing, youâve spoken to differentiating via the population study. So looking at obesity associated with cardiovascular or metabolic disease, how do you study that in the Phase 2? Yes. Thanks. Yes. In terms of the potential peak reduction, certainly at the higher dose, there was no plateau observed. And so obviously, thatâs one of the key endpoints for the Phase 2 trial, understanding just what that peak may be with prolonged dosing. The durability that weâre seeing also, I think, is quite important in this regard with a lack of relative rebound. One of the explanations for that relative smoothing out of the peaks and troughs of exposure to the molecule that may occur with molecules that require less frequent administration, for example, weekly. Narimon, let me get you to comment on the second part in terms of additional indications. But obviously, as I mentioned earlier, Salveen, preserving optionality so that we may then tackle specific indications going forward is one of the things we want to see coming out of Phase 2. Narimon? Thank you. Well, I want to just begin by saying that a Phase 2 study in and of itself is not likely to be able to address all the questions with regards to a patient population as heterogeneous as obesity. So it becomes very important to put that type of data in the context of broader data resources that we have available to us like those that we work with deCODE genetics on. So I would say the first point that would be useful to make is that we will be looking at the Phase 2 data in the context of broader data sets. The other piece that I think is important to consider is the depths of data that we will be collecting in the Phase 2. So we wonât just be looking at the anthropomorphic measures such as weight reduction, which are important, but also relatively high level with regards to understanding the mechanism of how AMG 133 works in particular. So we will have a variety of assessments, including deep phenotyping that we believe in deep characterization that we believe will be important in getting biomarkers from these patients, etcetera, and again, putting it into the context of that larger patient population data that we have access to. Thank you. Hi, guys. Good morning, and thank you for the presentation of the data. So two from my perspective. I would love to talk about kind of the potential weight loss in terms of lean muscle versus adipose tissue. What are you seeing for AMG 133 so far? And how â do you have any idea how fast too fast is that when it comes to weight loss? Any feedback from FDA kind of on this extended release approach? Thank you. Yes. Iâll let Narimon address both of these questions. Obviously, the question about lean body weight versus changes in lean body weight versus changes in adipose mass are quite important, Phase 1 is relatively small and hard to get a handle on that. But this is a very specific question going forward. Narimon, if you could maybe tackle that as well as the second part of the question here. Sure thing. Thanks, Dave. So at a high level, I think we could say what we expect are similar impact is what one sees from the existing increasing class of medicines that have been put to market. There are effects on both types of weight, lean and adiposity. But in these patients, in particular, with high atoposity, high-body mass index, you see a lot of the reduction happening in the reduction in fat mass. So we havenât formally assessed that in our Phase 1 data at this point. It is going to be limited given the small number of patients. So itâll be hard to be too definitive about what we observe. Importantly, we will be looking at this question in the context of our Phase 2 trial, where we will be making those assessments formally. There was a question that was asked with regards to have we received any feedback on whether there is such a thing as too fast of weight reduction. We havenât received that type of feedback. What I will say is what we understand from our Phase 1 study is that this pace of weight reduction that we observed seems to be well tolerated and safe. we will be continuing to monitor things in the context of our Phase 2. Thank you. Hey, guys. Thanks so much for the question. Just had two quick ones. So you guys when you look at the weight rebound at the last administration, at the high and low dose, it looks like it did rebound and it took maybe a few months, but the middle dose there, it didnât. Was there something unusual on that cohort? Any sort of common themes with there? And then I know the question has been asked on A1C at baseline, but can you talk a little bit about how you guys are thinking about that as that trend as maybe an indicator of your plans to move into a formal diabetes indication? And maybe what are the steps there? Thank you. Hi, Iâll take the second part of that question and then ask Narimon to talk about the kinetics of weight rebound. As we mentioned, these patients in Phase 1 were normal glycemic by definition, per protocol entry criteria. One wouldnât expect a very big change, if any, at all in hemoglobin A1C consequently. Again, weâre going to enrolling type 2 diabetes patients in the Phase 2 trial, specifically and we will, of course, be tracking all of the metabolic parameters that are typically followed in that population in the clinical trial setting. Narimon, do you want to talk about the question regarding weight rebound? Sure. So Iâll speak to what I believe the question was oriented towards the multiple ascending dose scores that were looked at, and specifically with regards to the middle dose 280 milligrams where it looks like there was steady maintenance of weight over the dosing interval â Iâm sorry, post dosing interval. There was nothing in particular about those patients in terms of their characteristics that would lead one to believe that they had some known reason why their weight stayed relatively flat. I think it is important to remain humble about Phase 1 data given the small number of patients. You do expect to see some variability. It might be that the apparent differences that weâre seeing here between the cohorts is just due to that, the small numbers and variability that you would expect rather than it be driven by a particular foundational element or driver. Thank you. Hey, good morning. And congrats on the data, and I appreciate you guys hosting this. Could you give us a little more detail on these three cohorts, which are ongoing and yet to be disclosed. Can you tell us what doses are being tested? And any other â anything else that would be helpful? When should we expect any disclosure on these cohorts? And Iâm curious, do you need to wait for them to reach completion in order for you to move to Phase 2? And then just a housekeeping one really, just within the data on the MAD cohorts, there were two patients who were replaced. Could you just qualify what was happening there? Thank you. Yes. Sure. Iâll ask Narimon to address both of these both in terms of some of the specifics on the ongoing cohorts, which is not slowing us down in terms of Phase 2, Colin, I will say that. And then in addition to the ongoing cohorts that speak to the specifics of the replacement patients also. Narimon? Thank you. So you are spot on, Dave the completion of these additional cohorts is not slowing us down and progressing towards Phase 2. In terms of the details on what those cohorts were in particular, for those in the dose escalation, we have two low dose administrations at 70 milligrams that are administered 1 week apart. And then we go to the highest dose that 420 milligrams within that cohort afterwards for two subsequent administrations each 4 weeks apart. For the second one, we have again four â this time, four low dose administrations each 1 week apart at 70 milligrams then hitting that target high dose at 420 milligrams, again, given for two doses approximately 4 weeks apart. So these patients, we were looking primarily at the dose escalation strategies that could work that might make the experience for patients a bit easier, if it would attenuate or change any of the mild nausea and vomiting symptoms that they may have had. They arenât intended to examine things like the weight reduction that we would expect from these doses as weâve qualified and characterized in the earlier multiple ascending dose cohorts that we have studied. We do have one cohort also open that is assessing the use of digital tools. Those patients have completed their experience, but the analysis of these is ongoing. And in terms of digital tools, weâre talking about things like wearables that assess actigraphy, sleep quality, that also record their dietary habits. This is very exploratory in its nature, but as an innovative company, weâre interested in understanding the utility of these tools and how we may apply them in our trial experiences. So we thought that would be a good thing to try out as well. There was a question asked about patients that had been replaced in the 420-milligram cohort, and I want to be sure to address that question. So for the two patients that were replaced, they were replaced because they had withdrew from â withdrawn from the study early on, so within the first month. And in order to understand the full characteristics of the drug at the high dose, we needed to maintain our specified cohort size. So with two subjects having stopped their participation in the study rather early, we needed to replace them with two other subjects. So thatâs the rationale there, and we donât expect that, that would have impacted the overall assessments that we have at the 420 milligram cohort. Thank you. Great. Thanks for taking my question. And thank you very much for showing these data. Maybe mechanistically, when you look at the data, and based on your pre-clinical models, what do you think â so do you think there could be any difference if we give antagonism versus agonism in terms of durability of effect? We know with agonism, the weight reduction continues for at least a year. So do you â should we expect similar results for longer duration? Or is there any reason to believe something different at this point? Thank you. Mohit, Iâll tackle that. We can speak to our data as well aware. Again, we chose the antagonistic approach for the GIP receptor based on the very powerful human genetic data that suggests that variance that associate with reduced signaling through that pathway or associated with lower weight. I think the durability weâre observing here is very encouraging. And obviously, the durability will be really something we examine quite closely in the expanded experience in Phase 2. But Iâd say Iâm quite optimistic on that front right now. Alex, next question. Hi, guys. Good morning. Thanks for taking my question. Just another one on the potential safety of antagonizing GIPR, I guess specifically in your pre-clinical models, have you looked bone density and is something that you might be â that youâre confident in that there is no impact? And the second question is in your Phase 2 study, are you confident enough in the tolerability profile to look at exclusively the flat dosing schedule or are you still planning to evaluate a step-up dosing in Phase 2 as well? Thanks so much. Thanks Michael. I can tackle both of those and then ask Narimon to provide some color, i.e., will be looking at flat dosing approaches in Phase 2 as well as dose escalation or titration scheme. So, again, we want to preserve optionality there and really optimize both the clinical effects as well as the experience for patients. In terms of the pre-clinical models, and your question related to bone density, I believe this is rooted in a paper thatâs 7 years or 8 years old that suggested that variance associated with the GIP receptor pathway could associate with lower bone mineral density, specifically inhibition of that pathway. We have looked at a much larger number of individuals with our colleagues in Iceland. We find no such association on bone mineral density at all, a finding that we are actually quite confident in. And thus far, that has not emerged as an issue in the program. Pre-clinically, we will be looking at this specifically in Phase 2 to address the question. But I can say with, I think some confidence here that the genetics here are not pointing us towards any specific concern in terms of bone mineral density. Thanks. Next question Alex. Yes. Thanks very much. Just to follow-up on that last question and your response. What was the duration of treatment of non-human primates when you looked at BMD in non-human primates? And second, with respect to Phase 2, I know that you havenât finalized plan. Tell us about the planned duration of treatment in Phase 2? Thank you. Sure. I will ask Narimon to address the question. I donât remember off the top of my head in the duration of therapy in the non-human primate study. Certainly, we can get that information to you. Narimon, if you know that off the top of your head, of course, feel free to weigh in. And then if you want to talk about duration of therapy in Phase 2. Thanks Dave. I do not remember the duration of therapy for the non-human primate toxicology study. We certainly can follow-up. But your responses before were spot on. There were not particular observations of a concern from that study and the human genetic studies that we have looked at, which were extensive and managed by our deCODE colleagues showed no evidence of bone signal. I think the important point also for me to add is that we did assess DEXA scans in our Phase 1, and insofar as that data is concerned, we saw no notable signal for reduction in bone mineral density in the context of our Phase 1, the same study that we are seeing the pharmacodynamic effects in assessing safety and tolerability. As you pointed out, we will be looking at this out of an abundance of caution in our Phase 2 trial. In terms of the duration of the study for Phase 2, it will as expected be much longer than our Phase 1 study and include patients that are obese. You have mentioned that they will be inclusive of patients with diabetes as well, which is absolutely correct. And we will be targeting a duration of therapy for approximately 1 year. Thank you. Great. Thanks so much. Just a couple of follow-ons on prior questions. I think you have mentioned a couple of times on the call kind of a robust Phase 2 program. Help us just a little bit on timelines about when we can think about data from that program and when you could make kind of a Phase 3 decision. Is that something thatâs reasonable to think about in 2024? I am just trying to get hands around when the next update we should think about here would be. And then my second one was just coming back to GI tolerability. I know the signals you are seeing here were highlighted as mild and kind of dissipating fairly quickly. But is your base case this drug is going to require dose titration like we see with some of the existing agents, or is your base case that you think you can get there just with a kind of single kind of therapeutic dose from day one? I just would appreciate â I know you wait for some more data, but just based on what you are seeing in the Phase 1, is there â are you kind of leaning one direction or the other? Thank you. Yes. Thanks Chris. In terms of the timeline, as Phase 2 gets up enrolling next year, you will provide guidance in terms of expected data availability, but sometime in â24, I think is a reasonable expectation. And we will get more specific on that in terms of â once we see enrollment. In terms of GI tolerability, as I have said, we want to preserve optionality. I think itâs quite possible that fixed dosing may be a regimen that goes forward or some form of dose titration. I donât know that I would heavily lean or be biased to one approach or another right now. And of course, thatâs something that we are going to prosecute quite carefully in Phase 2. Thank you. Next question, Alex. Good morning. Thanks for taking my questions. In the poster, you break down the difference between the intact and total AMG 133. And I guess do you think there is any impact of this naked or maybe un-conjugated AMG 133 given it does seem to have a longer half-life? And then did you look at all â or do you think that GIPR antagonism has an impact on glucagon secretion? Yes. Let me ask Narimon to tackle those questions. First is related to the pharmacokinetics of both the intact in total. And this is a reflection of the design of the molecule itself and then the GIP question. Narimon? Thank you. In terms of the pharmacokinetics and the intact and total molecules, so just keep in mind that total is inclusive of intact. So, there is a lot of similarity there in terms of the amount of circulating drug. A lot of it is going to be intact. The total is inclusive of the, what I would call the naked antibody portion as well. So, over time, the GLP-1 peptides can be clipped off and they are relatively quickly metabolized as they are peptides. And so we donât expect those GLP-1 peptides to, once they are clipped, to be contributing to the prolonged effects that we see with AMG 133. As we mentioned earlier, we believe both activities are important to the full complement of effect that we see because it was a synergistic effect that was observed with simultaneous GIP receptor antagonism and GLP-1 agonism. In our pre-clinical models, there may be some mechanistic rationale for the GIP receptor antibody mediating some additional effect with the chronic dosing interval. But again, we believe most of this effect is coming from the intact molecule, and both mechanisms being important in the data that we observe with weight reduction. Itâs too early to give a view on the glucagon levels, and frankly, many of the other biomarker assessments from our Phase 1 experience, it is a small cohort of patients that we have. So, there is going to be some variability, but this is a very good and important question. We will continue to assess it in our Phase 2 trial. Thank you. Hi. Itâs Brendan on for Yaron. Congrats to the team on the data. Just a quick one from us kind of building on some of the earlier questions. Obviously, safety, tolerability, is pretty solid so far. But is there really anything in particular we should watch for in terms of safety signals from either of the two mechanisms here that may be more of a concern as you move into some of these patient populations with other comorbidities? I know you addressed some of this in diabetes for the Phase 2. I guess really just wondering is there anything in particular you are watching for us, maybe especially from GIPR as you move into patients like with CBD or AFib, even COPD? And I guess in that same vein, assuming you will continue to measure this moving forward, but do you have any reason to think that maybe the difference in intact versus total AMG 133 might change at all across some of these other comorbidities? Thanks. Yes. I can address the second part here. There is no â reason biochemically, Yaron, to think that intact versus total will vary in the different disease states. Obviously, thatâs something that we will measure and compare between different cohorts, in particular, those with type 2 diabetes and those who are normal glycemic. Also I would say that there is nothing that stands out now in terms of any sort of heightened safety concern related to specific populations, and obviously, we will break down safety across different cohorts as we do in a standard fashion. Narimon, I donât know if there is anything you would like to add to that? Hey. Good morning. This is Nicole on for Robyn. Can you talk about â or actually, has gastric been evaluated? And can you talk about any potential impact on brown versus white adipose tissue based on the mechanism? Thanks Nicole. Let me ask Narimon to address that question as to whether we evaluated it in the Phase 1 experience. We have explored gastric emptying. The data is rather small and variable. So, itâs difficult to draw any conclusions. I think thatâs what we can say. There is obviously pre-clinical and â data, and what is expected from the general body of knowledge from the incretin class and you do expect there to be some effect on gastric emptying. But it would be too much for me to say that we have clinical evidence of that at this stage. So, there was a second question, I believe, on the contributions of weight reduction for brown and white adipose tissue changes. We havenât looked at that specifically. This is work that we can continue to explore primarily in the context of pre-clinical models. But I think itâs important to consider the context here for the addressable patient population, which will have a large excess of white adipose tissue. So, certainly, there is going to be an expectation on reduction of white adipose tissue, but proportionality versus brown is something that we will just have to explore in the future. Thank you. Hi guys. Itâs Trung Huynh from Credit Suisse. Thanks for taking my questions. Two, if I may. So, there was an 8-kilogram difference in baseline weight of the 420 mg dose versus the lower doses. I was just wondering if tissue penetration is easier, and efficacy tends to be better if you have a lower baseline weight versus a higher baseline weight, does it work that way? And then just secondly, on the two replaced patients, and I might have missed it, but why did they withdraw from the study? Thanks very much. Great. I will ask Narimon to comment on both why the two replacement individuals withdrew from the study, and then the question of tissue penetration. The short answer there is that we donât expect significant differences in tissue temp penetration, distribution based on baseline weight. I suspect biochemically thatâs probably not relevant. But Narimon, let me have you go ahead and weigh in here as well. Thanks Dave. I will start with the two patients that were placed in the 420 mg. So, they withdrew from the study relatively early. There was no clear reason why they chose to stop the study. There was no clear association with adverse events or anything of that nature. To the best of our knowledge, they just decided they didnât want to continue participating in a clinical trial. With regards to the question on the degree of adiposity of patients and baseline weight and effectiveness. I think the key points to keep in mind are, given the pharmacology of this drug, the target coverage that we have modeled with the doses we have selected, remember, we do have SAD data, or single dose data at the higher doses and in patients with higher weight and we saw observed weight reductions there. Our conclusion is that the effects that we are seeing are driven by the higher dose, and we are not seeing a particular sensitivity at this point in time with regards to differences in baseline body weight. We will of course, learn more in the context of our Phase 2. And I want to be humble and saying we canât exclude the possibility, but we certainly donât see any signals at this point in time. Thank you. Hey. Thanks for the second lap. Just wanted to quickly follow-up on just your response to my first question in that you â these two discontinuations, and then you are pursuing a dose titration strategy up to the high dose â well, the 420 milligram dose, which â for which all AEs were mild. I am just curious, was that borne out of concern over adverse events? I am just trying to understand this and like the fact that you are talking about exploring higher doses in Phase 2. Thanks. Yes. I will ask Narimon again to comment here, of course. But of course, in Phase 1, the number of potential approaches here is very large. And so we want to get some experience with dose escalation, chose a lower dose and then going to the higher dose to sort of bracket that experience. And the lower dose titration was really designed to see if you could even further optimize the tolerability of the agent, which appears to be quite good so far. Narimon, anything you want to add to this? I think you have hit it spot on, Dave. The issue, I think at the root of exploring any dose escalation strategy is if we can make the path easier for patients and more optimized. And from the safety that we have shared and articulated, patients do have mild complaints of GI tolerability at the higher and highest doses. So, if there is an opportunity to make the experience better for patients and not have those mild complaints, then why not explore that in the context of our Phase 1, which we did and carried that over as a learning into our Phase 2 study, which we are pursuing. Thank you. Great. Well, I really want to thank Narimon here, who as you can see, knows the data inside and out. And we are very excited to be moving into Phase 2. I want to thank everyone for joining. As always, our Investor Relations team will be standing by for additional questions. If you have got them, please feel free to send those in. Thank you and I will providing â I will provide guidance as we get into the first part of next year on Phase 2 launch and then expected timelines and further development over time. Thanks everyone and have a good day.
EarningCall_1990	I would now like to pass the conference over to your host, Mr. Chris Genualdi, Vice President of Investor Relations. Thank you. You may proceed. Hello and welcome to Planet's third quarter of fiscal year 2023 earnings call. Before we begin today's call, we'd like to remind everyone that we may make forward-looking statements related to future events or our financial outlook. Any forward-looking statements are based on management's current outlook, plans, estimates, expectations and projections. The inclusion of such forward-looking information should not be regarded as a representation by Planet that future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, as detailed in our SEC filings, which can be found at www.sec.gov. Our actual results or performance may differ materially from those indicated by such forward-looking statements and we undertake no responsibility to update such forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. During the call, we will also discuss non-GAAP financial measures. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. For more information on the non-GAAP financial measures, please see the reconciliation tables provided in our press release issued earlier this afternoon. Further, throughout this call, we provide a number of key performance indicators used by management and often used by competitors in our industry. These and other key performance indicators are discussed in more detail in our press release. Before we jump-in, I'd like to encourage everyone to reference the slides we have posted on our Investor Relations website, which are intended to accompany our prepared remarks. At this time, I'd now like to turn the call over to Will Marshall, Planet's CEO, Chairperson and Co-Founder. Over to you, Will. I'm pleased to share with you today our results for the third quarter of fiscal 2023, highlight some recent sales wins and talk through our progress on a number of strategic initiatives. I'll also provide a perspective on the demand environment and our outlook for the remainder of the year. So let's dive in. In Q3, we generated $49.7 million in revenue, representing 57% year-over-year growth. Non-GAAP gross margins expanded to 54%, up from 35% a year-ago. Yes, another significant year-over-year increase. We think this demonstrates the margin, potential of planet's one-to-many data subscription business model. We ended the quarter with 864 unique customers spanning a diverse range of industries. So to sum it up, we delivered another quarter of solid results in the face of an uncertain macro environment, which is a testament to the strong execution across the company and the mission critical nature of Planet solutions. Now I'll take you through some highlights. As we discussed at our Investor Day in October, we're increasingly focused on building partnerships to accelerate growth of our ecosystem of customers and users. There are three new and exciting strategic partnerships that I'd like to discuss first here today, the first of which is that last week, we announced a collaborative agreement with Accenture. We are combining Planet's high-frequency satellite data with Accenture's industry and technology expertise to collaborate on an array of sustainability and impact initiatives including traceable supply-chain strategy and database climate risk assessments to mitigate disruption across global value chains. These are just our initial areas of focus. We're thrilled to be working with Accenture and think our partnership will drive greater awareness of our offerings and the benefits of our data to deliver to organizations across many industry sectors. During the quarter, we also expanded our work with Microsoft. At the United Nations 2022 Climate Change Conference also known as COP27, we announced that we will be supplying satellite datas for African Climate Adaptation Projects developed out of Microsoft's first global expansion of its AI for good lab into Nairobi, Kenya and Cairo, Egypt. This work builds on prior projects including the global renewables watch which is mapping the world's utility scale, solar and wind installations and the creation of an important building damage assessment tool of Ukraine for the United Nations. Our partnership with Microsoft demonstrates how the combination of AI and satellite data is a powerful tool for helping to address some of the world's most complex and critical challenges. Finally, I'd like to highlight our partnership with Amazon Web Services, which we just announced today. We are directly embedding Planet data into AWS SageMaker, enabling data sciences and machine-learning engineers to acquire global, daily satellite data through the platform. This partnership helps customers build, train and deploy machine-learning model on geospatial data with great efficiency. The data from Planet's consistent daily scan of the earth is and answers ready and ideal for developers to build-on. It's an exciting early-stage go-to-market collaboration that amplifies the power of our sales organization with the significant potential given the large customer base of AWS. This new collaboration with AWS supports our go-to-market strategy to accelerate data access within Geospatial tools and cloud platforms. Shifting gears to M&A, as you know, we view Planet as a natural consolidator and we're particularly interested in joining forces with teams that have potential to accelerate our product roadmap and enhance our value proposition. With this in mind, we're very excited to announce that we have signed an agreement to acquire Salo Sciences, a small California climate company specializing, measuring us constantly changing ecosystems. Since 2019, we partnered with Salo Sciences team to deliver insights, one example is their, California Forest Observatory, which dynamically maps first structure and vegetative pure loads at the individual tree level across California. Earlier this year, we partnered to directly measure forest carbon in select areas around the world. We at Planet see a planetary variable for carbon as a key element for the global sustainability transition in general and the carbon offsetting market in particular. Today, Salo Sciences products include a forest carbon measurement tool, powered by Planet data that can help enable accountability towards the climate policies and market first carbon inventories and storage and much more. The next step is to extend the Salo sciences products and reach and that's where Planet comes in. This acquisition plays in neatly with our Board of planetary variable work including developments from our previous acquisition of VanderSat. I'm very excited what we can accomplish together. This deal is signed and subject to closing conditions. We expect to close early next year. We look-forward to sharing more at that time. Turning to customer wins, let's start with the government sector. Demand for our solutions with the government customers both civil and defense, domestic and international is robust. During the third quarter, we closed the renewal and expansion contract worth more than $10 million over the next 12 months with an international Ministry of Defense customer. We've worked with this customer for over three years and we're proud to continue to support them. On the civil government side, during the last month, we expanded our contract with a German Federal Agency for cartography and Geodesy also known BKG. As shared previously, this pioneering countrywide partnership is providing access to planet data for over 400 German federal institutions to help promote public and silver safety and many other use cases. We see this as an innovative model that has the potential to be repeated in other countries. I'd like to take a moment to share some of the recent highlights that have come out of the Brazil MAIS Program, which is the largest remote sensing project in Brazil. Through this project, Brazilian federal agencies are able to gain access to planet's daily satellite imagery and change from our partner, SCCON, a Brazilian company that develops and supplies geo IT solutions. With the implementation of our joint solution, the Brazilian Federal Police have used our data to help address a list of activities in the region, as an amazing example of capabilities of our products at scale and the potential to deliver huge value to customers. The project leverages Planet's monthly base maps and daily PlanetScope data and Planet's analytics feeds to staff and new roads and buildings across the country. Then these feeds into specialized alerting software developed by SCCON to bring the right information to the end-customer. The project has already yielded significant benefits including helping the Brazilian government collect the equivalent of over US$1.9 billion in fines, seas goods and frozen assets since 2020. Additionally, over 3,000 public agents were mobilized throughout the project in over 120 operations. We're proud to be able to support this initiative with our partners in Brazil. Turning to the commercial side of the market, during the quarter we signed a deal with a Fortune 500 Global Energy Services company. Planet is providing this customer it's high-resolution imagery of remote energy facilities, that is being used in a digital platform for the display of greenhouse gas emission, measured by onsite census, helping to quantify, prioritize and rectify emissions quickly and efficiently, another example of how satellite and on-the-ground data can be combined to solve critical issues. In the insurance sector, we recently signed a deal with ZEP-RE, an reinsurance provider based in Nairobi, Kenya. ZEP-RE is leveraging Planet's base maps to enhance drought risk protection in the Horn of Africa. Planet will deliver Normalized Difference Vegetative Index or NDVI time series data to measure vegetative health for an area of more than 600,000 square kilometers. ZEP-RE also plans to use Planet data as their independent calculation agent to quantify condition and provide metrics to measure drought. Working with Planet they aim to expand their insurance program from supporting a 150,000 to over 250,000 per store less in the process ZEP-RE is seeking to generate a Drought Index, which can be customized to locations to determine payout amounts, generate premium rates and enable faster claims. We're also expanding our partnership with Swiss Re. In the last year, we have provided index insurance services with Swiss Re in 14 countries, providing drought cover for organizations of farmers around the globe, leveraging the planetary variables from the VanderSat acquisition, most notably the global soil moisture product is a very valuable and unique application of our data that we are seeing scaled across global markets. In other developments, we launched this quarter, a nonprofit and NGO program to provide access to Planet imagery and support services, specifically for these types of organizations. This program enables NGOs to get up and running with standard pricing and packaging and customer onboarding. It's a seed investment at this stage, but overtime we hope it will foster similar benefits to those we have seen with our successful education research program, which is an important contributor to our sales top of funnel as it cultivates new applications for our data that can later be commercialized. Let me make some perspectives that we're seeing in the market today. Demand pipeline, win rates and our sales team execution all continue to be strong despite the economic backdrop. The pace at which our reps are signing new and expansion business remains healthy and our average deal size continues to increase as the reps are focusing on those opportunities with the strongest product to market fit. As you've heard, the government segment of the market, both domestic and international continues to be especially robust. On the commercial side of the market, we are seeing some customers become more cautious as they navigate the current economic environment, leading to increased scrutiny of spend. This market dynamic will require continued focus on these opportunities where our data can provide proven economic outcomes for commercial customers. Fortunately, we believe the secular tailwinds driving adoption of our solutions, digital transformation and the sustainability transition the need for greater patient security remain top priorities for countries and companies alike and our sales team continue to systematically execute and win in the market. In summary, Q3 was another truly excellent quarter and I'm proud of the team's execution. I'm particularly proud of the sales deals such as those I've just touched upon and the burgeoning strategic partnerships. It's exciting to see global technology leaders leveraging Planet solutions to helping new capabilities to their customers and users. I'm also excited about the signed acquisition agreement with Salo Sciences. We see a plan to be variable for carbon, the key element for the global sustainability transition. As Will mentioned, our revenue for the third quarter of fiscal '23 ending October 31st came in at $49.7 million, which represents 57% year-over-year growth. It's worth calling out that $1.5 million of the upside this quarter came in the form of onetime revenue associated with an option renewal by a European customer, focused on climate and environmental monitoring. We're proud to continue to support this partnership and I'm especially proud of the strong execution of our global teams who are delivering results for our customers. Our end-of-period customer count grew to 864 customers, which represent 16% year-over-year growth and is an indicator of the broader adoption of our platform. Our end-of-period customer count has grown quarter-over-quarter for every quarter in the last three years. We're pleased with our new logo additions in Q3, which showed continued momentum with large accounts. We've seen the average annual contract value of our customers grow year-over-year during the last four quarters, as our sales teams are prioritizing higher-value accounts with opportunity to expand over time. Net dollar retention rate at the end of Q3 was 123% and net dollar retention rate with win backs was 125%. This represent significant year-over-year improvement primarily driven by renewals and expansions in government and agriculture. This is down slightly quarter-over-quarter due to the timing of a renewal with a large international government customer in Asia, which was signed shortly after the end of our quarter. We remain focused on driving higher retention through our investments in product and customer success. Turning to gross margin, we expanded our non-GAAP gross margin to 54% for the third quarter of fiscal '23, compared to 35% in the prior year. The expansion of gross margins continues to be driven by the growth of revenue, the efficiency in our industry-leading agile aerospace approach and the fundamentals of our one-to-many data subscription business model. Adjusted EBITDA loss was $12.4 million for the quarter, better than we had expected, driven by revenue upside, effective cost management and the timing of some expenses which we expect will incur in the coming quarters. We have been disciplined in our pace and quality of hiring as we continue to invest in our teams across Planet to meet the growing demand for our solutions. We believe that Planet's commitment to our mission, technology and market leadership and the strength of our global organization, our competitive advantages in the market for talent. Turning to the balance sheet, we ended the quarter with $425 million in cash, cash equivalents and short-term investments, which we continue to believe provides us with sufficient capital to invest behind our growth accelerating initiatives without needing to raise additional capital. We also continue to have no debt outstanding. Capital expenditures for the quarter including capitalized software development were $3 million or approximately 6% of revenue, which is lower than we had anticipated, primarily due to the timing of procurements. We anticipate these expenses will catch up in subsequent quarters. At the end of Q3, our remaining performance obligations or RPOs were approximately $131 million, of which approximately 81% apply to the next 12 months and 96% apply to the next two years. Sequential RPO growth was impacted by the previously mentioned government customer in Asia that renewed their large multiyear contract shortly after the quarter end. As I've explained before, RPOs will fluctuate quarter-to-quarter as multiyear contracts come up for renewal. Additionally, please keep in mind that our reported RPOs exclude the value associated with the EOCL contract, as well as other contracts that include a termination for convenience clause, which is common in our federal contracts. Looking ahead to the fourth quarter, we expect revenue to come in between US$50 million and US$54 million, which represents growth of approximately 40% year-over-year at the midpoint. We expect non-GAAP gross margin for Q4 of 56% to 59%, up from 42% in Q4 fiscal '22. Our adjusted EBITDA loss for the fourth quarter is expected to be between negative $21 million and negative $16 million. We expect capital expenditures of approximately $4 million to $6 million, which represents 8% to 11% of revenue. For the fiscal year ending January 31st, 2023, we now expect revenue to be between US$188 million and US$192 million, representing 43% to 47% year-over-year growth. The midpoint of this guidance reflects revenue growth of approximately 45%, which would be a significant top line acceleration on a year-over-year basis. We expect our non-GAAP gross margin to be between 52% and 53%, an improvement of approximately 15 percentage points year-over-year. Our adjusted EBITDA loss is expected to be between negative $60 million and negative $56 million. We expect CapEx to be approximately $15 million to $17 million, which would be roughly 8% to 9% of revenue. The lower CapEx guidance is attributable to more measured procurement of ground stations for our future fleets and adjustments in our procurement schedule for our longer lead-time components. To close, I'd just like to say it was another great quarter. I'm proud of our Planet peers around the globe and the contributions they make to building such an incredible company. We are executing against our plan in a challenging macroeconomic environment and that's due to the focus and collaboration across our global teams. We remain confident in the market demand for our unique data sets and believe we're well positioned to continue to capture the opportunity ahead of us. Right. Hi. Excellent. Yes. Thanks. Very, very strong results. I guess, I just wanted to touch on one of the topics really from last quarter where you would have several customers. I think they used up their annual commitments early and there was some - reevaluate - did they coming expand or renew early or do they kind of hold the pattern with that annual commitment? Can you provide any color on how that's played out in the last quarter? Yes. I'd say, as we expected there are some customers that have engaged with us on either early renewals or expansions to their contracts, based on their higher consumption levels, and we've had others that continue to manage to the overall annual size that they have for their contract. So obviously we came in at the high end, we came in above our guidance range. And so we definitely continue to see strong consumption patterns, which is great. Sounds good. And then on the use of partners, can you elaborate a little bit more on how influential they are to new bookings and expansion that maybe segment a little bit between sort of maybe traditional software kind of our size, like Accenture versus tech partners here and how influential there on your leads and bookings at this point? Yes, it's great question. So we have both direct sales business and via partners. It's always - we've always used partners quite a bit, but we are seeing is a very strong go-to-market approach. And the strategic partners that you saw, I think it really is a great sign that those three large entities, AWS, Accenture and Microsoft are leaning in. It's obviously from my perspective, demonstrating that they see the big value of geospatial data to their markets, and it's mostly commercial markets that they have in mind by the way. And it's great to see them led that big opportunity, they don't lean in for small opportunity. So these organizations and so that's really great. And we have a number of solution partners as well where they're adding capabilities on top of our data that enables solutions and use cases that our solutions don't directly handle and that's what the market do. So we definitely leaning into partners. We've done it before but we're leaning in stronger and stronger into the partners as a rich market. Hi, thanks and congratulations on the quarter. I had a question on the acquisition announced. If we think about the contacts your peer men - I think I heard that this kind of falls under the planetary variables piece. Do you foresee kind of doing some more scouting in this area or are you starting to think about kind of moving up to insights? It's great question. We are very excited by this acquisition. Let me just speak a little bit broadly firstly, Planetary Variables and the sustainability business, because I think that the sustainability transition is desperately in need of really good scientific measures. And a Planetary Variables on carbon in particular it's critical to our carbon offsetting strategy as a species. So that's really exciting. Salo has great forest user for our satellite data to make good forest management techniques and translating that into not just forest cover but to forest carbon. This is essential ground preparation for that sort of move. And of course we've worked with them for some years through the California forest observatory work and other pieces. So we've got a good relationship with that team. So it's really good cultural fit and everything. And it does as you're pointing out, fit into the Board of Planetary Variables strategy, that we're embarking upon, really started in earnest with the acquisition this time last year of VanderSat, and they neatly fit into that as a piece of work. So - and this is continuing us up the stack, I'm the Planetary Variables are really important piece of it. And I think that's where the bigger focus is right now than the insights and indicators that might come beyond that. But they are the critical horizontal component that we need to be building up today. Understood. And just a follow-up actually several questions on the financials, obviously very, very strong flow through. I know you said, you mentioned that part of it was kind of a onetime upside, I think bringing early renewal or something. Could you maybe just give us a sense of, I guess, what happened there? Why would it kind of repeat? And then I think you also mentioned that there was a deal that kind of slipped after the quarter and any sense of what the rates would have looked like, if that actually fell in the quarter? Thanks. Yes. So in terms of the one-time revenue that I referenced in my remarks, that was a four-year deal that had a couple of renewal options after year two and year three. And just based on the accounting treatment, as it relates to the contract that required analyzing the revenue recognition over the term and understanding where we are on that revenue recognition versus the full contract size. So I'm not an accountant by background, but the team worked with the auditors to do an analysis on where we are in that, it resulted in a one-time revenue recognition in the quarter on a net basis, it was about $1.5 million impact to revenue. So obviously that is significant. So I wanted to make sure to call that out. Even without that, obviously, we would have come in at the high end or just above the high end of our range. So - but that was - that's what I was referencing in that part of the remarks with respect to the delayed renewal and that also as you know, had the opposite impact in the quarter where - when renewal comes in late and that's revenue that we miss out on. So had that come in on time, obviously, net dollar retention rate would have been higher in the quarter. RPOs would have been higher and revenues would have been higher. And so that underscores the importance of on-time renewals and it's something that we're very focused on internally. Thank you, Mr. Yu. The next question is from the line of Josh Sullivan with The Benchmark Company. You may proceed. As far as the net dollar retention, just given the comments on more customers scrutiny of spend. Do you think you'll be able to sustain this kind of level or do you think you might see some of those newer renewables extend more often? Yes. I think across the Board, the broader customer success team and the investments we have made have given us really good visibility into both the renewals and the ability to drive expansion. And we aim to be a business that operates in kind of the best-in-class net dollar retention rate levels north of 120%. Right now, we're on track for that. And we think that the investments that we've been making both in the product and usability of our products as well as with the teams that are working with our customers to drive that value proposition is having that impact and it should be sustainable. In terms of the cautionary note about the headwinds basically I could say, we're not immune to the macroeconomic environment. And so we are working with our customers to understand whether there is other ways to scope our relationships with them to continue to drive value. But the relationships remain strong and obviously the results in the quarter are speaking for themselves. Yes, I could just add that, yes, that's why we're seeing a little bit more budget tightening. But also at the same time in some of our commercial side is, but at the same time we just highlighted a bunch of new commercial sign-ups. So it's a mixed story there. But overall, we're continuing to grow even on the commercial side year-on-year. And if I step back a little bit more, there is still the secular tailwinds of digital transformation and sustainability transformation are really driving excitement here. And so I remain bullish on the commercial potential in the long-term, no matter what. And you can see by these three strategic partners leaning in another example of again they wouldn't do that if this was a small example, a small opportunity, they're only leaning with us a significant one. So I think that's a recognition of the opportunity from them as well. So we remain bullish on this in the long-run. Great. And then just the comment on the timing of procurement in the quarter, how should we think of the cadence of those layering back-end? Yes, I believe you made a comment just on there was some timing of procurements in the quarter. Just curious how we should expect those coming back? Yes. As I said, I anticipate that we will catch-up over the next couple of quarters. We are working closely with the teams to understand which are the - we've talked about this a bit at our Analyst Day, which are those long lead-time items where we see there could be risks. And so we want to mitigate any risks in the future and which are those where we're actually feeling quite comfortable that procurement will not be problematic when we need it. We prefer to operate very agile as it relates to procurement. So that we can be judicious with our spend and our vertical integration actually gives us a lot of flexibility on that front. But the lower spend in the quarter we do anticipate will catch up in the next couple of quarters. Great. Thanks for taking my questions. Ashley, Will, great job. Great job to the team, love the gross margins. I'm sure you're pretty satisfied with a lot of what you're looking at here. On the pipeline, I have just two quick questions on the pipeline. Can you quantitatively talk, I'd love some sense of the overall growth in pipeline year-over-year? And if you can quantitatively --qualitatively just what's really standing out in terms of the pipeline build? Well, I'm feeling really good about our pipeline overall. Both on the commercial and the government side, in fact, I've never quite seen so many big deals, to be honest. I think we counted over 40 deals greater than $1 million in our pipeline, which is pretty amazing. I've never seen quite that many. So, of course, these are big deals, so they can take some time. So it may not have an overnight but overall, the demand is incredibly strong, so we're feeling good about it. Yes, how would I answer that, I would say that, the good news is we see them. Obviously, the challenge with eight-figure deals as they tend to be longer procurement cycles and they can cause variability quarter-to-quarter on the bookings. But the fact that we have the - see them in our pipeline and are closing them is really fantastic for the business. And quite often we see these as multi-year procurements which is also very helpful to us, to know that these are relationships that are signed up at the outset for the long-term. Yes. Makes sense. With the partners and then just one other question on the partner front, I mean, obviously AWS, Microsoft, Accenture, I mean a lot of heavy weight names right there. And I guess you've already had meaningful partner influences. From a quantitative way, how are you going to measure it? I mean, are you already measuring partner influence - partner led partner influence deals? Do you have any numbers you can share? Yes. And in fact quite a large number of our deals are partner influenced, fewer of them are partner-led. But in a lot of cases we're bringing a partner and particularly what we call our solution partners that are building that kind of last mile interface that specific to the customer use case or the customer geography or both. So we do have a robust partner ecosystem. As we think about these larger partnerships, we're making fewer bets with those partners that view this as a really strategic opportunity. We're early days in them. So we'll be able to report on the progress of these relationships over time. But what's exciting as you see, these big names at very high level thinking of this as a very strategic opportunity which signals that we're not alone in seeing these tailwinds due to sustainability and digitization of the economy. Thank you, Mr. Van Rhee. [Operator Instructions] The next question is from the line of Greg Mesniaeff with WestPark Capital. You may proceed. Yes, thank you. Question on your sales and marketing expense levels. Can you give us a little bit of color and guidance on what to expect going forward? I know you've had a pretty significant ramp in your sales force. And given the fact that you're focusing your incremental wins on partnerships. How sales force intensive are those wins and how do you see the ramp in sales people continuing as you win more deals? Do you see that slowing down? Do you see it accelerating? I know you didn't give any guidance on sales and marketing, but your number was up, non-GAAP sales and marketing was up pretty significantly year-over-year at just over $16 million for this quarter. Thanks. Sure. Thanks for the question. And yes, as you point out, we've been investing significantly in our sales infrastructure. We talked about before we went public that a large reason for raising the capital was wanting to have more feet on the street, because there were a number of geographies where we weren't even vertically aligned in our sales organization, because we just didn't have enough AEs on the ground to do so. So we've been adding on that front, and with that comes a support infrastructure that you need to make a lot successful. So everything from our sales ops teams to our SDRs and sales engineers. And we've also been investing in customer success, making sure when we sign these customers, we're getting them the value as early in that on ramping process as possible. The goal now is to make that scalable and there are multiple ways to scale the sales infrastructure. One of them is through the continued automation that we're building into the product to make it easier for customers to on-ramp and to make it lighter touch for the customer success teams. So they can cover a broader customer base. The other way is through partnership programs. So right now, I would say, most - if not, well the vast majority of our partners still have a Planet wrap involved in the sales process. Ultimately as the products become more advanced again on the customer onboarding et cetera, we can be lighter touch with our rep involvement in the sales process. So we've been scaling rapidly over the last year, we'll obviously be focusing on making sure we get operational scale over the coming years. Great. And it sounds from what you're saying that, given the scale in the business we could expect the rate of growth in sales and marketing to taper-off a little at some point? Yes. We provided our long-term operating targets, which would see sales and marketing as a percentage of revenue, continue to drop. Obviously, we said we needed to first ramp it up. And then as we drive scale, we'll see that as a percentage of revenue, start to taper down to our target margins. Thank you, Mr. Mesniaeff. The next question is from the line of Harry Wilmerding with Needham & Company. You may proceed. Hi. Thanks for taking the time. Just a quick question on customer add there. Whether sequentially in the first half of the year, although it looks like 3Q is typically seasonally light, any changes to our call out on converting prospective customers in the quarter? And also how are you thinking about customer growth as we enter the next year? Yes. Well, I mean, that's primarily dominated by smaller accounts. And so - the reps are mainly focused on the large accounts and they're being very strategic and focused and disciplined about that. So some small deals - and there was a few on education research that fell off with some added. We're not tracking that closely because that's not where the dominant revenue is. So the growth - I would say is still good in revenue terms, which is the main thing that we're focused on. Yes. Just to underscore, obviously, we've added some really nice large customer wins and as Will said, that is where we're focusing the sales reps as those opportunities where we see an opportunity to really land and expand. On the smaller account basis as Will pointed out in education and research, you can see some projects that will cause numbers to go up and go down, there may be some seasonality with that - which you called out last year. So on the smaller deal size, it's less of a concern on the numerical numbers - numerical count, what we're really focused on is the quality of the deals that we're bringing on board and really seeing NPS scores across the Board improving. Thank you. [Operator Instructions] The next question is from the line of Ken Mestemacher with Edison Investment Research. You may proceed. Thank you for taking my questions. First, congratulations on the three announcements on Accenture and AWS and Microsoft. So how should we think about the revenue opportunity and financial impact on the company? And tied in with that, based on your responses to some of my colleagues earlier questions, should we be thinking it would be more medium or long-term rather than something in the next year or how might that timing look? I would just say like as you mentioned that these are nascent partnerships, but the fact that they're leaning in and again is a big sign of the scale of the opportunity that they see. I mean, I do think we'll see things in the next year. I don't know how meaningful it will change our revenue. But in that year, but we're definitely seeing this lean in and it's just it - after scale in a different way. They have a lot of industry expertise, they have a lot of a huge stack of customers where our data is relevant. And so going to market together with them makes a huge amount of sense. We've got incredibly exciting dataset that can help solve their customers' challenges. They've got the scale of all the compute or the industry knowledge to do that. So that's the way I think about it. Does that make sense? Definitely. Definitely. Thank you. And second, looking at gross margins increase this quarter. That's great news. And how would you say Planet is mitigating the impact of inflation? You touched earlier on microeconomic issues. But we keep seeing these wage increases and inflation and other people are struggling. So how are you all mitigating that especially in light of expecting it to increase to 56% to 59% next quarter? Yes. So I would say, on the gross margin line, the majority of that expense relates to either depreciation and amortization, which is a fixed number. Our hosting costs which we have a long-term contract in place. And then to a much lesser degree the cost of our professional services and customer success teams. Many of which we're able to locate in geographies outside of the United States that we can service customers on a lower cost basis. I wouldn't say that we're immune to inflation and cognizant of the impact that has on our employees. So we are - I think what I would say is, we're very focused and thoughtful about our hiring plans and our spending plans. I highlighted at the Analyst Day, how we think about the procurements and where there might be supply chain constraints, where inflation could have a higher impact and maybe getting in front of some of those with earlier in both procurement. So I guess the net answer is we're watching closely what's going on and making sure that we're thoughtful about our spending and budgeting. Great. I had one more follow-up on the Accenture, AWS, Microsoft. You look at marketing, will those three groups be looking into doing a lot of marketing for you or will it be mostly directed by Planet? Just trying to get a good feel for - how to reach customers? Definitely marketing is part of this. And we're seeing their leadership of these companies lean in and speak about Planet in high level forms and stuff, so that in of itself helps us. Yes. So I think we will see them help. And again, so broadly expands our reach and we're excited by that. Yes, it really expand our reach. We have a number of initiatives that through this quarter that expand our reach beyond that as well. I would note a couple of things that came out recently that both the economists and Bloomberg leveraged our Planetary Variables and got them into their various magazines and notes. And just incredibly important to see how these Planetary Variables are powering insights into the finance sector and they bringing awareness to our products in that sense as well. So I encourage you to have a look at those, it's quite cool to see how that's being and that's just tip of the iceberg. Let's start with some of that marketing piece, but I think it's - the tip of the iceberg of the potential. Great. It's always good to have them - do some marketing for us, that's really exciting great news. So again congratulations... Thank you. I was just going to add that we are on the front page of The New York Times again today, that we get a lot of this sort of free advertising anyway. Yes. How is it going? How is it going? Sorry about that. Sorry about that. It wasn't coming through, but nice to speak to you. Ashley, so last quarter you had guidance for revenue to grow sequentially but EBITDA to be down a decent amount. And the EBITDA didn't play out that way for next quarter, at the same guidance revenue to be up sequentially EBITDA to be down. If I go into your revenue guidance range and your gross margin guidance range, the operating cost between gross profit and EBITDA have to be up quite a lot sequentially to get into the EBITDA range. So what's the dynamic there and why will that actually happen in the fourth quarter? So as I mentioned on the lower spend in Q3 on the R&D side, there was some timing of procurements. And then I'd say across the Board there was timing of new hires. So some of that is what you saw in Q3 and the anticipation is, we'll be catching up to some of that spend and hiring in Q4. So that's the primary driver. Okay. That type of spending can bounce around that much quarter-to-quarter, I would think you would be laying that out on a longer-term planning basis and that it will be smoother, but it sounds like you're getting pretty onto it? Yes. On the space system side when we do procurements waiver in R&D mode for some of our newer fleets, that gets expensed as incurred, as opposed to being capitalized. So that's why you can see, if we make a large procurement for ground stations, some of the other spacecraft purchases that we make. If those procurements come in later than that spend just moves from quarter to quarter. So, yes, so it's a little bit lumpier because of that dynamic while these fleets are in R&D mode, it obviously will smooth out as we move out of R&D mode and into capitalizing those expenses. And then it would just obviously be capitalized as CapEx and run through DNA, primarily through gross margin in future years. Okay. And then two months through the quarter here, you're almost to your fiscal year end. Sure you're doing a lot of planning for next year. How are you feeling about next year's total company organic revenue growth compared to this year? And how are you feeling about the ability to march towards breakeven EBITDA? Well, overall we feel very good about the tailwinds behind the company right now. And I mentioned just the demand and pipeline earlier for example is really strong, slightly more cautious on the commercial segment. The reasons we discussed, very bullish on the government segment, both the civil and defense, intelligence. Extremely pleased with the team's execution across the Board and product side and the sales and marketing side. And so that feels like we're well set up similar to last year we will provide guidance on the next earnings call for next year. Thank you. That concludes our Q&A session. There are no more questions, and I will turn it back to Will Marshall for closing remarks. Thanks everyone. Thanks for joining the call today. I'd just like to emphasize just a couple of key points to conclude. So I think our Q3 results were really strong, underscoring the durability and demand for our mission critical solutions. I'm very proud of our sales deals that I touched upon and the strategic partnerships. It's great to see those global technology leaders leaning into Planet's tools and to develop new solutions for their clients. I'm also excited by the acquisition of Salo Sciences. As I mentioned, we see a carbon Planetary Variables, a critical element to the sustainability transition, and so that's exciting. And finally, we remain confident in our opportunity, despite the current macroeconomic environment and continue to invest in the long-run, while maintaining our focus on the profitability.
EarningCall_1991	Hello, and thank you for standing by. Welcome to the C3 AI Second Quarter Fiscal Year Earnings Conference Call. [Operator Instructions] Thank you, Andrew, and good afternoon, and welcome to C3 AI's earnings call for the second quarter of fiscal year 2023, which ended on October 31, 2022. My name is Reuben Gallegos, and I'm the Vice President of Investor Relations. With me on the call today is Tom Siebel, Chairman and Chief Executive Officer; and Juho Parkkinen, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our second quarter results as well as a supplemental to our results, both of which can be accessed through the Investor Relations section of our website at ir.c3.ai. This call is being webcast, and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws that reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or our outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our filings with the SEC. All figures will be discussed on a non-GAAP basis unless otherwise noted. Also during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared remarks, in response to your questions, we may discuss metrics that are incremental to our usual presentation to give greater insight into the dynamics of our business or quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. Thank you, Reuben, and hello, everyone. Thank you for joining us. I'm here with Juho Parkkinen, our Chief Financial Officer, and we are most pleased to share our results for the second quarter for fiscal year '23. Bottom line, it was a solid quarter in which we delivered our stated objectives and met expectations despite the rocky economic situation and the generally morose condition of the markets. In the last earnings call, we described two strategic initiatives to spur faster growth. One was to recompose our sales team with an emphasis on technical and domain expertise. The second was to shift our pricing model from a subscription-based pricing model to a consumption-based pricing model. I'm happy to report these initiatives have been successfully completed in the second quarter. I will explain these actions in some detail, but first, I'll comment on the financial results and some of the successes that we achieved during the quarter. With large, the quarter was quite solid. Subscription revenue for the quarter was $59.5 million, an increase of 26% year-over-year. Operating loss improved 15 points year-over-year to 24%. We continue to maintain a healthy gross margin of 77%. Customer comp grew 16% year-over-year to 236. Current RPO of $164.5 million was down slightly and consistent with our expectations as we transition to a consumption-based pricing model. We ended the quarter with cash reserves of approximately $860 million. The number of completed contracts in the quarter increased to 25, approximately a 100% increase year-over-year. Our average contract value in the second quarter was just over $800,000, down from $19 million a year earlier. This reduction in contract value was a direct result of our new pricing model. We believe the new pricing model will result in a substantially increased number of smaller transactions, providing greater forward visibility in both revenue and bookings. Our new consumption-based pricing model was well-received by our customers, our prospects, our partners and by our sales organization. We expect this new model to increase the number of customers with which we engage in any given quarter by an order of magnitude. As these customers continually increase their usage over time, we expect the compound effect on revenue growth to be quite significant. Our customers and prospects find a new consumption-based pricing easier to understand and easier to contract. Our market partners find this new pricing model well-aligned with how they price their own services and one that facilitates their successfully selling C3 AI products. I'm happy to report that our transition to this new consumption-based pricing model is now complete. Simultaneously, last quarter, we completed a transition of similar magnitude with the recomposition of our global sales team. We are now growing a team of highly qualified, well-trained technologically expert sales professionals, who are engaging with prospective customers in selling pilots and expanding production usage with existing customers. There is no question that there is pervasive economic uncertainty in the global business community that continues to provide bookings headwinds. This has been especially significant in the tech markets that are experiencing a blood bath in equity prices, with significant layoffs at companies, including Amazon, Meta, Salesforce, Google, Snap and many others. I believe this is just the start of what will be a significant tech market correction. Layoffs of established companies will accelerate. The many Series A, B, C and D companies that are hemorrhaging cash will simply not survive. Just like every other tech recession that we're seeing, the human capital at the piece parts companies will be redistributed to those companies that survive. We are confident in our business outlook, especially with the nearly $600 billion addressable market opportunity that we have before us. We continue to invest in our products and in the talent required to meet our goal of building a cash positive profitable business that will return to a growth rate of greater than 30% year-over-year within the next 18 months. Our employee base grew last quarter to over 850, a sequential increase of 83, and we continue to hire key engineers, data scientists, sales professionals and other key roles across the organization. Turning to some of our customer successes in the quarter. Shell has continued to expand their use of our solutions in new areas, and have successfully implemented C3 AI sustainability for manufacturing at two of their key offshore platforms in the Gulf of Mexico. We also have successfully concluded an ESG trial with Shell, with focus on leveraging NLP to generate targeted insights on the rapidly evolving ESG priorities of Shell's key stakeholders. Shell has already addressed and communicated that they are realizing massive economic value annually by deploying our C3 AI applications across the enterprise, upstream, downstream, midstream renewables. We're just getting started. There's a large and growing pipeline of enterprise AI applications that Shell is building, testing and deploying using the C3 AI platform, realizing the strategic value of our partnership and the fulfillment of the digital transformation of one of the largest and most iconic companies in the world. Cargill has continued to expand their use of our solutions and optimizing food production and distribution to meet the dynamic needs of the market and ensuring sustained food value chains in North America, Latin America, Europe, Africa and Asia. This is a critical mission that has enormous humanitarian ramifications, and we are proud to participate with Cargill in this important mission. Lastly, we are proud to say that we've continued to expand our relationship with the United States Air Force, working closely with them to improve aircraft availability and efficiency of readiness programs of the entire fleet of over 3,700 aircraft. The AI capabilities that we are putting into operation today offers the potential to improve readiness rates by up to 20% and reduce the cost of maintenance for up to $4 billion per year. Let me address our partner ecosystem. In recent weeks, there's been something of a seismic shift in the enterprise AI software space. Traditionally, the primary competition to purchasing C3 AI enterprise applications was the license -- was for a company to -- the alternative of C3 AI was for a company to license a large number of tools from the hyperscalers, piece parts from providers like Cloudera, Pivotal, DataBridge, DataRobot and the many of the scores of other point solution providers, and then engage in a long and expensive science experiment in an attempt to build a custom enterprise AI platform. No one to our knowledge ever succeeded with that. Now the market is truly changing due to -- changing and demonstrating an increased desire for production, tried, tested, proven enterprise AI solutions. All of the hyperscalers have acknowledged this within the last few months. Thomas Kurian at Google Cloud was the leader, announcing the GCP would lead in the market, okay, not with piece parts, but with turnkey production enterprise applications from C3 AI. Then last week, Adam Selipsky, CEO of AWS, announced that their customers were now demanding turnkey applications, not toolkits. This was followed the next day by Scott Guthrie, EVP of Microsoft Azure. All announced that the customers were telling them they no longer wanted toolkits to build applications, they now want functional turnkey AI applications that accrue immediate value. With a growing family of 42 production enterprise C3 AI applications in the market that serve the needs of financial services, utilities, health, manufacturing, defense, intelligence and other industries, C3 AI is well positioned to capitalize on this now clearly recognized market requirement. We sell it with GCP. We sell with Azure. We sell with AWS. We sell with Baker Hughes. We sell with Booz Allen Hamilton. And we are well positioned to help our partners to deliver to their customers the solutions they are demanding. C3 AI and Google Cloud are continuing to jointly invest in industry applications with the launch of two new enterprise AI applications last quarter optimized on GCP. Our sales teams are actively co-selling today to over 300 accounts around the world. Last quarter, we closed an expansion with a large transportation company, currently signed one of the top 50 retailers in the world to license our supply chain applications and signed several new deals in the financial services and oil and gas industries. Our GCP joint selling activity is quite brisk, and as a result, GCP is our fastest growing install base. That being said, AWS remains C3 AI's largest installed base, constituting about 56% of our customer base. C3 AI and Microsoft continue to close deals, particularly in the energy and manufacturing sectors. Azure remains our second largest installed base, constituting approximately 27% of our customer base. We announced a number of new product enhancements here in the course of the quarter that I'm not going to review in this call, but we continue to invest in technology leadership. We continue to invest in R&D and we'll continue to add to our industry-leading portfolio of enterprise AI applications and add fair debt and increased performance to these existing applications. Let me talk for a minute about human capital. C3 AI continues to be recognized as a Great Place to Work. In the second quarter, we received over 23,000 job applications. We interviewed over 2,200 of these applicants, and we hired 90. One of the secular changes of this tech downturn is the increased availability of highly trained professionals who are willing to come into the office, roll up their sleeves and get to work. We have never been more confident with the team that we have and with their ability to execute our strategy. Turning to guidance. Our Q3 revenue is expected to be between $63 million and $65 million, and we are reaffirming our full year fiscal year '23 revenue guidance of $255 million to $270 million. For non-GAAP operating loss, we expect in Q3 between $25 million and $29 million. And for the full year, we expect an operating loss between $85 million and $98 million. We continue to operate at roughly an 80% non-GAAP gross profit margin. We have a clear path to top line growth, non-GAAP profitability and a cash positive operations by the end of fiscal year '24. At this time, we did not see our cash balances below -- we did not see our cash balances falling below $700 million before that inflection. Final comment on the big picture. C3 AI is addressing a $600 billion addressable AI software market. If not the largest, we are one of the largest providers of these applications globally. Our business is exactly on track with what we have communicated to you. Our goal remains to establish and maintain a global leadership position in enterprise AI software. In the short run, we believe tech companies and tech equities will continue to face headwinds, as long as the Fed keeps its foot on the brake. The collateral damage, I think, is going to be more significant than people think. That being said, when the Fed takes its foot off the brake, be that in 2023 or 2024, C3 AI will be bigger, stronger, cash positive, profitable, a clear market leader and well positioned to benefit from the inevitable equity market surge that will ensue. Now let me turn the call over to our CFO, Juho Parkkinen, for a summary of our financials and additional commentary. Juho? Thank you, Tom. Now I will provide a recap of our financial results, add some color to the drivers of our financials for the back half of the year and conclude with some additional color related to the consumption-based revenue model we introduced on our last call. As Tom mentioned, we ended the quarter with revenue of $62.4 million, which represents 7% year-over-year growth. Subscription revenue increased by a solid 26% and was 95% of total revenues. Gross profit increased 5% to $47.8 million, and gross margin decreased 122 basis points to 76.6%. The decline is primarily due to a higher mix of trials and pilots, which carry a higher cost required to ensure customer success during this early phase of engagement. Operating loss of $15 million improved $7.6 million year-over-year, and operating loss margin also improved from 39% in the prior year to 24% in Q2. Our customer count increased by 16% year-over-year to 236, and we closed 25 deals during the quarter. It's noteworthy that deals under $1 million grew 167 year-over-year in Q2. Now turning to RPO and bookings. We reported RPO of $417.3 million, which met our expectations as we continue to convert to consumption-based deals. Current RPO was $164.5 million, down 8% from last year. We continue to see positive trends in bookings diversity outside of oil and gas, particularly in the Federal, aero and defense sectors, which grew sequentially and year-over-year. Turning to cash flow. Free cash flow for the quarter was an outflow of $77 million. Breaking this down, $23.7 million was for the build-out of our new headquarters. As I have mentioned previously, this will be amortized over the term of the lease and will not have a meaningful impact on our path to profitability. Normalizing for this payment, our adjusted free cash flow was an outflow of $54.3 million. Turning to guidance-related assumptions. As Tom mentioned, we have completed our transition from a subscription-based pricing model to a consumption-based pricing model and are now focused on ramping revenue from consumption-based deals. With respect to gross margin as the number of pilots ramp in the coming quarters and as the proportion of period revenue is more weighted towards pilots, we expect gross margin percentage to decline. However, consistent with the financial model we shared with you as part of the prior quarter earnings call, we expect the gross margin to increase to historical levels by the same time we expect to reach our initial non-GAAP profitability. Operating margin model and guidance includes our expectations for revenue growth and gross margin impact. Looking at our cash reserves, we have sufficient capacity to execute our plan to invest for growth in the coming quarters. We are well capitalized, having approximately $860 million available. With the planned expenditures related to the build-out of our new headquarters and investments in our business, we expect our cash investment balance to bottom out in fiscal '24 before we see improving free cash flow and improving cash balances thereafter. As a reminder, one of our most significant cash usages has been for the build-out of our new headquarters, which unlike many high-tech companies, we actually occupy. We are on track to achieve positive non-GAAP operating margin in the fourth quarter of the next fiscal year, driven by accelerating revenue growth and improving gross margin. Regarding the transition to consumption-based pricing, as a reminder, we do not require existing customers to move to a consumption-based arrangement. Our customers have been satisfied and are expected to remain in their current contract terms. As such, we expect the RPO to decline as our new deals will not require a significant upfront non-cancelable arrangement, but rather a consumption-based usage arrangement. The assumptions we provided last quarter for modeling the consumption-based business remain unchanged. In summary, we are focused on delivering profitable growth to our shareholders, and we continue to expect achieving non-GAAP profitability in the fourth quarter of fiscal '24, while growing the top line in excess of 30%. I guess my first one is either for you, Tom, or for Juho. Just as we think about the plan that you've laid out, and it's nice to see the progress relative to what you told us last quarter, but traditional metrics obviously don't tell the full story. So what's the right metric for us to track the progress quarter-to-quarter that you're making? What are the milestones that we should be looking for? And maybe can you tell us what metrics do you measure yourselves against internally and hold the sales force accountable to and incentivize them on so we can just get a sense quarter-to-quarter? In addition to customers, obviously, they eventually translate to dollars, but any insight there is helpful. And then I've got a follow-up. Brad, it's Tom. I mean, I think the bottom line is when we go to this model, we're looking at a number of customers, okay? So how many new pilots are or closing every quarter? We'd expect in the other quarters, I mean, this should be in order of magnitude larger than we're doing now. I think we did, what, 13 or 15 last quarter in roughly half a quarter, because we announced the transition to this model about halfway through the quarter, and we did 15 in about half a quarter. So basically, it's really number -- we're really looking at a number of customers, Brad, and then we're looking at how far we -- how rapidly they grow the use of the products. If in fact, we get in order of magnitude more customers, and they continue to grow their use as our customers have in the past, and you know we've modeled this very carefully, I mean, we get out there three, four, five quarters. This revenue line should accelerate pretty dramatically. Right. Brad, just one thing to add to that. So we guided in our original model for the analyst community to expect five pilots for the quarter. We actually closed 13, which was a combination of trials and pilots. So we're quite excited about how this started, this kicked off. That's helpful. And maybe just one follow-up. Appreciating the accelerated path to profitability and naturally, just given what's going on in the world, you guys are in in a pretty interesting position for sure. But what would need to happen to get you to positive free cash flow ahead of the fiscal '24 expectation? And maybe can you just clarify for us, is that an exit rate? Is that for the full year? How do we measure that? And what circumstances would maybe cause you to accelerate that? Not that you need to, you've got plenty of cash, but I mean, this is clearly the discipline that the world wants to see. Brad, it's simple. We can turn this to be cash positive and profitable honestly within 90 days. All I got to do is layoff about 40% of the workforce, okay? I don't think -- I mean, that might make some analysts happy and it might make some shareholder happy, but it's absolutely not in the best interest of the shareholders, employees or the customers. But I mean, it's all we have to do is basically stop our marketing expenses and lost 40% of the people and I don't know whether it's 40% or 50% or 35%. But, I mean, hard stop, it's cash positive and profitable like this quarter. But I don't think that would be responsible, and I don't think it's anybody's interest, but you asked the question we gave you the answer. Juho, do you have any further light on that? Only thing, Brad, that we -- the way that we've modeled our path to profitability, we feel confident on that and we stick to that. Got it. So just to clarify the expectation though, it's for the full year? Is it an exit rate when you say fiscal '24... I did want to circle up on some of the customer count dynamics just because I know that is going to be 1 of the metrics we're looking at while you guys are going through this transition. I think you guys had cited 236 up from 228 last quarter, right? And I just wanted to see what has the customer behavior been like since you guys announced this transition? And what I really would be interested in hearing I know you guys are not forcing your customers to migrate down to the consumption model. But curious to hear, have you seen customers trade down to the consumption model since you announced this transition? And then the second question there is, have you seen any changes in customer behavior from a churn perspective? Mike, it's Tom. No customer just in customer has requested to convert to the conversion base price -- the consumption-based pricing model. I understand that these customers are huge. I mean, you get in the Shell and you get into Koch, Baker Hughes, I mean, these are very, very large relationships now. And you can imagine their licensing terms are pretty favorable and unique to them. Have we seen any significant change in customer churn? No. I appreciate the color there. And then for the follow-up, I did want to -- I guess looking back at what we had spoken about last quarter with deals getting pushed out, just given the current environment. So specifically, you guys had called out 66 deals last quarter getting pushed. Have you closed any of those deals in the interim? And do we still see a similar order of magnitude for deals getting pushed given that you guys have made this transition? Are you helping streamline the adoption process for those customers and accelerating those sales cycles? Mike, this is Juho. Yes, so we did close some of those deals that were pushed out of last quarter. And like we expected from our revenue guidance, the macroeconomic climate, was tougher for the second -- after Q1, but it has stabilized and in particular, with our new consumption-based pricing, I think our customers and potential new customers are reacting well to that strategy. Got it. It makes a ton of sense, especially when I think about that average contract value declining from, call it, $19 million to less than $1 million this quarter. I was talking to myself, I want to ask about the subscription revenue outperformance seems like a big outperformance in the quarter. Was that largely because of the outperformance in the number of pilots that you're doing? Because even if you have closed some of the deals that got pushed, I wouldn't have thought that you would recognize a ton of revenue from those. So help me understand that. Well, I think you kind of got it. There were some previous transactions that were not based on consumption-based pricing but did close in the quarter. That did contribute to that. So I think you called it accurately, Pinjalim. Okay. So it was because of the deals that closed. Okay. Tom, on a high level, maybe help us understand what are you hearing from CIOs in terms of IT budgets for next year. Are people -- you kind have called out, obviously, the headwinds on macro, but are you hearing people kind of resetting their budgets for next year, next calendar year? What are you hearing? I think it's a really good question, and it varies from company to company. I mean, there are a lot of companies that see this as -- and organizations in the Federal government -- and by the way, I didn't comment on our Federal business, but our Federal business is really strong, okay? Particularly in the defense sector. And if you saw the defense budget, when he's flying through today, he increased, I think, almost over -- I'm sorry, $200 billion over last year, if I'm not mistaken. So that's a big business. I think there's kind of two categories. There's companies that are like bearing down and using these technologies to figure out how to save money. That would include Shell. That would include the Air Force, okay? And then there's companies that whose name I will not mention, that are just absolutely going to the mat and slashing expenses on everything. They're going train the bunkers and they're going into recession mode, and we will see some customer churn from that, okay? Hard stop. Okay. And they're just cutting to the bone. And so these two classes of companies out there, those who are investing in savings and those who are just kind of going into a knee jerk, perfectly rational response to an impending significant recession and then just slashing all costs. And so we see both. And I don't know how long this lasts. You guys are the pros of this, whether it's 12 or 24 months. But when it's over, we're going to still be here if you don't plug it away at it. And -- but it's -- you cannot deny it. I mean, it is rocky out there. I want to do a couple of sort of financial ones to start with, if that's okay. So gross margin, if I'm looking at it right, non-GAAP was 77%, down from 81% last quarter. Is there anything worth noting there? Pat, it's Juho. The only thing to call out there is the trials and tickets, as Tom mentioned in the opening remarks, there is more higher cost than those than the ongoing subscriptions. So as we see increase of pilots and trials even in the coming quarters, we are expecting some pressure on gross margin before it climbs back up to historical levels. I think you should expect a little bit more of a pressure as we increase the pilot as a proportion of total deals. And by the time we are back at Q4 FY '24, we should be back at these rates and higher. Okay. And then the subscription fee, but services missed at least my number by a lot and went down sequentially by a lot. What's to note there? Only thing to say, it's -- the services is a direct result of our transition to these pilots in our new consumption-based pricing model. There are minimal upfront big professional services deals associated with these. So as we -- as the pilots convert to ongoing license arrangements, we do expect the services component to increase as well. And in the second half of this fiscal year, we actually are expecting services to return back to the 10% to 20% of our total revenues. I'm saying the full back half of the year. So it could be somewhere in the range for Q3 and higher or lower in Q4. Okay. And then if you look at the subscription revenue of $59 million and change, the footnote says 32% of that is from related parties. Do you mind just explaining that for people, because I do get that question quite a bit? It's just the related party is relating to Baker Hughes. So Baker Hughes is our, of course, still a significant shareholder of C3 AI, and any revenues that we interact with Baker Hughes is direct purchases. We call them out in the financials. Yes. And so Tom, the bear case would be that in some way is a lower quality revenue, what would your response be to that? I don't know how to respond, Pat. We're going to be doing a lot more deals, a lot more customers. We're going to convert a lot more of them into production, and they're going to grow just like Shell, Baker Hughes, Koch and everybody else has grown. And there's -- so right now, things are looking pretty promising. I think we're right on track. Okay. Great. Last one, and this one is probably for you, Tom. So you signed -- it's been a year since you signed that $500 million production, other transaction agreement with the Department of Defense. How would you say it's going so far versus your original expectations? Roughly 100%. 100% in terms of bookings. DoD is a real bright point, Pat, and you're talking specifically on MDA, the MDA agreement applies to all of DoD, by the way, okay? And then we have $100 million agreement with RSO, and you will announce not in this release, but tomorrow morning as the announcement about a big partnership that we're doing with Booz Allen Hamilton, okay, in all of the Federal, particularly DoD. But that business is looking strong. Excellent. This is [Seaton] for Sanjit. I really just want to touch on sort of the consumption growth that you're seeing, especially with the Ex Machina product. Just if you can sort of provide any color on, one, how you see consumption trending with those customers? And then how you expect that going forward? And maybe sort of related to this environment, how are customers using it maybe differently than they have before? Okay. Great. This is Tom. And I would say, of the various products that we have in the marketplace today, okay, of which we have, I think, 42 production products, Ex Machina being one of them, okay? We are underperforming on the execution of Ex Machina sales. It is a dramatically superior product to other products that are out there in the marketplace. That big set, it's kind of order of $1,000 thing, okay, in terms of the unit, okay? And we really haven't put the sales motion together to do that at scale. Now we've taken the objectives to get after it, but I cannot look you in the eye and say, that we're hitting that ball over the left field fast, because we're not, okay? And it's a great product. Our customers love it. We have somebody -- we have three customers that have much greater consumption whether... 300% increase there. But can I look you in and tell you that we're killing, that we're realizing the potential of that product, that product could be an entire separate company, okay? Our CRM product could be an entire separate company, our ESG product could be an entire separate company, stand-alone company. And in all three of those, I think we really need to get full it going, and we haven't done that yet. Okay. That's helpful. I mean, your commentary sounds worse than the 270% consumption increase that you're seeing there. Any color sort of on what's enabling that increase in consumption? And then two, how are you -- in your other products, like trying to enable similar consumption rates, is there anything sort of to highlight that you're doing differently there to get to those kind of trends that you're seeing in this product, although you're not highlighting it specifically? Do you want to focus on Ex Machina -- or is it about Ex Machina or is this about overall products? No, I think, let me just kind of add on to that. So for Ex Machina, just what Tom said, we're still very early stages on that. So yes, we see those key customers that started early with us massive increase in consumption. Yes, we're excited about that. But that entire product is completely in its infancy, and we have high expectations on it. The other point on other consumption. So remember, again, we start these targets, the consumption deals start with a six-month pilot and then it moves into consumption. We started this quarter. So we're not really seeing any consumption until the initial six-month phases are complete. That question, and as we start talking about consumption under all the other deals that we do, we'll start reporting and discussing that more detail probably in Q1 next year. So for Tom, it looks like there's strong traction in Department of Defense, new and expanded deals with numerous agencies. Imagine the AI Defense Forum with a helpful touch point to close these through. So how would you characterize momentum in this sector? And then are these companies embracing the new consumption model? Or are they preferring to commit more upfront in the legacy model? Okay. Right. So for Tom, looks like there was really strong traction in Department of Defense, expanded deals with numerous agencies. How would you characterize momentum in this sector compared to a few years ago? And then are these companies looking at the consumption model? Or are they primarily sticking to the current model? Great question. It takes some time to really get traction in DoD, okay? And we've been working on that since 2014, okay, at the level of the Secretary of the Army and the Secretary of the Air Force and the joint chiefs and the -- and I mean, we've really been working it hard. I think we have 12 projects, all delivered on time, on budget to spec. And really, what we're finding is the consumption model there is really, really well received. They like it, okay? And they're kind of used to seeing these multibillion dollar juggernaut projects from the Lockheed Martins of the world or other providers, and we're coming in where, hey, we bring the project live for $0.5 million, and after that, $0.55 per CPU hour. It's like where do I sign?" So there it's been very well received in that market. Okay. That's really great to hear. And then for you Juho, I just want to touch again on the services revenue, understandable that it would be lower given some of the trial like activity. So since we expect trials to continue in the new consumption model. Just trying to get a better handle on how quickly services should ramp back up to that 10% to 20%? Well, again, there's a component of the ongoing gradations with our existing customers and potential services engagements with them. And then our expectation of services engagements as these pilot deals convert to consumption deals. So what I was alluding to earlier to Pat's question, we are expecting services activity in the second half of this year. And then separately, in the long-term models, you should expect that as the pilots convert to consumption, there are services deals associated with those as well. This is Arsenije on for Gal. And I think on the call, you said there were 13 consumption pilot wins in the quarter, and maybe that was maybe better than you initially expected. Is that a run rate you're comfortable with going into the end of the fiscal year? The back half? And any particular call-outs for sectors where the consumption model is maybe getting better traction than you initially expected? So sorry, the second half of your question, it was a bit unclear, but let me address the first one. Yes, while we're excited on the beginning of this, so we did 13 pilot plant trials. So there's still a combination of some of the trials in there, but we do expect them to convert to a consumption-based arrangement at the end of the trial period. I do not -- we would not want to increase any of our assumptions in the model we shared with you last quarter. So even though we said 5 this quarter and we came in at 13, I want to keep the model as it was that we provided last quarter. Great. And then just a brief follow-up. In terms of stock-based compensation, I think it's the second consecutive quarter where stock-based compensation as a percentage of sales is above 85%. I think in Q1, we talked about maybe that was a lot to do with share refreshers. And I wanted to see what dynamic was that happened in Q2. And what level of stock-based compensation should investors become comfortable with moving forward? Yes. I think broadly speaking, you see this across the industry. But stock-based compensation under GAAP is stuck with the grant date fair value of the underlying equity instrument. And as you obviously know, the history of the entire tech sector on C3 AI in the last 1.5 years, we are carrying significant stock-based compensation cost for awards that were granted when the share price was much higher than it is today. So unfortunately, there's nothing we can do about that unless the underlying employee decides to seek for other opportunities. So for now, until the end of these vesting terms for these awards, we are going to be carrying these pretty high stock-based compensation costs. Great. This is Adam on for Brad. Juho for you, can you talk a bit about the shape of the revenue curve for next year? I guess, naturally, we expect it to kind of increase sequentially every quarter given the new sequential given the new consumption model. But is there a chance there's still some lumpiness in that, as you know, certain larger customers may renew on kind of like the non-consumption license? Yes, I think the short answer to that is yes. And what we guided last quarter, we beat it for this quarter. Our guidance for next quarter, you see sequential increase and it does have the Q4 as an increase to that with respect to the implied guidance. The revenue curve is flattening as a result of the consumption-based pricing business model. But as we enter into it, in the short term, and as we enter into FY '24 and especially the second half of FY '24, you should start seeing the graph to get steeper and steeper in line with the presentation we shared last quarter. That's helpful. And then, again, just like the gross margin, could you kind of call out when that might trough out and what kind of like the level of that might be? I think it was at like 77% for this quarter. So is it fair to assume that that's kind of like a trough level for that? Well, thank you for the question. I think the more important thing is that we assume there would be a pressure in the gross margin when we provided the operating margin and operating profit guide and our path to profitability. So we are expecting pressure on it, but it doesn't change our path to profitability in 1 bit. So I cannot tell you exactly where I think it will dip down to, but I think in your models as you prepare the business back in FY '20 -- sorry, back when we hit FY '24, Q4, we should be back at 77-plus gross margin. So it may go down in the interim and then it comes back up as we enter profitability. I had a question on some of your kind of partnerships or alliances to help drive sales. Are you able to kind of dimension how much of your new sales or bookings come from in-house sales teams versus your partners? I'm sure it's probably pretty difficult to kind of bifurcate the 2. But if you're able to do that, that would be great. And on the same topic of partnerships, are the margins higher or lower on sales that are brought in by some of your partners? Arvind, it's Tom. Virtually all of our sales today, we're selling with a partner, not through a partner, okay? And so that would be 100%, where we're selling with them. Now they may introduce us to the account. They may bring the executive team over here as Google has, as Booz Allen -- I'm sorry, as Baker Hughes has, as Microsoft has in the past like many, many times. But we're actively engaged, okay, in the sales process. Now we are just now putting our products on the marketplaces of the various hyperscalers. And so that dynamic might change going forward. But there's no margin difference because there is virtually no case where they're selling independently of us. This is Michael Vidovic on for Michael Turits. Could you just talk about linearity in the quarter and then trends you're seeing to start out November for fiscal 3Q? Yes. And just was it month-to-month, how do deals trend? Was it a constant uptick to reach throughout the quarter? Or was it stronger back end of the quarter or the beginning of the quarter? We see activity all throughout the quarter, but it's not unusual in this business where as you approach currently, you have slightly more activity. Okay. And then just a quick follow-up on the vertical standpoint, particularly energy, have you seen like an uptick in deals in that area? And I guess, which areas besides Federal are you seeing particular strength in this time? So if your question is relating to the diversification of industries, we see continued diversification, which we're very excited about. Yes, there's deals in energy, but defense, as we discussed, is really exciting for us as many other industries as well. And we continue to expect more diversification with the consumption-based pricing and scores of new customers. Okay. I guess that was our last question. And gentlemen, thank you for your thoughtful questions. And we appreciate the courtesy of you participating in our call. And we thank you all very much for your time.
EarningCall_1992	Good morning and welcome to Super Groupâs Third Quarter of 2022 Earnings Conference Call. Following managementâs prepared remarks; we will open the call for a question-and-answer session. I would now like to turn the call over to Lisa Kampf, Vice President of Investor Relations. Good morning, everyone and thank you for joining our call today to discuss Super Groupâs results for the third quarter of 2022. During this call, we may make comments of a forward-looking nature that are subject to risks, uncertainties and other factors discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility to update forward-looking statements other than as required by law. Additionally on todayâs call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. We had provided a reconciliation of the non-GAAP financial measures to the most comparable GAAP figures in the press release issued earlier today and available on the Investor Relations page of Super Groupâs website. We suggest that all investors refer to the supplemental presentation posted to the IR section of our website, which includes the financial information that will be referred to during this call and additional information for the quarter. Today, I am joined by Neal Menashe, Chief Executive Officer and Alinda Van Wyk, Chief Financial Officer. After our prepared remarks, we will open the call up for questions and we will also be joined by Richard Hasson, President and Chief Operating Officer. Thank you, Lisa. Good morning, everyone and thank you for joining us today. Our results for the third quarter of 2022 demonstrate the benefits of our global footprint and our positioning of the company for the longer term. Total revenue was â¬308 million and operational EBITDA was â¬50 million. On a like-for-like basis, meaning not including Jumpman Gaming, which we acquired on September 1, we entertained on average 2.7 million customers per month this quarter, up 6% from the prior year quarter. Alinda will discuss the financial results in greater detail in a moment. I will first elaborate on the progress we have made this quarter. In Canada, we successfully transitioned Betway and Spin to Ontarioâs regulated environment. Performance since then has been in line with our expectations, including the excavation and engagement of historic Ontario customers with the new Ontario-specific platforms. Overall, Canada continues to perform and remains profitable for us. Our African business continues to operate at scale on our proprietary technology and we recently launched in our eighth regulated market on the continent. In the United States, we hope to close the DGC acquisition in January. Betway is currently live in 7 states through DGC, with Louisiana and Ohio expected to launch during the first quarter of next year. Both will be launching on Betwayâs global tech, taking the total number of states using this platform up to 4. I want to now talk about three ways we invest in our business: one, investment in technology; two, investment in our brands; three, investment in expanding our product offering through M&A. Firstly, in line with who we are and online-only technology business, we remain focused on improving the customer experience with ongoing enhancements to our global platform in order to optimize engagement and customer base. As a result, our demand for dedicated tech resources, are high and our requirements have increased over time. Consistent with these requirements, we have entered into arrangement with Apricot, a major sports book provider outside of Africa, to increase the resources dedicated to Betwayâs platform. To cover the spending, we have provided a funding facility to Apricot to the amount of â¬42 million, which can be drawn down until March 2023 and we have started the discussion with Apricot to explore the possibility of a fairly full ownership of the sports book technology for our Betway global product. While the early data of these talks have come down on they would all fall or the eventual outcome. Next, we have vetting to reinforce the Betway and Spin brand around the world. Spinâs best known brand Jack Whiteâs petite enjoy the first full sponsorship with the Toronto Maple Leafs and the Toronto Raptors during quarter three and went live in October. On the Betway side, following the crisis both calendar in Q3, marketing has picked as planned in the fourth quarter to leverage the international audiences of the T20 Cricket World Cup, which ended last weekend and the FIFA World Cup which kicks off on Sunday. The third way we expect investing growth in our businesses through M&A. As we have previously announced, we acquired a majority stake in Jumpman Gaming during the third quarter, a profitable UK-focused online casino business and all cash transaction. In addition to the opportunity that we see for Jumpman in UK given its focus on a more recreational segment of the online casino market, we are also excited about the future expansion of the business into other markets with this proprietary technology platform. Turning now to our capital structure, just under two weeks ago, we launched an SEC registered exchange after, while publicly held warrants. And we are also seeking constants of the warrant holders to amend the agreements to cancel the outstanding private large. If the exchanger contain solicitation are successfully completed in the SPAC sponsor and after this and the pre-merger Super Group shareholders will cancel their warrants and the rights to receive shares of possibly earn-out. The purpose of this exchange offer is to simplify capital structure and reduce the potential dilutive impact of the warrants and earn-outs. We also expect that eliminating the outstanding warrants and earn-out sites will increase our free float and result in less overall volatility in our quarterly results since we no longer have to revalue those liabilities each quarter. We are pleased with the progress we made during the third quarter and so far in the fourth quarter of this year, our monthly average customer numbers are picked up with fairly from August. During October, even excluding Jumpman Gaming customers, we recorded a daily record in excess of 1.3 million customers and reached 3.2 million customers for them. Super Group is a global, online only sports betting and online gaming business with continual opportunity for growth, strong financial fundamentals and exciting future ahead. Thank you, Neal. Today, I will provide the financial highlights for the third quarter of 2022 compared to the prior year quarter, referencing the adjusted numbers included in the presentation posted on our website. In the third quarter, our net revenue increased by 2% to â¬302 million. Taking our brand license income into account, our total revenue was â¬308 million. With reference to EBITDA, we continue to present operational EBITDA, which is EBITDA adjusted for fair value adjustments on warrants and earn-out liabilities, associated and unrealized foreign exchange movements and non-recurring items. For the third quarter, we achieved operational EBITDA of â¬50 million. Looking at the results by business segment, our sports book performed very well this quarter, even with the unforeseen football matches in the English soccer calendar. Overall, sports book revenue increased by â¬30 million or 14%, primarily driven by strong customer acquisition and retention in Africa and APAC, overall growth in Europe, growth in Canada, excluding Ontario, bolstered by modest decline in Ontario driven by Betwayâs transition to regulated markets. Moving on to casino, net revenue decreased by â¬8 million or 4%. The decline was driven by inflationary pressures on Spin, especially in the Canadian and APAC markets, short-term disruptions in Ontario from customers transitioning into the regulated market. These declines were partially offset by growth in Canada, excluding Ontario. Despite some competitive pressures, overall growth in the UK, which included Jumpman Gaming, as of September 1 and positive momentum in Africa. As it relates to EBITDA margin, business mix had a downward influence with Betway increasing to 54% of net revenue compared to 49% last year. As you know, the Betway segment has a lower profit margin than Spin. EBITDA margin for the quarter was 16% that is not where we wanted to be. We remain focused on growth and cost saving strategies to push margin back to higher levels in 2023. Diving deeper into expenses. General and administrative costs increased by â¬22 million due to similar drivers experienced in previous quarters. The key ones were higher staff cost, public company cost and increased investment in technology. As it relates to marketing cost, we saw a decrease in variable marketing and an increased investment in brand spend. This resulted in a net decline of â¬8 million. Looking at our financial position, our balance sheet remained strong with unrestricted cash and cash equivalents of â¬266 million at the end of September, with no debt. In conclusion, results for the third quarter are in line with our expectations. And we are reaffirming our 2022 full year guidance of total revenue between â¬1.15 billion and â¬1.28 billion and operational EBITDA between â¬200 million and â¬215 million. Thank you, Alinda. In summary, Super Group remained financially strong with solid growth prospects. We continue to explore ways to optimize our global footprint and operate more efficiently to leverage our scale. We remain focused on investing in technology and marketing as well as other opportunities that provide us with long-term growth and profitability. Hey, great. Thanks for taking my question. Just a couple if I may. Just first on the 4Q guidance, it looks like itâs a pretty wide range of revenue outcomes and we are more than halfway through the quarter. So can you just give us an update on the visibility into 4Q and then can you provide an update just on how we should be thinking around 2023 with sort of the economy macro pressures? And then I have a follow-up. Thanks. Thanks, Jed. Thanks for your question. As we are all aware, we are very excited about the World Cup that is now ongoing in quarter four. Even though some fluctuating results usually in the sports book, we feel optimistic, especially our casino is usually very strong during the fourth quarter as well. October had some promising numbers like Neal just made reference to a good customer increased to about 3.2 million customers for the month so far, which is a good result. Although you know that there is some volatilities in the sports as we all know, especially around the power line results and we have seen some of those volatilities coming through in November already, but we have a very strong customer base, and we keep on engaging our customers. Got it. Okay. And then just on â just in North America, it looks like the North America casino, the impact, it seems like you are getting your footing around some of the Ontario regulations. The growth was â the growth decline was less. So, can you kind of give us an outlook on Ontario and in Canada? And then can you just talk about anything you are seeing in the macro? Thanks. Thanks. Itâs Neal. Yes. So, Betway has been obviously are now live on Ontario with respect the platform. Obviously, switching to a regulated market has its cost in the short-term, but there are long-term benefits. To keep a high percentage of the historic.com customers activated and continue to engage on the new platform and early signs of positive and the lines of our predictions included with our guidance. And then obviously outside of Ontario and Canada, obviously â we have obviously seen competitive pressures in all the markets we operate in, Canada is no excess and no exception. But we have got our platforms. We have got our customers and all uptick. And we are constantly working to enlighten our marketing. Hey. Thanks a lot. I had a couple. The first one is just on the U.S. market. Can you â you mentioned some of the states that you have been up and running on your global tech stack in Arizona and Virginia for a decent period, now. Just be curious how you would characterize performance there relative to others that are on â still on third-party tech. And maybe just talk about how those states are sort of trending on growth curves? And then I have a follow-up. Thanks. Thanks Michael. Richard here, so as Neal mentioned, DGC, we are anticipating that coming into the group in January. At that point, we will obviously be able to do a much deeper dive into the DGC business plan, and forecast for growth. At this point, as you correctly pointed out, two of the states are running on that Betway Global technology. But itâs still early days for them as a business. And itâs something which we look forward to getting more stuck into once they become a part of the group. Okay. Thank you for that. And then sort of a big picture question. You have â you outperformed in the quarter, you have had some revenue declines because of regulatory changes. I am just wondering at a high level, when you think about the regulatory landscape and the impact on your business for next year, do you see sort of the setup being similar, or do you see things being different? As a normal, we operate in so many countries across the globe, thatâs been our business for the last two decades. So, itâs basically navigating each of those countries. And as you know, we have got teams looking after each of those countries. So, each one has its own businesses with its own right. So, itâs the game, itâs navigating it and getting the software, the tech right, the marketing returns right. But thatâs what we do. And thatâs what this business is about. Great. Thank you for taking the questions. To start, we would love to see if there is any added color on the $3.2 million MAUs in October, that number have been pretty consistent over the past year in terms of $2.6 million, $2.7 million. So, any way to dive deeper in terms of what was driving the strong results in October? So, basically, itâs all about the engagement on our platforms, across casino and sports. And obviously, lots of sports events happened in October, so itâs the game that the customer has been reengaged into it. And itâs about these â these are high quality customers. And our aim is obviously to keep bringing them back and then keep increasing that and then with that and obviously a little bit dealing with increasing our margins and getting that operational name respected. Understood. And then maybe just a follow-up to the first question on the guidance for fourth quarter, is there a way to think about maybe drivers in terms of what would cause you guys to hit the high end of the range versus the middle or versus the low end? Thank you, Bernie. Like I have said the vulnerability of the sports book, obviously itâs not so easy to plan towards the end of the quarter. But we remain â we feel comfortable that the casino is strong. And it will â the results should speak for itself by the end of the World Cup. And as you have just realized in this entire â I mean a couple of matches thatâs now being finished in the World Cup and itâs all volatile. You never know the results fluctuate without beyond our control. So, we just have to make sure that we keep on engaging the customers and luckily our customer base is strong. So, it marginalized out the volatility in the results. Got it. And then just lastly, the Jumpman transaction, we would love just to get your thoughts on the rationale for the deal. And then if you are able to size how big of a revenue generator, that asset is? So, hi Bernie, Richard here. So, the rationale for the transaction, Jumpman, it runs proprietary technology. Itâs built a great platform over the last many years. And while it is a UK focused business, itâs an opportunity for us when we are very excited about helping them expand into additional markets. They appeal to a different segments of the market and much more recreational segments to our existing customers. In terms of size of revenue, we disclosed before that in the month of September, they did around â¬7 million of net gaming revenue. And at this point, that will be something about the transaction. Thank you. Ladies and gentlemen, this concludes our question-and-answer session. And this concludes our call today. We thank you for your interest and participation and you may now disconnect.
EarningCall_1993	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 OrganiGram Holdings Fourth Quarter and Full Year Fiscal 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Thank you and good morning everyone. Before we start, I would like to remind everyone that today's call will include estimates and other forward-looking information from which the Company's actual results could differ. Please review the cautionary language in today's press release on various factors, assumptions and risks that could cause our actual results to differ. Further, reference we made to certain non-IFRS measures during this call, including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under IFRS. Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable. Please see today's earnings report for more information about these measures. Listeners should also be aware that, making certain statements relating to market share data, the Company relies on reputable third-party providers. Unless otherwise indicated, all references to market data are sourced from High Fire data as of August 31, 2022, pulled on October 18, 2022. Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today's call, we will discuss the financial results for the three months and year ended August 31, 2022, and I will provide a general business update. We will then open the call for questions. Now, I joined OrganiGram in September of 2021 and at the time I said, what attracted me to the Company was its high quality products, strong brand portfolio and proven ability to innovate to meet consumer needs. This was bolstered by a strong sales team to get products into distribution and efficient operations that would enable us to compete in the large value segment. I'm happy to report that, in fiscal 2022, those strengths proved to be significant and resulted in success on several fronts. In fiscal '22, we generated net revenue of $146 million and 84% increase over fiscal '21. In Q4, our net revenue was $45.5 million, an 83% increase over Q4 '21, and our sixth consecutive quarter of record revenue growth. We also became adjusted EBITDA positive in Q2 of this year and have delivered three consecutive quarters of positive earnings. Our share of the adult recreational market grew to 8.2% in Q4 fiscal 2022 from 7% in Q4 '21. For the month of October 2022, we held the number two position in terms of market share. According to High Fire, OrganiGram was the only top five LP to grow market share in our fiscal 2022. At the end of our fiscal year, we held the number one position in the flower category, which represents the largest portion of the adult recreational market. Also, according to Provincial Boards Data, since January, we held the number one position in Ontario in ship sales with a Q4 market share of 8.8% and in the Maritimes with a 14% share in Q4. In Quebec, we moved into the number three position in September, as shown by data from Weedcrawler. We have built SHRED into a recognized brand across multiple categories milled flower, gummies, and vapes. It is one of the biggest brands in the country with over $150 million in retail sales. SHRED also has a solid net promoter score of 77%, according to Brightfield based on field surveys from August 4th to September 27th. We continue to hold the number three position in the gummies category. This includes SHRED'ems and Monjour, CBD-infused gummies, and are the number two in terms of volume sold. In Q4, we had a 24.3% volume market share, which means that close to one out of every four gummies sold in Canada was an OrganiGram product. In fiscal 2022, we introduced over 60 new SKUs to the market to refresh and optimize our product offering. These new SKUs represented about 30% of our sales in the year, which speaks to our ability to not only innovate, but to create products that engage consumers. In Ontario, we have the highest average sales per SKU, which is more than double the average of the top 10 LPs, showing the efficiency of our line-up. A great example of innovation is our ingestible extract, Edison JOLTS. We introduced JOLT in August, 2021 using proprietary IP, and it quickly took the second position in the capsules category. There are now three flavors in the JOLTS lineup, and it holds a 26% market share. In fiscal 2022, we also launched our Monjour wellness focused brand. It was the first large format, a multi-flavor offering in the space and quickly gain share. It is now the number one selling pure CBD gummy with a 37% share. We continue to innovate with Monjour by adding new flavors and other minor cannabinoids into our formulations. We have also been successful at innovating in the value segment. Big Bag O' Buds was introduced in May '21 in the 28 gram format. It was unique in offering quality, high potency strains, not typically available on the value segment, such as Ultra Sour and GMO cookies. It was quickly embraced by consumers and received positive reviews on social media. Now, we did not have a presence serving the value segment in smaller pack sizes, which accounts for over $300 million in retail sales. So to address this, subsequent to quarter end, we introduced a new brand, Holy Mountain. Currently, we are in market with the strains R*NTZ and MAC-1 in 3.5 gram formats as well as pressed hash. I'd also like to talk about our success with acquisitions. Compared to the rest of the industry, we have taken a very prudent approach to acquiring companies. We look for those that will complement our product line and have the potential to be accretive to shareholder value. First was the edibles and infusions corporation based in Winnipeg, which we acquired in April 21, it was pre-revenue and pre-sales license, but had a manufacturing facility purpose, built for cannabis infused products with highly efficient state-of-the art equipment. This provided us with a significant opportunity to disrupt the cannabis edible market in Canada. We launched three gummy SKUs and Q4 of 2021 and grew that to 14 SKUs by the end of 2022. The three original SKUs continued to grow in sales from Q1 to Q4 by 19%, which we brought new ones -- while we brought new ones to market, indicating that the new SKUs attracted new consumers and further built our market position. We have invested in additional automation at Winnipeg including high-speed pouch packing lines and automated excise stamping. In September of 21, we ship three 39,000 gummies. In October of 22, we ship 3 million and have the capacity to increase further. In December, we purchased Laurentian Organics, a licensed producer of craft cannabis and hash, as well as giving us an important presence in Quebec. It was a successful operation with accretive revenue and EBITDA. We have committed $13 million to expand the facility to increase its annual capacity to 2,400 kilograms of flower, and over 2 million package units of hash. Construction is expected to be complete by the end of this calendar year. Our new Holy Mountain pressed hash is produced at this facility. We added Laurentian, Tremblant hash to our national distribution, and it was available in 10 provinces in five month post close. It has maintained its number one position in the Quebec market and is now the number two hash SKU in Canada. Also, a very important contemplated synergy, our new foothold in Quebec enabled significant growth of core organic SKUs in the province. In fiscal 2022, we achieved a 50% increase in revenue per SKU, and as of September 2022, we increased the number of SKUs in market from 21 to 35. I'm also pleased with our production success of fiscal 2022. In Q4, we brought all the cultivation rooms in our 4C expansion at our Moncton Cultivation Center online. We have 115 grow rooms available to us for the flowering period, which provides an annual growing capacity of 85,000 kilograms. We have also completed environmental enhancements at the facility with LED lighting in every room. This has resulted in an 11% increase in yield per plant, decreased power consumption per room, and at 21% reduction in the cost of cultivation. We have also introduced fractional watering. It will be available in all rooms by the end of this calendar year and has already shown to create further improvements. The results of these efforts have been lower production costs, higher yields, and higher potency. In Q4 of fiscal '22, we had a record harvest of 16,000 kilos, 33% higher than Q4 of fiscal 21, and yield per plant was 141 grams compared to 127 grams a year earlier. In fiscal 2022, the Center of Excellence formed as part of our product development collaboration with BAT completed all key spaces including the R&D lab and the state-of-the-art biolab for advanced plant science research. As part of the development, the COE has undertaken initial stage development and safety studies on first generation edibles and novel beverages as part of its work. The COE has created and set numerous delivery systems and created over 60 unique formulations to develop differentiated products in the future. Another key strategic advantage for us is the dedicated cultivation R&D space. This new space has accelerated rapid assessment and screening by delivering 20 to 30 unique cultivars every two months, while freeing up rooms for commercial growth. The plant science team continues to move the garden towards unique, high terpenes and high THC in-house grown cultivars, while also leveraging the newly commissioned biolab for ongoing plant science innovation. Their focus is on quality, potency and disease resistance to enrich the future flower pipeline. In fiscal 2022, OrganiGram established a significant position as an international supplier of cannabis. We shipped a total of $15.4 million of flowers to Canndoc in Israel, and Medcan and Cannatrek in Australia. This compares to the 351,000 of international sales in fiscal 2021. To-date this fiscal year, we have shipped approximately $6 million of dry flower internationally. With our expanded capacity at Moncton, we expect to increase our revenue from international sales. On November 17, we entered into a new agreement with Canndoc in Israel. This new agreement over a three year supply term allows for the shipments of 10,000 kilograms to dry flower with an option for Canndoc to order an additional 10,000 kilograms. This agreement speaks to the consistently high quality of our flower and our strong relationship with Canndoc and allows us to collaborate in the future on other emerging medical cannabis markets in other jurisdictions. Thanks, Beena. As Beena mentioned, we achieved record revenue in both the fourth quarter and the full year fiscal 2022. Gross revenue grew 81% from Q4 2021 to $66 million and revenue grew 83% from the same period of this point to $46 million. On an annual basis, gross revenue grew by 86% to $209 million from $110 million in fiscal '21. Net revenue grew by 84% to $146 million from $79 million in the previous year. These revenue increases were primarily due to higher recreational net revenue, which grew 64% from Q4 of fiscal '21 and 78% over the prior fiscal year. The cost of sales in Q4 fiscal '21 was $37 million compared to $26 million in Q4 fiscal 2021, an increase of 42%. Annually, cost of sales were $119 million, a 15% increase over $104 million in fiscal '21. The low increase of cost of sales relative to the large increase of revenues was due to the lower cost of production that was primarily achieved through improved efficiency from automation. We harvested approximately 16,000 kilos of flower during Q4 to '22 compared to about 12,000 kilos in Q4 of fiscal 2021, an increase of 33%. Annually for fiscal 2022, we harvested 51,000 kilograms, a 76% increase over the 29,000 kilos in fiscal '21. The annual capacity at the Moncton growing facility has increased to 85,000 kilos. This positions us well to meet our growing Canadian and international sales demand. On an adjusted basis, gross margin was $10.4 million or 23% of revenue over the $3 million or 12% for Q4 fiscal 2021. On an annual basis, adjusted gross margin was $33.4 million or 23% of revenue as compared to 3.6 million or 5% for the prior fiscal year. The significant improvement in adjusted gross margins was primarily due to the higher overall sales volumes combined with the lower cost of production. SG&A excluding non-cash share-based compensation increased to 15.7 million in Q4 2022 from $12.4 million in Q4 '21. Annually, SG&A was $60 million compared to 46 million for the prior fiscal year. The increased amounts over the period are largely due to the increased employee had found related to the acquisitions of the Winnipeg and Lac-SupÃ©rieur facility, increased professional fees, ERP implementation costs, and non-cash amortization of the intangible assets acquired from the two acquisitions. While there was an increase in SG&A as a percentage of net revenue, it decreased from 56% to 39%. In the quarter, we achieved a positive adjusted EBITDA of 3.2 million compared to a negative $4.8 million in Q4 '21. Annually, adjusted EBITDA was 3.5 million compared to a negative $27.6 million for the prior fiscal year. The primary drivers of the significant improvement to profitability were the higher volume of products sold, lower proven the cost of production, which increased margins. Q4 '22 was our third consecutive quarter of positive adjusted EBITDA, and based on our outlook for revenue, including international sales and improved efficiencies primarily achieved through scale, we expect this trend to continue. The net loss was 6 million in Q4fiscal 2022, compared to a net loss of 26 million in Q4 fiscal '21. For the fiscal year, net loss -- the net loss was 14 million compared to 131 million for the prior fiscal year. The decrease in net loss was primarily due to the increased revenues of improved cost structure, along with reductions to inventory provisions. From a statement of cash flow's perspective, beginning with operating activities, there was net cash used of $36 million during the year, and this was mainly driven by the increase to our working capital assets, which grew as a result of higher sales and production levels. From an investing perspective, organic brand dispersed $49 million in capital expenditures across factory facilities, $8.4 million in cash consideration towards the acquisition of Laurentian Organic, and a 2.5 million investment into Hyasynth Biologicals. From a financing perspective, the Company had lease obligation payments of approximately 1 million and raised 6.4 million from the issuance of common shares, which was primarily through BAT exercising its top off rate. In terms of our balance sheet, on August 31, 2022, we had $125 million in cash and short-term investments compared to $215 million at the end of the prior year. During the year, the Company undertook a significant expansion at its Moncton facility, which resulted in an expected decrease to our cash position. As we completed our expansion off at Laurentian and automation and enhancement investments at the Winnipeg and Moncton facilities, the Company expects to spend approximately $29 million for fiscal 2023. The Company's $125 million in cash and short-term investment includes $26 million unrestricted cash for the center of excellence, thereby leaving 99 million of unrestricted cash. With the Company now generating positive adjusted EBITDA, we believe that we'll generate positive cash flow from operating activities during fiscal 2023 and positive free cash flows in calendar 2023. We believe our capital position is healthy and that there is sufficient liquidity available to support the growth of the business over the near to medium-term. Thank you. We are pleased fiscal 2022, which reflects all our efforts in building a leading Canadian consumer package goods focused on cannabis. With the progress we've made, the market penetration we've achieved, our highly efficient production and our innovation platform, we are positioned to deliver long-term shareholder values. I want to express my gratitude to our board for their valued support and guidance as well as to our employees for their dedication and ingenuity. We look forward to further success in 2023. First, I just wanted to ask in terms of your thinking on the flower portfolio. It does seem like, especially with Holy Mountain, and Beena, you talk a bit about the rationale of launching this, but things like your portfolio continues to be more in value. So, I'm just wondering, as you go forward, is that where you want to stay for the most part, things are working there, or would you consider trying to up price the consumer with some more mainstream or premium type products in the future to improve your margin? I think the answer is we're comfortable in participating in the value segment because it's the largest segment in the market and it's important to be able to compete there profitably. But we do have our Edison brand, which is now going through a revitalization to really establish a stronger position in a more premium space. And through the acquisition of Laurentian, we also have craft opportunity to continue to push the craft flower set. So, we'll have products in all the different consumer segments, flower products, but we have brands that fulfill the value segment because that's where a lot of the volume is. And a follow-up for me is. So this quarter in your fiscal year ended in August and some of your competitors that had September and talked about how the disruptions in Ontario from the cyber attack as well as from labor strikes, I believe in both BC and Quebec, gave them a bit of a noisy period had some disruptions on the sales side. So I was wondering if, to the extent you can comment, did you see something similar post quarter? Sure, no problem. So listen, despite the challenges in the market during the month of August, so both the cyber attack and the BC strike. We were able to deliver a record net revenue in our fourth quarter. In terms of the OCS, we were proactive with our sales team. They were able to work directly with retailers, to let them know which SKUs were available at the OCS warehouse. So, they were able to get around of the allowed or work within the allowed limits. So that we kept up our position on our sales through that period until things got back to normal. Now I will say, we did see some minor impact in September, as we had such strong sell through in September that we have had to run down to some minimum volume levels at our distribution centers on our high velocity SKUs, and we had a bit of a delay in replenishment of those. So there was a slight impact. But overall, we are very pleased with the results of our quarter, and we feel very good that everything is resolved and we are having a solid Q1 as well. Hi. Thanks for taking my question and congrats on the quarter. Just wanted to start off. I'm wondering if you could share your views being on the structure that Canopy growth is using to roll up its U.S. assets and whether that's a pathway you are considering for OGI to establish a presence in the U.S.? So, Ty, thank you for your question. And listen, every single cannabis company is looking at what Canopy has done in the marketplace. I think it's important to start with that, we have been laser focused first and foremost and making sure, we have a sustainable and profitable position in Canada, right, and taking advantage of some international opportunities through exports. Now we have looked at the U.S. and in particular in the past, we have looked at CBD. But we haven't found a transaction that makes sense to us. So, on the THC side, we will continue to develop a market entry strategy. We will pay close attention to the proposed legislative changes, and the acceptance of the certain transactions from some of our competitors. So I guess the answer to your question is. We will enter only when we have determined the risk reward dynamic makes sense for the Company and all stakeholders. But we are watching it and we are going to see what works. Okay, great. Thanks for that. And then maybe one directed more towards Derrick. I'm wondering if you could unpack the gross margin rate a little bit for us. It looks like that came in lighter-than-expected, particularly given the significant step up in international revenues this quarter. I'm just wondering how much of an influence maybe pricing and mix were, for example. Just appreciate any color you can provide there. Sure. In Q4, we did have a significant increase over Q3 for the international sales. However, that was actually less than the increase that we had on flower sales in the rec market, which did allow us to achieve the highest rec sales overall for the Company in the quarter. So, it was -- so the mix was still somewhat heavier with the wet flower and with the value brands. But I will note that, on overall basis, our gross margin was $10.4 million. It was the highest quarterly amount in the past three years, over the last 12 quarters. And as well, we had the larger harvest now that our lower cost of production over Q4. But those harvests were just coming off at the end of Q4, and therefore were not part of our cost of sales in the quarter and they'll be more likely to impact ourQ1 margins. But overall, the margin was essentially five quarter-to-quarter even with the increased in international sales only because the larger reason our sales went up in the quarter was with the extra sales in flower that we had in the rec market. The first question for me is on international, nice to see the $6 million of sales you guys had in the quarter. It sounds like 6 million a year-to-date as well. So I want to talk about your expectations there, more longer term, specifically on the Israel market. I know you guys signed the agreement within InterCure earlier this month, $20,000, 10,000 now with an option on another 10,000. Sounds like 3000 already delivered. Just given some of your peers kind of backing away from that market, we'd love to get your longer term view there. Do you think it's more just the indoor quality that's why you're not seeing some of the pricing pressure that some of your competition has called out? And just how you're seeing that overall marketplace because I know there's been different views regarding some of your competitors for this real market? Thank you. Sure. So thanks for the question. We have a great partnership with Canndoc. The product in the market is dual branded. It includes OrganiGram and it clearly says indoor grown Canadian flowers. So we certainly are known for indoor grown, and we don't have competition -- market space. So, the quality of the flower is there and well accepted by consumers and we see continued opportunity in the Israeli market. I think, that the question on international opportunity, you saw the new agreement we signed with Canndoc. But more importantly, we've said in previous calls at a position where our demand was out stripping our supply. Now that we have our 4C expansion complete and we have more flower, we could explore other opportunities beyond our current customers to see where we could export our high quality indoor grown flower. Okay, great. Thanks for that. And just given, [indiscernible] factory wouldn't have international versus Canada, as you look to allocate, the extra capacity, is it fair to say that you might prioritize some new customers internationally versus what you might have domestically particularly as you're targeting? Sounds like a little bit more of the value segment in the near term on the Canadian side? Thanks. No. I think, the answer is the reverse. As I said earlier, we really want to make sure we have a sustainable, profitable leadership position in the Canadian marketplace. And so, over the course of last year, we prioritized our domestic market and continue to supply not only the value flower, but we supplied our Edison brand that has close to a 2% market share. So, we continue to have a brand playing in the premium segment. We are building capacity at our Laurentian facility and Lac-SupÃ©rieur to really participate in the craft flowers. So, it will have a complete portfolio of products for the Canadian market, and we'll explore excess opportunities with international markets because we have great quality flower, now we have the capacity to do it. So, I think the priority will still be to make sure we're strong at home and then build from there on opportunities internationally. Maybe first, just to expand on the previous question on gross margin, correct me if I'm wrong, but if I understand, the better international sales, higher margin international sales were kind of offset by more rec value flower sales. Just thinking going forward here, understanding that expansion is going to benefit with operating leverage and the word production cost going forward. Just kind of want to understand what the uplift potential to gross margin is? As mentioned this quarter, it seems value kind of offset international, but is that something that we're going to see less of starting in Q1 of fiscal '23? And again, what kind of pickup on gross margin could we see from the expansion here, assuming that a lot of your future demand is going to be value focused? Well, 75% of our revenues are in the flower categories. And yes, there is a delta between the margins on international versus domestic as a consequence of the excise tax, which is fairly high on the flower categories for all LPs. And we are selling a large portion of our products in the value brand; however, we currently are profitable in that sector in Canada. And that is really without the benefit of getting to scale, while we left our leading fiscal '22 with this higher annual capacity from the month of sale at 85,000 kilos, and at the beginning of the year, we were at 45,000 and the construction was only completed at the beginning of Q4 and then we were planting in rooms on a staggered basis. So, while we had some benefits to our cost structure through efficiencies and some automation, we didn't really have the benefit to our income statement yet for just the lower cost of production. And -- but we did indicate that our cost on a year-over-year basis for cost of cultivation has decreased 33% and that amount will ultimately lower our cost of flower, and I'm sorry, 23%, I apologize. And that will start to benefit our margins across all flower categories in fiscal 23. And again, we didn't see really much of that benefit lift on our income statement for fiscal '22. So, I won't give guidance on the exact margins that can come from this, but our main offerings are in the flower categories and the main cost of the cost of cultivation kind of seemly significant decrease on the cost of cultivation as we leave fiscal 2022 just based on getting to scale. And then, thinking about cash and the guidance that you put out there, positive cash flow in fiscal '23 and positive free cash flow and calendar '23. First, could you just confirm -- is this positive guidance more specifically to the entire fiscal '23 as a whole and the entire calendar '23 as a whole? Or is this achieving positive in any one of those quarters through the fiscal and calendar year? And secondly, just to understand kind of the cadence of what we should expect, especially given the working capital increase this quarter. Should we expect a big step change? Is this going to be a little bit more gradual to get to positive, and just kind of managing expectations here would be helpful. Thank you. Yes. The guidance that's being given is not for the whole fiscal year. It is that we will achieve that income during the fiscal year in one of our quarters. So starting with the operating cash flow, we finished the year with fairly large increased sales. We do expect sales to continue to grow. We have significantly increased the production level in Moncton. And if we plan in those rooms, that will increase our investment in our biological assets and our inventories. So, as we continue to have success in the marketplace with our products and getting to a higher level of scale, there will be negative cash pressures on the operating activities for the first half of the year. However, we do expect that once we are fully operating our capacity at all facilities that, that will level off and we are confident that we will have a positive operating cash flow prior to the end of fiscal 2023. And with regards to free cash flow, our main CapEx spend program, while significant in fiscal '22, we are doing further enhancements in automation in Winnipeg and Moncton and as well with completing the expansion at Laurentian. We expect to have that completed in fiscal 2023. And from there, we have no identified large capital projects. It would be more sustaining capital and as a consequence, as we get into the first part of fiscal '24, we would expect that positive operating cash flow with nominal CapEx will lead us to a positive free cash flow and that's why we indicated in the guidance by the end of calendar '23, which covers our first quarter of next year, of fiscal '24. Good morning everyone. Congrats on a strong finish to the fiscal year. Just wanted to kind of maybe more of a state of the union on what we are seeing and what's a saturated landscape in just terms of the number of participants in this sector, particularly on the cultivation production? So appreciate all the commentary on how you are positioned and you are pretty much sort of top three in everywhere where you are playing. But are you seeing any shakeouts right now, a lot of the commentary we have had from LPs as of late as there is a bit of what may be a bottoming in market share declines that we have seen pretty much across the board and you guys have been making good progress? So are you seeing that as well or maybe there is less competition for wholesales with the provincial boards? Or is this just more specifically where you are choosing to allocate time and effort in terms of the SKUs that you're looking at that's resulting in these gains? Well, an interesting question. So let me start by saying, we do see over the course of this past year that, there has been, those cultivation facilities that couldn't compete whether it was on quality or price that have shuttered, that has taken some capacity out of the marketplace. But there are other players that are still in there, trying to make a goal of it. And so, we are still going to see some level of price competitiveness in the marketplace. We are comfortable because of our cost base that we could compete in the value segment. As I said earlier, we have products that compete in other segments, but the value segment, especially today in the high inflation market is the space, where we expect to see the most growth and we are comfortable participating in that. While some of our competitors have said they only want to participate in the premium segment, it's not a large enough segment. We'll get economies at scale. And at the end of the day, while people are focused on our margin percent, the dollars matter, that's what you take to the bank. And we are continuing to grow our overall gross margin dollars. So I feel comfortable that the market -- we will have some further consolidation. We've seen some companies go into CCAA, we've seen some shutter facilities over the last while. This is going to be an interesting next 12 months in the market. We're comfortable in our position, in our improved -- we're projecting improved gross margins, as you've heard Derrick say. And we'll continue to compete in a segment that consumers are finding the right value, so the right quality at a fair price, right? And so I'm comfortable with our position. In terms of other market share, I mean, we're growing in the gummies category. We introduced product SHRED-X vapes into a segment that we really haven't been participating in leveraging our SHRED brand, and saw some nice growth in that segment. We have more opportunities to build on Tremblant hash portfolio because of the strength of that brand and that product. So we do see opportunities in other segments. As Derrick said, we're predominantly a flower company right now, and we have great assets that give us great quality there. But we continue to build our portfolio and our two acquisitions that we completed in the last year really have helped us expand our portfolio to some higher margin. Got it. Thanks. I think I might have dropped maybe not. But if I'm still on the line, just one more follow-up for me, I know you touched on this a little bit, but I just want to make sure I understand the cadence of what's in your guidance as well. So given calling for a significant increase in adjusted EBITDA over the last fiscal year. I'm just wondering if you think that the sort of run rate that you're at now, or at least the 3.2 million that you did in this quarter, are you expecting to continually see gains sequentially or do you think there'll be some volatility in terms of being breakeven and sort of up and above that sort of breakeven level? Yes, with regards to the EBITDA, we do expect significant improvement in fiscal '23 compared to fiscal '22. And but I do know that for the first three quarters of fiscal '22, we were nominally positive and most of the current fiscal '22 EBITDA do was generated in Q4. We do see EBITDA sequentially improving over next year. There can be some swings. It can depend on mix. But again, generally speaking, with the lower cost of production that we will have for next year and with our sales being at the level that they are, that we think that we can maintain and continue to increase that. Ultimately, we will see that it would increase over the year. But we can't guarantee one quarter over another at this time. So we're not giving guidance specifically by quarter, but we would certainly see the year fiscal '23 being higher than fiscal '22 in a significant way as a consequence of overall sales being higher and cost of production being much lower than it was for fiscal '22. Congratulations on a terrific quarter, and a really impressive year. So my first question is on capacity. You indicate you've completed built out of the 4C expansion in Moncton. You're continuing to expand cultivation capacity in the Laurentian facility, but with international agreements looking like they're on a trajectory of growth, there seems to be continued unmet demand in Canada. Do you see even with these capacity expansion projects you've been undertaking reaching, running out of capacity to meet demand both domestically and internationally? And if so, what routes might you take to address that? I think to start with, we continue to look at ways to enhance our yields further. So even with the completion of our expansion build out in Moncton, so the LED lights only roll through all of our facility by the end of this past quarter. And so the full impact of that benefit isn't yet in our numbers. As I mentioned and as I was talking, fractional watering will only be complete through the end of the calendar year. So that benefit is still to come and we work with our plant science group, the, the work that they're doing on cultivars, uh, breeding, cross breeding and selection. We're finding cultivars that have higher yields and higher potencies and will continue to update our garden with those products. So, there is upside even to the 85,000 kilograms that we're talking about right now as we work through the fiscal year at our Moncton facility. With that being said, and as you also mentioned, we have the capacity at the ranching facility. There is always the opportunity to go out into the market and buy incremental flower as required to fulfill our pro our sales needs. We don't anticipate needing it for fiscal year '23 based on sales, but if opportunities come up, we can certainly look at that there is excess capacity in the marketplace. And again that will be buying product that meets the specifications that we need to have to meet our consumers demand and the quality of products they're looking for from us. And if I didn't just drop, I have another question. Thank you for that answer. Talking about the categories in which you play OrganiGram has been in dominant and far very strong in edibles. The number two and three most important areas, largest categories apart from these or largest categories in the nation are pre-rolls and vapes after that, in which, by my calculations, OrganiGram stands number 9 and number 12 position respectively among LPs? How is OrganiGram thinking about these categories? I recognize there's an increased attention put towards vapes? Recently, we saw some positive movement there. How can OrganiGram cultivate a right to win in each of each of those categories, if these our aims? So, I think, a couple of answers here. Look, it's always important to look at all the different categories and where there's new opportunities for growth. Certainly, pre-roll is one that we have been and we have held higher market positions than where we are. And at the end of the day, no different than our flower demand in fiscal 2022, we had demand that outstripped our supply. And so we were at fully pushing on our pre-roll opportunities. Now that our flower is coming in, we have more opportunity to expand our pre-roll offering and we will continue to do so. So we have a strong pre-roll offering under our SHRED brand, called Jar of Joints. And we have a really good product offering under our Edison brand. Our Pinners that are dual. We have dual flavored, dual strain offerings under Edison. So we have good competing offerings. We just haven't been pushing pre-rolls to the extent, as a result of our available capacity and that will change going into fiscal year '23 as we have more flower available. In terms of vapes, as you said, we were not really a player in the vape market. We introduced vapes under our SHRED-X brand, again leveraging our brand strength and saw very strong off take at the beginning. Now we have to find, make sure that, we are offering a product that meets both what consumers are looking for at the right price. And it's a very crowded space in vapes right now and the market is very highly competitive. So while we have something to offer that's unique and different, we are in there and we do believe, but offering flavors that match our very successful flower flavors for our SHRED milled flower that we had something unique to offer in the marketplace. But we will continue to explore how we could provide a differentiated offering in those segments. That's part of the work we do both in our R&D group as well as through the center of excellence with BAT to look for how to have differentiated offerings. So, we could come in and really disrupt the market. And that's what we are working on behind the scenes, while we continue to push on the segments that we have good penetration. Okay. That's really helpful. And if you would indulge just one more, since you mentioned the COE with BAT. I wonder, if you could remind us the fate of those products that you develop in tandem with BAT, you mentioned 60 formulations developed and a bunch of delivery systems worked on this year. Where might we see these products and under what company might these be commercialized? Right. So just let me start off as a reminder to everyone that, we have the ability to commercialize all the products and all the IP that comes out of the COE, including through sub-licensing arrangements. So it's not necessary for us to even have physical footprints in some international markets to monetize the products or the IP that we have developed. That gives -- so we have the right to do that. And look, we will look to leverage these formulas not only internationally, but also within the Canadian marketplace where big products have differentiated offering that really stands apart. So some of the work, some of the science going on behind the scenes, working on improved onset or improved bio-availability those kind of things. We are working on those. And if we come up with products that really will differentiate our products, they will be introduced in our SHRED'ems or Monjour brands or into our SHRED-X or whatever the portfolio, where it makes sense to continue to build the strength of our brands with differentiated products, and to give us a competitive advantage over those that aren't doing the kind of research we are doing in the background. Congrats on the quarter. Thanks for taking my questions. My first question is on your guidance for CapEx next fiscal years. So if I got there, right, you're planning to spend about $29 million. So it seems like, you're continue to materially invest in your automation and your cultivation, your capabilities, so that stands out compared to what many of your competitors are doing right now in the marketplace. So could you provide a bit more color on the return you expect from that investment capital, and why does it make sense to know from a capital location standpoint to continue to invest at that space in the grid market conditions? Thank you. Yes. Maybe start the answer on that one. I would say that, a substantial portion of that capital that we're allocating for fiscal '23 relates to the plan spend at the Laurentian facility and Lac-SupÃ©rieur. We acquired a company that had the capacity for hash of 1 million units a year, and we're looking to double that capacity to 2 million and take the -- and quadruple the craft flower capacity there, along with provide certain automation equipment that will make it more profitable. So a large portion of that spend relates there. And in Moncton and Winnipeg, we're continuing to look at automation that will drive margins. Everything that we're investing in based upon our outlook on margins, has a very quick paybacks and are very attractive. But we have not identified anything significant with our current three facilities that we now have going beyond fiscal '24. This would be just the plan expenditure at Lac-SupÃ©rieur and funnel touches to completely automate the Moncton facility and as well in Winnipeg. I don't know Beena, if you wanted to provide any color there. Yes. I just want to say that, listen, we recognize that we have an opportunity to continue to invest, to drive significant efficiencies in our operations where some of our competitors who don't have the cash balances that we have, have had to stop that kind of investment, which again provides us with an opportunity of a competitive advantage as we continue to see our cost program go down through this investment of automation and other enhancements. So, this is again, a long term play. We're here for the long term, and we believe these are the right investments now to make us on continued ongoing improvement in our profitability and really be a leader in the space. Okay. Thanks for that. And then in terms of pricing in Canada and your average selling prices. So I know that in the past, Beena, you have mentioned that, you saw and sign off stabilization here in Canada in terms of pricing, but at the same time in terms of net average selling prices that you report, we continue to view decline there. So could you talk about that dynamic what you're seeing in the market right now and how you expect that to evolve going into2023? Thank you. Sure. So thanks for that question. Listen, our average selling price per gram did go down this quarter. And that really is attributed to our mix. So, a little bit more of, of our SHRED flower really as opposed to Edison flower that mix does drive the lower average selling price. But overall, we didn't take any price reductions in the market in Q4. This was simply the impact of mix. There is a drive to more value offerings in the marketplace, right? It's back to the comment earlier about. We're in a high inflationary market right now. While consumers are not going to use less cannabis, they're going to look for the best value they could buy. And so, we have to be aware that that's out there and there's going to be a push to more larger format so that 1 ounce or 28 gram formats is growing and it's going to be pricing compression there while consumer, while companies are trying to attract that consumer. We're comfortable that we have the right cost structure that we could compete in that space and offer competitive 28 gram offerings. At the same time, as we talked about, we launched the Holy Mountain offering to provide value in some of the smaller formats as well. So, the smaller formats are going to obviously be priced a little bit higher than the large flower format, so, we'll have that benefit to our pricing. But we also have a strong program planned on Edison on the revitalization of that brand. And that's important to us. It was delayed this past year because again, we had our flower demand was outstripped for our supplies, so we had to delay some of the work we've -- but we expect that will improve as well. So, I guess for us, average selling price is important, but it really, it will depend on the mix of our brands. And then, our portfolio, obviously derivative have higher prices, so, the more we could sell of our Tremblant hash, -- our overall margins will go up. And we'll continue to operate like that. I think you a more macro answer to your question in terms of what we see in the marketplace, we'll see some further challenges on especially the large format flowers, simply because there is still excess capacity in Canada. And so, while there's excess capacity companies might do different things. But what from our perspective, we're comfortable with where we are. And there are no further questions at this time. Ms. Beena Goldenberg, I turned the call back over to you for some closing remarks. Perfect. Thank you, operator. And to everybody who congratulated us quarter, thank you for that. We did have a great quarter and a great year. So thanks for joining the call today. And I do look forward to providing an update on our fiscal '23 progress in the New Year.
EarningCall_1994	Thank you for standing by. And welcome to the Yiren Digital Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions]. Thank you, operator. Good morning and good evening, everyone. Today's call features a presentation by the Founder, Chairman and CEO of CreditEase and our CEO, Mr. Ning Tang; and our CFO, Ms. Na Mei. Our SVP, Ms. Mei Zhou; Raymond Fang, CEO of Yiren Select who will also join the presenters in the Q&A session. Before beginning, I would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in our filings with the U.S. Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under applicable law. During the call, we will be referring to certain non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about those non-GAAP financial measures or reconciliations to GAAP measures, please refer to our earnings press release. Hi, everyone. Thank you for joining our conference call today. We are pleased to deliver a resilient quarter with solid business recovery and continued improvement in profitability post our product restructuring and pandemic resurgence in the first half this year. As the macro environment gradually rebounds, and our revenue structure continues to evolve and upgrade, we have full confidence to embrace an accelerated growth path in the quarters to come. First , an update on our holistic wealth management business. Our insurance brokerage business continues its strong momentum this quarter, becoming an essential revenue pillar. In the third quarter of 2022, our total premiums reached RMB1 billion, representing a 36% increase year-over-year, surpassing the industry average growth rate by over six times. Revenue generated from Hexiang Insurance brokerage services reached RMB189 million, accounting for more than 22% of total revenue, and we expect to see an accelerated double-digit growth in the fourth quarter. The rapid expansion of our insurance brokerage business is fueled by Hexiangâs outstanding capabilities in product customization and innovation, distinguished from other insurance brokers, Hexiang excels in analyzing and exploring different clients specific needs in their life and working scenarios. Therefore, our products enjoy a strong advantage of exclusiveness in the market. For example, one of our whole life insurance products, tailor made for high-net-worth clients called [inaudible] close for nearly RMB 60 million in premiums this quarter alone. Another example, our customized group insurance products targeting kids and teens with Vision Care Services will hit the market soon, which is expected to contribute sizable premium in the coming quarters. Moreover, our property insurance products also saw continued growth for the past 22 consecutive months, and that the demand remains strong as we expand into more fast-developing areas, such as litigation preservation liability insurance business. Another highlight, I would like to point out is that second year renewal rate for our long-term insurance products reached 96.6% as of the end of the quarter this year, much higher than the industry average of 85%, which has further proven the high quality of our services. Regarding the new regulation on online insurance sales, that's been a hot topic in industry this year. The actual impact on our business has been minimal due to the complexity and richness of our product matrix, and our relatively low reliance on online channels. In the third quarter this year, the total number of insurance products offered exceeded 750, up from around 650 in the prior quarter. Looking ahead, the momentum remains strong for both our life and property insurance segments. Now, moving on to a bigger picture of our holistic-wealth business. In the third quarter of 2022, total client assets reached the RMB 22.8 billion, an increase of 31% year-over-year, particularly on Yiren Select platform, which is the upgraded version of Yiren Wealth and our Super App strategy. Average client assets held by each client, through our institutional partners reached over more than RMB 350,000 representing a year-over-year growth of 36%. With the ongoing penetration of our live class finance initiatives, and the balanced asset allocation investment educational concept, in the third quarter, the number of clients with client assets over RMB 1 million increased by 57% from prior year, a vivid reflection of the enhanced recognition for our improved serving capabilities. Before we move on to an update on credit, I want to mention that we have officially closed our online brokerage arm China Glory in the fourth quarter last year to be complying with new regulations. Going forward, we will focus our efforts on our core wealth business lines and creating a powerful flywheel effect that will help our loyal and growing number member base with additional financial management solutions that match their needs for investment, savings and insurance protections, while also increasing their lifetime value to us. Looking into the year of 2023, we expect to realize increasing synergies between each business line, as Hexiang Insurance Brokerage continues to customize products and services that match the needs of our customers within the Yiren Digital ecosystem. Our customer base is also expected to continue to expand with higher acquisition efficiencies as our consumption driven businesses start to ramp up in scale and drive-up overall customer engagement. Thanks Ning Tang and hello everyone. Before I provide an update on our credit-tech business, I like to reiterate our statistical product transition. And we would like to see a full recovery of the growth pace post op restructuring with the aim of to improve our overall profitability and reduce a potential operational risk amid the pandemic resurgence. We started to proactively optimize our loan portfolio structure back to the second half of the last year, and to scale back, our offline secure loans business that were in higher operating costs and the higher volatility and during the pandemic. We officially terminate this product in the first quarter of this year. Now that our new loan portfolio enjoys a higher operating efficiency and large, lower borrowing costs, we believe the transition allows us to better sustain and scale with the housing unit economics and the higher flexibilities and leads in to respond to any further market evolvement. In the third quarter of this year, our total loan volume reached RMB6.3 billion, accounting for 66% of total loans facilitated in the first half this year and close to pre-restructuring level. Given the current strong demand for our loan-facilitation services, especially for our small revolving loans, we project a further two-digit growth quarter-over-quarter in total loan volume in the fourth quarter this year. Another notable highlight is that our MAU increased it to 1.7 million at the end of the third quarter this year, representing a 24% increase compared to the end of the last quarter, and a 54% growth compared to the end of the third quarter last year, due to our improved services and enhanced integration with our borrowers. Meanwhile, we see an increasing number of the users coming back for a second loan, as we continue to offer various value-added services and membership benefits, such as discounts, tailored insurance and products, and award credit in the third quarter of 2022, the repeat to borrowers accounts for 81% of the total borrowers for small revolving loan products compared to 62% in the third quarter last year, translating into a decline in acquisition cost per user. Moreover, as our e-commerce platform continue to enjoy increasing popularity among our users and bring a growing traffic, the average acquisition cost is expected to further decrease in the future. Just to echo what Ning mentioned earlier, our consumer -- our consumption-driven services from both our e-commerce platform and Yiren Select has helped built up a more dynamic and integrated ecosystem including synergies between different business lines. On the funding side, as we continue to increase and diversify our funding partners, we expect to see a continued decline in the funding cost in the coming quarters. Last, but not least, the asset quality of the new loan shows stability and improving trend. Our FPP 30-plus delinquency rate in the third quarter reached the 0.49%, still at a historical low as a result of our continued efforts in customer segment [inaudible] and risk control tightening. With that, I will now pass it on to Na, who will go through the financials for the third quarter this year. Okay. Thank you, Mei, and hello, everyone. For this quarter's financial update, I will focus on key financial highlights only. Please refer to our earnings release deck for further detail. We delivered solid results this quarter, with total revenue reached RMB 841 million, accounting for 56% of total revenue in the first half of this year, with an accelerated recovery from the temporary impact of our product restructure and the pandemic lockdown. As you may have noticed, we recognized our revenue segmentation in the third quarter last year to high e-commerce revenue as our strategy deployment in consumption driving service start to set off and life to a multi match maker ecosystem with enhanced our customer engagement, activity and long-term value. Contribution from holistic-wealth business reached RMB 294 million in the third quarter and accounting for 35% of the total revenue, up 8 percentage points compared with the same period last year. This is in line with our strategy proceeding as a personal financial management platform that differs us from our leading peers. On the credit side, our total facilitated this quarter RMB 6.3 million realized double-digital growth quarter-over-quarter and a rebounding to restructure level of last year, driving by the rate of our small revolving loan. Revenue from credit-tech service reached RMB 493 million this quarter, accounting for nearly 50% of that of the first half of this year. Our average borrowing cost has fell in to 24.3% for all new loan facility October, reflecting our ongoing commitment to financial inclusion and in line with the regular directive. On the income side, total operating income was RMB 505 million this quarter, decreased by 38% compared with the third quarter last year. Sales and marketing expense decreased to 66% to RMB 136 million from the same period last year, mainly driven by cost savings as we optimize our off-line business which Mei has stated on todayâs earnings. On general and administrative expense increased 20% year-on-year to RMB 224 million, mainly due to the expense of our insured work business as well as the increased spend on risk assessment service costs, having our risk management policy earlier this year. Allowance for accounts receivable and others decreased by 38% year-over-year to RMB 35 million due to higher provision booked for our long-term secured loan business last year. We delivered a strong profit of RMB 270 million this quarter, reflecting a net income margin of 32.2%, up 6.2 percentage point year-over-year as we enjoy better unit economics post the product-restructuring and continue to improve our cost efficiency. Turning to our balance sheet, our net income with substantial balance sheet reached RMB 5.5 million in total shareholders' equity of September 30, 2022, increased by 15% compared to as of December 31 last year. Meanwhile, we remain under strong cash position with usable cash reaching RMB 4.7 billion reserving sufficient buffer for the further execution of our share repurchase plan which was announced earlier this year as well as providing enough fuels for any new business opportunities going forward. Now based on our assessment, our business and the marketing conditions, we expect revenue in the fourth quarter this year is to be between RMB 0.9 billion to RMB 1.1 billion, with net profit margin expected to remain stable. Hi. Can you tell us how many is the size of the loan facilitation in Q2 of fiscal year '22? In your previous press release, you just gave a first half number. I'm just kind of curious to see what was the sequential rate of growth in your online lending channel. Okay. This is Na, I will answer your question. The third quarter, our loan volume is total about [RMB 12.6 million] and compared to the third quarter, the loan volume in our third quarter increased about 20% to 30%. Okay. And can you talk a little bit about the strength of the demand of those online loans. How much more growth can you expect to see in fiscal year '23? Yes, since our current outlook for our 2023 forecast, we think that our loan will keep on a stable and good at plan. And based on our current forecast, we think that our loan will increase about 20% to 30%, yes, at least. We hope that there is a better performance, yes. Your balance sheet is very strong. You have a lot of cash. What kind of interest income are you generating from that cash at this time? Because it seems like there's not -- I don't see much that's been reported on the income statement. Yes. I think most of our cash is mostly from the -- our revenue from our customers from the credit segment and the holistic segment. And actually, there is a little interest income as you mentioned in your tax deposits, yes, it's most from our customer revenue. Right. And I think you've done a great job of managing your expenses in a declining revenue environment. I'm just curious about your capital allocation. Given that you're not generating much interest income from the cash, is it possible that you could -- you do have a USD 20 million buyback program in place. And it doesn't appear to me that you have utilized any of that yet. It would appear to me that you should be much more aggressive about repurchasing your own shares going forward. Can you just comment a little bit about the status of your buyback program? Is it ready to be put into effect immediately? Yes, we totally agree with you. Yes, as you mentioned, we have announced a new share repurchase plan in September. And now I think after the earnings release with the quarter financial statement, then we'll restart our repurchase plan. And I think our strong cash positioning will give win power to execute our share repurchase in the future. Of course, we will also keep on identifying other, wise, multi business opportunity to use our capital -- use our cash position and also enhance our capital income. Yes, as you mentioned, we'll execute our repurchase plan and identify otherwise opportunity to use our cash position. Just -- sorry, I didn't mean to interrupt. Just to be clear, looking at your 20-F, you did have a previous USD 20 million buyback program authorized and in place. And yet you didn't utilize that during the year, and you canceled that and then put a new USD 20 million to replace it. Why was -- why did you do it that way? Why didn't you just utilize the existing repurchase program that was -- had already been authorized? Yes. I also mentioned we renew our new repurchase line in September. That's because the old plan we announced many years ago and during the last several years, we have executed our purchase plan and there is a little left so and as because we have a shareholder hope that we need to renew a new purchase line amount to $20 million. And so that we can renew one because the last one is the little left. Yes, it was many years ago we announced it. Right. I think what people are looking for is to see if you actually follow through with the repurchase. So I would urge you to do that. And that's it's important to show investors around the world that you also feel that the shares are undervalued and that you're going to be in there supporting the ADS, which seemed to be extremely undervalued even in a sector that is generally undervalued. And I guess this question is also for the larger shareholders who are on the call. Have you considered taking this company private given the dramatic difference in what this company should be valued at and what it is trading at right now. We have no such intention at this moment. Because [Obo] is our strategy, yes. And this offshore listing position helps a lot with our global strategy. Right. I understand. But a lot of, what can also be done in addition to that is if large insiders at the company are going in and purchasing stock themselves for their own accounts. And again, just another way of -- . Yes, the stock, the floating part is not that big. So while we totally agree that, yes, share buyback is very helpful, we are also mindful that the flow is not that big. If we buy back all the shares, then it is delisted. There are no further questions at this time. If you have any further questions, you can feel free to contact the company's IR team. That does also conclude our conference for today. Thank you for participating. You may now disconnect.
EarningCall_1995	Good afternoon, and welcome to Ulta Beauty's Conference Call to discuss Results for the Third Quarter of Fiscal '22. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. We ask that you please limit yourself to one question and then reenter the queue for any additional questions. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Thank you, Ms. Rawlins, please proceed. Thank you, John. Good afternoon, everyone, and thank you for joining us today for our discussion of Ulta Beauty's results for the third quarter of fiscal 2022. Hosting our call are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Kecia Steelman, Chief Operating Officer, will join us for the Q&A session. This afternoon, we announced our financial results for the third quarter. A copy of the press release is available in the Investor Relations section of our website. Before we begin, I'd like to remind you of the Company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, December 1, 2022. We have no obligation to update or revise our forward-looking statements, except as required by law, and you should not expect us to do so. We'll begin this afternoon with prepared remarks from Dave and Scott. Following our prepared comments, we'll open the call for questions. To allow us to accommodate as many questions as possible during the hour scheduled for this call, we respectfully ask that you limit your time to one question and one follow-up question. If you have additional questions, we ask that you requeue. And as always, the IR team will be available for any follow-up questions after the call. Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. The Ulta Beauty team delivered outstanding performance this quarter, with strong revenue growth driving operating margin expansion and double-digit earnings growth. We accomplished these results because the Ulta Beauty teams continue to execute at a high level, and I want to thank all of our associates for their commitment to delivering great guest experiences, ensuring operational excellence, strengthening our culture and working together as one team to move our business forward as the leader in beauty. For the third quarter, net sales increased 17.2% to $2.3 billion, and comp sales increased 14.6%. Operating margin increased to 15.5% of sales and diluted EPS increased 35.5% to $5.34 per share. Reflecting these results and our updated fourth quarter expectations, we have increased our outlook for the full year. Scott will share more details about our expectations later in the call. Our third quarter results are a testament to the resilience of the beauty category and our team's ability to drive strong guest engagement that fueled broad-based growth across our business. All major categories exceeded our expectations, and we increased our market share in Prestige beauty versus the fiscal third quarter last year based on dollar sales according to point-of-sale data from the NPD Group. We delivered growth across our store and digital channels and achieved record loyalty membership of 39 million members. Additionally, we continue to see growth in per member across all income demographics. Our strategic framework, anchored by the power of our differentiated model, continues to drive our ambitions and successes as we work to expand our market leadership and drive profitable growth. This afternoon, I will share an update on our progress against several of our strategic pillars. Starting with our efforts to drive disruptive growth through an expanded definition of All Things Beauty, our strategy to engage and delight beauty enthusiasts with a thoughtfully curated assortment focused on inclusivity and leading trends is delivering results. Our double-digit comp this quarter was a result of growth from our core assortment, price increases executed this year and compelling newness. Although pricing contributed more to our comp than last quarter, the majority of our third quarter comp was fueled by growth from our core assortment and newness. Historically, sales of new products have averaged 20% to 30% of our sales, and the overall mix of newness this year has been in line with our historical experience. Turning to performance by category. Skin care, fragrance and bath, hair care and makeup all delivered double-digit comp growth against the third quarter last year. From a segment perspective, we saw double-digit sales growth across both Prestige and Mass, with Mass generally outperforming Prestige. While it's hard to know with certainty if we are starting to see consumers trade down, as the only beauty retailer that offers a wide variety of price points from entry level Mass to high-end luxury and everything in between, Ulta Beauty is uniquely positioned to capture any consumer shifts within price points in the beauty category. Turning to the performance of our core categories, starting with our fastest-growing category, skincare. Beauty enthusiasts are maintaining their skincare routines with a focus on science-backed and dermatologist-recommended products. Guests are engaging with newer brands, like Drunk Elephant, Supergoop and Good Molecules, while new products from established brands like the Ordinary Hero Cosmetics and the Roche Posay also contributed to sales growth. To drive discovery and support guest education, this quarter, we introduced our Skincare We Love All in all stores. This curated presentation highlights exciting brands and best-selling items across key categories. The fragrance and bath category delivered another impressive quarter as Gen Z guests engaged with the category, leveraging multiple fragrances to express themselves. Recently launched Ulta Beauty exclusive Billie Eilish, as well as Nescens from Burberry, Gucci and Viktor&Rolf drove meaningful sales growth. While our monthly fragrance crush program drove engagement with established brands including Versace and Jimmy Choo. In addition, the category benefited from strong guest engagement with our holiday fragrance gift sets, which were available earlier this year. Haircare, our second largest category, delivered solid growth, primarily driven by newness and innovation. Key category trends include hair health, damage repair and targeted treatments. Prestige brands, including Whey and Briogeo, saw strength in treatments and core assortments, while Masstige brands, including Eva Nyc, Batiste and Kristin Ess, and professional brands such as Pureology, Redken and Kenra, continued to resonate with guests. Within the category, strong hair product growth was offset by softer performance in hair tools as we lapped strong performance last year. Finally, our largest category, makeup, delivered double-digit comp growth, driven by newness and the strength of our key events, including 21 Days of Beauty and Fall Haul. Growth in foundation, concealers, blush and lip continue to lead the category. New brands like Fenty, R.E.M. Beauty and NÂ°1 DE CHANEL drove sales during the quarter, while new products from a wide range of brands, including Clinique, e.l.f. and NYX also contributed to growth. In addition, the expansion of MAC, Chanel BeautÃ© and Bobbi Brown into more stores has continued to drive Prestige sales. Now let me give you an update on our key cross-category platforms, Conscious Beauty, Black-owned and BIPOC brands and wellness. With 290 certified brands, Conscious Beauty continues to resonate strongly with beauty enthusiasts, reflecting growing interest in products that are good for the world. This quarter, we certified 15 new brands, including NYX cosmetics, Morphe and Dime Beauty, and introduced the Conscious Beauty essentials kit, featuring minis for more than 15 brands, such as Dermalogica, Koula and our own Ulta Beauty Collection. During the quarter, we expanded our BIPOC brand assortment with four new BIPOC brands: Pebble, Bread Beauty Supply, Sugar Dough and Undefined Beauty. As another way we look to create foundational industry change, we proudly launched our MES Accelerator program to support early-stage BIPOC brands as they prepare for retail readiness. Our inaugural class included eight BIPOC founders, with innovative brands across skin care, makeup, fragrance, haircare and wellness. In addition to financial support, each MUSE Accelerator participant took part in an intensive 10-week training program, learning from Ulta Beauty leaders, industry subject matter experts and leading BIPOC brand owners. We are honored and excited to be a part of their journey as they build their business and expand their reach. Finally, we continue to increase our presence in wellness. During the quarter, we further enhanced our assortment to reflect our guest evolving needs. And in September, we expanded our offering to include intimate wellness as the sixth online-only pillar of the wellness shop. While wellness represents a small part of our overall business today, we believe it is a significant longer-term growth opportunity given the incrementality of the purchase and the strong emotional connection consumers have with self-care. Turning now to our efforts to evolve the omnichannel experience through a connected physical and digital ecosystem, all in your world. Store traffic trends accelerated this quarter and exceeded pre-pandemic levels for the first time, representing an important milestone in our COVID recovery. In addition to strong sales growth from stores, we continue to deliver growth in e-commerce, further reinforcing the incrementality of this important channel. The convenience of BOPIS for e-commerce orders continues to resonate with guests. During the quarter, BOPIS increased 18% to 23% of e-commerce sales, compared to 20% last year. Our services business accelerated and delivered another quarter of double-digit comp growth, primarily due to higher stylist retention, increased stylist productivity and increased capacity in our salons as we lap capacity constraints due to the pandemic. Our targeted CRM efforts to drive awareness, trial and frequency are working, delivering increases in salon appointments from both existing and new members. Additionally, our in-store back bar events continued to drive product attachment and new guest acquisition for participating brands. As industry leaders, we're always working to enhance guest experiences across all of our platforms. During the quarter, we introduced a new layout in about a dozen stores to showcase our categories better, improve navigation, enhance the services experience and create more opportunities for discovery. The most noticeable changes include the repositioning of skincare, an important growth category to the front of the store. All products grew by category with delineated fixtures and visuals and a flow from Prestige to Masstige to Mass. Elevated Gondolas that showcased key iconic and service brands, new beauty bars that offer our brow and makeup services, as well as supporting in-store events, dedicated space in the front of the store to feature brand and product launches across categories, and a relocated checkout closer to the salon. We are excited to introduce this new store layout to guest. And as we've done in the past, we intend to introduce this new experience in new stores, remodels and relocations. At this time, we have no plans to retrofit existing stores. Stores are a critical part of our ecosystem. And while most Ulta Beauty's transactions occur in stores, we know the guest journey often begins online. To assist guests along their journey, we offer a suite of virtual digital tools, including Glam Lab, Skin Advisor and our hairstyle tool, among others. The latest addition is a fragrance finder designed to help guests explore fragrances by favorite brand or ingredient, launched just in time for the holiday season. Finally, we continue to be excited about the long-term opportunity with our strategic Target partnership. This touch point enables us to connect and reconnect with members. And while the partnership isn't material yet to our overall member growth, it has contributed positively. Importantly, we are seeing members bounce back to Ulta Beauty after becoming an active member, while at the Ulta Beauty at target shop. Now, let me give you an update on some of the steps we're taking to drive love, loyalty, and emotional connection with Ulta Beauty. Recognizing the beauty is personal. We are on a multiyear journey to create stronger, more emotional connections with our guests and bring our brand purpose to life. Launched in September, our latest brand building campaign Beauty& is rooted in insights from cultural leaders and beauty enthusiasts. The creative content on owned and paid channels has driven broad improvement in top-of-mind awareness and is resonating with our guests, particularly Black and Latinx beauty enthusiasts. Turning to our loyalty program. Our efforts to nurture loyalty in personalized ways is driving member growth and delivering incremental value. We ended the quarter with 39 million active members, 9% higher than the third quarter last year. Overall spend per member increased driven by increased frequency and higher average ticket. While price increases are having an impact, we are encouraged to see unit growth per member. Our loyalty program is a strategic asset and an important driver of our long-term growth. We prioritize member engagement, loyalty and retention across every Ulta Beauty touch point. The growth and strength of our loyalty program starts with ensuring that our existing guests stay engaged. Nurturing our existing members through our Member Love events and life cycle marketing strategies has enabled us to maintain healthy retention rates, which have contributed to member growth and higher spend per member. Member reactivation remains a priority, and we are leveraging CRM tools to personalize offers and reengage members in more targeted ways. And, of course, conversion of new members also contributes to overall member growth, and we continue to acquire new members in our stores, digital platforms and through our partnership with Target. Shifting now to our plans and expectations for holiday. The holiday season is in full flow, and our teams are executing well. While predicting holiday shopping patterns this year is challenging, I am optimistic about the opportunity for Ulta Beauty this holiday season. Our engaging holiday messaging, one-of-a-kind assortment, with exceptional seasonal options and diverse touch points, all paired with our team's unrelenting passion for delivering great guest experiences, position us well to deliver another successful holiday season. Grounded in robust consumer insights, our holiday marketing strategy positions Ulta Beauty as the place for gifting, glamming and self-care this season. Our intent is to empower guests to celebrate the season however they want. And our integrated media plan for the holiday aims to build broad awareness of Ulta Beauty as a holiday destination, spark connection with key audiences, leverage our beauty expertise and drive consideration and purchase. Our merchandising team has built an outstanding holiday gifting assortment, whether guests want to get others or treat themselves, we have thoughtfully curated options across every category and budget, with a balanced approach to the mix of seasonal holiday items and core items that make great guests. We entered the holiday season with well-staffed stores in DCs, and our teams are excited, engaged and ready. For the first time since 2019, our store teams gathered in person to review our holiday strategies. And I know their excitement and enthusiasm for our plans will be felt in every guest interaction. And our corporate and DC teams have worked cross-functionally to ensure Ulta Beauty is positioned to deliver for our store teams and our guests. In closing, I am incredibly proud of our year-to-date results, and I'm excited about our holiday plans. Even as consumers continue to navigate economic headwinds, we believe the beauty category will remain resilient, and we are confident that our differentiated model and growth strategy, combined with our outstanding associates, will continue to position Ulta Beauty as the preferred beauty destination. Thanks, Dave, and good afternoon, everyone. Today, we reported results that were better than our initial expectations. Strong double-digit revenue growth resulted in record-setting third quarter operating margin performance. These excellent results reflect the continued focus and hard work of our store, DC and corporate teams. And I want to thank all of our Ulta Beauty associates for working together to deliver another outstanding quarter for our shareholders. Now to the financial results, starting with the income statement. Net sales for the quarter increased 17.2%, driven by comp sales growth of 14.6% and strong new store performance. In addition, other revenue increased $20 million, primarily due to credit card income growth, higher loyalty point redemptions and an increase in royalty income from our partnership with Target. Breaking down the comp performance further, comp transactions for the quarter increased 10.7%, primarily driven by strong growth from in-store transactions. Average ticket increased 3.5% due to an increase in average selling price, partially offset by slightly lower average units per transaction. The increase in average selling price primarily reflects the impact of retail price increases executed this year. We estimate that price increases contributed about 500 basis points to the overall comp increase. While average units per transaction was slightly lower than last year, the total number of units sold increased about 10% on a comp basis. During the quarter, we opened 18 new stores, relocated one store and remodeled eight stores. For the quarter, gross margin increased 160 basis points to 41.2% of sales compared to 39.6% last year. The increase was primarily due to the leverage of store fixed costs, other revenue growth and higher merchandise margin, partially offset by higher inventory shrink. Robust top line growth and benefits from our ongoing occupancy cost optimization efforts resulted in healthy leverage of store fixed costs. The improvement in merchandise margin was primarily due to benefits resulting from the timing of retail price changes, partially offset by brand mix. As we have discussed, we have executed a number of price increases from our brand partners this year. Generally, when the new price is effective at the shelf, we are still selling the inventory purchased at the lower cost. As a result, there's a short-term benefit to cost of goods as we move through the lower cost inventory. As expected, our promotional activity increased from the second quarter, but the impact to margin was not meaningful compared to last year. SG&A increased 18.6% to $597.2 million. As a percentage of sales, SG&A increased 30 basis points to 25.5% compared to 25.2% last year, primarily due to increases in store payroll and benefits and corporate overhead, partially offset by lower marketing expenses. Store payroll and benefits deleverage this quarter primarily due to increased labor hours to maintain service standards, higher average wage rates to support recruitment and retention and a timing shift of incentive compensation accruals. Corporate overhead expense deleveraged in the quarter, primarily reflecting investments related to our strategic priorities including Project SOAR and other IT capabilities, UB Media and Ulta Beauty at Target. These headwinds were partially offset by lower marketing expense. As we have discussed on previous calls, this year, we are offsetting the incremental marketing expense of digital campaigns we manage for our brand partners, with vendor income that is a direct reimbursement for these specific costs within total marketing expense. Similar to what we saw in the first half, this resulted in about 70 basis points of favorable impact to SG&A in the quarter. Operating income for the quarter increased 27.3% to $361.9 million. As a percentage of sales, operating margin increased 130 basis points to 15.5% of sales compared to 14.2% last year. Diluted GAAP earnings per share increased 35.5% to $5.34 per share compared to $3.94 per share last year. Moving to the balance sheet and cash flow. Total inventory increased 10.3%. In addition to the impact of 41 additional stores, the increase reflects purchases to support key brand launches and increases in inventory costs, as well as ongoing efforts to maintain strong in-stock to support expected demand. Capital expenditures in the quarter were $83.5 million compared to $51.1 million last year. The increase was primarily related to investments in new remodeled and relocated stores, IT projects and merchandising improvements. Depreciation was $58.5 million compared to $65.2 million last year, primarily due to a shift of IT investments from capital to cloud expense. We ended the quarter with $250.6 million in cash and cash equivalents. During the quarter, we repurchased 340,000 shares at a cost of $137.5 million. At the end of the third quarter, we had $1.4 billion remaining under our current $2 billion repurchase authorization. Turning now to our outlook. We have raised our financial guidance for fiscal 2022 to reflect our strong third quarter performance and increased expectations for the fourth quarter. We now expect net sales for the year will be between $9.95 billion and $10 billion, with comp sales growth between 12.6% and 13.2%. This guidance reflects our expectation that fourth quarter comp growth will be between 6% and 8%, up from our previous expectation for low single-digit increase. Sales growth moderated in November as we lapped last year's strong performance, but we are pleased with the sales trends we saw through the Thanksgiving holiday shopping weekend, including Cyber Monday. We still have several important weeks left in the holiday season, and the operating environment continues to be dynamic. Our Q4 comp outlook, reflects both the expected resilience of the beauty category as well as potential risks from shifts in consumer spending, increased points of distribution for Prestige beauty and higher promotional activity. For the year, we plan to open approximately 47 net new stores and remodel or relocate 33 stores. Our new store performance continues to be strong. But like many other major retailers, we are seeing project delays resulting from external real estate and construction issues, as well as supply chain disruption for key equipment. These external factors have impacted our fiscal 2022 plans and will likely shift new stores originally planned for fiscal 2023 into 2024. We continue to expect to open about 100 stores over the next two years, but the timing of opening between fiscal 2023 and 2024 may shift as we navigate these external challenges. The operating environment is fluid, and we will provide specific targets for fiscal 2023 when we report in March. We now expect operating margins for the year will be between 15.5% and 15.6% of sales. We expect gross margin for the year will increase with leverage of fixed costs and growth in other revenue partially offset by lower merchandise margin, higher shrink and higher supply chain costs. We continue to expect SG&A expense for the year will increase between 15% and 16% and or approximately flat as a percentage of sales, driven primarily by $60 million to $65 million of expenses related to our strategic priorities, as well as higher wage rate growth across the enterprise, partially offset by lower marketing expense. Reflecting these assumptions, we now expect diluted earnings per share for the year will be between $22.60 and $22.90. One final update. We now expect to spend between $300 million and $350 million in CapEx in fiscal 2022, including approximately $160 million for supply chain and IT, $140 million for new stores, remodels and merchandise fixtures, and about $30 million for store maintenance and other. We expect depreciation for the year will be around $250 million. While we are not providing guidance for next year on this call, we want to share some high-level thoughts for your consideration as you model fiscal 2023. The beauty category has been stronger this year than expected. Barring a major economic event, we would expect category growth to continue in 2023, albeit at lower rates, reflecting strong consumer engagement with the category, and we remain confident we can deliver comp sales growth in fiscal 2023 within our longer-term targeted range of 3% to 5%. In this sales scenario, we would expect operating margin deleverage versus our fiscal 2022 guidance. In addition to inflationary pressures on wage rates and other operational expenses, we expect to increase investment spending related to our strategic priorities, reflecting timing shifts from fiscal 2022 and the planned ramp-up of key IT and supply chain investments. Finally, fiscal 2023 will be a 53-week year for Ulta Beauty. We are still finalizing our budget for fiscal 2023 and plan to provide specific financial guidance, and update our longer-term growth targets, if appropriate, on our March earnings call. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question. Dave, Scott, I wanted to focus and start with member engagement. But Dave, curious if you can expand on how member engagement trends within the recent member cohorts differ or I guess, are similar from the more mature cohorts in terms of retention, repeat behavior, the maturation of wallet share, channel preferences, really just any color that helps maybe underpin your conviction for a positive comp outlook next year? Great. Thanks, Steve. Yes, as I said in the remarks, our loyalty program, our membership, is vital and critical to our long-term success and one that we're extremely proud of what we've built the relationship that we have with our guests. Yes, I guess, a few things that I'd call out. Naturally, our longer tenured, you get your tenured three-plus years, we see kind of a higher level of retention, higher level of engagement that tends to grow over time. Greater percentage of our guests, the longer they're here, move into our higher levels platinum and diamond levels. So naturally, with that tenure comes greater engagement. And as I mentioned, one of the drivers of our third quarter growth, 9% growth in our total membership was healthy retention and it's been a big focus for our entire team, our loyalty team, our store teams, our digital, everybody that participates into delivering a great experience. So that's key and really job one is engaging and retaining our existing guests. Our newer members that we acquire in stores, online and increasingly with our partnership with Target, play an important role. Their spend per member makes sense. It's on average lower, and we work hard to get them into the full Ulta Beauty experience. Often they enter into one category or one experience. They might come in store. We try to move them online. They might come in to makeup, we try to move them into skincare, get them into services. We have a full suite of activities and experiences designed to engage our new members through in -- and including their what we call their sophomore year, their second year with us, which is important pivot year into long-term retention. So, we look across all spectrum, what we're excited about now and encouraged by is we're seeing strength across all sectors, all income demographics, all geographies. We have a healthy member base. That's what's driving the 9% growth in our loyalty, and of course, that, in turn, played a big role in the sales performance we had in the third quarter. Congrats. Great quarter. I guess, Scott, I was going to focus on the margins with you. Merch margin is better in 3Q. It sounds like you're off to a good start on the promotional side in 4Q as well. You're going to end the year -- I mean, it's a good problem to have. You're going to end the year closer to 16% margins. Your long-term target is 13% to 14%. I guess, just with merch margins as elevated as they are and as healthy as they are, are you guys starting to think more longer term about the AUR dynamics in the business and maybe that this elevated level of merch margin that you're at might be more sustainable than maybe what you had originally thought and maybe that 13% to 14% actually can move a bit higher? I mean, it more is a high-level question, not necessarily 2023, but that's kind of where I was coming from. Yes. Thanks Mike. I think probably gets to a larger picture versus the AUR piece of your question there. So let me start it, because I know this is at the top of the list for all investors right now as we're thinking about next year. So let me start by saying we are very proud of what the Ulta Beauty team has been able to deliver over the last several years with respect to our operating margin profile overall. We continue to lead the beauty category, capture market share gains and deliver some of the strongest operating margins in all of retail, while also absorbing significant cost pressures, driven by an e-commerce business that we doubled the size of since 2019, along with wage pressures, supply chain disruptions, fuel costs and other inflationary pressures across the business. And also continuing to make significant investments to innovate and build a healthy and vibrant business for the long term. Having said that, we've been very transparent with investors all year when discussing the continued beauty rebound in 2022, and that sales trends have been much stronger than what we expected back in the fall of 2021 when we provided our long-term financial outlook. And that sales performance is driving stronger-than-expected operating margins, driven primarily by fixed cost leverage price increase benefits in gross margin that are extraordinary this year and more moderate promotion levels and that the sales increases have been outpacing the inflationary cost pressures that we've seen in our business. So again, big picture, let me just lay out a couple of the bigger variables here as we're thinking about modeling for next year. So again, back to what we referenced in the script, we do expect we can grow sales next year in line with our longer-term 3% to 5% comp target. So on the top line, merchants have done an outstanding job. We feel good about the queue for newness next year. We've got some great things lined up. But we're going to be lapping over some extraordinary newness this year, right, with these leading brands in each of our key categories, Fenty and makeup, Drunk Elephant in skincare and Olaplex in haircare, all right? Price increase is another major lever. So we're kind of in uncharted territory right now, right? The percentage of our assortment where we've seen increases and the depth of those increases is something we've never experienced in all the years here at Ulta Beauty. So we're going to be cycling over some of that next year, and it's kind of yet to be seen how the consumer is going to react to that over the longer period of time. So elasticity and resilient, while it's been resilient so far, there's a question of how far we're able to push this without seeing some kind of impact. Lastly, on the top line, I'd say we're going to lean into our very powerful loyalty program, the benefits of our credit card. And of course, we're going to look to continue to see benefit from our Ulta Beauty at Target relationship next year. Thinking about the rest of the P&L then, on the gross margin piece of it, promotion levels, we think, will likely be higher next year than they have been the last couple of years. Channel mix then kind of a benefit this year because stores, the big bounce back and traffic we see in stores has helped right some of the margin headwinds that we see from our digital business. Pricing benefits, again, this gross margin benefit from the timing between price versus the inventory change as it contributed meaningful benefits this year. And again, some of that will recur next year, but the question is, to what significance? Wage pressure will continue. Fuel will probably moderate, right? We've seen that here more recently. Supply chain investments will ramp up next year. And of course, UB Media will accelerate, will step up there. So ramp-up will contribute on the margin line, gross margin line. In SG&A, we got store payroll upward pressure on wages, which we expect to continue, maybe not to the same rate we've seen here this year, but certainly will continue upward. Variable cost, inflationary pressures, again, credit card fees, I mean, we're seeing it in every part of our business right now. We've been able to mitigate a lot of that. And super high sales increases help camouflage that a bit as well. And then, of course, our strategic investments, as we mentioned in the script, we plan to ramp those up, and that's coming in 2023, so other digital investments and UBN and target as well. So we've got mitigating strategies in place, right? You've heard us talk about some of these over the years, and we've demonstrated the Company we are able to deliver, we've delivered hundreds of millions of dollars in benefits from our EFG efforts, and we've got plenty of margin enhancement and cost optimization opportunities in front of us, and we're building out new continuous improvement capabilities, which, again, you've heard us talk about are building for the long-term cost optimization of the business. So I'll close it up by saying, even in what we see as a more uncertain environment, being with us here into next year, we are well positioned. We've got a strong business model. We are in a great category that's growing and we've got a very -- a business that delivers very healthy margins. And we expect to be able to grow the top line next year even off extraordinary performance in 2021 and '22. So, we feel good about where we are. Your sales guidance continues to include pressure from increased points of distribution for Prestige. Can you talk about what you're seeing in the fleet when one of these new stores open and how meaningful it is? Yes. We're certainly watching, monitoring, tracking all competitive activity across the landscape. And as I've said before, our focus continues to really be on offense for us to really leverage what we do best, the unique differentiated model we have. Nobody does what Ulta Beauty does. So our competitive strategy is is to lead and to drive our business forward. Having said that, we are watching, there are changes. When stores, competitive stores open, depending on the circumstances of the situation, we can see a relatively minor impact. Typically, over time, our business sustains and recovers any short-term impact. So we're confident. And again, our focus is on delivering what our experience is. What we found over time is doing that allows us to continue to find growth and deliver an experience that our guest continues to want to find at Ulta Beauty. Congrats on the quarter. So we just wanted to ask about the promotional landscape that you've seen heading into holiday. And if you feel discounting at other retailers has been as heavy as initially expected. Yes. I guess, we'd say for holiday, a little early to know exactly. I mean, we're right in the middle of the battle here, I guess, with our biggest, biggest weeks of the holiday period still ahead of us. And we know we've been -- I think we shared this at our last call and really any time we're talking about holiday. Holiday is a more promotional period. The November, December period is different than the other 10 months of the year because the gifting aspects, the idea that we're not just competing with beauty. We're competing with other gift categories across retail. The landscape, it's hard for us to judge midstream exactly. What we've been delivering is an aggressive promotional, but not wildly different than what we've done in the past. So we've seen consistency there. So far, we're really encouraged by what we're seeing, feeling like Ulta Beauty is well positioned and competing effectively, but we're also monitoring, tracking and ensuring that we close out this next, I guess, 24, 25 days with excellence as we complete the holiday, and that's our focus going forward. I just wanted to ask a little bit about cadence, the month throughout the third quarter. And then November, you said it slowed. I guess, I'm just wondering, within your 6% to 8% guidance for the fourth quarter, we know the comparisons get easier in December relative to November. Is that contemplated within the guidance? Or maybe another way to ask it is, is November slow? Did it slow below 6% to 8% and you need to pick up to get there? Or is it within that range? Well, what I will say is first on the third quarter, we saw a strong growth throughout the quarter, although October was modestly -- decelerated modestly, but still double-digit growth in each period of the quarter. As is suggested in our 6% to 8% guidance for the fourth quarter, we're anticipating deceleration from what we saw in the third quarter and really throughout the year. And we've been kind of anticipating this all year as we -- our comps are strong. And again, we're in a different type of period in holiday. We're not going to get into specific week-by-week replay yet. We'll, as I said, we're right in the middle of it. We've got big weeks ahead of us. We'll obviously share -- when we share our fourth quarter results, all the details. But what I will say is, again, reflected in the six to eight is an anticipated healthy growth, but not to the level of what we saw in the third quarter, and we're encouraged by what we're seeing so far in the holiday period, knowing that there's a lot of ground still to cover as we complete holiday. And January is a big important period for us as well. So still a lot ahead of us, but encouraged by what we're seeing so far. Great. Thank you very much. Scott, I was wondering if you can talk about -- you had mentioned sort of the vendor contribution that was offsetting some of the lower marketing spend. So does that mean that they want to present their brands more aggressively, and therefore, are taking more space either on the 21 days of beauty, or if we purchase that type of thing. And then I also wanted to know, Dave, at the beginning of the pandemic, you pulled out of the international Canada opening. Now that the domestic business seems to be on pretty good footing, how are you thinking about kind of reentry into that market? Yes. So I'll start. So the first part of your question, yes, it's an accounting recognition of how the debits and credits flow through the P&L, Adrienne. So there's really nothing related to the vendor choices or how we work or execute any of those kinds of things. It's just accounting convention. Matching up expense with income when it's incremental expenses related to these marketing activities and then the rest of it kind of rolls through the gross margin through our inventory accounting. And on your question about Canada and international, as you stated, we obviously stopped that early in the pandemic. Right now, we have no plans, consistent with what we shared at our Analyst Day. No plans to expand internationally at this time, although -- and we are always looking for opportunities to find new growth potential. And so in our future at some point, that's possible, but nothing in our immediate plans for sure. So I'd like to expand a little bit on what you're seeing within the specific product categories. I mean, you did know pretty strong growth for all categories. But as we head into the early parts here of Q4 and the holiday season, can you talk about kind of specific trends you're seeing for cosmetics, skincare, fragrance? What categories are maybe requiring a little bit heavier promotional activity for holiday? Just any color you can provide there would be helpful. Well, I'll start with -- we're really encouraged by what we saw in the third quarter. And really, we've seen this trend for the first three quarters, a strong growth across all categories, which is obviously a great place to be. The strength we're seeing in our business is not outweighted by one specific category. It's balanced across our portfolio. And it's because we've -- our team across both merchandising, marketing, our stores have done a great job engaging our guests in our entire assortment. And so we're excited and encouraged to see strength across double-digit growth across all key categories. Each one has unique stories, make up driven by this increased engagement in social activities, plus strong product trends that are highlighted through social media and new product growth that a spectrum of newness that's really working. So, a collection of activity that's coming together, both product newness, marketing newness and engagement opportunities. Skincare, continued strength by both science-backed, clinically proven dermatologists recommended solutions. So that engagement that many people elevated through the pandemic has sustained. It's actually our fastest-growing category in the third quarter. Haircare, you know we've been driving that growth as a leader in hair care and strong trends, a healthy portfolio of newness that continues to drive great engagement. And then really all year, pleased with fragrance and bath. As I look and the innovation and engagement, I mentioned Gen Z being a a part of that, and really the whole portfolio working quite well across that important category. As we look in the fourth quarter, again, not getting in, we won't get into any specifics right now. We're in the middle of holiday. And so there's a lot to cover. I wouldn't say there's anything jumping out uniquely for any category from a promotional standpoint. And we come in really with a focus in the fourth quarter of what we call gifting and glamming. And the gifting component is a mix of holiday-specific, but core items that serve all year long, and the team has done a nice job with a balance there. So we feel great about our assortment. It's -- again, we're encouraged by what we're seeing at this point in the holiday and confident that we'll be able to deliver a strong holiday across all of our categories. I have two questions. First one one on newness. Because you had a few brands that really anchored newness and I would imagine contributed towards the upper end of your average ranges this year. So could you talk about your view on innovation, the level of innovation as you think about the next 12 months versus the prior 12? And then you also mentioned in your prepared comments that Mass is outperforming for stage, but in your view, wasn't definitively trade down. So could we dig into that a little? Is there more newness in one versus the other? Or any other reason that you think that Mass is starting to outperform Prestige, if it wasn't related to such consumer. Yes. So just on the broader idea of newness, it's important to our business and the beauty category always. And as I mentioned in our remarks, typically 20% to 30% of sales are new items, and that's the range that we will land this year and anticipate we'll be able to continue to be in that range going forward. As I -- we did -- Scott mentioned, we had some really important new brands in 2022. But we're excited and encouraged by the outlook. This category, both big brands like some mentioned, but also new and emerging brands that take off and connect. I mentioned a couple of those like Good Molecules, among others. So we've got a portfolio of brands as we look forward into next year and confident about newness, both new brands and newness from our existing brands. That plays a big role. And as we work with all of them and see their pipeline, we're encouraged by what we're seeing. The trends are strong across each of the categories. And we're seeing healthy growth. And we think newness will play an important part in that going forward, knowing that we've got some of these big brands that Scott mentioned earlier to launch or to lap. As it relates to the Mass and Prestige, we did see Mass growing somewhat faster than Prestige. But both sides were strong and healthy. So I wouldn't say the strength in Mass or the somewhat higher growth in Mass as we look at it and do -- and analyze our members didn't come at the expense of Prestige. It's just a came because Mass is strong and there's good newness brands like e.l.f., NYX, Ordinary, La Roche-Posay, CeraVe, I mean thereâs strong, newness and engagement. And so they're just capturing and growing. But Prestige is doing really well, too. So I don't look at them being a little bit higher than Prestige as coming at the expense of just the their -- several of these brands and some of our bigger brands are hitting the mark, and that's working. All of our analysis suggests that we have not seen clear signs of trade down. But I'd reinforce, if there is that, we are uniquely positioned to deliver and support our guests regardless of what choices they make from a price point. Scott, can you help stress test a couple of the key variables that are going to impact Ulta's gross overall operating margin in 2023 between the expense spending that you slated for this year and the step-up that you had originally planned for 2023. Is it reasonable that we think around about that as like a $50 million increase in the next year? And then the second part of the question, you're on pace to have a 15.5% to 15.6% operating margin this year. If you were to take the level of promotional activity from 2019 and apply it, all else being equal, to this year, is it reasonable that you would have like a 14.5% operating margin. So a worst case, if promotions go back to 2019 levels, that would be like 100 basis points to the operating margin. Is this a Michael Lasser that I know? I mean, [Multiple Speakers] I appreciate your question, Michael. Yes, and I understand. But we can't -- we're not going to piecemeal out the bits and pieces of the variables and the formula for our EBIT margin for next year. It's just -- it's too hard, and that's why we said we would -- we'll update in March if it's appropriate, okay? And we kind of see how 2022 shakes out here in totality. And then look at our '23 plan, which we're in the heat of battle on right now, finalizing here, which the final step of that is as we get finalized through the holiday season, so to see what the numbers look like. So we either -- as I've laid out for Ike here a little bit earlier in the call, all the different variables and of course, they're all on wide continuums, right? And so we're doing our best to assess each one of those. And coming up with our best idea how we think it's going to shake out for next year. Again, we're very optimistic about the long-term options for our business. I mean, we're in a great position. We've got lots of levers to push and pull, to deliver healthy operating margins over the long term. Maybe since you mentioned it a few times now, how much is shrink versus 2019 as a percent of sales? I'm wondering if that's becoming a meaningful number? And maybe you could just help us orient how much incentive comp influences the margin this year. I don't know if I heard that. And I guess, just maybe touching on Michael's question, you seem to be getting the higher margins the right way here with all the extra sales and gross profit dollars from driving the business and leveraging the fixed costs. You'll be at a revenue level this year, we didn't expect to see until 2024, and you're still seeing the algo next year. I know you gave the long list to Ike in the middle of the P&L, but it feels like you earn some upside to the framework at that 13% to 14%. I'm just wondering if you can give us color on what you think relative to the framework you laid out remain structurally higher or what you think needs more investment than what you thought at the Analyst Day framework to bring all those extra dollars down to that 13 and 14? Yes, Michael. So working backwards. So the shrink part of your question, I mean shrink like when you think about our category, we are especially susceptible to some of the trends that you see across retail. But that's not new to us. We've been dealing with this since the very early days. because of the category we operated in. So I want to make sure I say thank you to our teams, to our LP teams, our store operations teams and all the support personnel that have been working hard to try to mitigate the losses that we've seen step up here, accelerate over the last couple of years. Again, when times get tough, shrink goes up. We've seen that in retail over a long period of time. On the incentive compensation, I would say, we -- for the year, it's going to be flattish versus 2021. Again, our performance has been super strong this year. And then back to the operating margin question, which everyone has, again -- we really can't provide any more quantitative detail at this point in time. I would just point back to the long laundry list of different variables that I described earlier in the call. And just that we're a pragmatic team. We're trying to optimize with all the things that we have, the challenges and the opportunities, we're going to do our best to lean in where we can and try to optimize and deliver the best overall financial performance that we're capable of, whether it's the fourth quarter or 2023. You can rely on us for that. All right. With that, I'm going to wrap it up. But I want to first thank you. Thank you for your interest and engagement in Ulta Beauty. And I want to close by thanking our more than 40,000 Ulta Beauty associates for delivering another excellent quarter, while also executing against our strategic priorities. Our teams have been working hard to get our stores, digital channels and DCs ready for this holiday season, and I sincerely appreciate their focus and commitment to delivering meaningful guest experiences across every single touch point. We hope you all have a happy and healthy holiday season, and we look forward to speaking to all of you again in early March when we report results for fiscal 2022 and share our plans for fiscal 2023. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
EarningCall_1996	Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Intuit's First Quarter Fiscal Year 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thanks, Regina. Good afternoon and welcome to Intuit's first quarter fiscal 2023 conference call. I'm here with Intuit's CEO, Sasan Goodarzi; and Michelle Clatterbuck, our CFO. Before we start, I'd like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit's results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2022 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking statement. Some of the numbers in these remarks are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP numbers in today's press release. Unless otherwise noted, all growth rates refer to the current period versus the comparable prior year period, and the business metrics and associated growth rates refer to worldwide business metrics. A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. Great. Thank you, Kim, and thanks to all of you for joining us today. We had a strong first quarter as we executed on our strategy to be the global AI-driven expert platform powering prosperity for consumers and small businesses. We continue to feel bullish about our momentum and execution across small business and tax. We're innovating at a high velocity using the power of our platform and modern technology capabilities to deliver new offerings at scale focusing on breakthrough adoption. We continue to be focused on putting more money in our customers' pockets, saving them time and ensuring complete confidence in every financial decision they make. This is more important than ever in the current uncertain economic environment and helps us penetrate our large total addressable market of over $300 billion. Now let's turn to our first quarter results. Revenue grew 29%, including 13 points from the addition of Mailchimp. Total revenue growth was fueled by the Small Business & Self-Employed Group revenue growth of 38% or 19% excluding Mailchimp and 25% revenue growth in the Consumer Group driven by a strong October peak with new customers and extension filers. The scale of our platform, along with our rich data, gives us the unique ability to see charge volume growth, the number of employees paid, the hours worked per small business and cash reserves. These measures remain strong for those on our platform and inform our perspective on the health of small businesses. TurboTax had a robust finish to the tax season with a record number of innovations launched and tested in the October peak. I'm excited about this upcoming season, particularly our strategy to transform the assisted category, including the launch of Business Tax and TurboTax and Credit Karma platform integrations. Now turning to Credit Karma. At Investor Day and on our fourth quarter call earnings call, we shared that all Credit Karma verticals had been negatively impacted by the macro uncertainty. In the last few weeks of the quarter and into November, we saw further deterioration in all verticals. Consumer default rates remain relatively low by historical standards, reflecting strong consumer cash balances coming out of the pandemic. However, we continue to see partners pull back from extending credit, reflecting the uncertainty in the economic environment and the risk of deterioration in credit performance. Given this context, Credit Karma revenue came in lower than expected for the quarter. We are lowering our fiscal year 2023 revenue guidance for Credit Karma to a decline of 15% to 10% versus our previous guidance of 10% to 15% growth. At the same time, we are reiterating our fiscal year 2023 revenue guidance for all other segments and reiterating our fiscal 2023 GAAP and non-GAAP operating income and earnings per share guidance. Our ability to maintain earnings power despite the lower Credit Karma revenue guidance shows the power of our diversified platform and our ability to balance platform and product investments for the future while delivering on our commitments. Regardless of the near-term macro volatility, we remain confident in our long-term revenue growth expectations of 20% to 25% for Credit Karma driven by our vision and innovation to become the self-driving financial platform fueling prosperity for all consumers. At Investor Day, we shared how our AI-driven expert platform strategy is accelerating our innovation and how our 5 Big Bets are solving the largest problems our customers face. We continue to deliver strong proof points that demonstrate our success and are well positioned for durable growth in the future. As a reminder, our 5 Big Bets are: revolutionize speed to benefit, connect people to experts, unlock smart money decisions, be the center of small business growth and disrupt the small business mid-market. Today, I'd like to highlight examples of our recent progress across three of these Big Bets. Our first Big Bet is to revolutionize speed to benefit. Our platform enables us to innovate for our customers with speed and at scale, which is foundational to all of our Big Bets. Our evolution from a siloed technology stack to a platform leveraging shared capabilities is well underway. Our development environment enables speed and innovation. Engineers now have 6x the velocity of deploying code, resulting in accelerated innovation compared to fiscal year 2020. Our AI and fintech capabilities are well positioned to solve our customers' biggest problems, such as our money innovations across payments and payroll, advancements in TurboTax Live, QuickBooks Live and QuickBooks Advance, just to name a few. And we're doing that today with over 730 million AI-driven customer interactions per year, 2 million AI models in production, 58 billion machine learning predictions per day and over $465 billion in money moved during fiscal year 2022. Our second Big Bet is to connect people to experts. We're solving one of the largest problems our customer face, lack of confidence, by connecting people to experts virtually. During the October tax peak, our team launched a record 50 innovations to test and learn. Our learnings can help us transform our go-to-market campaign for the assisted segment; revamp the end-to-end TurboTax Live platform experiences with faster access to money via Credit Karma; and better serve the investor, Latino and self-employed segments. We are looking forward to the upcoming tax season. Our fourth Big Bet is to become the center of small business growth by helping our customers get customers, get paid fast, manage capital, pay employees with confidence and grow in an omnichannel world. With Mailchimp, we're well on our way to becoming the source of truth for our customers to help them grow and run their business. We have three acceleration priorities with Mailchimp: first, delivering our vision of an end-to-end customer growth platform; second, disrupting the mid-market by developing a full marketing automation, CRM and e-commerce suite; and third, accelerating global growth with a holistic go-to-market approach. This quarter, we launched a new brand campaign, refreshed our website and launched an improved first-time use experience for new customers that help them more quickly find and use the feature that aligns with their unique business needs. We also launched a one-hour assisted onboarding process for our high-value Mailchimp customers with the goal of guiding them to more advanced features to increase awareness and usage. This program was launched in a record four weeks by leveraging components of our virtual expert platform, another example of the power of the Intuit platform capabilities. As a result of these enhancements and others, we're seeing a positive impact on customer growth and expansion and a lift in customers converting to pay. Turning to our money portfolio. We've made a tremendous investment over the last few years to expand our suite of money offerings to help small businesses get paid, pay others and access capital and manage their money. We continue to see strength in our charge volume driven by easier discovery, auto-enable payments, instant deposit and getting paid upfront. This quarter, we made it even easier for more customers to access their cash quickly by removing friction and opening the funnel to more customers. We're also rolling out a new invoicing experience with a more streamlined workflow and improved design, which is driving an increase in the percentage of companies that send payment-enabled invoices. Looking ahead, we're tackling another big challenge for our small business customers, B2B payments. More than $2 trillion of invoices were managed in QuickBooks in fiscal year 2022. As we shared at Investor Day, we are launching the QuickBooks Business Network, which connects small business customers each other, making it easier for them to do business. It's currently in beta testing, and we expect to launch more broadly later this fiscal year. We're also building our own bill pay functionality in QuickBooks and plan to launch this capability in the future. We're excited about our opportunities for growth with Mailchimp and payments becoming the center of small business growth. Wrapping up, we feel confident in our long-term business strategy and the power of our platform. In an uncertain macro environment, the benefits of our global financial technology platform are more important and more mission-critical than ever for our customers. We have a large TAM with low penetration, secular shifts working in our favor, a diversified large-scale platform where we continue to invest heavily in innovation across our 5 Big Bets to deliver benefits for our customers, resulting in top line growth and margin expansion. We're proud to be an employer of choice as well as the financial technology platform of choice for over 100 million customers around the world who rely on Intuit to prosper. Thanks, Sasan. For the first quarter of fiscal 2023, we delivered revenue of $2.6 billion, GAAP operating income of $76 million versus $195 million last year, non-GAAP operating income of $662 million versus $555 million last year, GAAP diluted earnings per share of $0.14 versus $0.82 a year ago, and non-GAAP diluted earnings per share of $1.66 versus $1.53 last year. Turning to the business segments. In the Small Business & Self-Employed Group, revenue grew 38% during the quarter and 19% on an organic basis, excluding $264 million in Mailchimp revenue. Online Ecosystem revenue grew 60% in Q1 or 28% excluding Mailchimp. With the goal of being the source of truth for small businesses, our strategic focus within the Small Business & Self-Employed Group is threefold: grow the core, connect the ecosystem and expand globally. First, we continue to focus on growing the core. QuickBooks Online accounting revenue grew 29% in Q1 driven mainly by customer growth, higher effective prices and mix shift. Second, we continue to focus on connecting the ecosystem. Online services revenue, which includes Mailchimp, Payroll, Payments, Capital and Time Tracking, grew 109% in Q1. Excluding Mailchimp, online services revenue grew 28%. Mailchimp revenue included in online services was $264 million, up low teens versus a year ago, in line with our expectations. Within Payroll, revenue growth in the quarter reflects an increase in payroll customers and a mix shift to higher-end offerings. Within Payments, revenue growth reflects an increase in charge volume per customer and ongoing customer growth. Third, we continue to make progress expanding globally, and we began to execute our refreshed international strategy, which includes leading with Mailchimp. On a constant currency basis, total international Online Ecosystem revenue grew 172% in Q1 and 19% on an organic basis excluding Mailchimp. Desktop Ecosystem revenue grew 7% in the first quarter. As a reminder, the subscription model for our desktop accounting solution makes this revenue more predictable, and we raised our desktop prices for several products in September to more closely align with QBO pricing. QuickBooks Desktop Enterprise revenue grew mid-single digits during the quarter. We continue to expect the Online Ecosystem to be our growth catalyst going forward. Moving on to Credit Karma. Revenue grew 2% to $425 million in Q1. This was below our expectations of mid-single-digit growth we shared at Investor Day due to further deterioration in all verticals the last few weeks of the quarter. On a product basis, revenue growth was driven primarily by credit cards, offset by headwinds in personal loans, home loans, auto insurance and auto loans. As the macro environment continues to remain uncertain, we're seeing an impact across all verticals. Sasan touched on this briefly earlier, but let me unpack what we're seeing. In credit cards, many financial institution partners have tightened eligibility, particularly in riskier segments. In personal loans, we saw continued pressure with many partners tightening eligibility further while increasing APRs. We continue to expect personal loan revenue to decline this year after very strong growth in fiscal 2022. As a result, we are reducing our fiscal 2023 Credit Karma revenue guidance to a decline of 15% to 10%. This embeds the current trends we're seeing and additional conservatism in the remainder of the year despite the expected continued rollout of several new innovations. Consumer Group revenue was $150 million, reflecting a strong finish to the tax season. We remain focused on transforming the assisted category in the tax prep market as we head into the next tax season. We're focused on making TurboTax a compelling destination for filers who prefer assistance to complete their taxes accurately and quickly. Turning to the ProTax Group. Revenue of $34 million was in line with our expectations. Our financial principles guide our decisions remain our long-term commitment and are unchanged. We finished the quarter with approximately $2.7 billion in cash and investments and $7 billion in debt on our balance sheet. We repurchased $519 million of stock during the first quarter. Depending on market conditions and other factors, our aim is to be in the market each quarter. The Board approved a quarterly dividend of $0.78 per share payable January 18, 2023. This represents a 15% increase versus last year. As I shared last quarter, we have an operating system we use to run the Company, and this includes a proven playbook for operating in both good and difficult economic times. Our first priority is to do the right thing for customers giving them access to the tools and offerings they need most. We manage for the short and long term and control discretionary spend to deliver strong results while investing in what is most important for future growth. The scale of our platform, along with our rich data, gives us the unique ability to see leading indicators that allow us to be forward-looking and adjust quickly. As Sasan shared earlier, we are reiterating our operating income and earnings per share expectations for fiscal year 2023 despite our lower revenue expectations for Credit Karma. We're able to do this by reducing spend in areas where we expect to see lower returns near term. Last quarter, I mentioned we identified several levers we can pull to deliver against our financial principles in a variety of scenarios, and the adjustments we have made are an example. Given the breadth of our offerings and the power of our diversified platform, we have the ability to maintain earnings power despite our expectation for lower Credit Karma revenue. At the same time, we have the ability to make the necessary platform and product investments for the future while delivering on our short- and long-term commitments. We also have a strong balance sheet that enables us to play offense. We will continue to accelerate our innovation, and our goal remains for Intuit to emerge from this period of macro uncertainty in a position of strength. Moving on to guidance. For fiscal 2023, we are lowering our revenue guidance for Credit Karma as trends in all verticals further deteriorated in the last few weeks of the quarter and into November. We now expect revenue to decline 15% to 10% versus our previous guidance range of 10% to 15% revenue growth. We are reiterating our revenue expectations for all other segments and now expect total company revenue growth of 10% to 12% versus the previous range of 14% to 16%. For the Small Business & Self-Employed Group, we continue to expect 19% to 20% revenue growth. And for the Consumer Group, we continue to expect 9% to 10% revenue growth. In both businesses, we expect the majority of our growth this year to come from customer growth and mix. We are reiterating our GAAP and non-GAAP operating income and earnings per share guidance for fiscal 2023. This demonstrates the resiliency of our diversified platform and business model. So to recap, for fiscal year 2023, we expect total company revenue growth of 10% to 12%, GAAP operating income growth of 9% to 13%, non-GAAP operating income growth of 17% to 19%, GAAP diluted earnings per share to decline approximately 5% to 1%, and non-GAAP diluted earnings per share growth of 15% to 17%. Our guidance for the second quarter of fiscal 2023 includes revenue growth of 8% to 9%, GAAP loss per share of $0.29 to $0.23, and non-GAAP earnings per share of $1.41 to $1.45. You can also find our full fiscal 2023 and Q2 guidance details in our press release and on our fact sheet. Great. Thank you, Michelle. As you all heard from Michelle and I, we're seeing continued momentum as a result of our strategy of being a global AI-driven expert platform, growing Intuit double digits with margin expansion. With our accelerated organic innovation and the addition of Credit Karma and Mailchimp, we are the leading global financial technology platform that powers prosperity for people and communities. Sasan, you lowered your Credit Karma growth now from 10% to 15% growth to decline now 15% to 10%. Just want to dig a little bit into your assumption for the remaining quarters in this fiscal year. Where do you see -- how conservative is this guidance? And I know that the Karma guarantee will be rolled out sometime later this year. Where can we see some kind of upside surprise if macro stays at the current level? Yes. Thanks for your question, Siti. So a couple of things. One, as you heard from Michelle, we took the current sort of trends that we were seeing in sort of end of October into November into account. But we also very intentionally included further conservatism, deterioration just to be prudent. And so when we look at things around delinquency rates and unemployment, which is really what financial institutions look at to make future decisions, although they are at historical lows, the assumption is that they're going to deteriorate. And so we just assumed that they will significantly deteriorate, and we wanted to include that in our go-forward guidance. We take a lot of pride in the commitments that we make at the Company level, and we want to make sure that we're very prudent in terms of the assumptions that we made with the guidance going forward. With that said, I think what I would amplify is our innovation that we talked about at Investor Day. Beyond things like Karma Guarantee, we are actually -- we have launched, it's almost at full scale, something called the Marketplace, where we're giving more exposure to personalize experiences around cards and personal loans to our members. And now with the integration of Mint and Credit Karma, which was part of our refreshed Big Bet three vision that we talked about at Investor Day, we expect in the future to have additional sort of capabilities and innovations for our prime customers, which has not been our sweet spot in -- on the Credit Karma platform. So we are leaning into our innovation and those possibilities. We are not counting on any of that impacting the growth rate that you just heard from Michelle and I for the fiscal year, and we just simply believe that's the right thing to do. Great. And then a quick follow-up on the small business side. That's pretty impressive quarter, and it grew 19% organically. And if I look at your guidance for remaining three quarters, you just have to grow 14% to hit your guidance. You already -- like you talked about price mix shift and -- or you already raised pricing 10% to 25%. So what are you seeing in the small business side? And what are your assumptions for the remaining of the year? Yes. Sure. Absolutely. First of all, I would start by saying we have a lot of visibility into things around consumer spending, which is charge volume. We see the number of employees, whether they're going up and down. We see a number of hours worked. We see cash reserves. And of course, there's our metrics around acquisition, retention, payments and payroll volume and also what we see across Mailchimp. And what we're seeing across the board is a continued flight to digitization. If you use our payments capability, you get paid faster, and cash flow is more critical in this environment. If you use our payroll capabilities, you're actually able to reduce errors and pay your employees and have money moved from your bank account to their bank account same day versus two weeks in advance. With the use of innovation that you've heard from us on Mailchimp, we're actually starting to see customer growth tick up. And so those are just illustrative examples are -- we're just continuing to see based on our innovation a flight to digitization, which is the strength that you heard from us in the first quarter. And we expect that momentum to continue the rest of the year. And we remain steadfast on our guidance until we see more quarters, but it is not at all about our sentiment about small business. We actually feel very good about what we're seeing across the board in small business. Just a question on the reiterated operating income guide. You lowered top line by, it looks like, about $700 million, yet you're able to sustain your operating income guidance, which is impressive and it speaks to the flexibility in your model. Michelle, you alluded to some adjustments that were made, if you could just provide a little bit of color as to where those adjustments were made in the business? No worries. No worries. Thank you, Brad. Yes, it is one of the things that we feel very good about. As I talked about on a previous call, when we were going through our planning for this year, we were really looking at making sure we had identified areas that we could take action on, the levers we could pull if we did see the macro environment get worse. Those things look like marketing expenses, things that we just don't think are going to pay off in the near term; other areas like travel, discretionary spend. But we are protecting R&D and our innovation. And we are continuing to invest. Our investments and our head count continue to go up across the Company. And yes, Credit Karma, we have taken the revenue down with a revenue hit there. But when we look at really being able to manage our expenses, it is looking across the Company holistically and really focusing on the areas where we think we're not going to see as much return in the short term so that we can continue to focus longer term and drive the innovation. Excellent. And this -- Sasan, one for you, if I may, please. Last year, we saw a little bit of moderation in TurboTax ASP growth. You talked a little bit about that at the Analyst Day. I think it was 4% on paid ARPU versus, I think, 8% in prior years. If you could elaborate a bit on what went on there. And should we see some acceleration here? Now that you're getting into more experience with TT Live and full service, might we actually see some acceleration in TurboTax ARPU? Sure. Absolutely. I think the way to think about it is in the long term and from a trajectory perspective, we should see ARPU go up. And now every year, strategically, we make decisions in terms of where we may expand our free offering or where we may increase price based on the leverage that we see in the marketplace, which is primarily in our assisted offerings. And those were some of the adjustments that we made last year. And as we look into this year, we actually feel very good about our do-it-yourself platform lineup. And really, our biggest leverage is going to come from accelerating what we're seeing across the TurboTax Live platform, which is really where the growth is coming from. It's really where the ARPU comes from, and it's where our biggest opportunity is with a $20 billion TAM in front of us. And of course, overtime, opening up an additional $10 billion TAM with business taxes. So that was really the intent and the logic behind why ARPU was probably a little bit slower growth last year versus prior years. And I think the way to think about it is we're going to continue to see ARPU growth into the future, and a lot of it will come from the assisted segment. And that's really part of our plan that we're executing against this coming year. Great. Sasan, you guys are always very transparent, great disclosure. And my question is maybe a little bit bigger picture. Can you talk about the opportunity to open up and externalize into its platform services to third parties for developing their own apps with live expert functionality, rich data services, money movement perhaps, and the things that are making you so successful? Yes. Absolutely. Great question. This was actually at Investor Day one of our, what we call Horizon 3 ideas that we have invested in, which is around externalizing services. So first and foremost, we do see a big problem space out there where developers and partners and firms look to access and have a need for things like around our virtual expert platform services to connect people to experts or had to use for our identity services and have a use for our fraud and risk capabilities. So there's a lot of services that we have across our platform that you heard Mariana talk about of which there is a need for those services externally. Now we want to be very choiceful and intentional what we choose to externalize and what we choose not to externalize and what problems we choose to solve and which ones we intentionally choose not to solve. But we do believe it as an opportunity, it's actually something that we funded about a little bit over 15 months ago, and we have a mission-based team that is working on it. And when we have more to share in terms of launches and anything that we think over time will be material for all of you to be aware, we'll be the first to share with you. But we do see it as an exciting Horizon 3 idea that's been funded and are excited about the prospects of it. I wanted to ask on Mailchimp. So last quarter, you pointed out that you were kind of working on go-to-market a little bit. You wanted to adjust that. This sound -- this quarter, you sounded better, and it looks like you're using Mailchimp like the lead to go -- to attack the international markets more broadly. Can you speak a little bit about what you do there, the progress that you're making, where you are in that journey, please? Yes. Absolutely. First of all, I'll just state that I'm really excited about Rania that we just put into the business and the leadership team that she is building in. It is the result of that leadership team where we are seeing accelerated innovation. And as I mentioned a moment ago, there's been a lot of innovation just in the last sort of three to four months in Mailchimp from an entirely new brand campaign where we communicate the benefit to how you can grow your business to SMBs, both on air and on -- through digital assets. We've redesigned our website. So when you come to us, you're very clear about the benefits that we offer, the choices that you have and why it can help fuel the success of your business to then revamping the first-time use experience, along with what we have just implemented for, I would say, higher-value, larger Mailchimp customers and new customers that we want to pursue, which is a one-hour assisted onboarding to help you get on to the platform to help you understand the benefits of the platform. And in context of what we've shared around international and Mailchimp as sort of the lead internationally, we are right now focused on localizing the language. Where we have localized language versus not, we have more than 13 points conversion variants. And so of course, localized language is one of our largest levers internationally along with having a playbook that we're putting in place around go-to-market to raise awareness. So a lot of those things we have already launched that I mentioned and the localizing languages we're working on as we speak. And a lot of what we -- what I just shared, we're starting to see a real impact from customer uptick, expansion revenue. And we're excited about the possibilities and the momentum that the leadership team is building. Congrats on a good quarter. Sasan, you all are in a somewhat unique position that you get to see demand -- sort of demand on both the front-office side as well as sort of the back-office side of Mailchimp and then QuickBooks. I was wondering if you could give us any when you look at the demand indicators from a front-office perspective or a back-office perspective. Are they similar? Are they different? Is there anything you've noticed now that you got to have some insight into sort of that other part of the -- of essentially the operating ecosystem of your customers? Obviously, there's just a lot of discussion in the market right now between front-office and back-office demand. So I was wondering if you can enlighten us, I guess, with any of your thoughts on that. Yes. Sure, Kirk. And let me try to be descriptive about it, so I'm not overly generic. I think our customers that we serve, the small businesses between zero to 100 employees don't as much think about back office, front office. They just really look to have a platform to be able to grow their business and to be able to manage their cash flow. So if you think about our QuickBooks platform, let me start there, and I'll get to a jump in a moment. Really, QuickBooks helps you manage your cash flow, all your money coming in and money going out. And the notion of digitization is really important for customers, which is why we're enjoying the growth that we just shared. And that really comes down to customers can use QuickBooks to be organized. They can get paid much faster with using our payments capabilities. They can get access to capital. They can have instant money flow from their bank to their employees' banks by using our payroll. If they're out in the field, they can use our time tracking so everything is automated. All those things are about digitization. And the way small businesses think about it is it actually helps them with their cash flow because we also -- with all those capabilities, project your cash flow. So that's the real big value sort of QuickBooks. And then you add to that Mailchimp. The real value of Mailchimp is don't think about it as these are not enterprise customers. These are smaller, small businesses that where their sort of lifeline comes from being able to reach out and manage their existing customers but also effectively be able to grow their customer base. And so the reason we're continuing to see an uptick based on our innovation and based on just good execution. And I think the best is yet ahead of us in Mailchimp is that is separate and distinct from do I spend more money on advertising dollars. When you use Mailchimp, you have the ability to use our tools with a subscription that you pay on a monthly basis to be able to in an automated way, reach out to your customers, market to new customers. And we're seeing sort of equal demand -- if I go back to your frame of front office versus back office, I think where there is slower spend and declining is spending money on advertising dollars. That is not what -- Mailchimp is not impacted by advertising dollars. It's actually a -- it's a platform that you use to be able to manage your customers even if you choose to spend less advertising dollars. You can still use Mailchimp very effectively to be able to manage your customers. So that's why the demand is strong with Mailchimp and QuickBooks, and that's really what we see across the platform. Next quarter in Q1. The question that we're all going to get tomorrow from investors is the outlook derisked. So I wanted to dig into kind of like your guys thought process. When you're talking about Credit Karma, you told us that -- you looked at sort of the trends that happened in -- at the end of the quarter in the last couple of weeks, and you assume that those trends deteriorate a little bit further on a go-forward basis to get a conservative Credit Karma guide. Can you talk to us about -- like you didn't change any of the other numbers? All the other sort of business lines are kind of intact with your prior expectations. But is there any similar kind of derisking them? Like are you assuming any degradation in the underlying business for QBO or Mailchimp or like any of the other businesses in a similar way you are Credit Karma? Yes. Keith, thank you for your question. And I just want to acknowledge that you and others were pushing us on our Credit Karma side at Investor Day. And let me just start at the top level to share sort of what we've learned and what we've adjusted, and then I'll answer your question. When we look across tax, which is 35% of the Company; and then when you look at across small business, which is over 50% of the Company, so that's like 86% of the Company, we have sort of -- which includes Mailchimp, we have proven and tried KPIs that allows us to see things well into sort of the future not only to ensure that we're investing in all the right things, but also be able to be very intentional and thoughtful about how we guide because we take our guidance very seriously. One of the things that we learned with Credit Karma is there are two factors that we look at but we did not take into account: one is unemployment, the other is delinquency rates. And what I mean by that, not taking it into account as we view it, we look at it, and they're at historical lows. And the one thing that we learned from this process, what we are adjusting and have adjusted our KPIs is just looking at where they are today, but also projecting where they could be a year from now and ultimately projecting what could happen if we were sitting in the shoes of some of the partners that are on our platform. So that is a very important shift, which actually gets at the point you made around our Credit Karma guidance. We feel that it is absolutely derisked. We -- as you heard from Michelle and I, we have built a deterioration and conservatism in the back half of the year because we have taken into account uptick in both unemployment and delinquency rates, and therefore, have put out a guidance that we believe is the risk. To go to the second part of your question, tax, which is 35% of the Company, that is really economically resilient. So let me focus my answer on Small Business. Because of our KPIs and the rich data that we have access to and what we see within Small Business, we actually feel like our guidance in Small Business is derisked because we make certain assumptions around how things will potentially play out the remainder of the year that we took into account when we set the initial guidance, and we still feel very good about the guidance. And you can see based on what we delivered in Q1, we can just do the math and see what it means for the rest of the year. So we feel very good about the way we set guidance in those two businesses. We feel very good about the guidance in those areas for the rest of the year. And hopefully, my explanation made sense around Credit Karma. Got it. Yes, that's super helpful. And then just one clarification question. On Mailchimp, it looks like the revenues was basically flat, maybe down a little bit sequentially. I'm assuming there is a currency impact in there. Can you -- is there like a constant currency number that we could see kind of like how it sequentially? Yes. It's actually -- it is in constant currency. I mean maybe, Michele, I'll let you chime in here in a moment. But I think what I would say is we -- when you look at our innovation and when you look at our customer uptick and the expansion revenue that we're starting to see, it's actually very much in line with what we would have expected because a lot of our innovation that is in place is actually now accelerating the growth of the business. Because remember, this business was run for cash flow and profitability, and now we're running it for growth. And we're actually quite pleased with the impact that we're starting to see, and we would expect that to accelerate in the upcoming quarters. But Michelle, do you want to chime in on the currency version? Yes. The only thing I would clarify is that Mailchimp actually sold at U.S. dollars, and so there isn't a currency impact there for the international, even though 50% of their sales are outside the U.S. Congrats on the results. Sasan and Michelle, curious to get your perspective, we don't like recessions, but this is a recession, maybe it's a recession that we've all been anticipating. It's most widely anticipated one. So what are the assumptions that you have incorporated in your soon you're forecasting for the foreseeable future? I mean, is it an uptick in attrition or maybe the expansion rates come down a little bit? I'm just curious to get your thoughts on what you've dialed in with your current go around of trajections. And also, Sasan, if you could talk about payments. You clearly demoed at the analyst event, very, very impressive. Clearly, it's got a lot of potential. What should we be expecting? What are you expecting in your payments business in the medium term to long term? What are your goals? Congrats. Yes. Thanks for the question, Kash. Just in terms of your question around assumptions, I think on Credit Karma, hopefully, what I just shared a moment ago resonated in that. We are assuming sort of further deterioration and conservatism in the back half of the year or the remainder of the year, I should say. Despite a lot of innovation that is still coming to market because we're just -- we're making assumptions around unemployment going up, delinquency rates getting worse, which means that financial institutions, although we're one of the last platforms they pull off of that they will be conservative in terms of their investment levels. So those are the assumptions that we've made for the remainder of the fiscal year for Credit Karma. And for Small Business, a lot of the strength that we're continuing to see is just -- it's a shift to digitization from folks that are already on our platform. So we have a lot of customers that are on our platform. If you remember, we used the figure of -- there's $2 trillion of invoices being managed on our platform, and we have over $100 million that is part of our -- well over $100 million as part of our payments charge volume, which means we have a huge opportunity to penetrate that within our existing base. And I use that just as an illustrative example, Kash. To answer your question, we're not making any assumptions around payments uptick because the macro environment will get better in the second half of the year. We're actually assuming that a lot of the growth that we are seeing is just continuing shift to digitization from those that are on our platform. And so we make customer acquisition assumptions. We make attrition assumptions. We'll look at assumptions around payments and payroll that are really in context of how we feel about the environment going forward. Although we're not seeing it within our SMB segment, we are assuming a level of conservatism as we think about the remainder of the year. And those are the assumptions that we've made for both Small Business and Credit Karma. And tax, again, tax is economically resilient. We pretty much make assumptions based on our penetration in the assisted segment. And that's really -- that and the total number of IRS returns is where our assumptions come from. And again, those are -- that's economically resilient. So that's how we think about the guide going forward as we just reiterated. In terms of payments, listen, payments is one of the areas that we're the most excited about. If I had to pick a couple of areas, it's Mailchimp, it's payments and it's what we're doing to go upmarket and with QuickBooks Advanced and mid-market. And with payments, we spent four or five years building out all of our fraud and risk capabilities, all of our AI capabilities, and we're just innovating very fast with that team. And a lot of the future around what we can do to digitize B2B around what's possible with bill pay, that -- those are yet to come and not even in our forecast going forward because we just believe that there's so much room for penetration attached going forward. So hopefully, our say and payments has been to your liking, but we think our best is yet ahead of us. Sasan, I'm curious, I'm kind of honing in on Credit Karma and credit cards, which I believe is about half of the revenue. And please correct me if that's changed, perhaps gone up, based on what personal loans has done. But just how are you looking at credit cards? What are you seeing with consumers there? I understand it was the strength in that segment of the quarter versus personal loans, home loans, auto loans, auto insurance. What -- specifically in the credit cards, is that strengthening -- or maybe not strengthening, but weakening a lot less? Just honing in on that specific segment, what are you seeing from the consumer? Yes. Sure, Scott. First of all, it is -- as you said, it's a large part of the overall Credit Karma platform. With that said, I'll start with context that when you look at the 129 million customers or members that we serve on Credit Karma, the majority of our focus has been sub-prime and near-prime customers. And that's really a lot of our personalized experiences are for those cohorts. And one of the things that we're very excited about that we have shared at Investor Day is we're also building out capabilities and innovation for prime customers. And that's why we shifted Mint over, and we're combining the Mint and Credit Karma platform. So that context is important because as you hear my answer, just hear it from the lens of the majority of where our business comes from is sub-prime and near-prime. In the future, we'll also have capabilities, innovation and ultimately, revenue that will come up front and prime as well, which positions us really well in the marketplace. And with all of that said, in essence, yes, we're continuing to see growth in credit cards, but we're actually assuming that, that will really deteriorate the rest of the year based on unemployment going up and delinquency rates going up. And as you heard from both Michelle and I, we have built conservatism into the remainder of the year. And so there's -- which will ultimately result in declining growth rate. But what we saw in Q1 and the growth rate of the 2%, a lot of the headwinds in other verticals was offset by credit cards. But we have assumed that, that will get worse over time. Okay. Appreciate that. And then following on -- it's kind of more on the tax side, but overall, the guidance for the second quarter seems to be the most derisked with EPS down year-over-year. And that's an uncommon sequential change. But it sounds like the levers Michelle is pulling, it sounded like marketing and advertising was one of them. I infer that it's more in the small business side. But just curious on the tax side, are you doing anything differently now that we may have a more normal tax season versus the past few with regard to advertising timing or overall? Yes. Sure. I'm actually glad you asked about our second quarter guide of 8% to 9%. First of all, our momentum in Small Business continues into Q2. There are two elements that drive our guide of 8% to 9% revenue growth in second quarter. One is we always make assumptions for tax. As you know, tax is tricky between second quarter and third quarter. And we make assumptions around when the IRS will open, forms availability, and those assumptions drive what we assume will happen in our tax business. And in some cases, we have elements of our tax business that actually we've assumed may decline in the second quarter. So that drives our guidance overall at the Company level for Q2. And then Q2 generally has been seasonally the weakest quarter for Credit Karma because of the month of November, December and January and then just the number of holidays. It's seasonally the weakest quarter. So when you combine our assumptions with tax and you combine our assumptions with Credit Karma, that's where you get Q2 where it is. And hopefully, that answers your question. This is Allan Verkhovski on for Alex Zukin. I think more people are warming up to your ability in hitting your SMB guide for the year despite the challenging macro. But I want to dig further into what you're seeing in the SMB segment today. Can you talk about what you saw around ARPC growth in the quarter, excluding the benefit you observed from the pricing increases that went into effect? It'd be helpful to get how much of a tailwind the pricing increase was in the quarter for QBO accounting and better understand the quarter how your growth levers, such as customer growth, upselling and cross-selling, were impacted from the macro, if at all? Yes. Sure. Absolutely. The majority of our guide for the year and what we also saw in Q1 actually came from customer growth and mix, and mix includes things like QuickBooks Advanced. And you saw from our online services growth of 28%, we're seeing really sort of good growth from Payroll, Payments, Time Tracking. And that, of course, excludes Mailchimp, and we talk about Mailchimp separately. So I think the short answer to your question is we are seeing the type of balance that we would want, which is our growth coming from customer growth and mix and price will play an element -- a smaller element, but it plays an important element as we look at not only what we saw in Q1, but what we expect for the remainder of the year. Got it. And just as a quick follow-up, if I may. On the Mailchimp front, I want to follow up to Keith's earlier point around Mailchimp revenues being sequentially relatively flat. Could you share maybe something more about maybe conversion rates? Or just a follow-up on the acceleration comment you made through the full year, just anything that could give us more color for how we think about potential revenue growth of Mailchimp for the full year? Yes. Yes. Absolutely. I mean if you go back to when we closed the deal almost a year ago, one of the things that we were very clear about, in addition to our excitement around the asset and the fact that now combined with QuickBooks, we can have one growth platform that can be the source of truth for -- and the source of growth for a small business, one of the things that we reiterated was that this was really a business that was run for profitability and it was run for cash flow. And even particularly in COVID times, where you saw a lot of front-office company accelerates, Mailchimp really didn't because, again, it was more run for cash flow and profitability. And so we worked very hard in the last year to put a playbook in place in context of the priorities that we've shared to accelerate growth. And those priorities, they always take time to shift the business from being run for profitability and cash flow to be run for a growth business typically takes a couple of years. And we're actually starting to see a trajectory change within the first year. And we're quite demanding of ourselves in terms of the velocity that we would like to see. So really, what's happened there last year is we were taking a business that was, again, run for profitability, cash flow to revamping the website coming up with a new campaign, revamping the product. And when I say revamp, it's not done. We've not reached the destination. It's just the beginning of what's possible to really focus on high-value customers to position ourselves to go after mid-market to start ramping up what we can do internationally. All of these things, we're starting to now see indicators where in the quarter, although it was sequentially flat from a revenue perspective, we're seeing conversion from free to pay is up. We're seeing customer growth tick up. We're actually seeing expansion revenue, which means our customers are growing and they're upgrading what SKU they use. We're starting to see these, and these things really become future indicators of growth. And that's why the comment that I made earlier and Michelle made earlier around, we expect that the growth in Mailchimp to accelerate in the coming quarters because we're seeing the KPIs around customer growth, expansion retention, these things are starting to improve. So hopefully, that helps to answer your question. I guess I just want to clarify a little bit on what you're seeing on the Credit Karma side and what you talked about historically on that front and what you're expecting for the guide here. I think before, you talk about expecting an acceleration kind of in the back half of the year as you kind of combine the cross-sell with TurboTax here. I guess, how are you thinking about that opportunity now given kind of where the macro is and what you're assuming versus the cross-sell that could potentially come here? Yes. We have taken -- thank you for the question. We have taken sort of a firewall approach here. One is we're very excited about the innovations that we talked about at Investor Day. And in fact, the only thing that's changed is we've added a few more innovations that we've launched within Credit Karma. The Marketplace that I shared earlier is one of them, where -- and it's almost at full scale where our customers see an additional tablet, a marketplace of all the products that are right for them in one place that brings more visibility and brings to the forefront products that are right for a specific cohort of customers. So in terms of the integration with TurboTax, you're going to see a far more robust experience this year with Credit Karma being integrated into TurboTax and vice versa. Credit Karma Guarantee continues to be on track in terms of a rollout to customer -- to members and financial institutions. All the innovations that we talked about, plus a few more are all on track, and we're equally as excited about the impact that it will have. And very consistent with what we shared at Investor Day, what we talked about then was that these innovations were not reliant on a macro pickup. They're just -- they're going to deliver more benefits, and therefore, more monetization. Back to the word firewall, we're not counting on those innovations in our results when we think about the rest of the year. We're assuming current trends. We're assuming further conservatism for the remainder of the year. We're making assumptions around unemployment going up, delinquency rates going up. And so therefore, that's informed our guide of minus 15% to minus 10%. And that's sort of separate and distinct from the innovation that we continue to be excited and focused on and are on track for the rollout. Okay. Got you. That's helpful. And I guess just to clarify again on Mailchimp. I know that last quarter you were putting some changes in place to kind of improve conversion rates and really kind of rightsize or kind of build out some of the structure of that business. Like where are those changes you're making kind of at this point? And how should we kind of think about the level that so this kind of go in there to kind of more kind of rightsize that business? Sure. Let me answer your question. I'm not sure what you mean by rightsize where -- is this -- we are very focused on investing in male and accelerating the growth combined with the QuickBooks platform. And I would say a couple of big things that we have put in place and are continuing to implement. One is really strengthening the leadership team at all levels. We're very excited about leaders that we -- had joined the Mailchimp family and with Radia's addition to the Mailchimp team with additional changes that we are making to continue to strengthen the team, very excited about the impact there because that's having a direct impact on innovation, which is the second point I want to make. I really like the velocity, particularly what I've seen in the last 90 days. And I actually hope to see Mailchimp being one of the highest-velocity innovative teams across the Company with the team that we have in place. And I think everything that I mentioned earlier that we have launched is a result of the impact of that team. And lastly, it's about impact. And we're starting to see the key performance indicators that I mentioned earlier uptick in the right direction, which means that almost a year in, it's not been quite a year, but almost a year in, I feel very good about sort of year two because we've put a lot of foundational things in place in year one. We have a lot of work still ahead of us. But a lot of the work is about turning this into a sort of a strong growth business and fueling the success of small businesses, and I feel like we are on that trajectory given what I've seen, particularly in the last 90 to 100 days. Thanks for squeezing me in. Two quick ones. A lot of talk about the macro with regards to Credit Karma. I'd love to hear about how you're overlaying that macro on QuickBooks Capital and anything you might be doing differently there as the year progresses, given the uncertainty. And then secondarily, Sasan, you talked about some of the economic indicators you track for small business. Are you seeing consistency in the U.S. and international? Or is maybe one geography stronger than the other right now? Yes, absolutely. Let me start with your macro question and QuickBooks Capital. We have built incredible machine learning capabilities, where we literally can control the dial of which customers' capacity for customers on a daily basis. And QuickBooks Capital is very important for our customers, and it is not a material sort of revenue driver for the Company is, however, essential as part of our overall platform. So I think that what I would say is we're very good and has been very good. I think it's been proven, especially during the COVID times, to be able to adjust the doubt so that we offer capital only to those that we can see can pay it back. And remember, the loans that we typically give could be from 30 days to six months. And there's a ceiling for all of these loans. So we feel very good about the macro environment impact and how we manage our QuickBooks Capital within that context, and I think we've proven that during COVID. The second element of your question, I would love to sort of parse it out in two ways. One is even in the U.S., there are sectors within small business. Remember, we're very diversified in the small businesses that we serve. But there are segments within small businesses that have gotten hit hard, those that focus on auto sales, those that focus on financial services, those that focus on real estate. Some of their revenues are down 10% to 15%, but you don't really see that in our results because we're very, very diversified. We're not -- no one sector can really impact our overall results. So that's in context of the globe, but it's also in context of the U.S. Not every sector is created equal. Some sectors are hit hard, the ones that I just mentioned. I would say U.S. has been the strongest followed by Canada, and the ones that have been hit the hardest has been U.K., Australia and France. And again, our -- we're not -- we've not assumed any of this in our guidance, but our hope is those will, over time, begin to bounce back. We've not seen the bounce back yet, but they've been hit harder than the U.S. You're very welcome. And I think that was the last question. And so maybe I can bring us to close by saying thank you for all of your wonderful questions. And be safe, and we look forward to seeing all of you for our second quarter earnings results.
EarningCall_1997	Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Superior Gold Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference all call is being recorded and broadcast live on the Internet. I would now like to turn the conference call over to Chris Jordaan, President and Chief Executive Officer. Please go ahead, Mr. Jordaan. Thank you very much. Good day, everyone, and thank you for joining us to discuss Superior Gold's third quarter 2022 results. As a reminder, please refer to slide two of our presentation, which is posted on our website to view our cautionary language regarding forward-looking statements. In addition, please note that all amounts discussed are in U.S. dollars unless otherwise noted. I'm pleased to say that I'm being joined today by four of our executives, being Paul Olmsted, our CFO; Russell Cole, VP Operations as well as General Manager of Plutonic; Andrew Bigg, our Vice President for Business Development and Long-Term Planning; and Mike McAllister, our Vice President for Investor Relations. To start off, I'd like to discuss a few of the third quarter highlights. Firstly, our safety performance improved markedly with our total recordable injury frequency rate reducing 27% since the previous quarter and it's down 56% since December 2021. Production increased from quarter two at 15,946 ounces of gold, which represents a 5% increase over the previous quarter and sales of 14,875 ounces of gold at an average realized price of $1,877 per ounce. Total cash costs were $1,789 per ounce sold and all-in sustaining costs were $1,989 per ounce sold, representing similar costs through Q2. Cash generated from the operations was $1.9 million after working capital changes, and exited the quarter with a cash position of $11.6 million. We also secured AUD10 million debt financing from Auramet International, and that is similar to the previous debt financing of 2020. In the third quarter, the company realized an 8% improvement from the previous quarter's mill throughput following the successful mill shutdown in the first half of the year. Post period, development rights have increased markedly in the underground mine as operations continue to implement the improvement program which included the [delivery] (ph) and commissioning of a new jumbo development rate. The higher development rates are expected to add additional stope inventory in time to the mine, while providing greater operational flexibility. We are on track to meet our revised 2022 annual production guidance of between 62,000 and 65,000 ounces. At this point, I'd like to hand over to Russell Cole, our VP for Operations, to elaborate on the operational highlights. Over to you Russell. Thanks, Chris. As we mentioned, the Plutonic Gold Operations produced 15,946 ounces of gold in the third quarter, which is a 5% increase over the previous quarter, mainly due to higher milling rates. Production was down 18% when compared to the 19,379 ounces of gold produced in the same period in 2021. The decrease is largely a result of lower grades and tonnes milled from both the underground and open pit operations with operational underperformance impacting the Main Pit Deeps project. Operationally, we achieved a stope grade of 2.6 grams per tonne, up 6% on quarter two, slightly below our targeted stope grade of 3 grams. This was mainly as a result of the wake from lower development in Q2 into Q3 due to labor impacts from COVID, which reduced the availability of higher grade stope inventory. As Chris mentioned, post-period, we have continued seeing a marked improvement in the underground development rates. Our mill grade in the third quarter of 2022 was similar to Q2, however, lower over the comparable period of 2021, mainly due to lower underground grade and the inclusion of legacy development ore. We expect the mill grade to improve in Q4 as we progress into 2023, reflecting the impact of higher underground grades and tonnes. Gold recoveries remained strong in the third quarter of 2022 at 86%. Finally, the total ore milled in the third quarter was 8% higher than the same period in 2021, reflecting the successful mill shutdowns in the first half of the year. Directionally, production rate from the underground is increasing in Q4 to date versus Q3. Thanks, Russell. The first nine months of 2022 was softer due to the planned mill shutdowns, unprecedented rainfall, high absenteeism due to COVID-19 and labor shortages, as well as decision to temporarily suspend the open-pit mining. Heading into Q4 and 2023, the operating focus will revert solely to the underground mine. Our goal is to accelerate developments on [indiscernible] to more higher grade stopes. As previously mentioned, we are realizing success in improving the development rates, which is expected to add additional stope inventory to the mine over time, while providing greater operational flexibility. Our cash position, as I said before, was $11.6 million at the end of September and had decreased 43% from the end of the third quarter in 2021, reflecting the lower production revenue and higher sustaining exploration capital expenditures. The company successfully secured a $10 million debt financing with Auramet International on October 2, 2022, which provides enhanced financial flexibility. I will now turn the call over to our [Technical Difficulty] discuss our financial results for the quarter. Over to you, Paul. Thanks, Chris. During the third quarter, revenue totaled $25.7 million from the sale of 14,875 ounces of gold, a decrease of $8.5 million from $34.2 million from the sale of 19,379 ounces of gold in the third quarter of 2021. Our gold revenues were slightly lower as a result of 4,407 fewer ounces being sold as a result of lower gold production, as well as a decrease in the realized gold price to $1,722 per ounce from a lower number than that in the prior period. Cost of sales were $29.5 million for the third quarter of '22, an increase of $1.2 million from $28.3 million for the third quarter of 2021. The increase in cost of sales in the current period versus the same period in 2021 was primarily due to increases in mining, processing and depreciation costs. These increases stemmed from higher contractor mining costs associated with the Main Pit Deeps project, which increased tonnages of ore and waste relative to the comparative quarter, as well as increased mill throughput following the mill maintenance shutdowns early in the year. In addition, site services cost increased from the comparative quarter as flight and accommodation costs associated with the contractor for the Main Pit Deeps project were incurred. Adjusted net loss for the quarter was $4 million or $0.03 per share compared to adjusted net income of $1.8 million or $0.01 per share in the three months ended September 30, 2021, again, primarily due to the lower operating income in the current period. During the three months ended September 30, 2022, cash generated from operating activities after working capital changes was $1.9 million, a $4.4 million decrease over cash from operating activities after working capital changes of $6.3 million for the three months ended September 30, 2021. Decrease in cash generated from operating activities was predominantly a result of lower operating earnings, offset by working capital changes, which reflected an increase in accounts payable due in part to higher capital expenditures in the quarter, as well as the timing of production versus sales at the end of the quarter. As at quarter end, the company had a cash balance of $11.6 million. Thank you very much, Paul. The production guidance will remain between 62,000 and 65,000 ounces as we reported on previously. A detailed review, and this is very important, of all cost inputs across the operation has identified several opportunities, many of these have already been implemented, that's specifically targeted to reduce cash cost in the fourth quarter, and also importantly, into 2023 as we primarily focus on the underground operations. And jumping to the last slide. To summarize the quarter, we were faced with several ongoing challenges in the third quarter. The impacts of absenteeism due to COVID-19 during the first half of the year, as well as wider labor and skilled contractor shortages affecting Western Australian mining sector combined to continue to negatively impact our development production and cash flow during the quarter. The labor shortages resulted in lower lateral development that reduced the developed higher grade stope inventory, thereby negatively impacting mined head grades and resulting in lower gold production. Additionally, operational underperformance of the Main Pit Deeps project resulted in reduced tonnages and lower grades being delivered to the mill. Looking ahead to the remainder of this year and into 2023, our operating focus reverts solely to the underground mine. Our goal is to accelerate development to unlock new mining areas of the mine as been identified in previous exploration programs. I would like to add, post-period, we continue to see a marked improvement in underground development rates following the delivery and commissioning of the new development jumbo late in the third quarter as part of the execution of the broader development improvement plan. As we target sustained high development rates, we expect to add additional stope inventory into the future for the mine, providing greater operational flexibility. With that, I would like to conclude the presentation portion of the call. Operator, you may now open the line for questions. Thank you very much. Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from the line of [Greg Orel] (ph) from OCM. Please ask your question. Chris, give us an idea of, first off, how is it going this quarter, if you can? And then secondly, what does it take to be on a cash flow positive manner to where you're actually putting cash on the balance sheet and not increasing liabilities. And so, what is the -- what does the business have to look like to do that in terms of development and ore grades mined, et cetera? Greg, I think that's a great question. So primarily, if you look at the challenges that we've had up to now, it's mainly focus around the stope inventory that we had available, specifically for the underground. We have developed and implementing an improvement program, which, as I said, also include the purchase and commissioning of a new jumbo. And more importantly also that this jumbo is furnished with vectors that give us more advanced cut that we take. So we nearly think you see an uptick there in development. And I think that the first [indiscernible] is the fact that our development rights have improved significantly. In fact, October, we achieved the highest development rate for the -- in a month. We continue to focus on standardization of the approach to development on the back of appropriate development plans to see that number increasing even further to enable us to sustain a larger inventory of stopes ahead of us. So to answer your question, the first thing is to get development right. The second thing is, that will enable us to have a larger optionality or larger optionality insofar as which starts with target within a specific month. Now needless to say, given the fact that we'll be improving our development, it will give us access to a larger number of higher grade stopes. The other thing that's important that needs to be addressed from a cash position. Given the fact that we're comfortable that we've addressed all issues that we might have had with the milling circuit is focusing on reducing costs. There is a number of initiatives that we're driving forward and many of them have already been implemented. To name a few, on an annualized basis by restructuring the business purely focusing on the underground we have reduced our total expenses by more than $36 million on an annualized basis. In addition to that, at the end of October, we did a restructure in the business, whereby we delimited a number of roles, in fact, several roles that will ultimately give us the necessary structure to purely focus on the underground, but also then provide us with a more cost efficient labor bill. In addition to that, we've also converted into campaign billing. Now campaign billing gives us an opportunity to reduce our consumable consumption and therefore reducing overall costs in the milling circuit. What we've also seen? If I look at the numbers on a quarter to date basis, we are seeing improved ounces from the underground mine. And that on the back of the process plant that's really running well. And we've demonstrated that this year -- that puts us on a very strong trajectory to achieve what we currently have in our forecast for next year. Now those forecasts are fully internal, we'll let the market know very early next year what that looks like. The important thing there is, once again unlocking the value from the underground by purely focusing on accessing more higher grade stopes, which is ultimately unlocked by driving our developments. In addition to that, we've also instituted an additional production drill, which will enable us to do more stope drilling throughout the months going ahead. So once again, then addressing further down the value chain, firstly, getting to the stopes, and then secondly, getting into the stopes, drilling them, blasting them and getting the ore back up to the process plant. So, we protect us on a number of -- from a number of fronts. I mean, there's a whole host of additional initiatives that we're driving forward to reduce costs even further. And that is part and parcel of what we need to achieve to turn the business back to cash generation. The last thing that I would like to add more specifically, because we're looking at not only this year, but moving into next year, there is one of the things that we had to do this year if we were to run the mill at full tilt was to start the build of an additional tailings [plant] (ph) or new tailings plane. The opportunity that the campaign billing has allowed us now is to kick that can further down the road, so we can -- Apologies. We can take or absorb that cost later in the year as opposed to this year. So once again, on a number of fronts trying to get the best we can from the underground mine, making sure we have the right kit available to be able to deliver the tonnes and the grade from the underground. And additionally to that restructuring and getting the organization aligned for the new operating model. Great, Chris. Lastly, in terms of the areas that you're going in in terms of development, how much of that is -- would be from newly discovered areas that you've found over the last couple of years from aspiration versus going into remnant areas? Yes. It's a bit of a mixed bag, to be quite honest. Clearly the remnant areas are the areas that require less development that will give us fast -- accelerated access to more stopes and high grade stopes. But in addition to that areas, like, Indian Access, etcetera, we will be targeting next year these stopes, I think, in the first quarter that's coming in, which is looking really positive for us and will have some impact without a doubt in Q1 next year. But primarily our short term focus is on remnant mining. The intent here is to take our development rights up further to get closer to about 250 meters per jumbo per month. That will enable us to then at a specific time, and that time will be a function of how much developed stock we have in front of us. We will then convert into capital or start capital lateral development, which will enable us to go into these new areas. So those areas are well defined. We know exactly where they are. And the work that Andrew and his team did in the last few months has clearly shown that we evaluated area by area and so far as ounces available, the grade, the tonnes, as well as the profitability of these areas. So we have a very clear line of sight, which will be included into the sequencing of our underground mine to [indiscernible] the more lucrative areas sooner. So areas like [Tmall] (ph) area, I think it's 134, but I'd like to hand over to Andrew to expand a little bit on the piece of work there, because I think it's important to understand what the opportunities in there. Yes. Thanks, Chris. I mean, you summarized it quite well, Chris, but effectively we went through a life of business planning process with the new resource and reserves. And that gave us a view of essentially how to optimize the mine over the life of the reserve. And we basically ranked and prioritized each of the operating zones. I've got 12 operating zones in the underground mine. And we rank them and prioritize them based on value. So like Chris said, our mine plan moving forward including the remainder of this year and the start of the full calendar year â23 is based on value to the business and balancing short term cash with NPV. So priority zones for us is zones like Tmall, Area 134, Indian and Indian Access will be primarily mining out of next year. So thatâs correct. So -- Yes. That's exactly right. Sometimes these have access to trade off versus ounces, in area like Indian Access, which is relatively new. We've spent the time to do the mining engineering in the area. So we can extract the full value of the area rather than getting in early and potentially sterilizing or not getting the optimum design out. So they're all the things that we're going to consider and try it off in the plan. [Operator Instructions] There are no further questions on the phone lines at this time. Handing it over to Mike McAllister for webcast questions. Thank you, operator. We do have a few webcast questions today. The first one is asking, will the suspension of the mining in the Main Pit Deeps expect to cut the all in sustaining cost? If so, by approximately how much? Certainly. It says, will the suspension of mining in the Main Pit Deeps cut the all in sustaining cost? If so, by how much do you expect that to cut the cost? Well, to put it into perspective, we were spending to the tune of about AUD3 million per month on the open pit operations. And one come very quick to -- given the fact that we didn't achieve the specific grade and tons from the open pit, that ore came in at an elevated cost. If one then looks at or look at the reduction in cost and assume a realistic percentage of open pit ounces to the total production on a quarterly basis, one can quickly calculate what that impact is. At this stage, I don't have it off of my head, but it's should be something that we can -- that someone can calculate quite quickly. Okay. Second question would be for Paul. Does the $11.6 million of cash equivalents include any drawdown from the new debt facility? No. The closing of the Auramet gold loan occurred after the quarter end. So it wouldn't be within that $11.6 million. Yes, absolutely. We're getting into Indian Access in Q1 calendar year â23. And like I mentioned earlier, we are mining in Indian and Indian access through the course of the calendar year. Thank you. The next one is, could you describe the current labor market conditions and the impact they are having on the company? Yes, I think I'll have a go at it and then give Russell an opportunity to expand on it. He's much closer to the fire so far as that's concerned. I think in general, we certainly seen a significant decline of people being impacted by COVID. I think currently running on about two employees -- Apologies, two employees who's positively -- who takes positive for COVID. So that impact has reduced significantly. And it's basically just normal illnesses that keep people away from work. In addition to that, the market still remains hot in WI. Mining companies across the site is sold running [indiscernible] the hunt for capable and talented people remains strong. We have in some areas started to see some featuring of costs. So I think it's normalized to some extent and certainly not as significant as in the past. But roughly, if you can give a little bit more color on that, I'd appreciate it. Certainly, Chris. The West Australian mining labor market is what most people are referring to is very hot at the moment. There were lot of projects being constructed and a lot of other operations going into production at the same time. As Chris said, we're starting to see a little bit of a drop off as some projects are coming to an end and we hope that trend will continue. We're only seeing the early signs of that at the moment, but I think most of the WI mining industry would like to see a bit of a drop off in that to allow a bit of a freeing up in the labor market. It's very, very tight at the moment. It's a very, very competitive market out there, which is just driving the price of the market up and forcing the closure of some projects. I think maybe what I can add to that is that, with our restructuring, of course, we shut down the structure that was supporting the open pit operations. We were able to redistribute that people -- some of those people into [indiscernible]. So in fact, not only did we see reduced labor costs, we've also seen a reduction in preparing labor, the cost related to that and also saw a reduction in our vacancy rates. Thank you. The next question is, the current changes you have described in the improvement program, would this allow to return to a normal state of production? If so, how many ounces would you estimate that a normal state of gold production would be on a quarterly basis? Yes. I think the important thing there is, yes, we believe it will. The key for us is to complete the work that's lying ahead of us. Given the fact that we're really driving hard on our development, the scheduling for FY '23 isn't flushed at the moment and that could change given the availability of stope at certain times of the year. We will give the appropriate level of guidance and finish that work, you can imagine that that piece of work goes through a number of iterations of verification and validation. So we haven't finished that work yet and that will be completed in the next few weeks. In fact, some of our board members will be visiting the site whereby we will -- in December, whereby we will be having a review of the physicals for next year at that point in time. We expect to provide guidance for 2023 very early in Q1, probably around the middle of January without production results for Q4. Thanks, Chris. The last question is, with the five management directors in this call, what is the total amount of superior gold shares that management combined is holding the company? I can take that. Management and Board own about 1.53 million shares, which is about 1.2% of the company. Management has bought earlier this year. We have been in blackout period. Once the blackout period is gone, we would expect probably to see management continue to buy in the market. Yes, thank you very much. Mike, since there are no further questions, I would like to thank everyone for joining us today. While the third quarter of 2022 has presented management with some challenges, plans have been put in place, and I've explained that in some detail to focus on the [indiscernible] that will provide us with optionality and additional sub areas targeting improved rate and operational flexibility. Now we expect that these improvements will drive the continued improvement in our financial performance, especially for 2023.
EarningCall_1998	Okay. Thanks, everyone for joining us. I think this is the last presentation, but perhaps, one of the key ones for us. Pleasure to have with us the team from Medtronic. We have the CEO, Geoff Martha; CFO, Karen Parkhill, and I think in the background we have Ryan Weispfenning from Investor Relations. Geoff and Karen, thank you both for taking the time with us this afternoon. I think, Geoff, you had some prepared remarks, a few opening remarks and then we can dive into Q&A. Yes. Sure. Thanks, Vijay, and thanks for having us, and thanks for everyone joining this session today. As you know, just last week, we reported our fiscal Q2 results, where we had a topline miss, which we were able to â topline miss consensus, which we were able to offset coming in on the bottom line, coming on the high-end of our EPS range. And of course, we recognized the focus though was on the downward revision of our initial guidance that indicated a slower pace of recovery for both procedure and supply chain reasons causing some really meaningful change to our initial assumptions. Now we are certainly disappointed at the reset for our second half of FY2023 in terms of our outlook. But when we look beyond these headwinds of our markets and supply, we have a really a fundamentally strong business with attractive end markets and several positive catalysts to drive growth, including that will have an impact on the ramp over the back half of this fiscal year. And look, we have a clear direction of travel, where we're headed as we transform the company and as the multiple changes we've enacted over the last two years, take hold, whether that's operating model changes, enhancements to our culture including being more competitive as well as the incentive changes to drive different behaviors. And we are focused on leveraging our scale and making that an advantage, allocating our capital and managing our portfolio to drive this higher growth and more consistent growth. And we also find that especially now that our investors value the strength of our balance sheet and our dividend during times like we are in right now. Geoff, I appreciate those opening remarks, and I think that sort of segues nicely into this question. And it's been sort of a pretty common inbound of garden Geoff to say. I know there have been a lot of changes Medtronic has done, but the company has had its fair share of thought one-offs, right? And I think for a large cap investors [indiscernible]. When you look at the business, I think people are asking, is this something underlying structural? Is this a cultural issue? How can investors gain confidence that Medtronic has done the right things and has the ability to execute here? Sure. Well, look, I'd start with saying no one is more frustrated than I am. And clearly, it's been rockier than we would have liked, but there are underlying benefits that are being masked, I believe. And there is several proof points. I mean, for example, the quality improvement plan we put in place. We have a lot of our products actually coming back to the market that were off the market for quality reasons coming back in the second half year â of the year with the significant improvements on the supply chain side. I know it was slower to take hold this past quarter, but the worst is behind us, and we believe we've made durable changes to our global operations and supply chain. And we do have several businesses that are outperforming like Cardiac Rhythm Management and consistently outperforming. Like Cardiac Rhythm Management, we had â our Structural Heart businesses had a really good quarter. Our Cranial & Spinal Technologies business has really differentiated itself and is performing well. Neurovascular, ENT, Cardiac Surgery, there is quite a list of businesses that are outperforming. And then there is a number of businesses that we are setting up, setting up to be big growth drivers for us, like our Afib business, which we call Cardiac Ablation Solutions with the Affera acquisition, Acutus acquisition, and our PFA portfolio both from Affera and organically. Diabetes is another one, which I am sure we will get into, and surgical robotics is a third. These are areas that we're setting ourselves up I think for strong growth over the next couple years on top of the businesses that we talked about. And I know that the changes we've made and continue to make are also setting us up. I mean, they're kind of foundational supporting these businesses, the organizational simplification, the new capabilities like the global operations, supply chain changes that I talked about and the new people that we've brought in from outside the company. The incentive changes that we're enhancing, it's driving a different culture and these benefits will come through. And finally, capital allocation and portfolio management. You are seeing very intentional moves on where we're putting our R&D and where we're prioritizing as well as our portfolio and you're starting to see that, for example, some of the pluses like, I mentioned cardiac ablation solutions or Afib business, where we've added mapping and navigation and strengthened our organic PFA portfolio with Affera. And then in the last three quarters, we talked â in the last two quarters, we've announced three divestitures in our Renal Care business, RCS and our patient monitoring business and our respiratory interventions or ventilation business. So you're starting to see that. When you put these together, this has an impact on the growth of the company and makes it more durable. So it's not where we want to be this last quarter in particular, but there's good reason to be optimistic and the results are just taking more time than we thought to surface. But I think you'll see some of this in the second half, and we're definitely going to get this right, Vijay. That's helpful context, Geoff. Sometimes it's easy to miss the positives, right, when weâve had these kinds of issues. Starting with the second quarter here, Geoff, I think you brought this up, the miss was, I think [indiscernible] guidance or perhaps versus where the street was, half of it was supply chain and half of it was slower recovery. But starting with that supply chain, and this is where â was this unforeseen or was this a guidance setting process, help us understand like why supply chain became incrementally more worse here and has it been resolved? Well, it didn't become, I guess incrementally worse, just didn't recover at the pace we thought. Some of the â let me start by saying that the biggest challenges, the most acute challenges that we had particularly in our packaging area for our surgical innovations business, that's behind us. But it did come in later in the quarter than we thought. And that really is driving some of the back half guide down from where we were because our momentum has been shifted out. And like I said, the supply chain [issues to our] surgical innovations business were like quite acute, and that business is going to hit the most, and there were several issues. But like I said, the worst is behind us. And we believe you'll start to see that here in the second half. Like I said, in SI, where we had the biggest issues, our competitor benefited, stepped in and filled the shelves with our customers and we're under long-term contracts with these and we're confident we're going to gain our share back. I am just with the couple â the East Coast right now with a couple customers yesterday and today and they indicated the same thing. So I know it's been bumpy, but we are making progress here addressing headwinds and getting back playing on offense here, and our outlook calls for continued acceleration into this second half of FY2023. Understood. And how much â that's some helpful context here Geoff that Medtronic hasn't lost customers. This is not a share loss, it is a timing issue, but how much inventories do a customer stock as we look at the back half? Should we expect some of these dynamics to normalize by Q4? Or is this more of a fiscal 2024 event for Medtronic? Got it. And then the other element which has been really tricky for us is the slow pace of elective recovery in the developed markets. We've seen ortho procedures do pretty well, ASCs do well. Again, [indiscernible] I think for your main competitor was â we've seen some impact. Give us some context on why Medtronic is seeing this differential pace of recovery in these different end markets and when can these dynamics get back to normalized levels? Yes. And with us, like you mentioned, ortho, our spine business, for example, which is kind of a parallel to ortho, I would say. We didn't have that issue there. We had a really strong quarter like U.S. Our spine business in the U.S. grew over 15%. So I mean, some of that is share gain. But that's partly market recovery. So in certain, and then you mentioned TAVR is one, so you mentioned ortho is good. Our spine was good. And it was impacted by China VBP a bit globally. So globally it was like 5%, but in the U.S. it was 15%. And then you mentioned TAVR, our competitor having talked about a slower market recovery there. We indicated the same even though our numbers for TAVR were pretty good partly because of new products, but our numbers, I think it was 17%, 18% in the quarter. So those are pretty good numbers, but we had a new product launch only a month of it with our new Evolut FX valve. But it's doing really well and we are anticipating even a slightly more growth than that. So the market growth was consistent with what our customers saying, not quite where we thought it would be. So the markets that â so we're not saying overall the market recovery wasn't there, it's very targeted in areas like TAVR. Another one is PCIs were part of it, and then China VBP was a piece of it too. So it's not across the board, it's very specific ones. I think for the most part you're hearing other competitors talk about as well. PCI is one where we are strictly in the stent business and don't have ancillary products around it and really are tied to procedure growth there, and that's the one that slowed down as well or didn't recover like we feel like it was on a pace and kind of plateaued. So these are assumptions for these specific markets we've assumed for the rest of the year that they won't continue to get back and we're going to â in our guidance, we have them staying consistent with what we saw in Q2. So that's a assumption that if there's upside to that that's great, but that's what we've assumed. Understood. And China VBP, I'd saved this question towards the end, but since you brought up, Geoff. When I just think about the second half guidance rate, I think the change in second half as prior was high singles and the new guide is 400 basis points. There's about a 400 basis points delta versus the prior guide, right? How much of this is China VBP and what is driving the remaining 300 basis points or so for the delta here? Yes, happy too. Thanks, Vijay. Thanks, Geoff. We said that our guide down â about 15% to 20% of the impact of our guide down was due to additional provincial tenders in China that we had originally believed would be a national tender and occur next fiscal year not this fiscal year. And it's just simply been pulled forward. So again, Vijay, China was about 15% to 20% of the guide down. We said that the assumption that we're making on procedures not improving from where they were in Q2, particularly in those areas that Geoff already mentioned plus in some general surgery areas too. That was a little bit more than 50% of the impact of our guide down. And then the remainder would be due to the impact of the supply challenges that are causing us to recover more slowly, particularly in SI given [the stocking] that happened from our competitor on the shelves. Understood. How should we think about this China VBP? Was this originally slated to happen in 2024 and just got pulled forward? Does this make 2024 â now the comps are easier in a much better? And I think I had a related question. People were asking me is there incremental VBP, CRM or neurovascular, et cetera, that we should be thinking about here? Yes. So as we think about China, yes, we do think that these tenders that are happening, particularly in our stapling business, and we had some provincial, some tenders in our spine business as well this year. But particularly in the stapling that's happening more on the provincial level, we think that's a pull forward from what was going to happen at the national level. And so it's just happening more quickly. As we look ahead into FY2024, we do expect some additional VBP, particularly in neurovascular and some coils and other products there. You mentioned CRM, we already had some provincial tenders in CRM back in 2021 for dual chamber pacing. So I think the bigger impact for us at least in FY2024 will be likely neurovascular. Got it. And just maybe on that point, Karen, how big is neurovascular business in China for you guys? Or any way to think about what the incremental impact could be? Yes, it is one of our larger businesses. So when we think about China this fiscal year, in Q2, it declined 9%, mainly because of the impact from the spine tender that happened that quarter. For the year, we expect it to be around low-single digits. I certainly don't think next year it's going to be back to its normal double digits given the neurovascular likely impact. But beyond that, we do expect China to be a double-digit grower for us well into the future. Got you. And then maybe one, you're on this back half guidance. I think third quarter guidance was low singles, 2.5% to 3%. I think the guide implies you step up back to north of 4% in Q4. Just talk about your assumptions, what drives the sequential acceleration from third quarter to fourth quarter? Yes. So we have a lot of good things going on in the back half, including some headwinds going away that we've talked about. But we also have new products. We've got our new TAVR valve. Geoff talked about the Evolut FX, which was only in the market for a month last quarter. And so we expect continued acceleration from that. We've got Hugo that's starting to ramp. We've got our Harmony valve back on the market. We've got the diabetic painful neuropathy opportunity that we are working to tap in the back half. So we've got a lot of things helping us in the back half. And then also, when we talk about the prolonged impact from the supply challenges in our SI business, that gradually improves as we move through the quarters in the back half. Understood. And then Geoff, maybe back to you on some of these pipeline opportunities that you highlighted. Let's start with the robot. You noted Medtronic had received the IDE approval to start a trial here. I think in the past, Medtronic has been a little tight-fisted on the trial size, how many sites. So any color to share on this trial â duration of trial and when perhaps we could see an FDA approval? Well, nothing new to share on that. On that part, Vijay, the details on the trial will be posted on clinicaltrials.gov pretty soon. So you'll see more details there, but nothing more to share on the trial itself. Understood. And I think OUS, on the call, there was some optimism on the order book here. Talk about what's happening in OUS and any numbers you can share on what that order book size is? Yes, sure. I mean outside the U.S. and in the U.S. too, I mean these surgeons have these conferences that are global, they talk and feedback is getting out there. So first, let's start with the robot itself. I mean we have â for a couple of reasons we've been, I'd say, keeping the â even though it's been on the market outside the U.S. and New York for a couple of months we haven't â we have not put the foot on the accelerator until recently because we wanted to â a couple of tweaks we wanted to make system instruments, those instruments are done and we've been building up supply of robots. And by the way, getting those instruments kind of making some adjustments to them and getting those approved by the FDA was also a catalyst for pushing the go button on the U.S. IDE. But in Europe now, we'll accelerate the ramp because we've got the product ready to go and where we want it. And the big thing that's happening is just the feedback is getting out there. We do have â we're not getting into how many robots we've sold and how many cases, but it's quite a few. And the cases or the feedback is getting out there, it's strong. And then â and recently â and I'll give you the feedback what we're hearing. But just even recently, there was this ARIS 2022 conference in Barcelona in October, where they had live stream cases out there on these almost like an esports kind of gaming screens all throughout the conference us versus the existing competitor and just the two of us. I mean, that says something about the â how the surgeons are looking at the marketplace as the da Vinci robot than us. And it was used to perform a range of OR procedures in these live cases, and we performed very well versus da Vinci and generated a lot of interest. And that's â what we're hearing is it's that the platform instruments, the AI and just the performance, both hospital and physicians are excited for us to bring this modular solution to market. The footprint like, if you don't need all four arms, you can just bring in two or three or whatever and that helps with the kind of the footprint in these ORs. It helps with training. They're also the visualization. There's a lot of feedback on the surgeon console and how that's set up and the 3D viewing and just the ergonomics of the console. So just a lot of good feedback. And then there's confidence as they see the instruments that are coming. I mean we have a long history of innovation in surgery. But I think more than anything, Vijay, it's â and the update over the last couple of months has been, one, getting these new instruments out there that we can hit the acceleration on the ramp. And two, just more feedback in this ARIS conference and helped a lot in terms of exposing surgeons to the robot and just word of mouth amongst the surgeons is very positive. And even some of our investors that have done their own checks have come back to us with what they've heard and it's consistent with what we've been saying to you. And maybe, Geoff, one last question around this Hugo topic, and then both of you can chime in. From a Wall Street perspective, success for us is always in the numbers, right? So when will we have some details on the number of procedures or placement numbers? Is Medtronic plan to share some of those details? And Karen, I think on the profitability side, you'd mentioned something about $400 million of investments in robotics. How should we think about those investments or profitability on the robot on a go-forward basis? So the $400 million that we had said before, Vijay was the investment that we had and the negative op profit drag from both Ardian and the Hugo robot at the time. Clearly, we expect both to be important growth drivers for us, and we were investing heavily in them. In terms of margins for the robot, that's capital equipment. And typically, capital equipment is a little bit lower margin than some of our other products. But that doesn't mean it's a really important growth driver for us. And obviously, there is a bit of a razor-razorblade model as you know with robots because you've got the end of factors or the consumables on the end of the robot, which are important. In terms of just Hugo and a growth driver in what we would disclose, we don't typically do product disclosure. And so it's not something that we're anticipating doing on a regular cadence because it's just not typical for us to do. We'll clearly give investors what they need to think about our growth drivers overall, but product level disclosure just isn't something we typically do. Understood. And then just to maybe sum up the conversation on the robot, Geoff. As we look at the last 12 months or even perhaps 24 months, right, perhaps time lines might have moved on the robot, but your optimism on the Hugo perhaps that has been consistent or perhaps even maybe coming in a little bit above expectations. Would that be a fair comment, Geoff? I'd say â look, a couple of dynamics. One, it took a little longer. We made the decision, we got good feedback initially on the robot that we have something to build from and another skepticism out there on this. I'm going back a year or two years. The initial feedback was positive from surgeons. And again, these aren't like our â these are surgeons that are robotic surgeons and that have been doing surgeries on da Vinci for years and have a lot of experience. And then they gave us some feedback on a couple of things that they've â if you could change these couple of things that we think it would â they weren't fundamental design issues, but things that we felt like on the two instruments that would help a lot. So we made the decision because you only get one chance to make a good first impression. You're going up against an established competitor like this that has a long history. It's not like they just started a couple of years ago. They've been in the market for 20-some years. And so we decided to make those enhancements. And now that we've done that and it caused a little bit more of a delay, but now that we've done that and now that it's out there, and we're seeing it actually compete in the wild mono to mono that my enthusiasm has gone up. It's always good to hear the confirmation of what you've been told by a handful of surgeons to many, many more out there in the wild, not in a controlled environment, and that's why. And then when we hear our investors who are very healthcare-focused investors do their own market checks, and come back with â these are skeptics too, coming back with this kind of feedback. It's good. Now we can't take our eye off the ball. I think there's some things that like training and things like that, that we need to make sure that we do properly. That's another thing we're seeing. Once you've been trained robotically, the switching isn't at least between the two main systems that are out there haven't been too difficult for surgeons, and so it's â we're excited. And robotic surgery has tentacles beyond soft tissue, right? We have â our spine robot has been instrumental as a part of our stable of enabling technology in our spine business, Cranial robot. And there's â so becoming a real robotic player across multiple therapies is exciting for us, and we think a real differentiator for the company. Like mono to mono, I already used that in one of my titles now. Maybe switching gears now to diabetes. I think there's some confusion in the market, Geoff. I think on the call, you guys said Medtronic hadn't asked for a variance letter. And for me, maybe I'm simplifying it in my mind, but it was shooting a friendly e-mail to the FDA asking for a variance. Why didn't Medtronic ask for a variance letter? And now what went into the decision making process? Well, look, we've had an ongoing dialogue with the FDA on a number of topics on this one in particular. And it's been very constructive. And look, I'd say a couple of things. One, we've got â there's 780G and Guardian Sensor 4, but also we've got a lot of technology that's right behind it. It's kind of logjam that we're getting further along outside the U.S. in terms of regulatory approvals. And the warning letter stands in the way of all of that, not just the 780G. And even enhancements to 780G and enhancements like extended-wear infusion sets, all these other things that we need to get done. A variance is not a typical thing for the FDA. It's a different process for them. And if you have to keep asking, they're not going to give you 10 variances. And so â and especially now where their resources, especially in that area have been stretched, I think, which is well understood out there in the marketplace now in terms of that area of the FDA. And so in those discussions and we just determined that our best path forward is really focus on lifting the warning letter. And as we've indicated, we've gone back to the FDA and said, okay, we're based on all the dialogue we've had and the areas that they pointed out, we think we've made those corrections and we like them to come back in and reinspect and move forward and hopefully get this lifted. Again, our perspective is that we've completed the use to the standards that they've asked us to and in some cases, beyond that. And hopefully, they'll agree when they see the work, but that's what needs to happen when they come back in and reinspect. And we don't have exact timing of that, but it does seem to be a priority for them, especially given that we've focused on this versus other things we could be asking them to do. Understood. That's helpful context, Geoff. You noted Medtronic is ready for reinspection. Has the FDA given a date on when they might come in and reinspect? I'm curious related to that, right, because this is a very conscious decision from Medtronic for not asking a variance letter, right, does that put Medtronic in a good light when the FDA comes for reinspection? Look, I don't know. When we make decisions like these things, whether it be a warning letter or any other dealing with the FDA, we do try to take into consideration what they're dealing with and trying to be a good partner â a long-term partner with the FDA. And we spend a lot of time with them not just reacting to things, but just being a strategic partner and a thought partner on many things. And so yes, I don't want to put words in the FDA's mouth, but we hope that what we did is looked upon favorably in terms of how we are handling this. They didn't give us an exact date, but it's sooner than later, I mean it's not quarters â it's not measured by quarters, it's earlier than that. Okay. That's helpful. And then I think one of the positives was this OUS growth in diabetes, I mean it really stands out, it's been strong for several quarters now. Initially, I thought, look, this is just Medtronic's channel presence in international markets, but this is â it seems like really the underlying product, it's driving share gains here. It's being seen as a better product. How confident are we, Geoff, like the same thing can be replicated in the U.S. once the product has launched? Yes, we're very confident. I mean, the people are type 1 diabetic, type 1 diabetic. And the reason for the growth is the patient feedback, the patient clinical results and the user experience. And I know that for the last couple of years, there's been a lot of focus on the component parts of a system, the CGM, the pump and our competition is kind of an amalgamation of those things. No one has the whole system. And even the whole iCGM, the thought process that everything's got to work with everything. All those things â once the 780G hit Europe and people saw the benefits of the whole system, when you have the pump or the insulin delivery device in this case of durable pump with a sensor design for that system and the algorithms all designed together, the whole is greater than the sum of the parts. And we're seeing that in the clinical benefits and the user experience. Like I said, we're seeing for the most difficult patients this more than any other system is putting diabetes in the background for patients and helping them control the diabetes. And we do think there's more room to go here, more innovation, but it is a bigger step forward than I think people anticipated because they're looking at the component parts and the specs of those component parts when you put them together, it works. And we anticipate seeing the same thing, and we're confident that we're going to see the same thing in the U.S. and that will lead to growth for us. And beyond that, Vijay, is while we were dealing with this warning letter, we are also continuing. We did make the double down investment in diabetes to continue the pipeline. And so it will just continue to improve. We've got our Simplera sensor that we've already submitted for the CE Mark, and we'll be ready to submit that in the U.S. as well. And just a broader pipeline of sensors, insulin delivery devices and continued enhancements to our algorithms as well as the different other accessories around the ecosystem. Got you. That's helpful, Geoff. And then maybe one last question here on diabetes. You didn't mention Simplera that you had submitted the 780G plus Simplera. Is that a true Zero calibration device, Geoff? Yes. So like you said, we did submit our IDE for the 780G and Simplera to the FDA as well. And for Simplera stand-alone, we haven't submitted Simplera for stand-alone, but for â it is â the benefits of Simplera, to answer your question, is an all-in-one disposable. It's 50% smaller than our Guardian Sensor 3 or 4. And does â requires no fingersticks. And has a simple insertion for patients that only takes seconds. It's like a three-step thing that takes like three â it takes a couple of seconds. So, yes, no fingersticks. Fantastic. And I just want to switch to some of the financial questions here, Karen. We'll get back to Ardian in a bit. But I think recently, you mentioned $0.36 headwind from FX in fiscal 2024. That's almost like 6.5%, 7% headwinds, right? And for me, simplistically, if Medtronic algorithm was mid-singles topline and high-singles earnings double-digit TSR. Are we now looking at no earnings growth for fiscal 2024? Or just talk about â because FX in and off itself without the other components or context rate, it kind of makes it looks like fiscal 2024 might be below trend? So we're not as you know, Vijay ready to give FY2024 guidance yet. We still have two quarters, half a year to go in FY2023 and just at the early stages of our planning process. But when you look at FX and isolation, your math is correct. Based on recent rates, we are forecasting a headwind to FY2024 EPS to be around $0.36, and that does equate to about 7% EPS growth off of our guidance for this year. On a positive side, on the topline, you can see that we expect to exit this year with mid-single-digit growth. And down the P&L, we've said that we are in a challenging operating environment with inflation, with interest rates, with currency. So we are purposely driving significant expense reduction throughout the company, given these headwinds and given the fact that we want to continue to focus to drive important long-term investments, too. So we do have several puts and takes next year. And obviously, we're going to work to be giving you more on FY2024 as we move through this back half. Understood. And then just one on gross margins, Karen. How much, if I guess inflation has been a drag. How much of this has been capitalized on the balance sheet and should that have an impact on a go-forward basis? Yes. You're right. We do put some of our inflationary pressures in the inventory on our balance sheet. So you see our inventory going up right now, too. And that will flow through our P&L over time. So some of the inflationary pressures, obviously, that we're seeing right now will hit us in the back half and into next fiscal year and create pressure for the next fiscal year. So we've got that pressure plus if inflation continues. Understood. And Geoff back on Ardian here. Medtronic remains confident. I mean for me, when I looked at the numbers, again, the control or the way it behaved, it was very off, right. I'm sure the FDA is going to be cognizant of this. But are we now â are physicians â do physicians understand this? Or has the enthusiasm and opportunity for Ardian perhaps a little bit less tepid now? No, physicians when they look at the data, and we â they see it. I mean they see what's happening here. And we think it further validates both the safety and the meaningful blood pressure reduction that we've seen for the Ardian system. I mean bottom line, the sham arm increased their level of medication and the Ardian arm decreased it, and the difference was 10x. It's very compelling. And at the same time, you've got all this â the totality of data that the FDA is going to consider of all these different trials, our pivotal trial, which was successful OFF MED, then you have ON MED and you have the different measurements and you've got the registry that we've shown. And at the same time, of all this is coming to an FDA approval. You've also got the current standard, the SMART trial that shows unrelated to Medtronic that this the current standard just isn't working. And it just confirmed the SMART trial that came out in September, which was the largest hypertension trial out there, just confirms that for these intensively managed hypertensive patients, that the current standard of drugs just doesn't work. And so you've got that at the same time and you got this new solution that's safe, effective, and we've got durability data out multiple years, even up to seven years, it's very compelling. And the health systems, I'm talking to large health systems around the world, particularly here in the United States, they want to lead. They want to actually lead the discussions with payers. I mean they need help, both for their mission to take care of patients. But financially, this situation isn't working for them. And so I think we've got some real strong advocates. I know reimbursement is a question with payers. Just on the FDA time line here, Geoff. Have they given you any indication on what path they're going to take? Whether there's going to be an AdCom or will they just review this? No, they haven't yet. We don't know. I mean, like we indicated, we did submit the day the Ardian results came out because four of the five modules required for approval already approved, so this last one left. I don't know â we don't know if it's going to go to an AdCom or not. But we do â in discussions with FDA, we do know they're looking at the totality of the data. Got you. And then maybe moving on to the last few minutes here to have some capital allocation missions. Stock is at these levels, right, it's pretty cheap. I mean the dividend yield is north of 3%, your free cash conversion has been great, balance sheet is in a good position. Why not â either we're doing a large M&A or a big share repo rate. I'm curious how Medtronic is thinking about capital allocation right now? Sure, happy too. So I think, Vijay, as you know, when it comes to returning cash to shareholders, the main way we do this is through our dividend. We have a large and growing dividend that we pay every year. And we've executed share repurchase for sure to offset dilution from stock-based compensation. And then we've done additional repurchase on top of that. We've spent $500 million year-to-date on share repurchases. But we also balance that with investing for the long-term with the company. And in Q1, we closed the Intersect acquisition. In Q2, we closed the Affera acquisition. So we are using our balance sheet to drive these important future growth drivers for us, too. And I think you should just continue, investors should just continue to expect more of that same kind of balance. Clearly, when we see our stock where it is, we do like to do share repurchase. And we've done â we did it last year. We've done more this year. And so we will continue to do that when we see the right opportunities. Got you. And maybe one last question here in the last couple of minutes Geoff. I think the portfolio changes that we've done with the recent announcement of divesting, monitoring and respiratory business. I think that's like a $0.40, $0.45 sort of based on some math. How does Medtronic plan on filing that EPS hole, Geoff? Or is the new mantra for Medtronic slim or lighter focus on the right areas? Well, we aren't giving specifics on the margin profiles of the NewCo or the RemainCo at this time. But for modeling purposes, I think the NewCo currently has a slighter revenue profile than overall Medtronic and a slightly higher operating margin. So your numbers are â the $0.45 are not pretty accurate. And in terms of what we plan to do, one is to fill that hole, I think you go to look at our portfolio moves in totality, right? There's the pluses that we're adding and the minuses. And what we're really focused on is getting to that â when you look at them in totality, that a higher level of growth for the company. And that's really what we're going for. And I donât know, Karen, if you have any comments on the EPS component of it. Great. I think with that, we're at the end of time. Geoff, Karen, thank you so much for spending this afternoon with us. All the best for fiscal 2024. It seems to be exciting with the product pipeline.
EarningCall_1999	Hello, everyone. And welcome to the KNOT Third Quarter 2022 Earnings Results Conference Call. My name is Charlie, and I'll be coordinating the call today [Operator Instructions]. I would now hand over to your host, Gary Chapman, Chief Executive Officer and CFO to begin. Gary, please go ahead. Thank you, Charlie. Thank you, and welcome everybody to our third quarter 2022 earnings call. The earnings release and this presentation are also available on our Web site at knotoffshorepartners.com if you want to view them. Straight on Slide 2 which concerns the nature of today's presentation. In particular, the inclusion of forward-looking statements, which are made in good faith, but which contain risks and uncertainties, meaning, that actual results may be materially different. The Partnership does not have or undertake a duty to update such forward-looking statements. And for further information, please consult our annual and quarterly SEC filings. Today's presentation also includes certain non-US GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures. On to Slide 3, highlights of the third quarter and subsequent. We announced a cash distribution of $0.52 for the quarter for the 29th consecutive time at this level under our 1099 structure, and which was the 38th consecutive distribution made since the Partnership first listed. We run at 99.7% utilization for scheduled operations during the second quarter and 92.8% taking into account the scheduled drydockings of the Lena and Windsor Knutsen vessels. We completed the acquisition of the SynnÃ¸ve Knutsen on July 1, 2022 to bring our fleet up to 18 vessels and at the same time adding a block of forward revenue and charter coverage as a result. And all five of our vessel drydocking scheduled in 2022 have been completed. In terms of charter developments, Knutsen NYK have taken each of their one month options on the Bodil Knutsen to date and have options to keep the vessel until June 2023. We signed the time charter for the Windsor Knutsen with Shell to commence in or around January 2023 for a one year fixed period, plus a one year option. The Lena Knutsen commenced on its charter with TotalEnergies for six months, plus a further six month option. And although in the second quarter we announced the redelivery of the Hilda Knutsen, we can confirm that the partnership sponsored Knutsen NYK in similar fashion to the Bodil Knutsen arrangement, have agreed to time charter the vessel for a 90 day period plus three further 30 day option periods, albeit at a reduced charter rate but to help support the Partnershipâs cash flow in the short term. This arrangement commenced on September 3, 2022. And if all options are taken by Knutsen NYK would currently expire on or around the beginning of March 2023. The time charter for the Tordis Knutsen with TotalEnergies commenced on September 10, 2022 for a fixed period of three months with charterâs options to extend the charter by up to two further three month periods, and TotalEnergies has already exercised the first every of its two three month option periods. On Slide 4, the current time charter for the Brasil Knutsen with Galp Sinopec expired in November 2022. However, the Partnership has entered into a new time charter contract also with Gulp in direct continuation for a period of one year, extending the vesselâs firm employment to November 2023. Regarding the Partnershipâs time charter contract with Equinor for the Bodil Knutsen that is to commence around the end of 2023, this charter was either one year firm plus two one year options or two years firm with two one year options. In November 2022, Equinor confirmed their intention to fix the initial charter period at two years. Meaning that if all options are taken by Equinor, the charter will be for four years and will expire around the end of 2027. We received news that Eni would redeliver the Torill Knutsen to us and we expect this to occur on or around December 17, 2022. We're now marketing the vessel for new employment. In accordance with the previously announced time charter agreement with Eni for the Ingrid Knutsen, the Partnership is expecting redelivery of the vessel on or around December 7, 2022. The Partnership is continuing to market the vessel for new employment during 2023 in anticipation of the commencement of the new three year Eni time charter contract commencing in January 2024. In terms of the wider market, we have continued to see good levels of activity in Brazil, but the North Sea remains a significant concern as we consider that this could take several further quarters to rebalance. As we said before, we're also in this time looking at the conventional tanker market where headline spot rates have risen substantially in recent weeks. And although this is a positive development, the reality is that it is not that easy to secure those high rates. And as part of this type of employment, it is necessary to consider utilization where the vessel may not earn revenue every day when it's between cargoes as it does under a time charter and also fuel costs, which would normally be a cost for our customers under a time charter contract. Although, we are also actively looking at the conventional market, it maybe that this does not provide a sufficient level of income. Notwithstanding, given the charter developments we have seen, we now have $644 million of contracted forward revenue, excluding options, up from $594 million at the end of June '22 plus $74.6 million in available liquidity. Slides 5 through 8 are our usual summary of our financial results. And as usual, I will just mention a few points. On Slide 5, our revenues held at well this quarter given the drydockings ongoing and depreciation was higher as a result of there now being 18 vessels in the fleet from July 1st. Operating expenses are above their historic average, mainly as a result of increased bunker fuel costs related to our time charter vessels that needed to transit to and from their drydocks. When time charted vessels are on hire fuel as a cost for our customers but these vessels are off hire during their drydocks and with fuel costs increasing this has impacted our results. The other factor affecting operating expenses are crew and crew related costs, which remain elevated since the onset of COVID and which level may become the new normal as we move forward. With a wide and geographically spread supply base to draw upon, we do believe we have some protection against certain elements of inflation that are incurring -- that are occurring in many countries just now. However, this is something that we like all companies are keeping under close review. The upturn in interest expenses and realized and unrealized gains and losses on derivative instruments are driven in part by the recent increases in US dollar interest rates and forward curve and again, partly driven by having an extra vessel in the fleet. At September 30, 2022 around 61% of our debt was actually or effectively fixed rate through either interest rate swaps or our two sale and leaseback financings. On Slide 7, you can see our cash and cash equivalents balance at the end of the quarter of $49.6 million, and the debt refinancing due in the third quarter of 2023 has moved to the current portion of our long term debt balance. This is something we have already started talking to our lenders about, and early indications are that we'll be able to successfully refinance the six underlying vessels in good time by mid 2023 and on acceptable terms. The distribution coverage ratio on Slide 8 was slightly up at 0.6 for the third quarter of 2022. And as we have disclosed previously, although, there is a tendency to focus heavily on this figure each quarter, the partnership and the board instead takes a longer and more rounded view. But of course, that's not to say that a DCR of less than one is something that is sustainable. In the context of the distribution, although, we do not mechanically link that to the distribution coverage ratio in a given quarter, our board does take into account our liquidity position, the outlook for the business in our market, our strategic interests and anything else we consider to be relevant. We feel this allows us to bring a holistic view in ensuring that we operate in the best interest of our unitholders, without jeopardizing our ability to participate in the longer term shuttle tanker opportunities that are the core of our business. Slide 9 is an update on our contracted revenue and charter portfolio. We've covered many of the contractual updates already, so I won't repeat them here. Other than to say that while we have had success in filling some of the gaps we had in 2022 and in the longer term, there remains important work to be done in the near term for 2023, particularly in the North Sea. And that is what we're expending a great deal of energy on at the moment. As noted before, at September 30, 2022, we had remaining forward contracted revenue of $644 million, excluding options with average remaining firm charters of 1.9 years and charters had options to extend these charters by further three years on average. Then on Slide 10, we have the potential dropdown vessels held by our sponsor, KNOT, that the Partnership may choose to purchase in the future. We've now added the two recently contracted vessels that are due for delivery in late 2024 and late 2025. It remains the Partnershipâs target to acquire these vessels from the sponsor when suitable opportunities arise. However, there is of course, no guarantee that this will be possible. Slide 11, we have seen pandemic related impacts start to recede and FPSO deployment and all production schedules have accelerated, especially in the Brazilian offshore shuttle tanker service to pre salt areas, partly this is from a belief that higher or higher -- high or higher oil prices will persist compared to project breakevens at or below $35 per barrel, driving investment and additional production capacity in the deepwater offshore fields. Although the more mature North Sea market has continued to encounter delays, resulting in the current oversupply of shuttle tankers in the region, we saw the arrival into Norway during the second quarter of the delayed Johan Castberg FPSO that is to be operated by Equinor. This is a great example of a large field that will need shuttle tankers for its proven volumes that are today estimated at between 400 million and 650 million barrels of oil equivalent and for throughout its production life, which is expected to be 30 years. On Slide 12, we've highlighted previously only a very small number of new shuttle tanker orders that have been placed in 2022 for deliveries in 2024 and 2025, constituting only approximately 5% of current shuttle tankers in service. Given this and the main shipyard still being effectively full with containerships and LNG carrier orders through 2025, the total order book for shuttle tankers is very muted with only six likely to deliver before the end of 2025, all of which are understood to be assigned to long term charters. Set against anticipated production startups from ordered or delivered FPSOs, we expect this will meaningfully tighten the midterm charter market potentially to the point of shortage. Newbuild shuttle tanker prices also remain elevated up around 30% since the second half of 2021 as a result of tight shipyard capacity and higher input prices for steel and labor, all of which continues to help the competitiveness of our existing fleet. So in summary for this quarter, on Slide 13, we have strong utilization of 99.7% for scheduled operations. We generated distributable cash flow of $10.9 million and we paid a quarterly distribution of $0.52 for the 29th consecutive quarter. We had $644 million of remaining contracted forward revenue, excluding options at the end of the quarter and no refinance due until the third quarter of 2023. As a reminder, the Partnershipâs operations are not exposed to short term fluctuations in oil prices, volume of oil transported or global storage capacity, and our offshore loading charter rates are not as volatile as you find in other segments of shipping either upwards or downwards. In the near term, we focus very much on safe operations, both onboard and onshore, and we aim to maintain our high utilization statistics for sheduled operations. We're talking with our customers as we always do and are proactively monitoring the wider market, including the conventional tanker market to ensure we can respond flexibly as opportunities arise. We're planning for the scheduled drydocks that had to occur in 2023. And it maybe worth saying here that all five of the drydocks in 2022 were for vessels based in Brazil. And with the drydocks taking place in Europe, these are our most expensive works due to longer mobilization time and fuel costs. In 2023, we have five further drydocks, however, three of these vessels are already based in Europe, resulting in significantly lower budgeted time and costs. Finally, as mentioned, the speed of recovery in all production and shuttle tanker demand in the North Sea is our biggest cause for concern at this moment. We're working every angle to support our short term cash flows across our North Sea vessels to find opportunities to reinforce our balance sheet. But if we're not able to do that and soon then the board will need to consider how this impacts on our distributable cash flow. At the same time, we continue to believe that the significant mid to long term expansion of offshore oil production, particularly in pre salt Brazil supported by the large number of committed FPSO orders and with low marginal cost of oil production together with the barriers to entry in our track record mean we can continue to remain positive with respect to the mid to long term outlook. Gary, I mean, obviously, you've got four vessels with limited chartering options. Your current liquidity position is what it is. Your coverage ratio is lower. And then you have to balance that against the long term charter opportunities as well as elevated asset values. How are you balancing your coverage ratio and how long do you think that you're going to have to go before your coverage ratio improves? I think the board is always looking at the whole picture, just as you have described there in terms of all of those things. And I think, the outlook for us hasn't changed in terms of what we've been saying for several quarters now that the impact will depend on the signing of new charters at good rates, and that's what we were doing yesterday, it's what we're doing today and it's what we will be doing tomorrow. And I think, we're working really hard to get back to a sustainable position. Like we said, the coverage ratio is not where we want it to be and we're working really hard to get that back. And I think that's really, as you've said, you've pointed out the North Sea vessels that we've got there, and that's exactly why we're looking at every angle, including the conventional market, to the maximum extent we can to make sure that we can not only get through this but also look after the long term interest of the unitholders and get us back to a sustainable place. So what are your options in the North Sea? I mean, I understand the truth, the conventional charter market is what it is. But if there's over capacity in the North Sea there is over capacity in the North Sea? That's not to say that the vessels aren't doing anything at all. There is business there, perhaps it's less long term than we would like. But we're talking to all of our customers all of the time, and their requirements change often, daily, weekly. So I think for us, we're pushing as many buttons as we can and that's why we broadened our horizon to the conventional market as well. There are opportunities out there. I think, we've been guiding towards this sort of situation for a little while. The gaps are a little bit [narrow] now and we recognize that, which is perhaps what's coming through in the earnings release that we've put out. But the extent to that depends on what charters we can get. And I do think there is some business in the North Sea, it's not that there's no business. And with the conventional market as well and obviously, the rates in the conventional market at the moment are very positive, so that's very helpful for us. They could go higher. So I think the extent of the impact for us is yet to be seen. And I think we're doing all we can to get some good business for those ships that are open. Gary, I just want to say that mid to long term outlook for KNOP is really the best it's looked since coming public, and it's really short term challenges. And I know you and the board will take the right course for creating long term shareholder value. Earlier this morning, I listened to the Frontline call and they shared Q4 Suezmax rates, you know, again, short term charter at $65,000 a day with a three year time charters at $35,000 a day. So it looks, if you wanted to do voyages that rates are still strong, without asking for a dollar, let's say Suezmax rates went up to $80,000 a day. Would that be competitive for KNOP? You've made some really good points there, particularly around the mid to long term, which we certainly would agree with. And it is the short term that's the challenge for us. I think the part of the reason why we've been a little bit raising the caveats about the conventional market is obviously around the fact that the utilization is a little bit unpredictable. Yes, you can sign up for a TC but at a lower rate. And playing in the market really does depend on utilization and to a degree, obviously, fuel and repositioning and ballast costs. So I think it's not so easy to come up with a rate that this would work and this one wouldn't. But I think what we can say is that certainly where the conventional market is today, it's really helpful for us and we are seriously looking at what we can achieve in that market. And I think given the volatility that we're seeing in the market, we don't know what's going to happen to rates, et cetera with what OPEC and Russia are going to do and the price cap beginning of December. There's a lot of things happening at the moment that make it very difficult to think that conventional tanker rates are going to come down in the in the short term, and that's very helpful for us. So, whilst we don't want to necessarily use our vessels in the conventional market, we would much rather be doing offshore loading activities. It does at least give us a realistic and viable chance to earn good money. And you're right, I can't give you a rate. But certainly, despite the caveats we've put, we do feel that it's a good opportunity for us to be able to secure some charters and some income for our vessels. Would it change the -- let's say, you decided to charter, let's say, two vessels short term or move them to for sell. Do you think that psychologically, the North Sea charters would start to become concerned about the availability of capacity? Yes, and certainly we've seen that already starting in 2024 for sure. And I think some of our customers must already be thinking that way, I think. And we're seeing that in Brazil even today for 2023. So I think that is very, very possible. We've seen a couple of vessels leaving the North Sea just recently I think. So again, the numbers are changing regularly. And I think we -- things are moving in the right direction for us. We're not seeing too many variables that are working against us at the moment, newbuild prices are high, certain vessels are leaving, the older vessels are perhaps leaving the market in ones and twos and things are being tied up. And certainly in Brazil, that is already the case. What we doing our best to do is to obviously work with the conditions that we've got in the North Sea and do our very best to sign new business for those vessels. But certainly, the underlying market and the conventional market at least is -- it's supporting us in those efforts, I think. I guess, I got a couple of questions for you, please. First of all, with regard to your hedge accounting, because for the accounting that -- specifically the realized and unrealized gain on the derivative instruments, because I believe in the news release, you said that you're not using hedge accounting, and if I'm using the right word. There's a significant -- if you look on the income statement, thereâs significant increase in the interest expense because of the increase in interest rates. But you also have a significant realized and unrealized gain on the derivatives, I mean the derivatives are all related to your interest rate risk, right? I mean you youâre notâ¦ I mean, you don't have other kinds of derivatives like Baltic tanker futures or anything like that, your derivatives are all interest rate related. Correct? Yes, theyâre all -- the realized and unrealized gain -- there's a breakdown in the earnings release, and the majority of that relates to the valuation of the interest rate swap contracts that goes through the P&L each quarter, because we don't do hedge accounting. So of that, that figure you have in there $12.37 million, how much of that relates to -- this quarterâs interest expense and how much of that can we assume can be offset against the current quarterâs interest expense, and I hope I'm phrasing this properly? Well, they're two different things. I mean, the interest expense is the interest expense on our debt and then separately, we have interest rate swap contracts that offset some of that. So they're not actually legally the same thing, if you see what I mean. So I think Jim, if you want to, I'm happy to speak to you separately away from this call, if that's helpful to you, if you wanted to drop an email to the IR email address, I'm very happy to talk to you. If you want to get into the detail at some point on that. Okay, I will understand it better. Next question. In the press release, you indicated that I guess a couple of the vessels which were redelivered, if that's the right word. They are currently on short term charter to I believe your sponsor, but at a somewhat lower rate. Can you give us an estimate of what the quarterly revenue impact of these lower rates will be on those particular vessels, how much have we should beâ¦ Yes, weâve traditionally not broken down our fleet by vessel for a number of different reasons, and I'm not going to do that here. And in particular, because that is a rate that is somewhat private between the company and its sponsor. However, those rates have been reviewed and checked by our independent conflicts committee as being appropriate rates, given the circumstances. And actually, we believe that it's positive for the business to have those charters in place, because the alternative, certainly, up until this period, the alternative was potentially no income at all for a period of time. So I think we don't generally break down our fleet in that respect and we tried to steer our investors away from looking at individual vessels and instead focusing on the total revenues. Certainly, I don't want to press the point, but there's more than one vessel affected. I was looking for an aggregate impact on the quarterly revenues of the transition of these -- two or three vessels to the short term charters. Would you be able to give us that number? I'm not going to give you a number on that, because I think, as I say, you'll just be able to -- there are two vessels, you'll just be able to take the number divided by two. So it will kind of lead me in the same direction. And the final thing is, this isn't -- this is not a question actually. And I know this is not -- this is supposed to be Q&A, not pontificating. But I would put -- as an investor, I would like to put in my $0.02 and no pun intended. I urge all of you to be conservative in calculating, determining your next distributions. I mean, obviously, I enjoy getting a nice quarterly distribution from you every three months. But to me the most important thing is the long term strength of the balance sheet and the company. And as you well know, there are an awful lot of companies that created some major problems for themselves by paying dividends well in excess of what they could really afford, starting with General Electric and General Motors. So again, I would encourage you to be conservative when it comes to making your next decision regarding that distribution. Yes, I appreciate that, Jim. And I've said before and on previous earnings call and I'm happy to say to them, we try to run this business on a conservative basis. We're generally not inclined to make rash decisions. We tried very hard to do the best for our unitholders and also making sure that we can access the benefits that we think are going to come in the good market that we see in the future. So I fully get your point. Just wanted to have a quick question. Realistically, what are the chances of spending some of the cash on repurchasing shares on the open market? We've never ruled that out. It's something that the board has always kept on the table. We've historically not done that, we've not gone down that route. We felt that the money has been better used and it makes more sense to keep that money in cash in the business. And obviously, that's a decision for the board rather than myself, so I wonât sort of pontificate on what the board might or might not decide to do in the future. But we haven't typically done that. And I think at the moment, with our outlook, I think the business probably needs the cash that it's got, and we're focused on getting all of the charters that we need at good rates. So that we're in a good sustainable position. So I think to answer your question, I don't think it's on the cards at the moment. But as I say, I won't speak on behalf of the board. But I think at the moment, that's probably not our priority. Gary, very concerned about this last report that you put out for a number of reasons, not just the financial reasons, but what it seems to point to based on your past actions. And my first question is, what was your purpose of revealing all of the new and upcoming shuttle tankers of Knutsen NYK that maybe available in the future, why did you reveal all of those? Yes, that slide has sort of been in our presentation, certainly, as long as I've been performing this role. And we always like to disclose what the sponsor has, because through the omnibus agreement, we have the ability to purchase those ships from the sponsor, at a point in the future, subject to all kinds of different things. But I think it's important that we disclose that information, so that people can understand where the future might be in terms of fleet growth for the business. So there's nothing sinister about, it's really just trying to be transparent. Well, currently, with our current situations with expiring contracts and the need to employ the ships, the report is obviously very troubling to the market, because we've lost over year's worth of dividends in the price of the stock for today. As we speak, it's down at $11.66 down [237], so that's very discouraging. And I think based on your past, pardon my horsey throat, your past conference calls. On the last one, you had said that there were no new dropdowns coming that you contemplated and then this latest drop down, which came in July, comes as a surprise based on what you're telling people that is going to happen in the future. And that's also happened a few quarters back when you mentioned nothing about drop downs. And then right after the conference call within a week, there was a dropdown and you didn't tell us that that was coming or even contemplated at that point in time. And I think that kind of communication hurts. Rob, the previous earnings call in August, the dropdown had already happened. It was effective 1st of July and the previous earnings call was in Augustâ¦ I missed that one, it was the one before that you said it. So it was the call [Multiple Speakers] so forgive meâ¦ But the dropdowns that we've done, certainly, recently have been using cash and debt and it basically internally financed. So we haven't had to dilute any of unitholders to in order to do that and in order to bring in those new revenue streamsâ¦ And we put out the KNOT vessels, which was your original point. So that people can see what those vessels might be. And we always are looking to drop vessels down at an appropriate time when we think we benefit from doing that. So [Multiple Speakers] certainly something that we want to do. Yes. But at this point in time, when you're struggling to get new contracts to fill the ships we have, I think it does not serve a good purpose to imply that there maybe future dropdowns with the raising of interest rates and raising of the debt levels that we have, because this last one you paid cash and you assume the debt. And altogether, we paid $119 million for a ship that turned out that it was actually defective and had to be repaired, which is not something that looks goodâ¦ I think that's a little bit harsh, because all of vessels have troubles and they get fixed. And that's the same as your car, itâs the same as anything else. I mean, it wasn't [Multiple Speakers] a little bit ofâ¦ I know. But it troubles me to see a used vessel go for $119 million in total cost, that was troubling. Anyhow, I'm happy as a shareholders for many, many years now that we're going to in the near future do some more dropdowns with conditions as they are until we get good contracts for our vessels, because it's obvious you do not want to operate in the spot market even though rates are high. And I can understand why you don't want to, because you're really not designed to compete against the VLCCs or the Suezmaxs that are doing that every day. And so that's my feeling thatâ¦ Well, we do and we are happy to go into the conventional market. I mean, all of these things are not so simple as looking at a headline rates and saying, yes, we can get that. But there's no reticence from us about putting our vessels in the conventional tanker market if we think that's the best thing to do. And certainlyâ¦ I see. Okay. Well, that's my concern. I know you want to be conservative and I just, I really don't want to see us increase our debt and increase our dropdowns at this point in time until we have solidified our existing fleet. Because next year, like you say, we face another five dry dockings, which are very tough on earnings. So that's my input. Okay. Thank you, Gary. We won't be doing any dropdowns unless it makes sense. So it's not that we grow, it's not a grow at all cost MLPâ¦ How does it make sense? Can you explain to me how it makes sense in a time when interest rates have risen and will probably rise some more, and we have ships that are not contracted for that maybe open to having to go in the spot market? How is it contemplating a dropdown beneficial? Well, because -- and I'm not saying we're going to do a dropdown. But the way that we think about the dropdown is whether or not by itself as a standalone ship does it make the MLP stronger, is it in the interest of everybody for us to take that when you look at the cash flows associated with that vessel. So if we pay X dollars for it, is it creating free cash flow for us by buying that vessel at that price with the debt that it has in the charter that it has. And also considering the fact that we will have to pay a certain amount of equity for it and that maybe generated through internal funds or debt. But as a project, as a vessel, it has to stand alone and be a good piece of business and that's accretive as to the Partnership, otherwise, obviously, we won't do it. Well, that's good to hear. The thing that's really discouraging is the market's reaction to the current report, which is quite discouraging. Because see a whole yearâs of dividends wiped out in the price of the stock. Okay, thank you. That's my input, Gary. Please consider that and have a nice holiday. And God bless you. Thank you everybody. And I wish everybody well for the holiday season if we don't speak to you, and thank you again for listening.

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